COMPLETE summary including Guest lectures + Mandatory papers + Recommended papers. Comments in slides are included, but also information that lectures provided during the classes.
Part 1. Corporate purpose, Corporate social responsibility, Shareholder vs stakeholder
value, and the B-corporation.
Mandatory paper: Bebchuck, Kastiel & Tallarita (2022): Does Enlightened Shareholder Value Add Value?
Shareholder Value Maximization (SVM):
• SVM entails maximizing the net present value through discounted cash flows and optimal capital
structure.
• Maximizing shareholder value.
• Diversification allows for the exclusion of firm-specific risk from CAPM calculations.
• Pure SVM is amoral, careless about right or wrong
Enhanced Shareholder Value Maximization (ESMV):
• ESMV broadens the focus to include all stakeholders, not just shareholders. Will serve long-term SVM.
• Legal contexts:
• Europe: Civil law, stakeholder embedded in law
• US: Common law, shareholder primacy, comes in 1st place because other stakeholders have
contracts.
• UK: Stakeholders are mentioned, but shareholder primacy.
Support for ESMV:
• Corporate leaders and institutional investors increasingly advocate for ESMV, recognizing the
importance of serving all stakeholders.
• Doing well by doing good: public pension funds are traditional activists, want to protect their
investments. Proposals for greener projects to protect shareholder value against regulatory risk.
Challenges and Trade-offs:
• While ESMV theoretically offers win-win outcomes, in reality, there are trade-offs between
shareholder and stakeholder interests.
• Tax avoidance and other practices raise questions about the practical implementation of ESMV.
ESVM = SVM
1. Corporate leaders are not myopic (short-sighted), consider long-term consequences on their choices
on long-term shareholder value
2. They are well-informed about consequences
3. Courts avoid micromanagement of corporate decisions and defer to the discretion of corporate leaders
under the business judgement rule (Corporations will act in the best interest of the company).
4. No greenwashing, so actual changes in treatment of stakeholders.
ESVM < > SVM
1. Focus on long-term, but is LT always better?
2. Education and informational value of ESVM, requires considering stakeholders. Could lead to
greenwashing?
3. Using ESVM as an excuse to deviate from value max?
Conclusion on ESVM:
• ESVM could help to focus on stakeholder constraints on value, potentially enhancing long-term value
creation.
• However, it could also be unhelpful but harmless, akin to "new wine in old bags," or counter-
productive if it induces misperceptions or destroys value.
Problem with SVM:
• SVM assumes conditions of a perfect competitive economy without externalities and no agent to
affect prices, which are often not fulfilled.
, • Then increase wealth of shareholders without others being worse off, stakeholders are protected by
contracts.
• SVM breaks down under:
• Imperfect competition: danger of monopoly power, consumers are ripped off
• Common ownership: maximalization does not happen on company level, but multiple
company (portfolio) levels.
• Externalities: cost or benefit that is caused by one party but financially incurred or received
by another.
• The Friedman Separation Theorem advocates for a separation of value maximization and paying for
externalities.
SWM (Shareholder Welfare Maximization):
• SWM = SVM + regulation AND /OR shareholder voting on ESG issues
• Problems:
• Voting is binding in EU, not US and UK
• Institutional investors will only vote in favour of long-term financial return of clients
• Will shareholders actually vote?
• Solution:
• Delegated voting: pay fee to have ISS vote for you. Can join voters profile.
• Requires that mutual funds have clearly specified voting policy.
• Issues to be voted on should be relevant; comparative advantage for firm.
• Should be minimal investment for shareholders to be able to make proposal
• Must be related to business.
Corporate Purpose statement:
• While a Corporate Purpose statement may foster trust, it alone is not sufficient.
• Stakeholder protection through contracts is common, but shareholders lack similar legal protections.
• And any contract is incomplete; cannot foresee everything.
• Solution: corporate governance mechanism.
• Good business get lower cost of capital → lower risk and lower return (=in equilibrium)
• Positive shock to ESG score → demand up → price up → high initial return →longer term higher prices
and lower returns (= out of equilibrium)
Fiduciary duties:
Legal responsibility to act solely in the best interest of another party.
• Corporate level
• = Legal directives, how managers and directors exercise their discretion left by external regulation.
• shareholder primacy vs stakeholderism.
• Fear that SVM forces managers to sacrifice social welfare for shareholder wealth gains.
• Misplaced fear, reason: business-judgement rule; courts will not interfere.
• Investment Trustees
• Subject to stricter fiduciary duties; less opportunity to justify social acts with he profitability of
long term commitments.
• Board elections and representation
• Shareholders typically appoint the board, with considerations for minority representation.
• Executive pay:
• Typically set by the board, often focused on stock price: LT incentives.
• Stock price could be metric for social welfare and includes effects on reputation, employee
engagement and including ESG-related factors.
Advantage of CP (Corporate Purpose):
• CP fosters commitment and trust but may not adequately protect shareholders.
• Problem: trade-off, which group? Decided through regulation.
,Regulation and lobbying:
• Regulation should reflect moral norms, but its effectiveness can be hindered by a slow or
dysfunctional democratic process. Not everything can be regulated.
• The role of lobbying in influencing regulation raises questions about its regulation or prohibition.
