David Denis Keynote Speech, JCF SI Conference, Hanken School of Economics, Finland, Aug 21, 2023 — Transcript

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1. 0:00David Dennis Keynote Speech: "Corporate Social Responsibility and the Shareholder Primacy Paradigm", JCF SI Conference, Hanken School of Economics, Finland, August 21, 2023
2. 0:01[Jon Karpoff] Thank you! Kam-Ming [Wan] and thank you for organising this conference.
3. 0:04It's great to see so many of you.
4. 0:08It's a real pleasure to introduce Dave [Denis], in part because there are so many really, genuinely wonderful things one can say about Dave.
5. 0:18You can read Dave's information, beat a profile online.
6. 0:24And so, you know, it includes things such as his contributions to the profession through serving as editor of the RFS [Review of Financial Studies] and president of the FMA [Financial Management Association].
7. 0:35But I would like to introduce Dave by making three observations.
8. 0:40The first is that one reason this is a pleasure is that I consider Dave a friend.
9. 0:46However, I believe that in that I am not alone in that.
10. 0:51I think Dave has a large number of friends throughout the profession.
11. 0:55He must be the most admired and congenial person in finance.
12. 1:01My second observation is about Dave's research, which reaches into seemingly all areas of corporate finance.
13. 1:09I mean, just if you think of of the areas he has touched, they include corporate diversification,
14. 1:14dividend payments, share repurchases, and more recently, corporate financial policies.
15. 1:20This is research in its most basic, fundamental and purest sense the exploration of data, the establishment of new facts and importantly,
16. 1:32the the provision of and a theoretical framework with which to make sense of these facts and the data.
17. 1:40There are several things that we now take as accepted in the canon of our field that come from Dave's papers,
18. 1:49and I thought I would mention just a couple of them. I have a long list here, but I'll stop part way through.
19. 1:56Managerial Agency Cost Help Explain Much Corporate diversification.
20. 2:02Not controversial. We teach this in our MBA classes.
21. 2:08Well, this comes from Dave's work, as he's got his 1997
22. 2:13JF [Journal of Finance] and 2002 JF papers with Diane Denis, Atuyla Sarin, Keven Yost or forced CEO
23. 2:24resignations are associated with performance improvements.
24. 2:28Notice these are my pithy attempts to take big insights and put them into the snippets that are just accepted parts of our field.
25. 2:39This comes from Dave's 1995 JF paper.
26. 2:44With Diane Denis. Ownership structure is a key factor in driving changes in corporate boards and top executive turnover.
27. 2:52Again to two JFE [Journal of Financial Economics] Papers one in 1997, one in 1999 with Diane Denis and Atuyla Sarin.
28. 3:01Here's one more. Firms hold cash to avoid investment constraints and economise on cost of external financing.
29. 3:08Now these are my words to try to summarise this. This is, I think, a broader set of insights which Dave's papers help establish,
30. 3:20including in an RFS paper and a recent JFE paper with Leonce Bargeron and Ken Lehn.
31. 3:30My third observation, you might have noticed that some of these papers are with Dave's wife, Diane Denis.
32. 3:39It turns out that I asked Diane for material for this introduction, and Diane provided this story, and this is my third observation.
33. 3:51This can only be bad. Even Diane met at the University of Michigan when there were Ph.D. students,
34. 3:56but it turns out that Dave almost did not make it to the University of Michigan.
35. 4:00He had not been accepted and was about to attend a Ph.D. program at another Big Ten university,
36. 4:08when apparently at the last minute he got a call and was accepted into Michigan's program.
37. 4:15He decided he'd take that offer. He went to Michigan, met Diane, and embarked on a collaboration that has been fruitful for all of us.
38. 4:25Thereby, I think, also illustrating that serendipity does in fact sometimes happen.
39. 4:32With that, I'd like to introduce Dave Denis. Thanks Jon [Karpoff], see if I can find my presentation.
40. 4:49You're going to do it well.
41. 4:55Thanks. Thanks, Jon, very much for the introduction.
42. 4:57As soon as you mentioned talking to Diane, I started to break out in a sweat, but that worked out all right.
