Enhanced Shareholder Value Creation
1) Shareholder Value Maximization
Traditional view = creating value for shareholders and CG should prevent execs to pursue own
interest.
FCF = (1 – t) * EBIT + Depreciation – CAPX – Change in NWC
2) Enhanced Shareholder Value Maximization
Consider interest of stakeholder this will serve Long Term SVM
LT value depends on stakeholders:
o Employees: human capital
o Community of taxpayers: (institutional) infrastructure or Local community
o Customers: revenues
o Firms: supply chain
Legal Context:
In Europe: Civil law Stakeholder is embedded in law
In US: Common law with shareholder primacy
In UK: Stakeholders are mentioned in UK Co Act.
There can be a trade-off between shareholder and stakeholder value (how far will you go to create
shareholder value via stakeholder value ten koste van shareholders). For example:
- ClimateChange: Oil and gas company: invest more in oil wells involves tradeoff between
shareholder interests and society’s interests in reducing climate risks.
ESVM = SVM: Conditions for equivalence of ESVM and SVM:
A1: Corporate leaders are not myopic (kortzichtig) and consider LT consequences of their choices on
LT shareholder value.
A2: Corporate leaders are well informed about consequences of their choices.
A3: Courts avoid micromanagement of corporate decisions and defer to the discretion of corporate
leaders under the business judgment rule.
A4: Only changes in actual treatment of stakeholders, and not merely linguistic changes (taalkundige
veranderingen) in formulation of decision are taken to be actual changes.
ESVM < > SVM: leads to fuller consideration of stakeholder effects. Conditions:
1. Focus on the Long Term
2. Education and informational value of ESVM
3. Using ESVM as an excuse to deviate from value max?
SVM is good under:
Perfect competitive economy with no agent able to affect prices.
No externalities (=everything that is not priced but has a cost on stakeholders).
Then: SVM -> increase in value increases wealth of shareholders without anyone being worse
off.
SVM breaks down under:
Imperfect competition: danger of monopoly (dominant single seller) / monopsony (dominant
single buyer). (e.g. Turing Pharmaceuticals (CEO Martin Shkreli))
Common ownership: Maximizing value of a portfolio rather than an individual firm
(Maximize firm A with the use of firm B).
Externalities: Damage-inducing activities (e.g. pollution) are often inseparable from
production activities Regulation is suboptimal. Regulation is mostly only within national
frontiers, so not global. Why would shareholders agree to separation of value
maximization and paying for externalities? (Friedman Separation Theorem)
Pure SVM is amoral (=without thoughts about good and bad)
3) Shareholder Welfare Maximization
1
,= SVM + regulation AND/OR shareholder voting on ESG issues
Problem: Voting outcome is non-binding in US and UK & Will shareholders vote?
Corporate Purpose Statement:
= Defines the reason your company exists. It also illustrates how your product or service positively
impacts the people you serve.
ESG-has higher returns:
- In equilibrium: lower returns
- Out of equilibrium: high returns
Out of equilibrium: a shock (e.g. a higher ESG score) -> demand goes up -> price goes up ->
high initial return -> longer term higher prices = lower returns
Advantage of CP
o The commitment -> trust
o Also: while many stakeholders are protected by contracts.
o For shareholder: legal shareholder protection is needed and focus on shareholder
primacy.
Even if one show that purpose statements cause success, the implications would be doubly
unclear:
o First, purpose (statements) may only work for the few firms that have (voluntarily)
adopted them.
o Second, a regulator can only set minimum requirements for mandatory purpose
statements.
B Corp and Benefit Corporation
B Corp = for-profit company, certified by the nonprofit B Labs. These companies commit to:
Accountability: Directors required to consider impact on all stakeholders.
Transparency: publish reports of overall social and environmental performance.
Performance: achieve minimum verified score on the B Impact
Assessment; and recertification is required every 2 years against
evolving standard.
Availability: B Corps certificate available to every business
regardless of corporate structure, state, or county of incorporation.
Exception: after 2 years of being a certified B Corp,
transition your corporate structure to a PBC (or public
benefit corporation by state designation).
Cost: B Lab certification fees from $500 to $50,000/year; based
on revenues.
(Public) Benefit corporation = legal entity with in its acts of incorporation
a public benefit
Accountability: Directors required to consider impact on all stakeholders.
Transparency: publish public reports of overall social and environmental performance.
(Exception: Delaware PBCs not required to report publicly or against a third party standard).
Performance: co reports self-reported metrics and evaluations to shareholders.
Availability: PBCs are legal entity choices in 30 US states and D.C.
Cost: PBC state filing fees range from $70-$200.
Purpose: PBCs = provide option of combining for profit + social impact purposes/interests.
- France: Entreprise a mission = legal entity in France allowed focus on stakeholders
Legal Origin and CSR
PAPER: On the Foundations of Corporate Social Responsibility (Liang, H. and L. Renneboog,
2017)
What fundamental forces steer corporations to behave as good citizens rather than as pure profit
maximizers?
