New commentary from legal and business scholars, published on the Harvard Law School Forum on Corporate Governance, urges caution in interpreting ESG scores as definitive indicators of social purpose in nonprofit-controlled firms.
Ofer Eldar, a professor of law at UC Berkeley School of Law, and Mark Ørberg, an assistant professor at Copenhagen Business School, authored the piece, offering a critical response to a recent empirical study on ESG performance in such entities.
Eldar and Ørberg highlight that the current landscape of nonprofit control is facing scrutiny, citing recent governance debates at OpenAI in the US and turmoil at Novo Nordisk in Europe. They note that the intervention by the Novo Foundation in Novo Nordisk, a prominent example of the enterprise foundation model, appeared driven by concerns over profit generation to sustain philanthropic giving rather than social purpose. This, they argue, reinforces their definition of the income-generating model of nonprofit control, where the primary aim is to generate cash flows for the parent nonprofit, as also seen in companies like IKEA and Carlsberg.
While acknowledging the valuable empirical study by Schröder and Thomsen on ESG performance among foundation-owned firms, the authors presented several caveats. First, they point out that the study’s sample is concentrated in wealthy European countries, and the control group may suffer from unobserved quality correlations. They suggest that the superior ESG scores of foundation-owned firms might reflect their inherent high performance as income-generating entities, rather than a direct causal link to embedded social purpose.
Second, the authors question the reliability of ESG scores themselves, describing them as “crude proxies for true social or environmental impact.” They refer to various studies highlighting inconsistencies and biases in ESG ratings. As an example, they note that Carlsberg’s employee satisfaction, based on Glassdoor reviews, is lower than a competitor, despite its foundation ownership. They also point out that the average ESG score for foundation-owned firms (around 57) is mid-range, not indicative of leading ESG performance, reinforcing the need for caution in making broad claims about “lofty purposes” based solely on these scores.
Third, Eldar and Ørberg argue that even if ESG differences are accurately captured, the results align with their theoretical distinction between income-generating and socially oriented nonprofit control. For many foundation-owned firms, like Carlsberg or Novo Nordisk, the primary objective is long-term profit generation to support their nonprofit parents. They suggest that any ESG outperformance in these cases likely reflects responsible business practices driven by financial prudence rather than a prioritization of social impact over profit.
The authors acknowledge that income-generating nonprofit-controlled firms may act responsibly but contend this is often a byproduct of long-term business strategy, not a signal of embedded social purpose.
The scholars emphasize that the real test for nonprofit control arises when firms pursue broad social goals while relying on outside capital, potentially leading to conflicts and “mission integrity” compromises, as illustrated by the OpenAI case. They also caution against “greenwashing” as more tech and blockchain firms explore foundation-based models.
While advocating for legal frameworks that facilitate the income-generating model of nonprofit control due to their effective business operations and charitable contributions, Eldar and Ørberg stress the need for greater scrutiny when nonprofit-controlled firms invoke expansive missions without directly channeling cash flows back to their nonprofit sponsors.
In conclusion, they assert that while Schröder and Thomsen’s study offers useful data, its findings on foundation-owned firms’ ESG performance should be interpreted with care. They argue that reasonable ESG metrics do not necessarily equate to a deeper commitment to public purpose and that effective nonprofit control structures require careful design and governance to prevent mission drift and reputational misuse.
