The concept of Enlightened Shareholder Value (ESV) promotes corporate social responsibility without abandoning the traditional long-term shareholder wealth purpose of a corporation.
Discussion of corporate social responsibility is typically framed within the either-or debate on the purpose of a corporation pitting those who believe the purpose of a corporation is to increase shareholder value against those who believe the purpose of a corporation must incorporate the interests of all stakeholders.
The concept of Enlightened Shareholder Value (ESV) rejects this either-or dichotomy, arguing that socially responsible behaviour is the path to greater long-term shareholder value. For example, mistreating either employees or customers is no way to ensure the long-term financial health of a company. The documented excess returns earned on the shares of companies listed on the 100 Best Companies to Work For in America between 1994-2009 is just one piece of evidence in favour of ESV.
In an article titled, “Corporate Social Responsibility through Shareholder Governance,” law professors Robert Bartlett of California Berkeley and Ryan Bubb of NYU review the feasibility and potential effectiveness of ESV—specifically, whether it fulfils the mandate to address CSR concerns, and whether it is feasible, in terms of information requirements and behaviour incentives.
In terms of feasibility, the ESV requirement to invest now for an uncertain future benefit is “in the wheelhouse” of managers. That is, corporate managers have the information-gathering and analytical skills to make such decisions, as exemplified by issues such as whether to expand production or whether to invest significantly in R&D, both common decisions that involve up-front costs to gain uncertain benefits in the future. The plethora of MBA courses on the strategic issues related to CSR further place ESV in the wheelhouse of managers in terms of analytic skills and priority issues.
In terms of incentives for ESV, corporate law and policy is currently designed to incentivize managers to focus on maximizing long-term shareholder value. In addition, compensation packages that include significant equity provide even further motivation for managers to increase shareholder value over the long term.
At the same time, managers face pressures to focus on the short-term. The market, for example, may undervalue the long-term benefit of a significant short-term investment, bringing the share price down and making the company vulnerable to takeover attempts by corporate raiders, or minority-owner hedge fund activists who will push for short-termism in operations or financial decisions that favour short-termism.
Compensation packages that turn executives into short-term stockholders represent another incentive that encourages short-termism.
In terms of effectiveness, Bartlett and Bubb note that ESV addresses some CSR concerns but is not a panacea. Income inequalities based on market forces will not magically disappear despite ESV. Nor does a focus on long-term shareholder value make concerns about corporate conduct disappear. A company that’s willing to surreptitiously cut corners to save money wouldn’t be deterred by the new long-term focus.
Proponents of two new variations of ESV argue that their approaches resolve the limitations of ESV because they aim to promote shareholder well-being—what they term shareholder welfare—rather than shareholder wealth. After a deep analysis of the effectiveness and feasibility of the two shareholder welfare approaches, Bartlett and Bubb find that neither shareholder social preferences (SSP), in which the social concerns and opinions of shareholders influence the company’s purpose and activities or portfolio value maximization (PVM), in which a company incorporates into its decisions the social impact of a company’s actions on other firms in the portfolio, improves on enlightened shareholder value—and can even, in the case of PVM, lead to socially irresponsible and destructive behaviour.
In conclusion, ESV as an approach is not perfect, but it does effectively lead companies to invest in CSR for the purpose of improving long-term shareholder value as well supporting socially responsible outcomes.
in 2021, an obscure new hedge fund, Engine No.1, holding 0.0016% of ExxonMobil outstanding shares, won a contested director election and placed three new directors on the oil giant’s board. This victory was significant because the directors won on a platform that directly challenged ExxonMobil’s management for its head-in-the-sand strategy that ignored climate change and decarbonization and assumed that the long-term demand for oil and gas would never waver.
Significantly, Engine No.1 did not argue that ExxonMobil needed to shift to a more socially responsible attitude on climate change and decarbonization to “save the earth,” but rather to prevent the destruction of long-term shareholder wealth that clinging to an outdated paradigm of the energy industry would inevitably engender.
Of equal significance, Engine No.1 won on this ESV position by persuading the key actors who could turn the election in its favour—ExxonMobil’s institutional investors including its three largest investors, BlackRock, State Street, and Vanguard—that the long-term value of ExxonMobil shares was at risk.
For shareholders and corporate leaders of any public company looking to increase the company’s socially responsible behaviour, ESV offers a pathway to a CSR future that does not alter the shareholder value maximization purpose that guides the activities and decisions of a corporation. Persuading key influencers or decision makers with a robust, long-term-shareholder-value case for CSR is key.
Robert P. Bartlett’s profile at University of California, Berkeley
https://vcresearch.berkeley.edu/faculty/robert-bartlett
Ryan Bubb’s profile at New York University
https://its.law.nyu.edu/facultyprofiles/index.cfm?fuseaction=profile.overview&personid=34148
Corporate Social Responsibility through Shareholder Governance. Robert P. Bartlett and Ryan Bubb. Law Working Paper No. 682/2023 (February 2023).
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4354220
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