ESG (Environmental, Social, and Corporate Governance), like pretty much everything else in this increasingly partisan world, has become an extremely divisive topic in the business sector. While many think that more socially and environmentally conscious investment and business practices are the best way forward and a central pillar of the future global economy, others dismiss it as leftist and utopian. While some argue that ESG is an inevitable trend (accelerated by the novel coronavirus’ interruption to business as usual), the Trump administration has threatened to make it illegal. A new proposed regulation from the U.S. Department of Labor would expressly prohibit the department from including ESG in any decision-making criteria when it comes to U.S. employer-provided pension funds, in an apparent bid to protect Big Oil.
In other parts of the world, however, ESG is already being put in place on a much grander scale. This month the UK-based mining giant Rio Tinto cut their executive bonuses by nearly $4 million dollars as a punitive measure after the company destroyed some of the oldest aboriginal sites in Western Australia in spite of outspoken opposition of Aboriginal traditional owners. “The caves showed evidence of continuous human habitation dating back 46,000 years,” reports the BBC.
While the three chief executives will keep their jobs, this kind of comeuppance for corporate mistreatment of social and environmental heritage is nearly unheard of in the U.S. “Apparently, the executives were not accused of directly causing the destruction but were being held indirectly responsible. Without a doubt, this would be unlikely in most American corporations—and many others around the world,” a Forbes article comments on the event.
The article, instead of deriding the events at Rio Tinto as anomalous or overblown, issues the warning that this occurrence should be “A Lesson For U.S. Shale Executives.” Senior energy contributor Michael Lynch writes, “There is an underlying need for executives to consider the impact of their behavior” and that, “frankly, U.S. corporations often reward senior executives large bonuses as participation trophies, that is, simply showing up.”
In fact, in many cases, the U.S. shale industry has taken that stance to another extreme, issuing hefty bonuses even for execs who ran their companies into the ground. This was the case for Texas shale company Hi-Crush, a story that came to light just this month. Earlier this summer, West Texas plunged into COVID chaos and over 39,000 workers lost direct oil and natural gas jobs in the first half of 2020 in the Lone Star State alone. In the midst of this economic disaster, some shale founders were apparently cutting fat checks. “On July 7, the board of directors at Texas fracking sand supplier Hi-Crush granted nearly $3 million in bonuses to four top executives, including $1.35 million for CEO and founder Robert Rasmus,” Reuters reported in a scathing expose. “Five days later, the company declared bankruptcy.”
Expounding on the phenomenon of “participation trophy” oil and shale exec bonuses, Lynch writes, “I suspect, although I haven’t researched the issue, that this practice originated in the business school argument that executives should be invested in the companies they managed (something that was often not true historically), so as to encourage them to be more attentive to the interests of shareholders. Not surprisingly, this turned into awarding stock options to executives as a reward for good management—and sometimes just for occupying the CEO chair.”
But in an era that ESG is becoming more commonplace and corporate execs are receiving more scrutiny (and in the case of Rio Tinto, actual consequences for their negligence or misdeeds), emboldened shale execs like those at Hi-Crush would do well to consider their business decisions more thoughtfully and with a greater consideration for their public image, not to mention their real-world impact and often extreme negative externalities.