Working Paper: NBER ID: w29975
Authors: Oliver D. Hart; Luigi Zingales
Abstract: In the last few years, there has been a dramatic increase in shareholder engagement on environmental and social issues. In some cases shareholders are pushing companies to take actions that may reduce market value. It is hard to understand this behavior using the dominant corporate governance paradigm based on shareholder value maximization. We explain how jurisprudence has sustained this criterion in spite of its economic weaknesses. To overcome these weaknesses we propose the criterion of shareholder welfare maximization and argue that it can better explain observed behavior. Finally, we outline how shareholder welfare maximization can be implemented in practice.
Keywords: corporate governance; shareholder value; shareholder welfare; environmental issues; social issues
JEL Codes: G3; K22; L21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| changing shareholder preferences (G34) | corporate governance practices (G38) |
| shareholder welfare maximization (SWM) (L21) | corporate actions concerning environmental impacts (F64) |
| shareholder value maximization (SVM) (L21) | shareholder engagement in environmental and social issues (G38) |
| shareholder engagement in environmental and social issues (G38) | shareholder welfare maximization (SWM) (L21) |
| shareholder proposals (G34) | corporate governance practices (G38) |
| externalities complicate SVM framework (D62) | shareholder preferences (G35) |