Shifting Mandate

Capitalism is built upon the bedrock belief that shareholders value profit above all else. But the times may be ’a changing.

In today’s economy, many shareholders are as likely to demand that corporate leaders improve diversity efforts, promote ethical products, reduce their environmental footprint and speak out on political issues.

And corporate leaders have reason to fear the wrath of shareholder discontent over a range of social concerns, according to new research by Abhinav Gupta, an associate professor of management and Michael G. Foster Endowed Fellow at the University of Washington Foster School of Business.

He and his co-authors have discovered that CEOs who run afoul of shareholders on matters of corporate social responsibility (CSR) are more likely to get fired or hit with compensation penalties than those who cross shareholders over decisions of strategy or governance that threaten their personal wealth. (Surprisingly, Gupta says, those profit-oriented concerns have little effect on whether a CEO gets docked or dismissed.)

Make money or change the world?

To understand the effect of shareholder interests in corporate social responsibility, Gupta and collaborators Michelle Lee of Queen’s University and Don Hambrick of Pennsylvania State University analyzed a large sample of public corporations over a 12-year period. They measured annual levels of wealth-oriented unrest (related to dividends, board structure, divestitures) and CSR-oriented unrest (related to environmental practices, human rights, employment equity).

They found a significant disparity in repercussions. CSR-oriented disputes with shareholders triggered far more CEO pay penalties and dismissals than wealth-oriented disputes did.

The disparity may seem surprising.

“Why would shareholders’ complaints about social issues be more damaging to CEOs’ careers than those about wealth-maximizing concerns?” Gupta asks. “After all, most shareholders typically buy the stock of a company to make money—not to change the world.”

Information economics

Gupta and his co-authors find the most viable explanation in the study of “information economics,” which suggests that if you give people information that simply corroborates what was previously known, they will think of the information as redundant, and not change their opinions.

This would explain why shareholder unrest focused on corporate social responsibility is much more potent than unrest focused on wealth maximization.

While there are many established financial metrics—stock returns, net income, sales growth—to judge a CEO’s effectiveness at maximizing wealth, there are no universally agreed-upon metrics of a company’s social performance.

“Shareholder unrest focused on social issues, therefore, is new information for the board, which may fear that the company is at risk of suffering negative press and reputational damage,” Gupta says.