Employees and stakeholder engagement

Social impact: Accounting for Employment Impact at Scale by Adel Fadhel, Katie Panella, Ethan Rouen, and  George Serafeim as of Jan. 12^th, 2022 (#284): “This paper demonstrates that large scale monetized impact analysis is feasible … Employment impact intensity is calculated for 22,322 firm-year years, providing a robust sample for industry-level benchmark analyses. We find significant heterogeneity within industries … Presenting employment impact intensity in dollar terms allows firms, investors, and policy-makers to effectively calculate future risks and opportunities associated with human capital practices “ (p. 28/29).

Employee activists: Protests from Within: Engaging with Employee Activists by Stephen Miles, David F. Larcker, and Brian Tayan as of March 9th, 2021 (#404): “Recent years have witnessed a growing trend of stakeholder issues becoming prominent in discussions of corporate governance. One source of this pressure comes from an unexpected constituent: the company’s own employee base. In this Closer Look, we examine the rise of employee activism and its implications on corporate mission, the board, and management” (abstract).

Employee ESG surveys: Do Employees Have Useful Information About Firms’ ESG Practices? by Hoa Briscoe-Tran as of Nov. 11^th, 2022 (#818): “… I study whether employees have useful information about firms’ environmental, social, and governance (ESG) practices by analyzing 10.4 million anonymous employee reviews. I find that employees discuss ESG topics in 43% of reviews, thereby providing substantial information about firms’ ESG practices. The employees’ inside view predicts various indicators of a firm’s future ESG-related outcomes, beyond the existing ESG ratings, particularly on the S and G dimensions. Using the inside view, I show that a firm’s stated ESG policies often differ from its employees’ view of its practices” (p. 34).

Employee ESG: Caremark and ESG, Perfect Together: A Practical Approach to Implementing an Integrated, Efficient, and Effective Caremark and EESG Strategy by Leo E. Strine, Jr., Kirby M. Smith, and Reilly S. Steel as of July 2^nd, 2021 (#936): “… Building on an emerging literature connecting EESG (employee, environmental, social, and governance factors) with corporate compliance, this Essay argues that EESG is best understood as an extension of the board’s duty to implement and monitor a compliance program …” (abstract).

UK employee participation law: The Workforce Engagement Mechanisms in the UK: A Way Towards More Sustainable Companies? (Part 2) by  Katarzyna Chalaczkiewicz-Ladna, Irene-Marie Esser, and Iain MacNeil as of Jan. 20^th, 2023 (#88): “This study concentrates on evaluating workforce engagement mechanisms as a tool to ensure more sustainable companies in 2020 – the second year this provision is in force. … we assert in this paper that on their own even well-functioning workforce engagement tools are unlikely to improve the standards of workforce engagement and a more integrated (“bundled” or “package”) approach to workforce engagement and participation is required. Finally, as mentioned in the Introduction, we view Provision 5 not only as a stakeholder empowerment tool, but more broadly as the start of a process of experimentation to determine the best ways to engage all stakeholders in board decision-making“ (p. 30).

Employee satisfaction alpha 1: Employee Satisfaction, Labor Market Flexibility, and Stock Returns Around the World by Alex Edmans, Darcy Pu, Chendi Zhang, and Lucius Li as of Jan. 23^rd, 2023 (#4151): “This paper studies how the relationship between employee satisfaction and stock returns depends critically on a country’s labor market flexibility. The alphas documented by Edmans (2011, 2012) for the US are not anomalous in a global context, in terms of economic significance. However, they do not automatically generalize to every country – the returns to being listed as a Best Company to Work For are increasing in labor market flexibility. We find similar results for current valuation ratios, operating performance, and future earnings surprises. Our findings are consistent with the recruitment, retention, and motivational benefits of employee satisfaction being most valuable in flexible labor markets“ (p. 25).

Employee satisfaction alpha 2: Do high-ability managers choose ESG projects that create shareholder value? Evidence from employee opinions by Kyle Welch and Aaron Yoon as of June 22^nd, 2022 (#1737): “… we find that firms with both high ESG ratings and high employee opinions of senior management significantly outperform those with low ratings on both. … the set of firms with high ESG and high managerial ability exhibits not only superior future accounting performance but also greater earnings surprises versus other firms. … we suggest that employee opinions may be an important factor not yet incorporated in traditional ESG ratings“ (p. 25/26).

