The role of business in promoting social objectives has many aspects and is a rich area of study for researchers in finance.
ESG (environmental, social and governance)is a hot term in the financial markets. In 2020, investors poured more than $50 billion into funds that invest in companies that promote social good.
Larry Fink, who runs BlackRock, the world’s largest asset management firm, urges companies to consider how their practices benefit all stakeholders, including shareholders, employees, customers and the communities they operate. At the same time, more firms are beginning to voluntarily increase minimum wages, adopt gender and ethnicity diversity goals and promote renewable energy.
All this is exciting, if not more puzzling, for students who spent years in finance classrooms. They learned from business school professors that managers should aim to boost corporate profits and maximize shareholder wealth. In this classic framework, CEOs and the board of directors owe their loyalty to shareholders and are duly compensated for creating value for stock owners.
On the contrary, using corporations to promote a social agenda is suspicious, to say the least. After all, why should firms donate to charity if shareholders can write a check themselves? As Milton Friedman put it 50 years ago, “The social responsibility of business is to increase its profits.”
Is shareholder wealth maximization still a relevant idea for the new generation of business school students? What is the objective of the firm in this fast-evolving era? My research at the Harbert College of Business aims to answer these questions by examining the relationship between firms and various stakeholders, especially employees.
I have studied how labor market regulations and labor unions affect a firm’s investment strategy, product quality and valuation. In other projects, I analyzed how mergers and acquisitions influence labor hiring and procurement costs from suppliers.
A common theme that emerges from my work is that the stakeholders are increasingly important and more integrated into the corporations nowadays. Take labor as an example. Research shows that the contribution by employees accounts for more than 20% of a firm’s stock market value in the United States. In many nascent industries, labor and intangible capital, rather than machines and equipment, are the main business growth drivers.
Once we understand the role of stakeholders, the trend toward ESG may not be at odds with shareholder wealth maximization. Companies with a reputation for mistreating workers and customers will not attract talented employees and investments from local communities. By adopting a stakeholder perspective, firms also safeguard their most important assets — human capital and business relationships. ESG efforts may well be an organic process of growth towards shareholder value creation.
In other words, firms are “doing well by doing good.”
However, much remains for us to study in the rising pro-social behaviors of firms. Do firms more committed to ESG efforts enjoy better stock returns? Shall we use performances in ESG activities to evaluate CEOs? How should firms and government interact when part of their social agenda overlaps? The answers to these questions will provide new insights to the business community.
Mo Shen
Assistant Professor
Department of Finance
