Driving a Stake Through Stakeholder Capitalism

By Rupert Darwall

Writing shortly before President Trump’s return to the White House, Peter Thiel hailed the election as an apokálypsis, an unveiling, of the ancien régime’s secrets. “The new administration’s revelations need not justify vengefulness,” Thiel wrote. “But for reconciliation, there must first be truth.” The early weeks of Trump’s second term have been apocalyptic for some of progressives’ favorite acronyms such as DEI and USAID. So far, arguably the most damaging, ESG — an approach to finance derived from the UN’s Principles for Responsible Investment — and its spawn, stakeholder capitalism — which demotes shareholders to one of many groups (employees, customers, suppliers, and the environment) that companies should prioritize — have evaded their rendezvous with truth. That needs to change, because the last four years saw an unprecedented and sustained attack on America’s system of shareholder capitalism.

A year ago, the Delaware Court of Chancery struck down the ten-year performance-driven compensation package the Tesla board had awarded Elon Musk, a ruling reaffirmed in December despite the package having gained overwhelming shareholder approval a second time. Three years earlier, in May 2021, shareholders in ExxonMobil voted to put three directors on the board from a minuscule activist investor, Engine No.1, with a mandate to drive America’s largest oil company out of the oil and gas business and thereby destroy shareholder value.

The apparent paradox — no, let’s put that more strongly: The perversity of shareholders voting against their own apparent interests, which is what happened at ExxonMobil, has its own well-deserved apokálypsis in Andy Puzder’s new book, A Tyranny for the Good of Its Victims: The Ugly Truth about Stakeholder Capitalism (Encounter Books, January 2025). Central to Puzder’s account of the attempt to destroy shareholder capitalism is the role of the Big Three asset managers — BlackRock, Vanguard, and State Street Global Advisors (SSGA), whose enormous size derives from the popularity of index funds among institutional investors and private investors alike.

Fundamental to the success of shareholder capitalism is the alignment of investors’ financial interests with the success of the businesses they’re shareholders in, which in turn drives economic growth and rising living standards. As Robert Rubin, President Clinton’s Treasury secretary for most of his second term, recently wrote in the Wall Street Journal, “While every company functions differently, businesses share the overarching goal of strong profitability over time. That focus is fundamental to our market economy.”

That link between the interest of the investor and the company is broken with index investing. “Don’t look for the needle in the haystack. Just buy the haystack!” John Bogle, the pioneer of index investing and founder of Vanguard, advised. The success of index funds gives rise to the anomalous situation where the Big Three have the most votes in a huge number of American companies but where their financial interest in the individual success of those businesses is so attenuated as to be virtually non-existent.

Puzder accuses the Big Three of corrupting capitalism. The corruption is not about anything as vulgar as money, it’s about power — in Puzder’s words, the Big Three’s use of their “unaccountable power to accomplish their ends.” Puzder exposes the speciousness of ESG as an investment methodology and how the Big Three’s inflicting ESG on businesses has real-world harms. An example is the collapse of Silicon Valley Bank (SVB) in March 2023. Each of the Big Three had voted in favor of all SVB board candidates at SVB’s annual shareholder meeting in April 2022, even though BlackRock’s consulting arm had given SVB “a gentleman’s C” for its risk controls and found SVB lagging behind similar banks in eleven out of eleven factors in January 2022. SVB did not have a chief risk officer for nine critical months, and its sole board director with the necessary banking expertise, Thomas King, a former Barclays Investment Banking CEO, was excluded from SVB’s risk management committee.

Despite these warning signs, SVB was still included in BlackRock’s ESG-based fund products. As Puzder observes, “BlackRock’s major concern was not primarily corporate governance — it was diversity, and SVB gave BlackRock what it wanted.” (Puzder on DEI is priceless: “Three lies in one acronym.”) There’s no real reason to think that SSGA or (at least for a while) Vanguard saw things any differently. As Steve Soukup writes in his review, the “G” is often mistakenly viewed as the acceptable letter in ESG and goes on to quote Puzder that the “G” should be a “D” “because it stands for selecting corporate board members based on ‘diversity’ rather than merit or value to the company.”

But wasn’t ESG meant to identify risks that traditional financial analysis allegedly ignores? Not according to MSCI ESG Research, which had given SVB’s parent an above-average “A” rating. One of its vice presidents explained, “E, S, G does not cover core financial risks. We’re looking to assess financially-relevant environmental, social and governance factors, not financially-relevant financial factors.” Got that? Yup. It’s total hogwash.

Puzder puts this in the context of the Big Three’s willingness to use its voting power to bully boards into compliance with their dictates. In BlackRock CEO Larry Fink’s 2020 letter to CEOs — Puzder’s textural analysis of Fink’s annual epistolary emissions is outstanding — he warned boards, “When a company is not effectively addressing a material issue, its directors should be held accountable.” And that’s what BlackRock did. In 2021, BlackRock voted against the reelection of 1,862 directors at 975 companies based on a lack of board diversity.

In his 2019 letter, “Purpose and Profit” — earning Puzder’s rejoinder, “Profit is the purpose for which businesses exist” — Fink asserted that “society,” meaning himself, was “looking to companies to address pressing social and economic problems.” Later that year, the Business Roundtable (BRT) produced its now notorious “Statement on the Purpose of a Corporation,” about which Alex Gorsky, its chair of corporate governance and Johnson & Johnson CEO, confessed, “There were times when I felt like Thomas Jefferson.”

