The Growing Influence of ESG: A Double-Edged Sword for Organizational Sustainability

In recent years, environmental, social, and governance (ESG) concerns have moved to the top of the agenda of many organizations. Stakeholders, such as employees, managers, and investors, are now placing greater emphasis on sustainability within their organizations. Sustainable investing, for instance, has surged dramatically, reflecting a fundamental demand for companies to prioritize ESG factors. However, these developments also raise some challenging questions: How do pro-social stakeholders influence organizational sustainability? Does the impact of these stakeholders vary based on their roles within the organization? And perhaps most intriguingly, can pro-social preferences sometimes lead to conflicts within the organization, and how are these resolved?

To unravel these questions, we must understand how interactions between different stakeholders shape an organization’s approach to sustainability. To this end, we develop a theoretical framework in which an owner and a manager collaborate to execute a project. The owner is the controlling stakeholder, but the manager's involvement is critical for the day-to-day running of the organization. 

The Top-Down vs. Bottom-Up Approach

Interestingly, while it seems intuitive that stronger pro-social preferences would universally benefit an organization’s sustainability, our research suggests otherwise. Our analysis highlights the importance of distinguishing between a top-down and a bottom-up approach to addressing sustainability concerns. A top-down approach, where the pro-social initiative comes from the owner, tends to consistently enhance organizational sustainability. However, the same is not always true when adopting a bottom-up approach, in which the pro-social initiative originates from the manager. 

An important result of our analysis shows that when the manager becomes more committed to social causes than the owner, it can actually lead to the organization becoming less sustainable. How? As the manager becomes more pro-social, the potential for conflicts of interest intensifies between the owner and the manager. The owner may even limit the manager’s authority as the conflict of interest becomes too severe. This results in control shifting from a more pro-social manager to a less pro-social owner, and the organization’s sustainability declines. To illustrate this result, we can consider the case of Danone’s CEO Emmanuel Faber, who was removed from his position in 2021 after attempting to transform Danone into a company that focuses on profits and environmental sustainability.

The Conundrum of Managerial Authority

The owner’s decision to delegate authority to the manager involves a trade-off. On the one hand, delegation can allow a more informed manager to make decisions and reduce the owner’s cost of implementing a project. On the other hand, if the manager’s pro-social preferences differ significantly from the owner’s, delegation can lead to the implementation of an undesirable project from the owner’s perspective, prompting the owner to reclaim control and choose a project themself. 

Implications for Organizational Strategy

Our findings challenge the view that more pro-social stakeholders within an organization will automatically lead to better sustainability outcomes. Strengthening the owner's pro-social preferences generally improves these outcomes. However, enhancing the manager's pro-social preferences can either help or hinder organizational sustainability, depending on whether the changes in preferences lead to a change in control between the two stakeholders.

These insights have important implications for policymakers, stakeholders, and researchers. For policymakers aiming to promote sustainability, understanding the dynamics within an organization is essential. Simply encouraging more pro-social behavior is not enough; what matters is which stakeholders are effectively in control and how more pro-social concerns shape their actions. For stakeholders, particularly those in managerial roles, it is important to recognize that pushing too hard on sustainability could backfire if it leads to a loss of influence within the organization, for example, due to pushback from other parties within the organization. Finally, for researchers, our model offers a framework for exploring how pro-social preferences shape organizational outcomes and thus offers a way of interpreting empirical results.

The Paradox of Pro-Social Preferences

In trying to promote organizational sustainability, it is tempting to assume that more is always better—that more pro-social behavior will invariably lead to better outcomes. However, our research suggests a more nuanced view. While pro-social preferences can drive positive change, they can also create conflicts that undermine sustainability, particularly when the push for change comes from within the ranks rather than the top. The key takeaway is that the effectiveness of pro-social behavior in promoting sustainability depends not just on the presence of such behavior but on the structure of control within the organization.

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By Jan Starmans (Stockholm School of Economics)

This article is Part Three of a five-part blog series covering insights from the SHoF-ECGI Corporate Governance Conference. Explore the rest of the posts: read Part One here, read Part Two here, read Part Four here, read Part Five here.

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