43. 5:06I appreciate it. Very, very generous comments.
44. 5:10And I want to offer my thanks also to Kam-Ming and Hanken School [of Economics] and JCF [Journal of Corporate Finance] for putting all this together and and especially for
45. 5:22inviting me to be part of it as it's very much an honour to the to be up here and actually have a teleprompter and that's a big deal.
46. 5:33You know, as Jon mentioned,
47. 5:37I've dabbled in a lot of different areas in research and in corporate finance and in part of the title of this conference,
48. 5:45I've certainly dabbled in with the impact of ownership structure,
49. 5:49What drives ownership structure and what are the consequences of ownership structure.
50. 5:55But I have not dabbled in the second half of this, such as sustainability policy.
51. 5:59So it's been kind of interesting for me to step back and think about how these two things might be related in some ways.
52. 6:08And that's that's going to be kind of what I talk about this morning.
53. 6:13But before I get there, I you know, it occurred to me in thinking about all of this that, you know,
54. 6:21the starting point for what I'm going to talk about and I think probably is true for virtually everybody in this room is just to sort of
55. 6:29accept the fact that there is this increased attention on and corporate socially responsible policies and an increased demand for that today.
56. 6:39And we just sort of accept that to be true. And I think it's unquestionably true at this point.
57. 6:44But we don't tend to ask why that is the case very often, nor am I going to attempt to answer why that is.
58. 6:52But it did lead me to speculate on a couple of reasons for for why that might be might be true,
59. 6:59because it's certainly the case that social concerns have been around forever and corporations have been
60. 7:07pushed for a long time to think about these things and maybe make them part of the objective function.
61. 7:13And nothing's been in the way of that happening.
62. 7:16But it's not really till the last five or ten years that I think we've seen the magnitude of this attention being
63. 7:24being placed on thinking about these social concerns within the organisational structure of of the corporation.
64. 7:33So so why is that the case? I don't have the answer to that.
65. 7:37But you know, a couple of things that that came to mind is that it's possible that the social concerns
66. 7:44may have increased in magnitude in recent years as companies have become more complex,
67. 7:50more global. Maybe the social concerns themselves are larger and you can think of climate change perhaps as a as a prototypical
68. 7:59example of that sort of thing that might that might increase the magnitude of the concerns themselves.
69. 8:07A second possibility is that, well, maybe the concerns themselves are not really that different from before,
70. 8:14but individual preferences have changed over time so that various stakeholders are just more sensitive to those concerns than they were before.
71. 8:26Or a third possibility is that, well, maybe a lot of these concerns really take the form of externalities that as economists we would think,
72. 8:34well, these are these are things that institutions like government bodies should be addressing.
73. 8:40But we have diminished faith in the ability of those institutions to address those things.
74. 8:47And as a result, there's now increased demand for them to be addressed within the organisational structure of the corporation.
75. 8:56All these are possibilities are not mutually exclusive. I don't know which one is is really driving it.
76. 9:02Maybe there's others that are more important than this, but, but I think it's worth actually thinking about and some of you may be addressing
77. 9:09this over the course of the next couple of days in the context of your talks.
78. 9:14But I'm going to talk about something that I think is a little bit more manageable from my from my standpoint, a much more narrow concern,
79. 9:24which is whether this increased demand or attention on CSR [Corporate Social Responsibility] requires us to rethink
80. 9:31this whole idea of shareholder primacy in the corporate objective function.
81. 9:36Now, just taking a quotation from the call for papers for this.
82. 9:41Conference that in a way kind of implies, well, we're already moving along this path towards rethinking this this this paradigm.
83. 9:50And the call for papers of sort of tells us that, you know, going all the way back to Friedman,
84. 9:55we've had this idea of of shareholder primacy that we can justify under certain conditions,
85. 10:03but those conditions don't actually exist in the real world.
86. 10:07And so therefore we sort of started gradually shifting towards a stakeholder primacy sort of viewpoint of the of the corporate objective function.
87. 10:19And that's sort of what I want to take a little bit deeper dive into thinking about
88. 10:24as to whether that that's really required in this particular case of CSR demand.
89. 10:31And and basically where I'm going with this is say my short answer is no, I don't think so.