The “law and finance” view:
2
, Corporate law address agency conflicts between managers and shareholders.
Common law is superior in providing fertile ground for shareholder protection.
Shareholder protection financial development efficient resource allocation
Better economic development and social welfare
The stakeholder view
Civil laws are superior in providing fertile ground for stakeholder protection.
Stakeholder protection reducing market externalities social welfare
The institutional view (“conventional wisdom”)
Political institutions shape corporate governance structures and aggregate social
preferences.
To foster CSR and sustainability: democracy and constraints on government need to
come first.
The development view:
Institutions are the consequence, rather than preconditions, of economic development.
Democracy and executive constraints hinder good economic outcomes (e.g. CSR and
sustainability): difficulty in consensus building.
Legal origins: only consistent predictors of CSR
Civil law firms outperform common law firms in CSR issues.
Scandinavian firms outperform the rest of the world in CSR.
Channels between LOs and CSR:
2SLS (not IV)
Shareholder litigation
Employment laws
Collective relations laws
Degree of state
involvement in the
economy
Super majority rules
- The adjacent table
shows the difference
between (e.g.) civil law
vs. common law for
different dependent
variables.
- Overal IVA Rating
(Intangible Value
Assessment (IVA))
- The table shows that
Civil law has a
coefficient which is
18.676 higher than
common law for the first column.
- French has a higher coefficient than English with 16.044, what is highly significant, for the
first column.
- The difference between civil and common law is the biggest for Eco Value.
3
, - The dependent variable is
CSR score.
- French origin countries have
the highest CSR score in
comparison with German
and Scandinavian origin
countries. Given the highest
coefficient in column 1.
- Countries with a higher GDP care
more for CSR, because positive
coefficient.
- Firms that are in a country that
are more globalized are more in
CSR, because positive coefficients.
Testing for LO and Scandals & Disasters:
Quasi-natural experiments and Diff-in-Diff analysis for causation:
Reaction to 2008 Chinese milk scandal by firms in food- related industries from different
legal regimes (treatment = civil law)
Corporate donations as a reaction to 2004 Asian tsunami by firms from different legal
regimes (treatment = civil law)
Environmental performance upgrade by firms in energy- related industries from different legal
regimes as a reaction to 2010 Deepwater Horizon oil spill (treatment = civil law)
The table above shows that after the Chinese milk scandal in 2008, the product responsibility
and product safety is higher for civil law countries.
The same counts for cash
donations after the Indian
Ocean Tsunami in 2004.
For the test above, they also conducted
a placebo test, to test for the effect on
other industries:
4
1) Shareholder Value Maximization
Traditional view = creating value for shareholders and CG should prevent execs to pursue own
interest.
FCF = (1 – t) * EBIT + Depreciation – CAPX – Change in NWC
2) Enhanced Shareholder Value Maximization
Consider interest of stakeholder this will serve Long Term SVM
LT value depends on stakeholders:
o Employees: human capital
o Community of taxpayers: (institutional) infrastructure or Local community
o Customers: revenues
o Firms: supply chain
Legal Context:
In Europe: Civil law Stakeholder is embedded in law
In US: Common law with shareholder primacy
In UK: Stakeholders are mentioned in UK Co Act.
There can be a trade-off between shareholder and stakeholder value (how far will you go to create
shareholder value via stakeholder value ten koste van shareholders). For example:
- ClimateChange: Oil and gas company: invest more in oil wells involves tradeoff between
shareholder interests and society’s interests in reducing climate risks.
ESVM = SVM: Conditions for equivalence of ESVM and SVM:
A1: Corporate leaders are not myopic (kortzichtig) and consider LT consequences of their choices on
LT shareholder value.
A2: Corporate leaders are well informed about consequences of their choices.
A3: Courts avoid micromanagement of corporate decisions and defer to the discretion of corporate
leaders under the business judgment rule.
A4: Only changes in actual treatment of stakeholders, and not merely linguistic changes (taalkundige
veranderingen) in formulation of decision are taken to be actual changes.
ESVM < > SVM: leads to fuller consideration of stakeholder effects. Conditions:
1. Focus on the Long Term
2. Education and informational value of ESVM
3. Using ESVM as an excuse to deviate from value max?
SVM is good under:
Perfect competitive economy with no agent able to affect prices.
No externalities (=everything that is not priced but has a cost on stakeholders).
Then: SVM -> increase in value increases wealth of shareholders without anyone being worse
off.
SVM breaks down under:
Imperfect competition: danger of monopoly (dominant single seller) / monopsony (dominant
single buyer). (e.g. Turing Pharmaceuticals (CEO Martin Shkreli))
Common ownership: Maximizing value of a portfolio rather than an individual firm
(Maximize firm A with the use of firm B).
Externalities: Damage-inducing activities (e.g. pollution) are often inseparable from
production activities Regulation is suboptimal. Regulation is mostly only within national
frontiers, so not global. Why would shareholders agree to separation of value
maximization and paying for externalities? (Friedman Separation Theorem)
Pure SVM is amoral (=without thoughts about good and bad)
3) Shareholder Welfare Maximization
1
,= SVM + regulation AND/OR shareholder voting on ESG issues
Problem: Voting outcome is non-binding in US and UK & Will shareholders vote?
