Research Management Paper

Olivier Rochedreux olivier.rochedreux@espeme.com (585) 633-9757

he financial crisis in 2007 reinforced the societal image that shareholders are narrow-minded profit maximizers who demand that managers ignore calls for a broader social responsibility of business (Glac, 2010, p.3). This recent financial

turmoil deeply impacted the community and increased awareness about the role of organizations in societies. Shareholders are considered to be the predominant group of stakeholders driving management and corporate activities. Consequently, shareholders have the biggest potential influence on social, environmental and financial aspects of their investments. This paper aims to investigate how shareholders activism and socially responsible investments engage the corporation into a social responsibility process and the impact on societies. Shareholders activism enhances the development of corporate social responsibility and social responsible investing is also supportive of corporate social responsibility. To support these notions, it is necessary to examine how shareholders activism impacts our corporations and societies. Also, it is crucial to focus on the concept of socially responsible investing and how it can create value for shareholders as well as the society. We begin with a discussion of key terms: corporate social responsibility and shareholders. Colquitt, LePine and Wesson argue that corporate social responsibility (CSR) is a perspective that successfully acknowledges the fact that the responsibilities of a business encompass the economic, legal, ethical and citizenship expectation of society (2011, p.244). These different components of a corporation underline the necessary aim of making money, but they also stress the fact that companies responsibilities do not end with profit maximization. In fact, the legal component of CSR represents societys codification of right and wrong and must be therefore followed (2011, p.244). The ethical component of CSR emphasizes the obligation

to do what is right, just, and fair to avoid harm (2011, p.244). Lastly, it is stated that the citizenship part of CSR improves the quality of life in the communities in which they work (2011, p.56). In order to be a responsible and contributing member of society, a mutual investment between corporations and their environment is primordial (Matten, Crane, 2005, p.167). Shareholders are an essential factor in a companys success; in fact; they can be described as those without whose participation, the corporation cannot survive (Hillman, Keim, 2001, p.126). Similarly, they are the group of stakeholders driving management and corporate activity (Glac, 2010, p.4). For example, the Rule 14a-8 of the Security and Exchange Commission (SEC) provides shareholders with an opportunity to place certain proposals in a company's proxy materials for a vote at an annual or special meeting of shareholders. Therefore, it can be argued that shareholders have a strong influence on management. They can be the source of profound changes within a company, such as influencing their companies to engage in a corporate socially responsible behavior. Shareholders activism is present when there is a lively engagement between shareholders input and a companys managerial actions. It refers to a range of actions taken to influence corporate management and boards (Becht, Franks, Mayer & Rossi, 2006, p.3). In our case, the triple bottom line that relates to the net business outcomes: financial, social, and environmental (Takacs, 2008, p.2) are the three main components to consider to achieve a corporate socially responsible goal. The financial aspect refers to the economic value created for shareholders and its economic environment. The social component focuses on business practices toward labor, community and region in which a corporation conducts its business such as the existence of equal opportunity policies or compliance with International Labor Organization. The

last one refers to environmental practices that minimize as much as possible environmental impact like industry pollution or biodiversity conservation according to Takacs. An example of this occurred at General Motors Inc. in 1970. Shareholders submitted a first proposal at the annual meeting that wanted to increase diversity of the board of directors by having a woman, an African-American, and an environmentalist. Shareholders also submitted a second proposal in order to create a Committee for Corporate Responsibility. Even though the results of the votes were disappointing, we can considere that it increased awareness of the management and stakeholders about these questions. In fact, afterwards General Motors Inc. created a public policy committee with Leon Sullivan who was an African-American very involved in the black community. As of today, the Board of Directors is composed of one African-American and four women. This means that there is a better diversity than before thanks to the vote of shareholders (Glac, 2010). This example underlines the predominant role of shareholders to create a shift in how corporations must behave and engage them in a corporate responsibility process. This shift may not lead to significant changes in the corporations but at least open up a public debate about a specific topic and increase public attention. Glac emphasizes that corporate social responsibility is considered to be a long process, promoting a better management that will help the corporation to achieve its financial goals, and be a source for social change in communities. In order to do so, shareholders have to be involved to develop corporate social responsibility through the channel of shareholder activism. A contemporary debate about corporate social responsibility is suggesting that firms can be simultaneously socially responsible and socially irresponsible (Strike, Gao, Bansal, 2006, p.850). For example, the international human rights organization identified that Nike commits labor abuses such as excessive shifts or violent intimidation in developing countries.