90. 10:36I don't think that we really need to rethink that, that objective function in a sort of based on on three primary observations.
91. 10:46One is that this increase in focus on CSR is really distinct from the factors that drove us towards shareholder primacy in the first place.
92. 10:57So all those factors that led to shareholder primacy as sort of being an endogenous outcome of of of organisational structure,
93. 11:07all those factors are still there and in fact maybe even exacerbated if we throw on top of the traditional factors some increase in demand for CSR.
94. 11:18So if we thought shareholder primacy was a reasonable equilibrium before, I think it's probably still the case right now.
95. 11:27Of course, that doesn't mean that if we have increased demand for CSR, that demand is not being met.
96. 11:33In fact, I'm going to argue that there's lots of market forces that are out there that will push this CSR
97. 11:40demand to be met within the confines of a shareholder primacy sort of of objective function.
98. 11:47And then third, that if we were to shift away from that,
99. 11:51we're likely to generate some additional costs both in the form of traditional contracting costs and agency agency problems that at
100. 12:00least to me seem like they're likely to exceed the benefits that we would get from from moving towards a more stakeholder orientation.
101. 12:10So that's kind of where I'm going to be going with this over over the next several minutes.
102. 12:15Now, how am I going to get there? I think what I'd like to do is sort of go back to the basics.
103. 12:20And in a lot of ways what I'm talking about is really my evolution of thinking about it in the first place.
104. 12:28This is the kind of the way I have to think about all problems.
105. 12:31This is to make them as simple as they possibly can and then try to think about if anything's different.
106. 12:37So I think it's worthwhile to think about how we got to shareholder privacy in the first place as equilibrium organisational type of structure,
107. 12:46and then ask if if we have this increase in demand for for CSR, should that change anything?
108. 12:54How and how should that change? A third, what might be some costs of deviating from this idea of shareholder primacy?
109. 13:03And then finally, assuming Kam-Ming doesn't cut me off due to time, which I'll try to be efficient,
110. 13:10I think there's some implications of the framework that I'm going to talk about for conducting research in this area.
111. 13:18And I think I should point out at this point that I feel like a lot of what I'm going
112. 13:25to talk about are issues that others have have talked a lot about already in the past,
113. 13:31Jon [Karpoff] is certainly one of them, Diane's [Denis] one of them.
114. 13:35They've addressed this issue of the corporate objective function.
115. 13:38And I view sort of what I'm talking about is collecting the thoughts from a lot of different people in a way that makes sense to me and applying
116. 13:46them in this in the context of this very specific question of increased CSR demand and how that potentially impacts the the objective function.
117. 13:58Okay, So let me go back to the starting point for me.
118. 14:03The starting point is,
119. 14:04is kind of the contracting framework that at least when I first learned it was advocated by authors like Jensen and Meckling [1976], Fama and Jensen [1983]
120. 14:13and various combinations of those authors over the years where they kind of view the firm as a legal fiction in the
121. 14:21sense that there's this nexus of contracts among customers and the various factors of production suppliers of labour,
122. 14:29suppliers of capital and and so on. And if you view the firm in that way,
123. 14:35how the firm is ultimately structured as an organisation is really an endogenous solution to a problem of trying to supply a
124. 14:46product that is demanded by customers at as low price as possible while covering all the costs that are internalised by the firm,
125. 14:57where those costs would include any costs of managing the contracts among the different parties to the firm.
126. 15:05In its very simplest form, that organisational structure is going to is going to define two primary things.
127. 15:13One is the nature of the payoffs, who gets what and when do they get it.
128. 15:19And secondly, the what is going to be the decision making process within the firm?
129. 15:24Who gets to decide what are the operational decisions of the firm.
130. 15:29And again,
131. 15:31this is all falling out of the of an endogenous process that tries to pull all these these different parties to contracts together in a way that is
132. 15:40most efficient to deliver this product at the minimum cost that's going to allow this organisation to be competitive in a in a competitive world.
133. 15:52Right now, how does this somehow lead us to shareholder primacy in the first place?
