Shares of Boeing have almost doubled in just a few days. But shareholders still must deal with the aerospace giant’s questionable corporate culture.

Boeing’s BA, +0.28% internal culture contributed to the flawed development of its 737 MAX jetliners (one of which crashed in December 2018 and a second in March 2019). Many have alleged that Boeing’s culture evolved from one run by safety-conscious engineers to one dominated by MBAs whose primary focus was financial engineering.

For this column, I am more interested in why Boeing’s culture may have evolved in this way. While most blame Boeing’s executives for either promoting it or letting it happen, that’s only part of the story. Responsibility also rests with a Wall Street investment community that demands a briskly rising stock price with minimal volatility.

“ If we seriously expect companies to not prioritize short-term results over longer-term considerations like jetliner safety, then we need to become less short-term oriented ourselves. ”

Financial engineering is the natural result of responding to that demand. If we seriously expect companies to not prioritize short-term results over longer-term considerations like jetliner safety, then we need to become less short-term oriented ourselves. We need to give companies longer leashes with which to focus on maximizing longer-term value, even if it means forfeiting shorter-term results along the way.

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If shareholders are not willing to give companies more breathing room, then corporations need governance structures that enable them to resist the demands of Wall Street. Yet such structures often run afoul of what gets a company a good “governance” score from firms that compile ESG ratings. (Those ratings refer to companies’ performance along the dimensions of Environment, Social, and Governance.)

That’s because such rating consider responsiveness to shareholders to be a virtue. Defining good governance in this way traces at least as far back as a now-famous 1986 article by Harvard Business School professor Michael Jensen that focused on the fundamental conflict of interest between corporate managers and shareholders. Jensen argued that managers have an incentive to not pay out corporate cash to shareholders since that will “reduce the resources under managers’ control, thereby reducing managers’ power.”

Jensen favored governance structures that motivated managers to “disgorge the cash” to shareholders, the rightful owners of that cash. The boom in share repurchases over the last several decades was in part the consequence of the growing focus on shareholder rights and corporate governance.

“ In many ways Boeing behaved just as Wall Street wanted it to. ”

This is why it’s unfair to exclusively blame Boeing for its culture shift over the last few decades. In many ways Boeing behaved just as Wall Street wanted it to. It’s easy to ridicule the company for deciding, just six weeks after the first of the two 737 MAX crashes, to raise its dividend by 20% and increase its share purchase program to $20 billion. But shouldn’t some scorn also be directed at the shareholders who wanted a better performing stock price and the belief that responsiveness to shareholders is a mark of good corporate governance?

Let me stress that I am not excusing Boeing’s executives from their responsibility, which is enormous. But we cannot expect to prevent future tragedies if we have an incorrect assessment of the underlying causes.

The failure of the “G” part of ESG ratings

This discussion in turn calls into serious question the “G” part of the ESG ratings. In the years prior to the 737 MAX jet crashes, the ESG rating agencies for the most part gave Boeing a corporate governance score of average or higher. No red flags were raised about a corporate culture that might be prioritizing short-term gains at the expense of longer-term concerns.

Gilbert Hedstrom is not surprised. He is owner and founder of Hedstrom Associates, a firm that consults with corporate executives and boards on sustainability issues. In an interview, he told me that he places “zero confidence in the G part of the ESG ratings.” In fact, he added, they really should be called “ES” ratings because, while they do a decent job assessing the environmental and social aspects of a corporation’s actions, those ratings “just do a lousy job on governance.”

One big reason for this, according to Hedstrom, is that it’s almost impossible for outsiders to quantify what’s really important in a company’s internal governance. “There are only a few governance items the raters ask about and get data on (e.g., board diversity),” he wrote in an email, “but the vast majority of relevant information on Governance and Strategy does not lend itself to data. And the ESG Raters are almost entirely interested in data.”

“ Getting a high ESG rating has become a game that corporations play. ”

A related problem is that getting a high ESG rating has become a game that corporations play. According to the Global Sustainable Investment Alliance, more than $30 trillion of assets worldwide are now invested according to ESG factors. As a result, Hedstrom argued, “public companies globally are engaged in an almost relentless pursuit of strong ESG ratings, viewing them as necessary.”

It is surprisingly easy for corporations to play this game when it comes to their governance score, which is largely based on publicly available data or answers given to a questionnaire. And “the way the raters ask for the information is such that companies will virtually always answer in the most positive light,” according to Hedstrom. Not surprisingly, therefore, the reality is usually far different than what is portrayed by these ESG ratings.

(For the record, Hedstrom is speaking about his experience working with numerous large companies over the past three decades; he is not commenting about Boeing in particular.)

The bottom line? To really find out about a corporation’s internal governance and culture, you need to look elsewhere than the governance scores that are part of ESG ratings. One way of thinking of your task is to imagine yourself in Warren Buffett’s shoes as the CEO and Chairman of Berkshire Hathaway.

Read: This stock market is full of drunken sailors, and you want to buy what they’re foolishly selling

As he reminded investors yet again in his most recent annual letter to shareholders, released in late February, his ideal holding period for an investment is forever. Such a focus reframes your decision making far differently than when you’re selecting stocks as part of a short-term trade.

There is no denying that this involves a lot of investigative work and analysis. But as Buffett’s long-term record illustrates, the rewards of getting it right are substantial.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

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