Sustainable Organizations

Abstract

We develop a theory of stakeholder governance to study how pro-social stakeholders
shape organizations. Conflicts of interest arising from diverging pro-social preferences
can lead to shifts in control rights, which significantly affect organizational sustainability.
We provide conditions under which more pro-social stakeholders benefit or harm
an organization’s sustainability, showing that they do not necessarily make it more
sustainable. The key insight of our analysis is that a top-down approach to addressing
sustainability concerns consistently improves organizational sustainability, while a
bottom-up approach can harm it. Our results apply to CEO authority and retention,
board composition, and shareholder proposals and engagement.