I’m sure most readers are aware of the controversy caused by Houston Rockets’ GM Daryl Morey’s tweet supporting Hong Kong. It strikes me that there are some interesting lessons to be drawn from the reaction by the NBA to Morey and the reaction of corporate CEOs to the views of the ESG community.
I recently wrote about the perils of ESG investing and of CEOs endorsing their agenda without input from the majority of shareholders. If you haven’t read it, I humbly suggest you should.
In fact, one of my predictions has already come true! I posited that the Roundtable statement was a bad negotiating tactic as politicians would view it as an opening bid. This is exactly what happened!
Sen. Warren wrote a letter to some of the signatories demanding they support her agenda suggesting that “commitments are hollow if they’re not accompanied by tangible action that provides real benefits to workers and other stakeholders.” Then, she outlines the actions they should take. The Roundtable is already painted into a corner!
The NBA Chose Business over ESG
Anyway, back to the NBA. The backlash to the Morey tweet was immediate and overpowering. The team owner (sorry, “Governor” – the NBA is woke when it needs to be) quickly pointed out Morey’s views did not represent the team. Chinese sponsors didn’t care and immediately pulled their ads and banned the Rockets from TV (the Rockets are China’s most popular team as the famed Chinese player Yao Ming played for them). The owner of the NBA’s Brooklyn Nets posted a long response on Facebook explaining why Morey’s tweet was so offensive.
However, there is now a backlash to the backlash. Several US Senators (from both sides of the aisle) have accused the NBA of choosing money over human rights.
They have a point (regardless of whether you agree or disagree with the merits of the Hong Kong protesters). The NBA is known as the most socially active sports league. Yet, it has never spoken out on social issues in China presumably because of fear of the reaction that Morey created. Social activism is good…as long as it doesn’t hurt the bottom line!
The ESG Case Against China
OK, trigger warning first. What follows isn’t anti (or pro) China. It is merely showing how one could support an argument that China rates poorly on ESG metrics. It doesn’t mean I agree with that argument any more than I agree with some of the ESG arguments used in the US. There are two sides to every argument and I am focusing on one side to make a point – that point being the application of ESG is incredibly inconsistent.
Environmental
China is the leader in world pollution. How can any ESG supporter invest in a company that does business in China? Supposedly, a million people per year are dying in China from pollution. If that’s really true, ESG investors should go hug a fracker before they invest in US companies with Chinese operations.
Social
China doesn’t have a good record on human rights. They also spy on their citizens and rank them on a social credit system which grants or takes away privileges. You can lose points for things like jaywalking, smoking in public, or not sorting your garbage correctly.
Governance
Whatever one’s views on the sovereignty of Hong Kong, it does seem that some of the actions this year violate the terms of transfer between Britain and China which were encoded in the Hong Kong Basic Law of 1997. That is a textbook governance issue.
Corporate America Chooses China over ESG
But let’s not pick on just the NBA. Corporate America takes the same attitude towards China = profits over causes. US companies have willingly accepted censorship or turned over their IP in order to participate in Chinese markets.
When corporations suggest (whether intentionally or accidentally) that Taiwan or Tibet are countries, there is swift condemnation. Companies from Costco to Marriott to the major US airlines to GAP have gotten in trouble for faux pas. Every time they chose to accommodate China by changing the location rather than sacrifice profit.
The Business Roundtable statement says they prioritize supporting communities and treating employees with respect and dignity over creating value for shareholders. Yet, it seems they mean only American employees and American communities. Otherwise, they would stand up for their Chinese employees when they are being censored or for their Hong Kong employees when they are being denied their constitutional rights.
ESG Is A Fashion Statement, Not A Theory
Hopefully, you have figured out by now where I am headed with this. The reason Friedman argued the purpose of a corporation is to maximize shareholder value was because it was an intellectually sound theory. If you want to replace it, you need a better theory. ESG is not that. Not even close.
The principle failure of ESG is that there is no standard definition. It means different things to different people. Why is a living wage in the US an ESG issue but eliminating social credit scores in China is not? Why is the internal combustion engine uninvestable but companies who source products from high polluting (not to be confused with high falutin’) Chinese factories accepted?
There are so many inconsistencies in ESG. There is no theory. It is completely subjective and often self serving. What is ESG to one investor might be banned by another! (For instance, what is worse for the environment – organic foods or GMO foods? Should we be against one? Both? Neither?) ESG is a fashion statement, not a theory! It changes with the seasons.
A CEO Homework Assignment
Given all these inner conflicts within ESG, the truth is it is nothing more than an expression of individual preferences by certain investors. Those investors are entitled to express those preferences. However, CEOs should not act on those preferences unless they are supported by the majority of shareholders.
My homework assignment to any CEO reading this is to ask your Chief Sustainability Officer to put together a list of all the conflicts embedded within ESG. Then, have a healthy debate about why we are active in some causes but not in others that look very similar. Then, present those conclusions to your shareholders and ask them for their reaction.
Banned In China
The good thing about being a niche blog is I don’t think I will come to the attention of Chinese censors. If it did, hopefully they would understand I am not taking sides but showing possible interpretations one could take. It would not surprise me if in the near future ESG investors demand companies change business practices in China or withdraw. I am not advocating it; rather, I am pointing out the risk that comes with letting ESG into the hen house. You never know what will be in fashion!
On a lighter note, there is one outfit that did choose ESG over the Chinese market. In an incredibly prescient act, South Park just days before the Morey tweet released an episode called “Band in China” that was critical of Chinese censorship and pretty much intended to get themselves banned by China. Which they did.
They chose to support ESG (which they are entitled to do since they don’t have shareholders and if they prefer principles over profits that is up to them)! The episode even had NBA players (including James Harden) who they mocked for going over to China to make money. I would post a link but it’s not NSFW so you can find it on your own.
A Closing Caption
I was able to gain secret access (from a whistleblower, obviously) to a photo of a CEO leaving the recent Business Roundtable meeting after the new corporate purpose statement was issued.
