Managerial Compensation and Firm Value in the Presence of Socially Responsible Investors

Pierre Chaigneau

Journal of Business Ethics, 2018, vol. 149, issue 3, No 12, 747-768

Abstract: Abstract Shareholders with standard monetary preferences will give a manager incentives to increase firm profits, which can be achieved with equity grants. When shareholders are socially responsible, in the sense that they also value corporate social performance, it is not clear which incentives the manager should receive. Yet, in a standard principal–agent model, we show that the optimal contract is surprisingly simple: it consists in giving equity holdings to the manager. This is notably because the stock price will incorporate expected profits as well as the social performance of the firm, to the extent that it is valued by shareholders. Consequently, equity holdings give the manager incentives to jointly maximize the profits and the social performance of the firm according to shareholders’ preferences. To facilitate alignment of interests, more socially responsible firms will optimally hire more socially responsible managers. We conclude that neither the shareholder primacy model nor equity-based managerial compensation is necessarily inconsistent with the attainment of social objectives.

Keywords: Corporate social performance (CSP); Corporate social responsibility (CSR); Executive compensation; Fiduciary duty; Incentive contracts; Principal–agent model; Socially responsible investment (SRI) (search for similar items in EconPapers)
JEL-codes: D21 D64 G34 K20 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s10551-016-3115-9 Abstract (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:jbuset:v:149:y:2018:i:3:d:10.1007_s10551-016-3115-9

Ordering information: This journal article can be ordered from
http://www.springer. ... cs/journal/10551/PS2

DOI: 10.1007/s10551-016-3115-9

Access Statistics for this article

Journal of Business Ethics is currently edited by Michelle Greenwood and R. Edward Freeman

More articles in Journal of Business Ethics from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().