How Much Do Investors Care About Social Responsibility?

Scott Hirst is Associate Professor of Law at Boston University; Kobi Kastiel is Associate Professor of Law at Tel Aviv University and Senior Fellow of the Harvard Law School Program on Corporate Governance; and Tamar Kricheli-Katz is a Professor of Law at Tel Aviv University. This post is based on their recent paper. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); For Whom Corporate Leaders Bargain (discussed on the Forum here); and Stakeholder Capitalism in the Time of COVID (discussed on the Forum here), both by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita.

Perhaps the most important corporate law debate over the last several years concerns whether directors and executives should manage corporations to maximize value for investors, or to also take into account the interests of other stakeholders or society (see, e.g., Hart and Zingales, 2017; Bebchuk and Tallarita, 2020; Rock, 2021). But this raises several important questions that have received much less attention: Do individual investors themselves wish to maximize returns, or are they willing to forgo returns for social purposes? And more broadly, do market participants, such as investors and consumers, differ from donors in the ways in which they prioritize monetary gains and the promotion of social goals?

Our recent paper, How Much Do Investors Care about Social Responsibility?, attempts to answer these important questions with new empirical evidence from an experiment conducted on 279 Americans with investing experience that involved real monetary gains for participants. The experiment investigated the tradeoffs that individuals make between their own financial interests, and four different social interests—gender diversity, income equality, environmental protection, and faith-based values.

Scholars have generally assumed that the investment preferences of individuals on these kinds of social interests are the same as their consumption preferences (for examples, for electric cars, fair trade coffee, or free range chicken, per Hart and Zingales, 2017). But there has been surprisingly little consideration of whether individuals’ prosocial preferences are indeed the same across the different channels by which they could further social interests. To better understand this question, we randomly assign participants among scenarios where they are asked to make investment decisions, consumption decisions, and donation decisions. Such comparison of the willingness-to-pay across these three channels also helps overcome potential issues regarding the external validity of our results.

We design each set of tradeoffs to replicate how individuals make real-world decisions. In the investment questionnaire, for example, participants are asked to make four sets of investment decisions (correlating with the above-mentioned four social interests), each relating to how they would invest $10,000. Participants were asked to choose whether to invest in a “general” portfolio of public companies or a “socially responsible” portfolio with a particular focus on certain socially responsible characteristics, and excluding companies that lack those characteristics (such as companies with a low proportion of women in leadership positions; companies whose products have negative environmental impacts; companies with a high pay disparity between their top executives and median employee; and companies that profit from adult entertainment, tobacco, or gambling). Participants were told that general portfolios have tended to perform better than socially responsible portfolios in the past, possibly because socially responsible ones may incur greater costs.

In each of the four sets of investment decisions, participants were asked to make ten binary decisions, as to whether they wish to invest in the general portfolio with 10% returns or to invest in the “socially responsible” portfolio with returns between 1% and 9.9%, foregoing gains of between 0.1% and 9%. The consumption and donation questionnaires (assigned to participants in the other two experimental conditions) were as similar as possible to the investment questionnaire, except for minor differences corresponding to the decisions for that relevant channel.

Previous literature on investor decision making that examined these questions suffers, by and large, from external validity issues. While some external validity issues are inevitable, our study aims to improve on the setting of most previous work by offering real financial rewards to investor decisions—that is, requiring participants to put their money where their mouth is. We therefore structure participants’ incentives to reflect the outcomes of their decisions; if they choose the general alternative that involves greater investment returns in our scenario, their real-world payment increased and they increased their probability of winning a larger lump-sum payment that we awarded to one random participant; if they choose greater social responsibility, they received a lower bonus payment and a lower likelihood of winning the larger lump-sum payment, but a larger amount was donated to registered charities that work to further the relevant social causes.

Our empirical analysis provides three main results. First, we find that when making investment decisions, individuals are indeed willing to forgo some returns in order to promote social interests: The average sacrifice in our experiment varied (depending on the particular cause) between $176 and $253 out of returns of $1,000 on a $10,000 investment (corresponding to returns of between 1.76% and 2.53%, out of a potential total return of 10%).

More importantly, whereas most investors are willing to forgo gains to promote social interests, a substantial proportion of investors (about 32%) are unwilling to forgo even a trivial amount ($10 out of $1,000, or a 0.1% return out of the 10% potential return) to advance any of the four social goals we presented to them through their investment decisions. These individuals have a strong preference to maximize profits over social goals, even where the cost to them of furthering social goals is extremely small. We believe that this finding is likely to be generalizable to other situations, where sacrificing value for social purposes is likely to be at least as costly as in our scenarios, and probably considerably more so.

Second, we find that the amount of money individuals are willing to forgo to promote social interests depends on the channels through which they make their decisions. In particular, the amount individuals are willing to forgo when making investment decisions is significantly less than the amount they are willing to forgo when making donation decisions. We interpret this to mean that a substantial number of investors would prefer that corporations distribute returns to their investors, who can then use those returns to advance social goals directly. We also find that the amount of money that individuals are willing to forgo when making investment decisions is significantly lower than when making consumption decisions. This counsels caution in drawing inferences for investment preferences from consumption preferences.

Third, we find significant heterogeneity in preferences among individuals, which is associated with their political affiliation, gender and age. This heterogeneity is expressed both in the amount that individuals are willing to forgo to promote social causes, and in the proportion of individuals that are unwilling to forgo even trivial amounts to promote social causes. Altogether, we find that individuals identifying as Democrats and women, and those with greater income, are more willing to forgo, and to forgo greater amounts, to promote social causes, compared to those identifying as Republicans or independents and men, and those with lower incomes. We also find that individuals are more willing to forgo to promote social causes considered to be conservative when donating, compared to when they are investing or consuming.

Together these finding suggest that there is no clear consensus among investors that corporations should, or should not, promote social causes at the expense of their financial gains. More than anything, the split in investors’ social preferences that we observe is a reflection of a political divide between individuals who support relatively progressive causes and those who support more conservative causes.

The clear variation in investors’ preferences also raises challenging questions, both for corporate leaders, and for investment managers. For corporate leaders, whose preferences should they follow? Which particular social causes should they promote? How much value should they sacrifice for those returns? And how should corporate leaders be monitored to ensure that they appropriately respond to these concerns? Analogous questions apply to investment managers: How should they attempt to influence corporate managers with respect to their social responsibility decisions? And how much of their investors’ returns should they be willing to sacrifice to improve the extent to which corporations further social interests?

We do not pretend to answer these questions. But our results suggest that corporate leaders, and investment managers, cannot continue to avoid them.

The complete paper is available for download here.

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