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NEW YORK – Just over a year ago the Business Roundtable (BRT) signaled a tectonic shift in thinking within the private sector when it declared the purpose of corporations is to deliver value to stakeholders rather than solely to returning profits to shareholders. The statement from the American business association and a corresponding letter signed by the chief executives of some of the most influential U.S. companies sparked a new corporate trend focusing on Environmental, Social, and Governance (ESG). From businesses and mutual funds to asset managers and private equity firms – many corporate leaders pledged to implement stakeholder-oriented approaches to how they operate and invest to ensure that they become more ethical and responsible corporate actors. But research from Columbia Business School finds that in the first few years since making these promises, the results have been underwhelming at best.
In the financial industry, many banks and firms have launched socially responsible funds and initiatives to address big challenges, including environmental problems like carbon efficiency, social issues including gender and racial diversity, and governance policies on executive compensation. In the study, Do the Socially Responsible Walk the Talk?, Columbia Business School’s Shivaram Rajgopal, the Roy Bernard Kester and T.W. Byrnes Professor of Accounting and Auditing and Chazen Senior Scholar, and London School of Economics Professor Aneesh Raghunandan find that companies that signed the 2018 BRT statement:
- Have higher rates of environmental and labor-related compliance violations and penalties
- Are more likely to have paid settlements in lawsuits alleging workplace discrimination or wage theft
- Are more likely to face scrutiny in future mergers and acquisitions (M&A) transactions because they have higher market share.
“The so-called ‘social responsibility’ shift of companies from focusing on shareholder’s pockets to stakeholder value is a high-minded ideal,” said Professor Rajgopal. “But our research shows that the companies using their dollars to make purchases into ESG mutual funds do not actually practice the ethics they’re claiming to value.”
The researchers focused on whether ESG ratings – the measure of a company’s resilience against environmental, social and governance risks which are developed by various ratings firms – capture companies’ ESG orientations. Using data on federal complaints and settlements from the Violation Tracker created by Good Jobs First, the researchers developed a model to evaluate correlation between BRT signatories and violations. Researchers then identified the 183 companies that signed the BRT letter in 2018 and evaluated their track record with stakeholders based on violations – measuring concern for employees, the environment, and governance. Additionally, the researchers analyzed the impact of a company’s market share, since many BRT signatories firms receive heightened scrutiny by regulators and have incentive to signal virtue.
In addition to their underperformance on embracing stakeholder capitalism, the study also found that BRT signatories’ CEOs are paid more relative to peer firms – a sign that a lower percentage of them have independent boards of directors in comparison to non-signatory firms.
“Our findings are sobering and they serve as a way for investors, especially asset managers, to hold managers’ feet to the fire with respect to potential cheap talk about corporate purpose,” said Professor Rajgopal. “It also shows that the BRT signatories have historically not walked the talk and they need to put their money where their mouth is with respect to ESG issues.”
To learn more about the cutting-edge research being conducted at Columbia Business School, please visit www.gsb.columbia.edu.
About the researcher
Shiva Rajgopal is the Kester and Byrnes Professor of Accounting and Auditing at Columbia Business School. He has also been a faculty member...Read more.