The document produced by the BRT’s Thomas Jefferson reversed the long-standing view of corporate purpose famously set out by Milton Friedman in a 1970 New York Times article. Puzder — his book is dedicated to Friedman’s memory — points out that the Big Three are the largest shareholders in virtually every company that signed the BRT statement, and in the case of Gorsky’s Johnson & Johnson, control a combined 23% of the stock. “It may have been a coincidence that the BRT issues its shareholder-capitalism concession in a year when BlackRock alone ‘voted against or withheld votes from 4,800 directors at 2,700 different companies’ — but I seriously doubt it,” Puzder writes.

Fink’s next two letters were even more extreme. “Every government, company and shareholder must confront climate change,” Fink wrote in bold type in his 2020 letter to CEOs, warning that climate change was causing “a fundamental reshaping of finance.” He went further in his 2021 letter, saying, “It’s important to recognize that net zero demands a transformation of the entire economy.” Who was demanding net zero? It wasn’t Congress. Congress has never passed a climate law with decarbonization targets, let alone a net-zero law. It was Fink who demanded — “we are asking” — that companies prepare net-zero plans and incorporate them into their long-term strategy.

There was real menace behind those words. In his 2020 letter, Fink had written, again in bold type, that BlackRock would be “increasingly disposed to vote against management and board directors when companies are not making sufficient progress on sustainability-related disclosures and the business practices and plans underlying them.” Fink went on to note that BlackRock had voted against or withheld votes from 4,800 directors at 2,700 different companies. That year, BlackRock’s stewardship team disclosed it had identified 244 companies making insufficient progress integrating climate risk into their business models or disclosures and had taken “voting action” against 53 of them. “This was an exercise of raw and absolute financial power,” Puzder writes. “If you were the CEO of one of the thousands of companies in which BlackRock invested the message was clear — Resistance is futile.”

One of those companies is, of course, ExxonMobil. Justifying its value-destroying, anti-fossil-fuel vote for the three Engine No.1 directors, BlackRock said it had a long history of multi-year engagement with the company on a range of issues including “oversight of climate risk” and had engaged with Exxon no fewer than twelve times over the previous year. “That is a lot of ‘stewardship,’” Puzder writes. “As it turns out, for U.S. and global consumers, international security, and Exxon’s shareholders, forcing Exxon to reduce oil production and advance net-zero policies was unequivocally the wrong plan.”

The Big Three are unlike other investors who make a bad call and suffer the consequences in their investment performance or who vote their values and accept the hit to their returns. For index fund providers, owning individual stocks and the proxies vested in them is an unavoidable by-product of Bogle’s buying the haystack. The Big Three’s vast accumulation of proxies creates the temptation for index managers to exercise power without responsibility and pursue ESG as politics by other means. The traditional assumption that shareholders were solely or primarily interested in financial return was not one that could be safely made in their case. That might have been true of their clients, whose money they were managing — the “real” (underlying) shareholders — but their investment managers had bigger fish to fry such as saving the planet.

Of them, despite some verbal backtracking by Fink, only Vanguard has shown the necessary awareness of the dangers this creates. “We don’t believe that we should dictate company strategy,” Vanguard’s then CEO, Tim Buckley, told the Financial Times in February 2023. “It would be hubris to presume that we know the right strategy for the thousands of companies that Vanguard invests with. We just want to make sure that risks are being appropriately disclosed and that every company is playing by the rules.”

Puzder has been a leading light in the resistance against ESG, which, especially at state level, was already proving far from futile even prior to Trump’s return to the White House. It’s a mark of progress that, as early as June 2023, Fink had dropped the term ESG, but remains committed to discussing “decarbonization” with companies that it describes as “critical to the transition to a low-carbon economy,” including those with carbon-intensive business models. DEI lives on in BlackRock’s “engagement” with companies over their “human capital management” including efforts to foster a diverse and inclusive workforce culture. “If you believe the collectivists will discontinue their efforts to use their massive financial leverage in order to achieve their authoritarian vision of utopia, you are wrong,” Puzder warns.

A May 2024 Bloomberg editorial board opinion piece echoed Buckley’s view in arguing that the Big Three’s stewardship “should be restricted to ensuring effective corporate governance and rigorously documented and disclosed.” Bringing about such a restriction in a legal settlement should be a key aim of litigation against the Big Three brought by states such as Texas. “Stewardship is actually more effective and more insidious than proxy voting, as it occurs in C-suite conference rooms and on Zoom calls, beyond the purview of both investors and those who would protect their interests,” Puzder says. The only durable and effective remedy is to radically curtail the scope of issues on which index funds can cast their proxies so that they are cast in favor of board proposals except for those ensuring more effective corporate governance or where adoption of a proposal would result in a demonstrable increase in shareholder returns.

Puzder himself says of ESG’s opponents, “We are not going away.” On January 23, President Trump nominated him to be U.S. ambassador to the EU. If confirmed by the Senate, Puzder will confront another threat to American capitalism in the form of the EU Sustainable Finance Disclosure Regulation and the EU taxonomy on sustainable activities and the ESG requirements they impose on European investors in American companies. If Brussels wants to gain a preview of the nominee, they would do well to read Puzder’s book, as should anyone who cares about the future of shareholder capitalism in America.

RUPERT DARWALL is a senior fellow of the National Center for Energy Analytics and author of The Age of Error: Net Zero and the Destruction of the West (publication later this year by Encounter Books).

This article was originally published by RealClearEnergy and made available via RealClearWire.