Journal of Business Ethics

, Volume 149, Issue 3, pp 747–768 | Cite as

Managerial Compensation and Firm Value in the Presence of Socially Responsible Investors

Article
  • 358 Downloads

Abstract

Shareholders with standard monetary preferences will give a manager incentives to increase firm profits, which can be achieved with equity grants. When shareholders are socially responsible, in the sense that they also value corporate social performance, it is not clear which incentives the manager should receive. Yet, in a standard principal–agent model, we show that the optimal contract is surprisingly simple: it consists in giving equity holdings to the manager. This is notably because the stock price will incorporate expected profits as well as the social performance of the firm, to the extent that it is valued by shareholders. Consequently, equity holdings give the manager incentives to jointly maximize the profits and the social performance of the firm according to shareholders’ preferences. To facilitate alignment of interests, more socially responsible firms will optimally hire more socially responsible managers. We conclude that neither the shareholder primacy model nor equity-based managerial compensation is necessarily inconsistent with the attainment of social objectives.

Keywords

Corporate social performance (CSP) Corporate social responsibility (CSR) Executive compensation Fiduciary duty Incentive contracts Principal–agent model Socially responsible investment (SRI) 

JEL Classification

D21 D64 G34 K20 

References

  1. Andreoni, J., & Miller, J. (2002). Giving according to GARP: An experimental test of the consistency of preferences for altruism. Econometrica, 70(2), 737–753.CrossRefGoogle Scholar
  2. Baron, D. P. (2008). Managerial contracting and corporate social responsibility. Journal of Public Economics, 92(1–2), 268–288.CrossRefGoogle Scholar
  3. Besley, T., & Ghatak, M. (2005). Competition and incentives with motivated agents. American Economic Review, 95(3), 616–636.CrossRefGoogle Scholar
  4. Brammer, S., Brooks, C., & Pavelin, S. (2006). Corporate social performance and stock returns: UK evidence from disaggregate measures. Financial Management, 35(3), 97–116.CrossRefGoogle Scholar
  5. Brekke, K. A., & Nyborg, K. (2008). Attracting responsible employees: Green production as labor market screening. Resource and Energy Economics, 30(4), 509–526.CrossRefGoogle Scholar
  6. de Bettignies, J.-E., & Robinson, D. T. (2013). When is social responsibility socially desirable? Working paper, Queen’s University.Google Scholar
  7. Demange, G., & Laroque, G. (2006). Finance and the economics of uncertainty. Cambridge, MA: Wiley-Blackwell.Google Scholar
  8. Edmans, A., Gabaix, X., & Landier, A. (2009). A multiplicative model of optimal CEO incentives in market equilibrium. Review of Financial Studies, 22(12), 4881–4917.CrossRefGoogle Scholar
  9. Friedman, M. (1970, September 13). The social responsibility of business is to increase its profits. New York Times Magazine.Google Scholar
  10. Frydman, C., & Jenter, D. (2010). CEO compensation. Annual Review of Financial Economics, 2, 75–102.CrossRefGoogle Scholar
  11. Frye, M. B., Nelling, E., & Webb, E. (2006). Executive compensation in socially responsible firms. Corporate Governance: An International Review, 14(5), 446–455.CrossRefGoogle Scholar
  12. Galema, R., Plantinga, A., & Scholtens, B. (2008). The stocks at stake: Return and risk in socially responsible investment. Journal of Banking and Finance, 32(12), 2646–2654.CrossRefGoogle Scholar
  13. Garriga, E., & Melé, D. (2004). Corporate social responsibility theories: Mapping the territory. Journal of Business Ethics, 53(1–2), 51–71.CrossRefGoogle Scholar
  14. Gollier, C. (2001). The economics of risk and time. Cambridge, MA: MIT Press.Google Scholar
  15. Graff Zivin, J., & Small, A. (2005). A Modigliani-Miller theory of altruistic corporate social responsibility. Topics in Economic Analysis & Policy, 5(1), Article 10.Google Scholar
  16. Grossman, S. J., & Hart, O. D. (1979). A theory of competitive equilibrium in stock market economies. Econometrica, 47(2), 293–329.CrossRefGoogle Scholar
  17. Grossman, S. J., & Stiglitz, J. E. (1980). On the impossibility of informationally efficient markets. American Economic Review, 70(3), 393–408.Google Scholar
  18. Holmström, B., & Milgrom, P. (1991). Multitask Principal–Agent analyses: Incentive contracts, asset ownership, and job design. Journal of Law, Economics, and Organization, 7, 24–52.CrossRefGoogle Scholar
  19. Kitzmueller, M., & Shimshack, J. (2012). Economic perspectives on corporate social responsibility. Journal of Economic Literature, 50(1), 51–84.CrossRefGoogle Scholar
  20. Kolstad, I. (2007). Why firms should not always maximize profits. Journal of Business Ethics, 76(2), 137–145.CrossRefGoogle Scholar
  21. Laffont, J.-J., & Martimort, D. (2001). The theory of incentives. Princeton, NJ: Princeton University Press.Google Scholar
  22. Lyon, T. P., & Maxwell, J. W. (2008). Corporate social responsibility and the environment: A theoretical perspective. Review of Environmental Economics and Policy, 2(2), 240–260.CrossRefGoogle Scholar
  23. Margolis, J. D., Elfenbein, H. A., & Walsh, J. P. (2007). Does it pay to be good? A meta-analysis and redirection of research on the relationship between corporate social and financial performance. Working Paper, Harvard University.Google Scholar
  24. McWilliams, A. (2000). Corporate social responsibility. Wiley Encyclopedia of Management, 12, 1–4.Google Scholar
  25. McWilliams, A., & Siegel, D. (2001). Corporate social responsibility: A theory of the firm perspective. Academy of Management Review, 26(1), 117–127.CrossRefGoogle Scholar
  26. Reinhardt, F. L., Stavins, R. N., & Vietor, R. H. K. (2008). Corporate social responsibility through an economic lens. Review of Environmental Economics and Policy, 2(2), 219–239.CrossRefGoogle Scholar
  27. Ruf, B. M., Muralidhar, K., Brown, R. M., Janney, J. J., & Paul, K. (2001). An empirical investigation of the relationship between change in corporate social performance and financial performance: A stakeholder theory perspective. Journal of Business Ethics, 32(2), 143–156.CrossRefGoogle Scholar
  28. Sinclair-Desgagné, B. (1999). How to restore higher-powered incentives in multi-task agencies. Journal of Law, Economics, and Organization, 15(2), 418–433.CrossRefGoogle Scholar
  29. Sparkes, R., & Cowton, C. J. (2004). The maturing of socially responsible investment: A review of the developing link with corporate social responsibility. Journal of Business Ethics, 52(1), 45–57.CrossRefGoogle Scholar
  30. Tirole, J. (2001). Corporate governance. Econometrica, 69(1), 1–35.CrossRefGoogle Scholar
  31. van Beurden, P., & Gössling, T. (2008). The worth of values: A literature review on the relation between corporate social and financial performance. Journal of Business Ethics, 82(2), 407–424.CrossRefGoogle Scholar
  32. Viénot, M. (1995). Le conseil d’administration des sociétés cotées.Google Scholar

Copyright information

© Springer Science+Business Media Dordrecht 2016

Authors and Affiliations

  1. 1.HEC MontréalMontrealCanada

Personalised recommendations