134. 15:59Well, the first step, I think, is to recognise that when you think about a particular organisation, a corporation,
135. 16:07you're talking about an entity that has many different stakeholders customers, suppliers,
136. 16:12creditors, communities, labour, all these different parties to what we call the firm.
137. 16:21And if we think of that sort of structure in the context of a traditional Coase Theorem sort of approach,
138. 16:29what Coase Theorem would say is that the optimal decision rule is sort of take a stakeholder sort of
139. 16:37approach to sort of maximise the combined welfare of all these stakeholders and then just use contracts,
140. 16:45right, to efficiently allocate the resulting wealth among these these different stakeholders.
141. 16:51I and the way in which the Coase Theorem is ultimately going to work in an efficient sense is if these contracts are costless to write.
142. 17:00But of course they're not costless to write, they're not costless to enforce.
143. 17:05And what's particularly important, I think, in the context of a corporation is that all these different stakeholders have
144. 17:13potentially wildly different preferences with respect to the actual decisions that a
145. 17:19company would undertake and the resulting payoffs that might be generated and the
146. 17:25riskiness of those payoffs that might be generated through this process.
147. 17:29So arguably,
148. 17:31then it's it's it's exceedingly costly to try to write contracts that are going to meet a variety of these different stakeholder preferences.
149. 17:43So. What results in endogenous optimisation process is the
150. 17:52corporate organisational form that tends to have these particular characteristics that
151. 17:58most of these different factors of production have contracts that have mostly
152. 18:05a fixed payoff kind of structure like you see with a with a labour contract or a,
153. 18:12or a fixed car credit sort of contract.
154. 18:16They might have some incentive payoffs, but those incentive payoffs tend to be tied to two very specific performance measures.
155. 18:24Now, to say that these are fixed payoffs does not at all imply that they are riskless payoffs. Make their risky payoffs
156. 18:33for each of these parties in that risk assume it depends on the priority structure.
157. 18:38These payoffs who who gets paid first and and so on.
158. 18:42But these contracts all have prices associated with them.
159. 18:47And those prices are going to reflect that that particular risk.
160. 18:51All right. There's going to be some residual risk then that is borne by one set of agencies in this case is the
161. 18:58shareholders who have contracted for the rights to what we tend to call in finance the net cash flows.
162. 19:05What cash flows are left over after the other various factors of production have happened.
163. 19:12Pay. So what that's that sort of specifies the payoff structure,
164. 19:18the decision rights that are vested in this set of agents, the shareholders who are the residual claimants.
165. 19:27Right now. Again,
166. 19:27I think it's important to point out that that this is the result of an optimisation process and in a presumably competitive type of market.
167. 19:37There's nothing that says you have to be organised this way, but corporations are organised this way.
168. 19:46So it is a competitive solution of trying to maximise the stakeholder welfare
169. 19:50overall in a way that minimises the various contracting costs that are associated with
170. 19:58doing so. So it clearly doesn't say that these stakeholders are being ignored in any way.
171. 20:04In fact, they're contracting right up front through the through the price pricing structure that they've agreed to.
172. 20:11Now, why do we think this is efficient? Well, my short answer would always be, well, it's the outcome of a competitive process.
173. 20:17It must be efficient if that's the case.
174. 20:19But I think there's reasonable economic arguments, too, for for why we would think this would be an efficient structure.
175. 20:27One. One argument is that while we're allowing for some specialisation and risk bearing
176. 20:33instead of agents in this case to shareholders who aren't also making
177. 20:38organisation specific investments like an employee might or a supplier might not
178. 20:45so allows for that specialisation that arguably is going to be efficient in some ways.
179. 20:51More importantly, I think this allows for the objective function of the company in meeting the demand of the customer to be
180. 21:01done in a way that limits the contracting costs by limiting the risks to these other agents besides the residual claimants,
181. 21:10the costs of monitoring and adjusting other contracts for changing risks or changing dynamics within the firm are reduced.
182. 21:21And then third, right. This is likely to contribute to the survival of the organisation, because by limiting these contracting costs,
183. 21:31not only is that good for the holders of the rights to the net cash flows,
184. 21:36but it's going to allow the company to deliver its product at a lower price and therefore be more competitive in
185. 21:42the marketplace and therefore survive at a higher rate than companies that were organised in a different way.
