Merritt B. Fox is the Arthur Levitt Professor of Law at Columbia Law School and Menesh Patel is a Professor of Law at UC Davis School of Law. This post is based on their recent article.
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?
