On the modern corporation

What are the goals of modern corporations in the US?

In this paper Rajan et al. collect the shareholder letters of the Fortune-ranked 120 largest non-financial U.S. corporations by revenues and 30 largest financial corporations by assets from 1955 to 2020. They use Natural Language Processing (NLP) to read these letters and identify the goals. Some of their findings include:

• Corporations pick and choose the stakeholders they want to focus attention on, while emphasizing long-term shareholder value, especially in how they compensate;
• Executive compensation remains overwhelmingly focused on shareholder value, as measured by stock prices and financial performance;
• Although there is an increase in the use of environmental and social metrics in compensation, especially by firms that announce such goals, the magnitude of this relationship is still small. There is also evidence that corporate statements of ESG goals are associated with policies and programs that favor those goals, but there is little evidence that it improves the firm’s measurable ESG outcomes.

These findings cast doubt on the hope that self-regulation would suffice to undertake a green transition. Firms seem very responsive to the public mood in words and programs. Better outcomes? Not yet!

What Purpose Do Corporations Purport? Evidence from Letters to Shareholders
Authors: Raghuram Rajan, Pietro Ramella, Luigi Zingales
From: University of Chicago

How investors affect corporations’ environmental goals

Gupta et al. in this paper examine how investors can induce firms to reduce negative externalities such as carbon emissions in a timely fashion. They develop a dynamic search model with both financial and socially responsible investors who consider acquiring a firm initially owned by an entrepreneur. In their model there are two ways a brown firm can become green: a) the firm owner can immediately reform a brown firm and make it green by paying a cost to reduce negative production externalities; or b) a socially responsible investor acquires a brown firm and subsequently reforms it. They find that the anticipation of trading gains for firms with high negative externalities decreases the incentive of current firm owners to reduce these externalities proactively, potentially causing delay in reform.

Our paper highlights the unintended consequences of active investment strategies aimed at generating impact as they can disincentivize current firm owners to reform their firms proactively. In contrast, a passive investment strategy of acquiring green firms at a premium can generate incentives for timely reform.

The Pace of Change: Socially Responsible Investing in Private Markets
Authors: Deeksha Gupta, Alexandr Kopytov, Jan Starmans
From: Johns Hopkins University, University of Hong Kong, Stockholm School of Economics