Financial Leadership for Good: Stakeholders, Shareholders, and Foundations
Saturday, Jan. 6, 2024 8:00 AM - 10:00 AM (CST)
- Chair: Sarah E. Hamersma, Syracuse University
Finance, Human Flourishing and the Logic of Stakeholder Engagement
AbstractMany firms underinvest in higher purpose and stakeholder engagement. One reason is because agency models exclude stakeholder flourishing and the subjective dimension of work, automatically excluding engagement. By influencing decision makers, these models contribute to this underinvestment problem. A second reason is the paradox of non-calculation: investments in stakeholder engagement may generate economic gain, but only if done without the intent of producing economic gain (Quinn and Thakor, 2019). This paradox is resolved when stakeholder flourishing is integrated into the firm’s objective function. We present a model with bi-directional causality between firm value and stakeholder engagement, where the equilibrium weights on stakeholder flourishing and shareholder value are endogenously determined. Consistent with stages of psychosocial human development, distributive justice emerges alongside stakeholder engagement as a corporate value, and in equilibrium is positively correlated with value at the firm level. Optimal investments in engagement always increase stakeholder flourishing and often increase shareholder wealth, but credible investments cannot ‘maximize’ shareholder value in the neoclassical sense. The explicit pursuit of shareholder value maximization dissolves the link between engagement and firm value and highlights the complex and paradoxical nature of corporate investments in human flourishing, higher purpose and stakeholder engagement.
Doing Good and Doing It With (Investment) Style
AbstractWe study the asset allocation, spending behavior, fees, and investment performance of U.S. private foundations. We find that large foundations generate positive risk-adjusted returns of about one percent per year. Larger and more sophisticated foundations perform better and invest more aggressively. Foundations with concentrated stock holdings have higher returns but also take on more risk. Because of the constraints imposed by the five percent minimum spending rule and accommodating monetary policy, private foundations increase their risk-taking and reach for yield. Due to these constraints, a conservative asset allocation will decrease real wealth over time resulting in less charitable giving.
The Labor Market Impact of Shareholder Power: Worker-Level Evidence
AbstractUsing worker-level data from the US Census Bureau’s LEHD program from 1993 through 2015, we show that shareholder power leads to large earnings losses for employees. We track the earnings of employees up to five years after their firms experience a material increase in concentrated ownership by block institutional shareholders, relative to employees of other firms that experience a similarly sized increase in ownership by diffused institutional shareholders. We find that over the next six years, the cumulative earnings of the affected employees decline by 10% of their pre-event annual earnings on average. Workers with "high skills" (such as those with earnings in the top tercile) and top managers (such as chief executives) bear the brunt of the negative impact, with the cumulative earnings declining by 16% and 63%, respectively. In contrast, shareholder power does not affect the earnings of employees with relatively low pay. There is also a negative impact on hiring but no impact on employee departures nor differential earnings losses conditional on departure, suggesting that separation is not the main channel underlying the earnings losses. The collection of evidence is consistent with concentrated ownership increasing shareholders' bargaining power, which in turn reduces employees' rents.
- G3 - Corporate Finance and Governance