186. 21:48That then involves higher contracting costs.
187. 21:54So that's it's sort of a quick summary, a quick summary of how we got to shareholder primacy in the first place.
188. 22:04So I think then the question is, well, if we have evolved to a situation like we're in today in which there is increased demand for CSR,
189. 22:16should that change anything about that logic that led us to shareholder primacy in the first place?
190. 22:23So to get at that, I think it's worthwhile to at least think about the different possible effects that various CSR policies might have, right?
191. 22:33You can think of certain policies that fall under the CSR umbrella that would increase the present value of the net cash flows.
192. 22:43So increase what's available to the shareholders.
193. 22:48And one example might be some sustainable production processes like, you know, free range chickens for which there's increased consumer demand.
194. 22:58Consumers offer a price premium on that. If that price premium exceeds the marginal costs of of of providing that sustainable production process,
195. 23:09then it is in the interests of the shareholders to go ahead and adopt that policy.
196. 23:14So that's one type of policy, right?
197. 23:17Another type of CSR policy might decrease the present value of net cash flows, but also fail to increase the welfare of any other stakeholders.
198. 23:29And some people have argued that some of the the proposals that the SEC [Securities & Exchange Commission] have made with respect to climate disclosures,
199. 23:36sorts of rules would fall into that category in which you're imposing some costs
200. 23:43on shareholders and it's not actually producing a benefit in terms of climate change.
201. 23:48So other stakeholders are not benefited from that.
202. 23:51So if that's what's going on, that would fall into this category, number two, right?
203. 23:57The third category, which is arguably the most interesting and all in all this debate,
204. 24:01are policies that would decrease the net cash flows to the shareholders,
205. 24:07but they might increase the welfare of at least some of the stakeholders.
206. 24:12So there's some trade off that's involved and somebody is going to have to make that choice somewhat.
207. 24:18And so those those are sort of the three main categories of interests that I think you want to ask.
208. 24:25Well, if we were to move away from shareholder primacy,
209. 24:28are we likely to be to adopting an objective function that does a better job of sorting among those different policies?
210. 24:39But the problem here and the way I'm thinking about this is that.
211. 24:45Just like it's the case that various stakeholders have very differences,
212. 24:49very different preferences with respect to day to day operating policies of the firm.
213. 24:55That's likely to be true with respect to any CSR policies as well.
214. 25:01Right. So whatever problems we saw in terms of exacerbating contracting costs
215. 25:09by trying to adopt contracts that meet the preferences of all our stakeholders,
216. 25:13those are even greater if we add on top of that different preferences with respect to CSR policies.
217. 25:21So on that basis, it seems likely that the efficient organisational structure is still likely to involve shareholders
218. 25:32as a residual claimant of receiving these net cash flows, which would then lead us to to a shareholder primacy sort of approach to this.
219. 25:41Now, I think what's important to point out here though,
220. 25:44is that that does not mean that the stakeholder preferences or this increased demand for CSR is going to be ignored.
221. 25:53In fact, it shouldn't be at all because this increased demand should be embedded in these fixed payoffs
222. 25:59or the prices that the various stakeholders are agreeing to it when contracting with the firm.
223. 26:08So what I mean by that is the basic idea here is that the stakeholder demands for CSR are going to be reflected in,
224. 26:17well, state contingent contract prices.
225. 26:21What the state years is the fulfilment or not of of the demand for CSR.
226. 26:28Right. So we can think this through in terms of the various stakeholders to the firm customers.
227. 26:34We talked about this one already. Customers may in fact be willing to offer a price premium for companies with more socially responsible policies.
228. 26:45And if that price premium is big enough that CSR demand is met by the firm,
229. 26:50employees may demand a wage premium in companies that they view as being less socially responsible suppliers that are
230. 26:59going to define the terms of their agreement on the basis of their view of the company's CSR policies.
231. 27:07Communities are going to make their anti subsidies to corporations within the
232. 27:14community contingent on the supply of socially responsible policies.
233. 27:21Shareholders might be willing to accept lower returns in exchange for certain CSR policies.