Mandatory Corporate Purpose statement:
• May only work for few firms, forcing all can destroy the distinguishing value
• Regulator can set minimum requirements for mandatory purpose statements, may be richer then
voluntary statements.
Mandatory paper: Marquis (2020): The B Crop Movement Goes Big.
B Corp:
• In the U.S., many states allow constituency statutes: allows firm not to focus only on shareholders.
• B Corp is a for-profit corporation, certified by the non-profit B Labs. Commits to:
• Accountability: directors must consider impact on all stakeholders.
• Transparency: they publish public reports of overall environmental & social performance.
• Performance: they achieve a minimum verified score on B Impact Assessment (re-certification
required every 2 years).
• Availability: B Corps are available to every business regardless of corporate structure, state, or
county of incorporation. After certified for 2 years: transition to PBC.
• Cost: B Lab certification fees range from $500 to $50,000 per year, based on revenues.
Public Benefit Corporation (PBC):
• It is a legal entity with in its acts of incorporation a public benefit.
• Accountability: directors are (also) required to consider impact on all stakeholders.
• Transparency: they must publish public reports of overall social and environmental
performance.
• Performance: the corporation reports self-reported metrics and evaluations to shareholders.
• Availability: PBCs are legal entity choices in 30 U.S. states and D.C.
• Cost: PBC state filing fees range from $70 to $200.
• Purpose: PBCs were developed model legislation to provide corporations the option of having
both for-profit and social impact purposes/interests.
In France: entreprise a mission:
• Legal entity in France allowed focus on stakeholders.
Impediments (belemmeringen):
• Institutions: the rules of the game (corporate law, securities law, policy incentives, market intuitions)
designed to maximise shareholder value.
• Norms: cultural norms of behaviour of business and people, maximize shareholder value.
B Corporation:
• Four key sections: (1) Governance, (2) Workers, (3) Community, and (4) Environment. (Previously also
customers.)
• Unique assessment of corporation’s entire operations.
• Assessment process: an analyst reviews and ensures consistency and accuracy of submitted
assessment. If below 80, BIA helps identify new areas to create impact.
• Certified if score is above 80 out of 200.
• Need to continue improving per evolving standard.
• Means at least one area of excellence and other areas of proficiency.
B Impact Assessment (BIA):
• A way to understand the company.
• A tool for continuous improvement and deeper engagement.
• A platform to compare and learn.
• A holistic view of business and environment beyond organization itself. Allows corporations to follow
systemic approach to approach corporate management and responsibility.
, Mandatory paper: On the Foundations of Corporate Social Responsibility H. Liang, L. Renneboog, 2017.
CSR = incorporation of ESG considerations. Internalize externalities firms create. There are several rating
agencies with measures of ESG performance, these are inconsistent, however. CSR also deals with SRI.
Sustainable responsible funds use negative screening, positive screening, activism, and direct engagement. Are
investors willing to give up return?
Main RQ: What are the fundamental forces that steer corporations to behave as good citizens rather than as
pure profit maximisers?
Laws:
• Legal origins = English common law, French civil law, German civil law, Scandinavian law, Socialist law.
• "Law and Finance" view: solve agency conflicts between managers and shareholders.
• Corporate laws address agency conflicts between managers and shareholders, and
between controlling and minority shareholders.
• Common law is superior in providing fertile ground for shareholder protection.
• Shareholder protection → financial development → efficient resource allocation →
better economic development and social welfare.
• "Stakeholder" view: the firm has a responsibility to shareholders, but also to broader
stakeholders
• Civil laws are superior in providing fertile ground for stakeholder protection.
• Stakeholder → reducing market externalities → social welfare.
Institutions: democracy and constraints
• "Institutional" view (conventional wisdom): political institutions shape corporate governance
structures and aggregate social preferences.
• To foster CSR and sustainability: democracy and constraints on government need to come
first.
• "Development" view: institutions are the consequence, rather than preconditions, of economic
development.
• Democracy and executive constraints hinder good economic outcomes (such as CSR and
sustainability): difficulty in consensus building.
Results:
• Civil law firms have higher CSR scores and ESG scores than common law firms.
• French origin does better than English origin.
• Capitalist countries do better than former socialist countries.
In the regressions, they use the different CSR scores as the dependent variable. When comparing the laws and
countries, they leave 1 out as base group (which is the English common law).
• Civil law: has higher CSR scores. Doing better in terms of CSR.
What about causality? Quasi-experiments. Endogeneity:
• No control for country fixed-effects (legal origin = time-invariant) The laws are established long before
CSR was an issue → common law.
• Product responsibility after 2009 went up for civil law countries: after Chinese Milk scandal.
• In civil law countries, litigations are less normal (negative relationship).
• This explains the CSR rating.
• Strong employment regulation = higher CSR rating. CSR is not just fulfilling regulation: may go beyond
regulation.
Summary:
• Legal origins: only consistent predictors of CSR
• Civil law firms outperform common law firms in CSR issues.
• Scandinavian firms outperform the rest of the world in CSR.
• Political ‘institutions’: mostly insignificant.
• Corporate governance (ownership structure & board structure), financial performance, financial
constraints, cultures, etc: not strong predictors of CSR.
• Policy trade-off between shareholder protection and stakeholder protection, and between financial
development and societal sustainability.
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