Corporate Purpose Statement:
= Defines the reason your company exists. It also illustrates how your product or service positively
impacts the people you serve.
ESG-has higher returns:
- In equilibrium: lower returns
- Out of equilibrium: high returns
Out of equilibrium: a shock (e.g. a higher ESG score) -> demand goes up -> price goes up ->
high initial return -> longer term higher prices = lower returns
Advantage of CP
o The commitment -> trust
o Also: while many stakeholders are protected by contracts.
o For shareholder: legal shareholder protection is needed and focus on shareholder
primacy.
Even if one show that purpose statements cause success, the implications would be doubly
unclear:
o First, purpose (statements) may only work for the few firms that have (voluntarily)
adopted them.
o Second, a regulator can only set minimum requirements for mandatory purpose
statements.
B Corp and Benefit Corporation
B Corp = for-profit company, certified by the nonprofit B Labs. These companies commit to:
Accountability: Directors required to consider impact on all stakeholders.
Transparency: publish reports of overall social and environmental performance.
Performance: achieve minimum verified score on the B Impact
Assessment; and recertification is required every 2 years against
evolving standard.
Availability: B Corps certificate available to every business
regardless of corporate structure, state, or county of incorporation.
Exception: after 2 years of being a certified B Corp,
transition your corporate structure to a PBC (or public
benefit corporation by state designation).
Cost: B Lab certification fees from $500 to $50,000/year; based
on revenues.
(Public) Benefit corporation = legal entity with in its acts of incorporation
a public benefit
Accountability: Directors required to consider impact on all stakeholders.
Transparency: publish public reports of overall social and environmental performance.
(Exception: Delaware PBCs not required to report publicly or against a third party standard).
Performance: co reports self-reported metrics and evaluations to shareholders.
Availability: PBCs are legal entity choices in 30 US states and D.C.
Cost: PBC state filing fees range from $70-$200.
Purpose: PBCs = provide option of combining for profit + social impact purposes/interests.
- France: Entreprise a mission = legal entity in France allowed focus on stakeholders
Legal Origin and CSR
PAPER: On the Foundations of Corporate Social Responsibility (Liang, H. and L. Renneboog,
2017)
What fundamental forces steer corporations to behave as good citizens rather than as pure profit
maximizers?
The “law and finance” view:
2
, Corporate law address agency conflicts between managers and shareholders.
Common law is superior in providing fertile ground for shareholder protection.
Shareholder protection financial development efficient resource allocation
Better economic development and social welfare
The stakeholder view
Civil laws are superior in providing fertile ground for stakeholder protection.
Stakeholder protection reducing market externalities social welfare
The institutional view (“conventional wisdom”)
Political institutions shape corporate governance structures and aggregate social
preferences.
To foster CSR and sustainability: democracy and constraints on government need to
come first.
The development view:
Institutions are the consequence, rather than preconditions, of economic development.
Democracy and executive constraints hinder good economic outcomes (e.g. CSR and
sustainability): difficulty in consensus building.
Legal origins: only consistent predictors of CSR
Civil law firms outperform common law firms in CSR issues.
Scandinavian firms outperform the rest of the world in CSR.
Channels between LOs and CSR:
2SLS (not IV)
Shareholder litigation
Employment laws
Collective relations laws
Degree of state
involvement in the
economy
Super majority rules
- The adjacent table
shows the difference
between (e.g.) civil law
vs. common law for
different dependent
variables.
- Overal IVA Rating
(Intangible Value
Assessment (IVA))
- The table shows that
Civil law has a
coefficient which is
18.676 higher than
common law for the first column.
- French has a higher coefficient than English with 16.044, what is highly significant, for the
first column.
- The difference between civil and common law is the biggest for Eco Value.
3
, - The dependent variable is
CSR score.
- French origin countries have
the highest CSR score in
comparison with German
and Scandinavian origin
countries. Given the highest
coefficient in column 1.
- Countries with a higher GDP care
more for CSR, because positive
coefficient.
- Firms that are in a country that
are more globalized are more in
CSR, because positive coefficients.
Testing for LO and Scandals & Disasters:
Quasi-natural experiments and Diff-in-Diff analysis for causation:
Reaction to 2008 Chinese milk scandal by firms in food- related industries from different
legal regimes (treatment = civil law)
Corporate donations as a reaction to 2004 Asian tsunami by firms from different legal
regimes (treatment = civil law)
Environmental performance upgrade by firms in energy- related industries from different legal
regimes as a reaction to 2010 Deepwater Horizon oil spill (treatment = civil law)
The table above shows that after the Chinese milk scandal in 2008, the product responsibility
and product safety is higher for civil law countries.
The same counts for cash
donations after the Indian
Ocean Tsunami in 2004.
For the test above, they also conducted
a placebo test, to test for the effect on
other industries:
4
