Stakeholders and Shareholders: Are Executives Really “Penny Wise and Pound Foolish” About ESG?

Stakeholders and Shareholders: Are Executives Really “Penny Wise and Pound Foolish” About ESG?

By
David F. Larcker, Brian Tayan, Vinay Trivedi, Owen Wurzbacher
Stanford Closer Look Series. Corporate Governance Research Initiative, July
2019

Currently, there is much debate about the role that non-investor stakeholder interests play in the governance of public companies. Critics argue that greater attention should be paid to the interest of stakeholders and that by investing in initiatives and programs to promote their interests, companies will create long-term value that is greater, more sustainable, and more equitably shared among investors and society. However, advocacy for a more stakeholder-centric governance model is based on assumptions about managerial behavior that are relatively untested. In this Closer Look, we examine survey data of the CEOs and CFOs of companies in the S&P 1500 Index to understand the extent to which they incorporate stakeholder needs into the business planning and long-term strategy, and their view of the costs and benefits of ESG-related programs.

We ask:

  • What are the real costs and benefits of ESG?
  • How do companies signal to constituents that they take ESG activities seriously?
  • How accurate are the ratings of third-party providers that rate companies on ESG factors?
  • Do boards understand the short- and long-term impact of ESG activities?
  • Do boards believe this investment is beneficial for the company?