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E-MailHajin Kim is an Assistant Professors of Law at the University of Chicago Law School. This post is based on her paper forthcoming in the Journal of Legal Studies. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) and Does Enlightened Shareholder Value Add Value? (discussed on the Forum here) both by Lucian A. Bebchuk and Roberto Tallarita; How Much Do Investors Care about Social Responsibility? (discussed on the Forum here) Scott Hirst, Kobi Kastiel, and Tamar Kricheli-Katz; Companies Should Maximize Shareholder Welfare Not Market Value (discussed on the Forum here) by Oliver D. Hart and Luigi Zingales; and Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee (discussed on the Forum here) by Robert H. Sitkoff and Max M. Schanzenbach.
Expecting Corporate Prosociality
The long-running corporate purpose debate often assumes stakeholder preferences for corporate prosociality are exogenous: Investors, employees, and consumers want corporations to be prosocial or they don’t. My paper, Expecting Corporate Prosociality, on SSRN and forthcoming in the Journal of Legal Studies, develops and empirically tests the idea that rhetoric from the debate itself can influence these preferences and stakeholder demands. I find that expectations of exclusive profit maximization (that firms can and should maximize only profits) can reduce stakeholder demands for corporate prosociality. Such a loss in tangible incentives for corporate prosociality would reduce “win-wins”—what is both profitable and good for society.
Consider two worlds—caricatures to illustrate the point: In Profit Maximization World, people expect that businesses can and should maximize only profits. Paula, an employee for ABC Corp., learns that ABC Corp. will cut down old growth forest for a parking lot. She’s upset but doesn’t object. ABC Corp. must do what is most profitable, so what’s the point in complaining?
In contrast, in Social Responsibility World, people expect that businesses can and should also care about the impact they have on society. Sally, an employee for XYZ Corp., learns that XYZ Corp. will cut down old growth forest for a parking lot. She’s upset and so organizes an employee protest. When XYZ Corp. razes the forest anyway, Sally leaves to work for a competitor.
In other words, if key stakeholders (consumers, employees, and investors) expect that firms can and should care about society, they, like Sally, may be more likely to reward prosocial firm decisions and protest antisocial ones—their rewards and protests may seem both more appropriate and effective if firms are supposed to care. These reputational rewards and protests would create stronger bottom-line incentives for firms to care about society, or to at least act like they care. In this way, key stakeholder expectations of corporate prosociality could help align private and public ends. And the cycle might be somewhat self-reinforcing: As more firms act ostensibly prosocially, key stakeholders may come to have greater expectations that firms can and should care about society.
In two preregistered studies with nearly 1300 participants, I find initial support for the idea that stakeholder expectations of corporate prosociality can influence demands for corporate prosociality. I randomly assigned Amazon Mechanical Turk workers (“MTurkers”) to learn either about an exclusive profit maximization legal rule and norm or about a more permissive legal regime that allows for a social responsibility norm. MTurkers then decided whether to sign a real Greenpeace petition against Amazon, the company that runs MTurk. (MTurkers are not Amazon employees but often view Amazon as their de facto employer. Some of the reasons participants gave for not signing the petition included: “I don’t want to bite the hand that feeds me”; “I fear retaliation. I make money from MTurk”; “Because I don’t want to lose my MTurk job”; and so on.)
In Study 1, as predicted, teaching participants about exclusive profit maximization led to less protest: 48% of the profit maximization participants signed the petition, compared to 61% of the social responsibility participants. Profit maximization participants felt that it was less appropriate for employees to push for social change and more futile to protest, and they expected fewer firms to care about society and fewer others to protest with them.
In Study 2, I tested whether learning about exclusive profit maximization could persuade people against their initial instincts to protest. Participants decided whether to sign the petition twice, both before and after they learned the applicable legal norm (half learned about exclusive profit maximization and half about the social responsibility norm). As predicted, exclusive profit maximization changed the behavior of people who would otherwise protest. Of those who at first chose to sign the petition, 9.7% of participants decided not to sign after learning about the exclusive profit maximization norm, while only 1.1% of participants did the same after learning about the social responsibility norm.
To be sure, these studies considered only MTurkers, who may differ in important ways from other stakeholders with greater influence over firm decisions, and evaluated only decisions to protest in the form of petition signing. And even if the theory here does extend to other contexts, it would not resolve the corporate purpose debate. This theory adds just one argument to the litany of reasons for and against a corporate prosociality norm.
Nonetheless, the studies provide proof-of-concept empirical support for the idea that learning about profit maximization can reduce stakeholder protest and that it makes such demands for corporate prosociality appear less appropriate and less effective. Expectations of corporate prosociality instead could thus make it easier for firms to do well by doing good.