Pay gap research

ESG employee advantage? The Sustainability Wage Gap by Philipp Krueger, Daniel Metzger, and Jiaxin Wu as of April 19^th, 2022 (#1058): “Using … data from Sweden … we provide evidence that firms with better sustainability characteristics tend to pay lower wages (about 9%) and attract and retain workers that are more skilled. We coin this empirical regularity as the Sustainability Wage Gap. We argue that workers are willing to give up part of their financial compensation because they derive nonpecuniary benefits related to their preferences to work in more sustainable firms or sectors. … we show that the wage gap is indeed more pronounced for workers that are more highly skilled and increasing over time” (p. 38).

Pay gap research 1: Do firms’ disclosure choices conform to social attitudes? Evidence from the CEO pay ratio estimation by Zinat Alam, Chinmoy Ghosh, Harley E. Ryan, and Lingling Wang as of Oct. 26^th, 2022 (#219): “Congress mandated the disclosure of a CEO-to-employee pay ratio for U.S. public firms as part of the Dodd-Frank Act … Our analysis reveals a strong negative association between the disclosed pay ratio and the complexity of the CACM (consistently applied compensation method) choice … This systematic relation suggests that firms can influence the disclosed pay ratio by choosing a different CACM without actually changing either CEO or employee pay. Our analysis of the determinants of the CACM choice reveals that firms with headquarters in states that exhibit stronger aversion toward income inequality are more likely to choose a more complex CACM, which results in a lower disclosed CEO pay ratio. … Firms’ tendencies to use a more complex estimation method, however, declines when the CEO has lower pay and is close to retirement, suggesting that firms rationally trade off the benefits of reducing the pay ratio with the costs of strategic disclosure” (p. 37). My comment: In my engagement activities I suggest all firms to disclose CEO pay ratios because I fear that the introduction of ESG compensation may further increase this gap.

Pay gap research 2: Spinning the CEO pay ratio disclosure by Audra Boone, Austin Starkweather, and Joshua T. White as of Dec. 17^th, 2021 (#1112): “We find that firms avail themselves of exemptions and other choices that can help boost reported median employee pay and lower the ratio, but such firms, on average, still tend to have higher ratio values. … Those firms that have better prior performance, more compensation consultants, and prior wage-related labor violations are less likely to use spin even if they have a higher ratio. Firms reporting a higher ratio experience declines in employees’ view of the CEO’s performance and their own pay, particularly when the reported ratio is unexpectedly high. These firms also experience lower gains in employee productivity, especially in industries where employees could directly impact sales, such as those that interact frequently with customers. Placebo and falsification tests suggest that employees are responding to the disclosure of the ratio and not just the existence of the vertical pay disparity. Prior investments in employee-related CSR help attenuate the negative employee response to a high ratio” (p. 29/30).

Customers stakeholder engagement

Sustainable stakeholders: Corporate Law and Social Risk by Stavros Gadinis and Amelia Miazad as of May 22^nd, 2020 (#1683): “Social risk has proven highly destructive for corporate value even when the company’s key failure is not violating laws, as the recent crises at Facebook and Uber demonstrate. Sustainability can help avoid such crises, because it provides corporate boards with input from stakeholders such as employees, NGOs, local authorities, and regulatory agencies. These stakeholders are uniquely placed to register the impact of company policies on the ground and can communicate concerns early … the intractability of many sustainability concerns, combined with management’s confidence in the company’s success, lead to systematically downplaying social risk“ (abstract).

Covid stakeholder boost: Test of Stakeholder Capitalism by Stavros Gadinis and Amelia Miazad as of Aug. 21st, 2021 (#461): “Our findings suggest that companies turned to stakeholders during the pandemic with increasing frequency and asked for input on issues that are central to their business. Companies relied on stakeholder communications with employees to negotiate the remote working environment and arrange for continuous operation and reopenings, and with suppliers under immense strain as global trade contracted. Through stakeholder governance, companies understood better the needs of consumers in financial difficulty and the concerns of local authorities about unnecessary population movements …. Stakeholder governance emerges from our interviews as a systematic framework that companies are developing in order to obtain information about the social impact of their practices. In the past, companies communicated with their stakeholders about specific issues as the need arose. Today, stakeholder governance seeks to proactively cover the company’s social profile as comprehensively as possible, collecting information in a regular and standardized manner” (abstract).

