In the debate over whether corporations should give priority to shareholder interests or stakeholder interests, among the thorniest issues is whether one approach creates more value for a company than the other. The challenge lies in the difficulty of assessing which stakeholder groups firms or managers favor.
In a new study, we address that challenge by using machine learning to analyze managers’ statements from earnings calls, developing a time-varying measure of a firm’s shareholder or stakeholder focus. Earnings calls present an opportune moment to assess a firm’s priorities, as they communicate key information about current performance and future strategies. A stakeholder-focused manager, for instance, would articulate goals that include the interests of all stakeholders.
Our machine-learning approach begins with an initial set of defined bigrams associated with either shareholder or stakeholder focus. For stakeholder focus, we consider groups such as employees, customers, communities, suppliers, the environment, and the government. This initial list of was drawn from Business Roundtable statements, Environmental Protection Agency documents, and the Dodd-Frank Act. We then train a model to identify additional terms indicative of managers’ focus on these groups. This method follows similar approaches used in assessing firm culture, identity, and risk exposure. The result is a comprehensive dictionary of terms linked to each stakeholder group as well as to shareholders.
Using these dictionaries, we create a novel and objective metric – Shareholder-Stakeholder Focus (SS Focus) – to quantify a manager’s orientation. The metric aggregates the scores for the various stakeholder groups and subtracts them from the shareholder score. A firm with a shareholder focus will have a more positive SS Focus score, while a stakeholder-focused firm will have a more negative score.
Using the SS Focus measure, we find strong evidence that a shareholder-focused model is optimal – not only for shareholders but also for all stakeholder groups. These findings align with prior research showing that socially responsible behavior can be consistent with maximizing shareholder value.
We begin by analyzing the impact of SS Focus on future stock returns. Across both univariate and multivariate analyses, we consistently find that firms with a higher SS Focus – indicating a stronger shareholder orientation – achieve significantly higher returns. These returns persist over both the short and long term, lasting up to three years after the earnings call. While critics of shareholder value may argue that such returns result from extracting value from stakeholders, our next analysis shows otherwise.
To evaluate this, we examine the relationship between SS Focus and subsequent environmental and social (ES) incidents reported in the RepRisk database. Using multivariate models that control for various firm and industry characteristics, we find the opposite of what critics suggest: Firms with a shareholder focus report fewer ES incidents , in both the short and long term. This holds for new and recurring incidents, and the severity of incidents is also lower in these firms.
Tests focusing on specific ES issues support these conclusions. Shareholder-focused firms report fewer incidents related to community impact, product health, environmental concerns, greenhouse gas emissions, and local pollution. On the social side, these firms experience fewer issues concerning poor employee conditions, occupational health, gender inequality, employment discrimination, anti-competitive behavior, supply chain disruptions, human rights violations, legal breaches, fraud, privacy violations, and misleading communications.
We acknowledge the possibility that firm-specific characteristics may be influencing our results. To test this, we perform several robustness checks. First, we replicate our primary analyses using a propensity-score matched sample and arrive at the same conclusions.
We also use the COVID-19 pandemic as a quasi-natural experiment. The pandemic intensified attention on ES issues and prompted firms to improve performance in those areas. Yet, we find that post-pandemic, firms with higher SS Focus saw the greatest reductions in ES incidents.
Next, we analyze new CEO appointments, which often reflect a shift in corporate strategy. In tests measuring how a new CEO’s stakeholder orientation differs from her predecessor’s, we find that the new CEO’s SS Focus continues to predict both stock returns and ES incidents. This suggests that it is the CEO’s orientation, rather than lingering firm or industry traits, driving outcomes.
Overall, our findings support the view that a shareholder focus is not only beneficial to shareholders but also leads to better outcomes for a wide range of stakeholders. These results contrast sharply with current social and political pressures on firms to adopt stakeholder-oriented governance. Ironically, pursuing those goals may produce worse outcomes for the very groups they aim to protect.
Our study contributes to several research areas. First, it adds to the literature on the relationship between ESG practices and corporate value. The increasing focus on ESG reflects a broader shift in corporate thinking, recognizing the links between financial success and stakeholder well-being. We offer new insights into how a shareholder-oriented approach can align with society’s broader goals. Our evidence shows that firms with high shareholder focus are better equipped to mitigate environmental and social risks.
This post comes to us from John Ampong and Matthew E. Souther at the University of South Carolina’s Darla Moore School of Business. It is based on their recent paper, “Can a Shareholder Focus Create Value for all Stakeholders?” available here.