Environment, social, and governance investing faces a credibility crisis. Critics rightly question whether ESG’s growth has produced meaningful social or environmental benefits, pointing their fingers at lax rating agencies and greenwashing fund managers. If governance gets any attention, it’s as a dutiful side dish of risk reduction.

That’s a problem because the G signifies what is actually the acronym’s most powerful element: Governance dictates who makes strategic decisions and whose interests drive them. It seems dull only because it’s discussed in the dry language of board accountability, fiduciary duty, compliance, and shareholder rights.

Governance is the key that could unlock real advances in corporate social and environmental performance. But that will require changing the fundamental structures of business.

Power players like the Business Roundtable; the World Economic Forum; and Larry Fink, CEO of BlackRock, the world’s largest asset manager, have embraced the phrase stakeholder capitalism but not, it seems, the substance. Fink, for one, frames engaging with stakeholders as essential to maximizing shareholder value: In other words, it’s a way to instrumentalize other stakeholders to make more money for shareholders faster, not a way to serve the interests of those stakeholders.

In most cases, governance is singularly driven by shareholders looking to maximize their returns while (in the best-case scenario) welcoming environmental and social benefits. This produces, at most, incremental changes, which are not going to help solve issues like the climate crisis, structural injustices, and global conflict. If we want better results, we need better governance.

EXPANDED BOARD REPRESENTATION AND BENEFIT CORPORATIONS ARE A GOOD START

The German system of codetermination, which requires one-third to one-half of supervisory board members to be worker representatives, would add needed balance to U.S. corporate boards. While it’s not exactly on the front burner, adoption of that rule has some high-profile advocates, including Massachusetts Senator Elizabeth Warren.

Bringing employees into strategic decision-making can significantly improve a company’s social impact. Adding customers, supply chain partners, and community representatives to boards would be another positive step. Plenty of research shows that diverse groups are more innovative and make better decisions.

The benefit corporation, a legal form available in most states, is another step forward. Provisions vary by state, but generally benefit corporations must specify social and environmental goals, report publicly on progress, and consider those goals alongside profitability and shareholder value when making decisions.

A nascent idea just 10 years ago, benefit corporations now number in the thousands and include public companies such as Allbirds, Coursera, Lemonade Insurance, and Warby Parker. And ESG activist investors, fed up with the slow pace of change, have started filing shareholder proposals mandating benefit corporation certification.

YOU CAN’T HAVE STAKEHOLDER CAPITALISM WITHOUT STAKEHOLDER GOVERNANCE

Benefit corporations are a real improvement over the dominant paradigm, but we can’t produce stakeholder capitalism with shareholder governance. When governance is focused solely on shareholder value, strategic decision-makers—whether they’re employees, founders, or some investment fund—tend to maximize their short-term advantage and try to “win” against competing interests.

One way around that problem is conversion to a noncharitable perpetual trust, which owns a majority of voting shares and appoints a board of directors. This model redefines fiduciary duty to include multiple stakeholders, and prevents an unwelcome sale of the business or undue extraction of profits. Profits are reinvested and shared with stakeholders. Outside investors can purchase stock and receive a dividend from the corporation, even while voting control is held in a trust.

Portland, Oregon-based Organically Grown Co., one of the largest independent organic produce distributors in the nation, was one of the first to adopt this structure in the U.S. In July 2018, OGC bought back all shares and transferred them to a perpetual trust, which now holds 100% ownership of the company’s voting shares.

Last year Firebrand Artisan Breads made a similar move, converting to a perpetual purpose trust governed by a stewardship committee that’s responsible to 12 purposes, including a preference for hiring formerly incarcerated people and others who face employment barriers.

Foundation ownership is another model that supports long-term thinking and resilience, as demonstrated by companies including Bosch, Novo Nordisk, and Rolex—all owned by charitable foundations. The “charitable” label, however, doesn’t guarantee positive environmental and social impact or transparency (which not all these corporations deliver). Foundation ownership is best coupled with binding mission commitments.

Ownership structures like these avoid the tendency for shareholders to focus on their self-interest at the expense of the business and its other stakeholders. They instead prioritize profitability in service to an environmental or social mission and to stakeholders collectively.

Obviously, a large-scale shift in their direction would be a governance revolution. If that happens, it will be because mission-driven founders and investors realize that governance is the soil that enables social and environmental impact to grow.