The primary focus of the contemporary study of corporate governance is minimizing agency costs. Standard models assume that the principal—a firm’s shareholders—all seek to maximize risk-adjusted returns and thus uniformly wish their agent—the firm’s managers—to maximize share value. In reality, many equity investors, at least if fully informed, would be willing to sacrifice a portion of their returns to advance one or more socially-oriented objectives, particularly given our worsening social and environmental problems and waning faith in government’s ability to cure them.

In a new paper, we apply the teachings of corporate governance and financial economics to answer two questions, one positive and one normative: (1) given existing law, are these willing-to-sacrifice equity investors actually affecting firm behavior; and (2) should there be legal reform that makes firms more sensitive to these investors’ preferences?

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