234. 27:28And I know lots of people, some in this room have done some work on that already.
235. 27:34So the idea here is that under a shareholder primacy,
236. 27:38organisational type of form, firms are going to supply CSR to the extent that the costs of doing so are lower than than the benefits of doing so.
237. 27:53Where the benefits are, the adjustment in these contract prices that they have with the different stakeholders.
238. 28:02Now. You may be sitting here thinking this already said, well,
239. 28:08a lot of these things are not actually internalised by the firm that we're really talking a lot about things that are externalities.
240. 28:17Now, again, as economists think, well, it's not really the most efficient way to to address these externalities by doing so within,
241. 28:28within the organisational structure of the firm,
242. 28:30it really should be institutions like government regulators who are in best position to address those externalities.
243. 28:40but we might be in this position already because this position being an increased demand for CSR,
244. 28:51because there is this view that governments are not doing a very good job of addressing those externalities.
245. 28:58So what if that's the case? Should that push us towards more of a stakeholder primacy point of view?
246. 29:05Well, here it's difficult for me to see how a stakeholder primacy type of approach would do a better job at that because like shareholders,
247. 29:18other stakeholders that are within the firm may in fact have very different preferences with
248. 29:23respect to those CSR policies relative to what we might view as what's best for society.
249. 29:30So it's not at all clear that taking a stakeholder approach is really going to get us anything there.
250. 29:36That's not to say that the shareholder primacy view is going to necessarily then provide the socially optimal amount of CSR policy.
251. 29:45It's just saying that they're just as likely to do so as a stakeholder type of approach
252. 29:51without some of the additional costs that might come with the stakeholder approach.
253. 30:00So another possibility then would be, okay, if we can't count on government regulators and other institutions to handle this,
254. 30:10maybe what we ought to do and a lot of people call for this,
255. 30:13I think, is to essentially delegate this role to corporate executives and sort of make the CEO [Chief Executive Officer], in a sense, a CSR central planner.
256. 30:25Again, here I have to express some scepticism that the CEOs could really do this,
257. 30:31because what we're really be saying and is that this problem is really too complex and too costly for voluntary contracts to sort out.
258. 30:42But yet we expect this one individual or a small set of of individuals within the firm
259. 30:50to do an effective job of of managing this the central planning sort of exercise.
260. 30:56It's not all obvious that the top executives have what you think is the specialised expertise that would be required to do this.
261. 31:06They're hired to do a certain thing, which is to meet this customer demand that at effective prices.
262. 31:12Now we'd be asking them to do something that's much broader than that and to manage the trade offs that
263. 31:18would exist among the different stakeholders if you're talking about CSR policies that fall into that bin
264. 31:24mumber three that I was talking about where it might decrease present values of net
265. 31:29cash flows to shareholders but benefit some stakeholders but not all stakeholders.
266. 31:34Those are tough decisions to make and we'd be we be delegating this to corporate managers who really don't have any specialised expertise in that.
267. 31:43And then I think what that causes is potentially a much greater agency problem than we already have.
268. 31:50So if we think of residual agency costs within the firm as being a result of sort
269. 31:57of this opaque decision making structure in which there is some specialised expertise
270. 32:04in the hands of the managers, that outsiders like shareholders don't have as good of information.
271. 32:10So it's difficult to monitor managerial behaviour as a result of that opacity.
272. 32:16Well, that opacity is much, much greater now if we're saying, well,
273. 32:20in addition to making decisions that maximise the net cash flows, present value in a present value sense, we want you to do this too.
274. 32:30We want you to manage these trade-offs among stakeholders.
275. 32:33With respect to CSR, I doubt it would seem like it would be creating potentially very large agency costs that are much,
276. 32:42much more difficult to monitor. Right.
277. 32:47So, that's the sense in which ultimately it doesn't seem like this increase
278. 32:52in demand for CSR should really lead us to a different objective function,
279. 32:58but rather that objective function of shareholder primacy within the confines of that these demands can be met maybe not fully,
280. 33:10but they can be met as efficiently as any other structure.
281. 33:15So let me try to finish up with with just a few thoughts then about what this means in terms of doing research in this area.
