M&A deals in the US suffer from “ESG amnesia” and the sale of Twitter to Elon Musk is a prime example, according to new research from academics.
A new paper argues that ESG is often raised as a risk issue as part of due diligence but rarely are related aims, targets, programmes and objectives for the future written into the terms of a deal.
Caley Petrucci and Guhan Subramanian write that this means that the parties to a merger or acquisition suffer from ESG amnesia, leaving no ESG agreements in place when the ink is dry on a deal.
The pair write that ESG policy making “pervades” all areas of a business. “But when it comes time for one of the most significant events in a corporation’s life, the sale of the company and what becomes of it thereafter, ESG is all but non-existent. Rather, boards succumb to ‘ESG amnesia’, forgetting about prior ESG commitments in favour of an offer to purchase the company at a premium.”
Musk’s notorious acquisition of Twitter—now known as X—is a case in point, they say. Under its previous leadership, Twitter had highlighted its ESG credentials with a mission that included serving a “healthy public discourse” and “healthier public conversation”.
The company even operated a “hateful conduct policy” to stymie efforts to promote violence or threatens users on the platform.
Twitter also made policies to address misinformation about Covid-19 and famously suspended Donald Trump’s account for breaching user rules.
According to Petrucci and Subramanian, Twitter also made much of its commitment to employees, with statements such as “We put people first.”
Twitter even initiated commitments to carbon neutrality, with carbon offsetting projects in Brazil, India, Kenya and Uganda.
Greenbacks over governance
However, little of it survived the Musk takeover, with the deal failing to protect many employees and imposing no “guardrails” to protect content moderation post deal.
The researchers write that “despite Twitter’s long-standing commitment to ESG and stakeholder governance, and the Twitter board’s ability to constrain Musk’s behaviour following the deal, the board stepped aside to let Musk wreak havoc on Twitter’s stakeholders.”
Reuters recently estimated that X, formerly Twitter, far from the $44bn paid by Musk, is now worth around $8bn.
Petrucci and Subramanian say there is enough scope in US fiduciary duties for boards to write ESG commitments into M&A deals so they survive a takeover.
In what many may read as a plea to future M&A participants, the pair write: “While ESG amnesia is a widespread phenomenon in corporate dealmaking, ESG considerations can pervade all aspects of managerial decision making, including decisions about the sale of the company.
“Boards of directors that consider the impact of a transaction on ESG objectives, and incorporate them into the merger agreement as a result, we argue are acting entirely consistent with their fiduciary duties.”
This is not the first time attention has been drawn to the Twitter deal and its apparent failure to meet the values of contemporary corporate values, such as the idea of being a “purposeful” business.
Last year, another team of academics led by Harvard professor Lucian Bebchuk, argued that the then Twitter board had “pushed its stakeholders under the (Musk) bus” when they took legal action to force Musk to uphold his offer for the company.
However, Bebchuk’s claim is that US boards, in the event of an M&A event, “cannot be expected to look after the interests of stakeholders”.
The Twitter deal will be a case study in business circles for some time to come. It has much to teach students of governance. And one of those lessons may be about the fragility of stakeholder-driven values in the face of a big takeover offer. Boards espousing ESG values may wish to remember their commitments when buyers come knocking.