Author(s)

Ting Zhang^*, KaiHua Bao

Affiliation(s)

Research Institute of Machinery Industry Economic & Management, Beijing 100055, China.

Corresponding Author

Ting Zhang

ABSTRACT

Since its inception, the concept of Environmental, Social, and Governance (ESG) has become a prominent topic of international discourse. In practice, however, there has been an overemphasis on environmental protection (E) and social responsibility (S) at the expense of corporate governance (G). Moreover, skepticism exists regarding the capacity of corporate governance to generate social value. This paper investigates the interrelationships among E, S, and G within the ESG framework, with a particular focus on the role of corporate governance and the mechanisms through which it creates social value. Our findings are twofold: (1) In accordance with Adam Smith's "invisible hand" theory, the societal benefits arising from a firm's pursuit of shareholder wealth maximization often exceed those generated by direct pursuits of social welfare maximization. Therefore, firms should prioritize the maximization of shareholder returns. The primary objective of corporate governance is to maximize shareholder value, encompassing key elements such as institutional frameworks, human capital, entrepreneurship, and risk management, which collectively form the bedrock for achieving this goal. As social interest and social value are considered equivalent, strong corporate governance that maximizes shareholder returns consequently generates greater social value. Furthermore, given that corporate governance within ESG should not be bifurcated into broad and narrow interpretations, it represents the most fundamental component of the ESG framework. Within ESG, social responsibility (S) encompasses environmental protection (E). (2) Corporate governance inherently creates social value. The transmission mechanism operates as follows: robust corporate governance maximizes shareholder returns, which in turn creates social value through channels such as innovation, taxation, and employment. Looking ahead, regulators, the public, and corporations should return to this foundational principle, concentrating on corporate governance and sustainable development.

KEYWORDS

ESG; Corporate governance; Corporate social value; Adam Smith's theory

CITE THIS PAPER

Ting Zhang, KaiHua Bao. How corporate governance in ESG creates social value. World Journal of Management Science. 2025, 3(4): 37-44. DOI: https://doi.org/10.61784/wms3087.

REFERENCES

[1] Edmans A. The end of ESG. Financial Management, 2023, 52(1): 3-17.

[2] Mehmood A, De Luca F, Quach H. Investigating how board gender diversity affects environmental, social and governance performance: Evidence from the utilities sector. Utilities Policy, 2023, 83: 101607.

[3] Tampakoudis I, Anagnostopoulou E. The effect of mergers and acquisitions on environmental, social and governance performance and market value: Evidence from EU acquirers. Business Strategy and the Environment, 2020, 29(5): 1865-1875.

[4] Zhou R, Hou J, Ding F. Understanding the nexus between environmental, social, and governance (ESG) and financial performance: Evidence from Chinese-listed companies. Environmental Science and Pollution Research, 2023, 30: 73231-73253.

[5] Jyoti G, Khanna A. Does sustainability performance impact financial performance? Evidence from Indian service sector firms. Sustainable Development, 2021, 29(6): 1086-1095.

[6] Goldstein I, Jiang W, Karolyi G A. To FinTech and beyond. The Review of Financial Studies, 2023, 36(4): 1663-1702.

[7] Summers L H. The inequality puzzle. Democracy: A Journal of Ideas, 2014, 33(2): 65-73.

[8] Gallemore J, Gipper B, Mayberry M. Banks as tax planning intermediaries. The Accounting Review, 2022, 97(2): 233-258.

[9] Broccardo E, Hart O, Zingales L.Exit vs. voice. Journal of Political Economy, 2022, 130(12): 3101-3145.

[10] Berk J B, van Binsbergen J H. The impact of impact investing. Journal of Financial Economics, 2022, 143(2): 792-812.

[11] Berg F, Koelbel J F, Rigobon R. Aggregate confusion: The divergence of ESG ratings. Review of Finance, 2022, 26(6): 1315-1344.

[12] Pedersen L H, Fitzgibbons S, Pomorski L. Responsible investing: The ESG-efficient frontier. Journal of Financial Economics, 2021, 142(2): 572-597.

[13] Zerbib O D. The effect of pro-environmental preferences on bond prices: Evidence from green bonds. Journal of Banking & Finance, 2019, 98: 39-60.

[14] Khan M A. ESG disclosure and firm performance: A bibliometric and meta analysis. Research in International Business and Finance, 2022, 61: 101668.

[15] Glossner S, Matos P, Ramelli S, et al. Do institutional investors stabilize equity markets in crisis periods? Evidence from COVID-19. Management Science, 2025.

[16] Aydomus M, Gülay G, Ergun K. Impact of ESG performance on firm value and profitability. Borsa Istanbul Review, 2022, 22(2): 119-127.

[17] Berle A A, Means G C. The modern corporation and private property. Macmillan, 1932.

[18] Edmans A, Gosling T, Jenter D. CEO compensation: Evidence from the field. Journal of Financial Economics, 2023, 150(3): 103718.

[19] Shleifer A, Vishny R W. A survey of corporate governance. The Journal of Finance, 1997, 52(2): 737-783.

[20] Denis D K, McConnell J J. International corporate governance. Journal of Financial and Quantitative Analysis, 2003, 38(1): 1-36.

[21] Jensen M C, Meckling W H. Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 1976, 3(4): 305-360.

[22] Claessens S, Djankov S, Fan J P, et al. Disentangling the incentive and entrenchment effects of large shareholdings. The Journal of Finance, 2022, 57(6): 2741-2771.

[23] Dasgupta S, Li X, Wang A Y. Product market competition and the agency cost of corporate social responsibility. Review of Financial Studies, 2023, 36(8): 3323-3366.

[24] Bebchuk L A, Tallarita R. The illusory promise of stakeholder governance. Cornell Law Review, 2022, 106: 91.

[25] Williamson O E. Corporate governance. The Yale Law Journal, 1984, 93(7): 1197-1230.

[26] Krueger P, Sautner Z, Starks L T. The importance of climate risks for institutional investors. The Review of Financial Studies, 2020, 33(3): 1067-1111.

[27] Serafeim G. Public sentiment and the price of corporate sustainability. Financial Analysts Journal, 2020, 76(2): 26-46.

[28] Dahlsrud A. How corporate social responsibility is defined: an analysis of 37 definitions. Corporate Social Responsibility and Environmental Management, 2008, 15(1): 1-13.

[29] Hart O, Zingales L. The new corporate governance. The University of Chicago Law Review, 2022: 1-30.

[30] Cohen L, Gurun U G, Nguyen Q H. The ESG-innovation disconnect: Evidence from green patenting. Review of Financial Studies, 2022, 35(12): 5321-5361.

[31] Jaffe A B. Technological opportunity and spillovers of R&D: evidence from firms' patents, profits, and market value. The American Economic Review, 1986, 76(5): 984-1001.

[32] Dyreng S D, Jacob M, Jiang X, Müller M A. Tax incidence and tax avoidance. Contemporary Accounting Research, 2022, 39(4): 2622-2656.

[33] George G, Merrill R K, Schillebeeckx S J D. Digital sustainability and entrepreneurship: How digital innovations are helping tackle climate change and sustainable development. Entrepreneurship Theory and Practice, 2021, 45(5): 999-1027.

[34] Chava S, Kim J H J, Lee J. Risk, return, and environmental and social ratings. Journal of Corporate Finance, 2025, 92: 102744.