282. 33:25And when I say research in this area, I'm really narrowing it down to, you know,
283. 33:31this framework of organisational structure and its impact on sustainability.
284. 33:35There's many more aspects to sustainability research than just these.
285. 33:40But if you think about this framework by itself, I think the general idea here is that the supply of CSR is then going to be endogenous,
286. 33:51that companies that that supply the CSR will be those that can do so at the lowest price.
287. 33:59Right. There's not going to be a one size fits all CSR sort of approach.
288. 34:03There's a certain amount of demand for CSR that's going to be met by those parties that can provide that CSR at the lowest price.
289. 34:12So sustainable farming would be a good example of that. But it doesn't mean that all farms should be farming in exactly the same way.
290. 34:20There's some demand for certain amount of sustainability that's met by companies that can provide that at the lowest price.
291. 34:31Others don't. And they're all, all these companies are optimising in that sense.
292. 34:34So what this means, I think in terms of research is that it's probably not as fruitful to be thinking in terms of,
293. 34:43well, how does CSR impact value, you know, in a cross sectional sort of sense?
294. 34:49And that's the parallel that I would draw with, you know,
295. 34:54traditional corporate governance research where for a long time we thought, well, what's the optimal governance structure?
296. 34:59Our companies better off, for example, with more outside directors.
297. 35:04And so you see a lot of tasks that relate corporate value to the proportion of outside directors, and you don't find all that much,
298. 35:11but I don't think you'd expect to find very much because this is an endogenous selection process.
299. 35:17And if companies are all optimising and you don't really find anything in terms of the cross-section of value against the selection of
300. 35:27these policies, it seems a lot more fruitful to be thinking in terms of what drives the cross-section of these choices.
301. 35:36Why do some firms provide certain CSR policies while other firms do not?
302. 35:43Is that because of the cost structure providing it? Is it differences in agency problems across these different organisations?
303. 35:51I think it's useful to think in terms of the tasks of the impact on the various stakeholder prices.
304. 36:00To what extent are there wage premiums, for example, based on observed CSR policies works then?
305. 36:06Are there consumer price premiums? To what extent to shareholder are shareholders willing to accept lower returns?
306. 36:13And we've certainly seen some of that research already. And to me that seems very, very useful thing to do.
307. 36:20Right. This seems like an area that's very ripe for working in the field of shareholder activism.
308. 36:26To when does this take place? When do activists try to pursue CSR policies?
309. 36:32When is it effective for them to do so? How do they do so?
310. 36:35Is it different from the other type of shareholder activism that we see?
311. 36:40Can we link various proxies for agency costs like we have in other parts of corporate finance?
312. 36:46Do we see those being having predictive power for the choice of CSR policies?
313. 36:52That seems fairly fruitful. I think we started to see some research in the area of CEO incentive contracts.
314. 37:01To what extent are CEO contracts written in a way that try to promote certain CSR policies?
315. 37:08Which firms do that sort of thing when you see it,
316. 37:11what sort of tradeoffs are implied by the magnitudes of the incentives for CSR versus the magnitude of incentives for maximising the stock price?
317. 37:23These are all things that seem like useful approaches to me that come directly out of thinking about this framework of
318. 37:31of firms optimising their organisational structure and therefore pursuing a shareholder primacy sort of approach.
319. 37:40Okay, I think I'm getting short on time, so let me just try to quickly, quickly.
320. 37:45Summarize what I take the main takeaways from this, I think again,
321. 37:50unquestionably there is this increased attention and demand for CSR policies within companies.
322. 38:00I think the main point is that this demand can be met and is met even under a shareholder primacy sort of approach.
323. 38:09It could also be met with a stakeholder primacy type of approach.
324. 38:15But it seems likely to me that that approach is going to engender much higher costs in the form of
325. 38:21contracting costs and potential agency costs than what you would see under a shareholder primacy approach.
326. 38:28Where does that leave us in terms of research? I think the research can be
327. 38:33very useful in contributing to our understanding of not only how do CSR preferences impact the various contracts within the firm,
328. 38:42but also how firms tend to choose among the different set of CSR sort of policies.