Nevertheless, Nike donated $1 million to the victims of the Indian tsunamis in 2004 according to Strike, Gao and Bansal. This means that corporations can be responsible and also irresponsible through their actions. Another strategy exists to engage corporations on issues of shareholder interest. Instead of being involved in shareholders activism, an approach considered to be much more indirect emerged by investing in corporations based on social and environmental criteria in addition to traditional financial criteria. This approach is called socially responsible investing (SRI). Based on Professor Helen Tackas and the SRI Discussion Group at Dickinson College, socially responsible investing recognizes that all investment decisions have implications beyond the financial performance of those decisions (2008, p.2) and aims to achieve the balance between obtaining competitive financial returns and establishing a sustainable society (2008, p.2). In order to do so and achieve development that meets the needs of the present without compromising the ability of future generations to meet their own needs (World Commission on Environment and Development, 1987, p.16), there are two main socially responsible ways to do it: a positive screening of stocks including corporations promoting alternative business model such as the creation of alternative energy: wind, solar and hydro energies. The second way is to exclude stocks from investors portfolios with a negative screening of unsuitable industries like the tobacco or weapons industries. The Report on Socially Responsible Investing Trends in the United States from the Social Investment Forum Foundation highlights that socially responsible investing is now a sizable portion of the investment industry and continued to grow at a faster pace than the broader universe of conventional investment assets under professional management (2010, p.8). In 2010, investments following socially responsible investing stood at $3.07 trillion, a rise of more than 380 percent from $639 billion in 1995 (2010, p.8). This recent growth in social responsible

investing is certainly due to growing concerns over environmental issues, labor issues, and repressive regimes, the greater media exposure and advertising about SRI, and perhaps most importantly, the growing evidence that SRI investments can produce similar returns to those that are not SRI (Schwartz, 2003, p.196). There are numerous conflicts in the literature about the contribution of socially responsible investing to the corporate social responsibility movement and its value to investors. The main goal for investors is wealth maximization and to various degree additional non-financial goals for socially responsible investors. However, according to the traditional portfolio theory, any decision based on non-economic factors implies lower returns or higher risk (Glac, 2010, p.19). From a practical application, financial markets are not efficient and several studies watched the performance of socially responsible investing and have failed to support this theoretical prediction such as Schwartz. Then, some studies have found opposite performance about socially responsible investing, it might perform worst, equally or actually better than regular investments like Tackas. This means that there is not a clear measurement of the risk-adjusted performance of socially responsible investing. A last argument is that socially responsible investing does not lead to significant change in the stock price and therefore no change in the cost of capital for unethical firms due to the current socially responsible investing level over the investment industry according to the Report on Socially Responsible Investing Trends in the United States. This approach allows investors to promote and support companies that they evaluate socially responsible. However, this growing segment may not be considered enough significant in the investment industry. As a conclusion, shareholders activism and responsible socially investing are two tools to develop corporate social responsibility. One of the critical elements of this approach is the ability of shareholders to channel concerns and expectations about the responsible corporate conduct through proposals to the Board of Directors and other shareholders. Even if the results of the

proposals may be disappointing there is a better attention of the public about social, environmental and financial issues and may participate to changes in the future. We can consider that the growing socially responsible investing segment participates to enhance corporate conduct. This approach is viewed as more passive way of influencing corporations but integrates a social and environmental dimension in addition to the basic economic goal in order to select investment opportunities. The mains concerns about these two perspectives are the dual reality of responsibility and irresponsibility for corporations. It is also hard to identify or give a real punishment to unethical behaviors. However, shareholders are now considered to be the most important allies of corporate socially responsible conduct. Shareholders enhance the development of corporate social responsibility and use their influence to achieve high levels of financial, social and environmental success for our societies.

Work cited:
Glac, K. (2010). The influence of shareholders on corporate social responsibility (Working Paper No. 2). Retrieved from the Center for Ethical Business Cultures website:

http://www.cebcglobal.org/uploaded_files/Glac_paper_on_Social_Investment_FINAL.pdf

Becht, M., Franks, J., Mayer C., Rossi S. (2006). Returns to Shareholder Activism: Evidence from a Clinical Study of the Hermes U.K. Focus Fund (Working Paper No. 138). Retrieved from the European Corporate Governance Institute website:

http://www.ie.edu/workshop_governance/pdf/Paper4_Collin_mayer.pdf

Colquitt, J., LePine, J. A., & Wesson, M. J. (2011). Organizational behavior: Improving performance and commitment in the workplace (2nd ed.). New York: McGraw-Hill Irwin.

Schwartz, M.S. (2003). The ethics of ethical investing. Journal of Business Ethics, 43(3): 195-213.

Matten, D., & Crane, A. (2005, January). Corporate citizenship: Toward an extended theoretical conceptualization. The Academy of Management Review, 30: 166-179.

Takacs, H. (2008). The Socially Responsible Investing Discussion Group at Dickinson College [White paper]. Retrieved from

http://www.dickinson.edu/uploadedFiles/about/offices/financialoperations/content/investments/SRI%20Commitee%20White%20Paper(1).pdf

Strike, V. M., Gao, J., & Bansal, P. (2006). Being good while being bad: Social responsibility and the international diversification of US firms. Journal of International Business Studies, 37(6), 850-862.

Hillman, A. J., & Keim, G. D. (2001, February). Sharholder Value, Stakeholder Management, and Social Issues: What's the bottom line?. Strategic Management Journal, 22, 125-139.

United Nations. (2008). Guidance on corporate responsibility indicators in annual reports. Retrieved from http://www.unctad.org/en/Docs/iteteb20076_en.pdf
Social Investment Forum. (2010). Report on Socially Responsible Investing Trends in the United States. Retrieved from http://ussif.org/resources/research/documents/2010TrendsES.pdf

1. SEC