Adi Libson is associate professor at Bar-Ilan University. This post is based on a recent article by Professor Libson, forthcoming in the U.C. Irvine Law Review. Related research from the Program on Corporate Governance includes The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst (discussed on the Forum here) and Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).
2016 Nobel Laureate Oliver Hart and Professor Luigi Zingales have recently published an article justifying companies’ pursuit of social objectives at the expense of profits from within the shareholder primacy framework. They argue that in cases in which shareholders have social preferences besides maximization of profits, the maximization of their welfare requires managers and the directors to take these preferences into account.
My article, Taking Shareholders’ Social Preferences Seriously: Confronting a New Agency Problem, highlights an important consequence of this approach: a new agency problem between managers and shareholders regarding social preferences. It argues that there exists a systemic gap between managers and shareholders in regards to prosocial preferences. Shareholders have a greater tendency to sacrifice profits in order to promote a social goal than managers, who are more sensitive to the bottom line profit. Data regarding shareholders’ proposals during the 2016 proxy season support this claim. Among the 916 proposals of shareholders, 299 were aimed at enhancing the corporations’ engagement to promote social objectives such as diversity, environmental protection, and minimum wage. No proposals were made for scaling down social objectives in order to increase profits. There are two reasons for such systemic gap: managers’ human capital investment in the firm is less diversified than that of shareholders; and the existence of bonding mechanisms such as options and bonuses which intensifies managers’ sensitivity to the firm’s profits.