Customer satisfaction alpha: Do Contented Customers Make Shareholders Wealthy? – Implications of Intangibles for Security Pricing by Erik Theissen and Lukas Zimmermann as of Jan. 9^th, 2021 (#126): “This paper considers the link between intangible assets and security returns by documenting that firms with higher levels of customer satisfaction (as measured by the American Customer Satisfaction Index, ACSI) have higher risk-adjusted stock returns. … We find that the customer satisfaction premium is larger among firms with high equity duration and higher operating leverage, and is larger among firms which are more exposed to competitive threats … We also document a time-series relation between the return of the customer satisfaction strategy and factors related to measures of innovative activity, such as venture capital financing, aggregate R&D spending, or patenting activity. Based on our findings, we conclude that the customer satisfaction premium is a compensation for risk not captured by standard risk factors“ (p. 34/35).

Shareholders versus other stakeholders

CEO limitations: The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita as of March 24^th, 2022 (#13545): “To address growing concerns about the negative effects of corporations on their stakeholders, supporters of stakeholder governance (“stakeholderism”) advocate a governance model that encourages and relies on corporate leaders to serve the interests of stakeholders and not only those of shareholders. We conduct a conceptual, economic, and empirical analysis of stakeholderism and its expected consequences. Stakeholderism, we conclude, is an inadequate and substantially counterproductive approach to addressing stakeholder concerns. … recent commitments to stakeholderism were mostly for show rather than a reflection of plans to improve the treatment of stakeholders. Our analysis indicates that, because corporate leaders have strong incentives not to protect stakeholders beyond what would serve shareholder value, acceptance of stakeholderism should not be expected to produce material benefits for stakeholders. Furthermore, we show that acceptance of stakeholderism could well impose major costs. By making corporate leaders less accountable and more insulated from shareholder oversight, acceptance of stakeholderism would increase slack and hurt performance, reducing the economic pie available to shareholders and stakeholders. In addition, and importantly, by raising illusory hopes that corporate leaders would on their own protect stakeholders, acceptance of stakeholderism would impede or delay reforms that could bring real, meaningful protection to stakeholders” (abstract).

No enlightment: Does Enlightened Shareholder Value Add Value? By Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita as of Jan. 25th, 2023 (#1697): “Unlike shareholder value maximization (SV), which merely calls on corporate leaders to maximize shareholder value, enlightened shareholder value (ESV) combines this prescription with guidance to consider stakeholder interests in the pursuit of long-term shareholder value maximization. … corporate leaders often face significant trade-offs between shareholder and stakeholder interests … arguments that using ESV is beneficial in order to (i) counter the tendency of corporate leaders to be excessively focused on short-term effects, (ii) educate corporate leaders to give appropriate weight to stakeholder effects, (iii) provide cover to corporate leaders who wish to serve stakeholders, and/or (iv) protect capitalism from a backlash and deflect pressures to adopt stakeholder-protecting regulation. We show that each of these arguments is flawed. We conclude that, at best, replacing SV with ESV would create neither value nor harm“ (abstract).

Shareholder-focus: Stakeholder Capitalism in the Time of COVID by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita as of Jan. 26^th, 2023 (#1725): “We conduct a detailed examination of all the $1B+ acquisitions of public companies that were announced from April 2020 to March 2022, totaling 122 acquisitions with an aggregate consideration exceeding $800 billion. We find that deal terms provided large gains for the shareholders of target companies, as well as substantial private benefits for corporate leaders. However, although many transactions were viewed at the time of the deal as posing significant post-deal risks for employees, corporate leaders largely did not obtain any employee protections, including payments to employees who would be laid off post-deal. Similarly, we find that corporate leaders failed to negotiate for protections for customers, suppliers, communities, the environment, and other stakeholders. After conducting various tests to examine whether this pattern could have been driven by other factors, we conclude that it is likely to have been driven by corporate leaders’ incentives not to benefit stakeholders beyond what would serve shareholder interests“ (abstract).