329. 38:49So I'll stop there and I guess we may have time for some questions.
330. 38:53Is that right? [clapping] ... Testing
331. 39:07Thank you, David. Right on time. We have five minutes.
332. 39:12We will have two helpers with the mic.
333. 39:15So, anyone have a question? for David.
334. 39:20Yes. Cindy.
335. 39:27Yep. Thank you very much. This was very interesting.
336. 39:32and I agree with the fact that it's unclear if we think about this externality being integrated into the firm that
337. 39:40which primary model we should choose.
338. 39:43But I think that's sort of a different discussion, which is sort of starting with Friedman,
339. 39:48is should firms look at other things than shareholder value.
340. 39:55So this is kind of conditional on shareholder primacy, right? So that's sort of accepted.
341. 39:59But now that shareholders have different preferences,
342. 40:01apparently now we deviate from profit maximisation or shareholder value maximisation and we go for shareholder welfare maximisation.
343. 40:08So at the heart of the Zingales arguments, I wonder, I think this is sort of different.
344. 40:11What you've been talking about is I wonder what you view. It's something. Yeah, I mean, I think it's a really interesting, interesting question.
345. 40:17I think it's a particularly difficult one, though,
346. 40:19to manage within the firm because you think of a typical corporation anyway that that is widely held and shares that are very liquid.
347. 40:30And so you have potentially a shareholder base that is constantly changing to define what
348. 40:36that shareholder welfare is or shareholder welfare preferences is extremely difficult.
349. 40:42And I think that you're running into the same sort of contracting costs that you would come with in terms of a stakeholder approach.
350. 40:49We have different stakeholders with different preferences. Shareholders, again,
351. 40:53have very different preferences here and where where we got to shareholder value as in being an objective function comes mostly from the fact that,
352. 41:02well, that's one dimension on which most rational economic agents can agree is that more value is better than less and less.
353. 41:11volatility of that value is better than more volatile. So it's a it's a very well defined objective function.
354. 41:18And so to me, it seems like that's probably still the most efficient way to go and to try to introduce these additional
355. 41:27dimensions of shareholder welfare is going to be difficult other than through the prices themselves.
356. 41:34Now, shareholders, you know,
357. 41:35certainly have the ability to influence the price of those shares and that's going to influence the corporate policies through that dimension.
358. 41:46But other than that,
359. 41:46I think it's going to be very costly to try to for the company to do something like Hart and Zingales [2017] sort of argue that,
360. 41:58you know, maybe you sort of pull shareholders short what
361. 42:00They want! Well, sure you can do that, but I'm a little skeptical that can be managed and in a way that's not extremely costly.
362. 42:11Okay. I would take one more question there is a lady at the back.
363. 42:20[C.S. Agnes Cheng] Hey, David. Again, very interesting talk.
364. 42:24You listed that for a negative value like NPV has negative value as example for SEC disclosure.
365. 42:32Like a lot of people now is working under ESG reporting and so can you
366. 42:40elaborate in your mind that is actually like negative [NPV] I'm simply using as a hypothetical?
367. 42:48Some people would view that as a negative. Other people do not.
368. 42:52The sense in which it could be a negative is if this is a disclosure rule that by its very nature any
369. 42:59disclosure rule is going to impose some additional costs on the companies providing that disclosure.
370. 43:04If it doesn't also produce a benefit for for shareholders, then it's in the negative NPV.
371. 43:13So the example I was giving it would be a situation in which you mandate this disclosure, but in providing the disclosure,
372. 43:22nothing has changed about the socially responsible policies themselves or the impact ultimately on something like climate change.
373. 43:31If that's true, it would fall into that category of number two.
374. 43:35I'm not arguing that it is true or isn't true, but that would be the type of decision that would fall into that category.
375. 43:44But I think from a standpoint of accounting scholar like yourself and others,
376. 43:49that's the way you want to be thinking about this is,
377. 43:53you know, what's the social trade-off that's involved in these disclosure policies that are being discussed.
378. 44:02Thank you, David, for the time sake. Let give a big hand of applause for David.
379. 44:11Thanks for listening.
380. 44:15Thank you, Jon.