Corporate Social Responsibility through Shareholder Governance
Series number :
- Corporate Objective •
- Corporate Social Responsibility •
- enlightened shareholder value
New approaches to corporate purpose have emerged in recent years that hold out the promise of addressing concerns about corporate social responsibility (CSR) through shareholder governance, rather than in spite of it, by reconceptualizing shareholder interests in more holistic ways. We provide the first comprehensive analysis of such attempts to reconcile shareholder primacy with CSR.
The seminal approach—enlightened shareholder value (ESV)—is based on the idea that treating other stakeholders well can ultimately redound to long-term shareholder value. Two newer approaches depart from the traditional corporate objective of long-term shareholder value by positing that it is shareholders’ welfare, not their wealth per se, that managers should pursue. The shareholder social preferences (SSP) view incorporates into the corporate objective the degree to which the firm’s operations aligns with the social views of shareholders. The portfolio value maximization (PVM) view, in contrast, argues that corporate fiduciaries should maximize the value of diversified shareholders’ portfolios by considering the externalities of the firm’s operations on those portfolios.
While the long-term shareholder value objective of ESV does align to some extent with key stakeholder concerns, it falls short of resolving all social conflicts about corporate conduct, and moreover management will sometimes, perhaps often, fall short of the degree of social responsibility that is consistent with the shareholder value objective. But incorporating shareholders’ social preferences into the corporate objective offers little hope for improvement. For one, shareholder welfare puts far greater relative weight on long-term shareholder value than would a proper conception of social welfare. As well, shareholders’ insulation from the social and moral pressures that generate pro-social behavior at the individual level mutes their social preferences with respect to corporate conduct. Conflicts among shareholders about social issues further dampen the role of social preferences in shareholder welfare. Additionally, the shareholders actually willing to hold the shares of the companies that pose the greatest social concerns will be those least concerned about the social issues implicated. And even among these shareholders, management faces significant information problems in gleaning their social preferences. Finally, we show that the optimal incentive scheme under SSP in fact focuses management squarely on shareholder value.
The story is much the same for PVM. Diversified shareholders’ portfolio value captures only a small portion of the externalities like pollution that its proponents hope to address. The type of externalities it does capture effectively are competitive effects on other firms, the result of which is to motivate socially destructive anticompetitive conduct.
Shareholder governance nonetheless does hold significant promise for improving corporate conduct, but this promise does not stem from any innovation in our basic understanding of shareholders’ interests along the lines of shareholder welfarism. Rather, the future of CSR, as with its past, is with ESV. The existing law-and-economics literature on ESV, however, has been stunted by key misconceptions. The first is to frame ESV as an alternative to shareholder value as a corporate objective. This is a category mistake; ESV is best understood as a reform agenda targeting a particular class of agency costs and information problems that harm not only shareholders but also other corporate stakeholders. A second misconception is that the behavior of all the key actors in the corporate system is determined by their incentives and so ESV ideas cannot influence it. But we show that this “determinacy paradox” is a challenge for all normative arguments in corporate law scholarship and that there are good reasons to think it can be surmounted in the case of ESV. As a positive matter, the increasing use by various actors in the corporate system of normative arguments that sound in ESV terms is by our lights a phenomenon worth studying rather than simply dismissing. The renewed interest in CSR in recent years may lead to new pathways for achieving social progress through pursuit of enlightened shareholder value.