Active Ownership Increases Corporate Returns

Elroy Dimson, Oguzhan Karakas, and Xi Li analyze an extensive proprietary database of corporate social responsibility engagements with US public companies over 1999–2009. Engagements address environmental, social, and governance concerns. They are followed by a one-year abnormal return that averages 1.8%, comprising 4.4% for successful and zero for unsuccessful engagements.

The authors document outperformance following environmental/social, as well as governance, engagements. Firms are more likely to be engaged, and engagements are more likely to be successful, if the target firm is concerned about its reputation and if it has higher capacity to implement corporate social responsibility changes. After successful engagements, companies experience improvements in operating performance, profitability, efficiency, and governance.

 Active Ownership (December 17, 2012). Available at SSRN.

First, performance improvements could result from filtering by engaged companies, which accept value-enhancing proposals and reject value-destructive proposals.

Second, since they found a positive cumulative abnormal return for successful engagements and a zero return for unsuccessful ones, one could conclude that expected CSR changes increase the value of engaged companies. An alternative explanation is that target firms wait, and adopt the requested changes if their stock prices increase. That seems unlikely to me.

A third possibility is that milestones are recorded retrospectively after a positive stock market reaction but that doesn’t appear likely from their analysis.

Fourth, target firms have poorer corporate governance than control firms, indicating more serious agency issues and a greater likelihood of deviating from shareholder value maximization, which would impede adoption even of value-enhancing CSR projects.

The positive abnormal returns are most pronounced for engagements on the themes of corporate governance and climate change.

These findings provide more evidence that universal owners such as pension funds, insurance companies and other global investors are voting for CSR initiatives.  However, this may be a case of low hanging fruit. Will the push continue without engaged beneficial owners. I have my doubts.


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