Stakeholder management in action

I tend to think of corporate social responsibility (or corporate ESG efforts if you like) as a form of stakeholder value maximisation. For decades, businesses have been run under the shareholder value maximisation principle where all actions are made to increase the valuation of the company in the stock market. In continental Europe, this theory was never as powerful as in the Anglo-Saxon world because European businesses (partly due to differing legal systems) were more committed to the stakeholder value maximisation principle.

Stakeholder value maximisation requires a company to weigh the interests of all stakeholders against each other and try to take actions that maximise the combined value provided for all stakeholders. This may mean that shareholder value may take a hit if there are more important concerns of other stakeholders like the public or the employees.

In my view, pure shareholder value maximisation is short-sighted because it risks falling into the short-term trap of maximising short-term value for shareholders even if the actions of the company make shareholders worse off in the long run or lead to the exploitation of workers, etc. Meanwhile, stakeholder value maximisation can lead to inefficient businesses that lack competitiveness and eventually decline into bankruptcy.

Corporate social responsibility provides a middle ground by pushing businesses into managing the interest of all stakeholders in a way that leads to maximum long-term value for shareholders. A company that just tries to maximise shareholder value may run sweatshops in China to manufacture its goods so it can sell them at a lower price than its competitors. But in today’s media landscape, such efforts can backfire dramatically, and the company may soon find its share price tumble as customers switch to other more ethical companies. Similarly, saving on safety measures while drilling for oil in the Gulf of Mexico may increase shareholder value for a time, but once you spilled 49 million litres of oil in the Gulf, your share price will never fully recover. What is good for the environment can be good for shareholders as well.

A team of researchers from the Australian National University has now demonstrated another way how corporate social responsibility can be good for investors. They looked at the demand for dividends by shareholders and the responsiveness of companies to these demands.

If a company has more shareholders that are older, the demand for dividend payouts is higher simply because many pensioners need dividend income to fund their retirement. Thus, the share of pensioners owning a stock can be used as a proxy for the dividend demand from investors. Of course, the relationship is bidirectional because companies that pay higher dividends attract more shareholders that need dividends to generate income. But what happens if a company has an increasing share of pensioners on its register? Does it increase its dividend payout? What if these pensioners live near the headquarters of the company and thus show up at the AGM?

It turns out that companies that have better corporate social responsibility credentials manage their finances with an eye on all stakeholders and thus are 25% more likely to increase their dividends if there are more pensioners who own shares living near the headquarters. In essence, these companies notice that in their local communities there are a lot of people who need income from their shares. They notice this because these folks show up at the AGM and demand higher dividends. But by listening to this small stakeholder group of local pensioners, they start a positive feedback loop where they see more demand for dividends and thus, they either switch from share buybacks to dividends or increase their dividends. This, in turn, makes the shares more attractive for pensioners and attracts more investors, which, in turn, increases the valuation of the shares of these companies. By paying attention to a relatively small group of local stakeholders the company improves the outcomes for all shareholders.