Shareholder activism: Everything everywhere all at once

In Unintended Consequences of Shareholder Activism: A Socio-Cognitive Stakeholder Theory, Ruth Aguilera and her co-authors, Maria Ruiz-Castillo, J. Alberto Aragón-Correa, and Nuria E. Hurtado-Torres, take a fresh look at a question that could not be more topical: does shareholder activism affect firm behavior on each of the sides of the ESG triangle?  To address this empirical question, the authors advance a theoretical framework dubbed Socio-Cognitive Stakeholder Theory, which focuses on the board of directors and its decision-making process in strategy formation.

The central finding of this paper is rather striking, as captured by this article’s eponymous motion picture.  In a longitudinal sample of just under 5000 shareholder proposals in general meetings of S&P 500 firms from 2006 to 2020, while distinguishing between governance-focused (G) and environmental and social-focused (E&S) proposals, the authors document positive associations between more shareholder proposals and higher scores in subsequent years both on the same and on the other dimension.  That is, there are significantly higher E&S scores following years with more G-focused proposals, and higher though non-significant G scores following years with more E&S-focused proposals.

It thus appears that firms respond across the board to more intense shareholder activism through shareholder proposals, seemingly in disregard to the substantive subject matter of such proposals. What could be the cause for that (especially when the vast majority of proposals are rejected or withdrawn)? 

The authors propose that such responses could be explained in a socio-cognitive stakeholder theory framework that expands Freeman's (2010) seminal Stakeholder Theory.  Drawing on the work of Rindova, Reger, and Dalpiaz (2012; see also Pfarrer et al. 2019), they argue that executives react to activists’ demands by considering stakeholders’ umbrella evaluations that condition the firms’ legitimacy, such that firms’ responses to shareholder activism are not necessarily based on the issues shareholders demand the most; rather, they deploy their responses to cope with uncertainty and seek legitimacy.  In short, they argue, executives’ bounded rationality will lead them to prioritize issues that foster their firms’ legitimacy in the eyes of multiple stakeholders.

The paper provides a crisp, clear, and compelling empirical analysis of a complex interaction.  The findings are surprising yet plausible, which is key for a great paper. Its most important contribution lies in turning the limelight to decision-making processes at the board of directors.  While the literature on boards, board members, and shareholder/stakeholder-related strategy is vast, relatively little has been done to uncover the psychological factors that could affect the thinking at the board (and by that I distinguish substantial work that has examined personal attributes such as narcissism among CEOs). 

This "socio-cognitive" framework could be broken down into its two constitutive components – the "socio" element, which refers to the societal level of analysis; and the "cognitive" element, which refers to the individual level of analysis.  The societal level analysis suggests that firms, through their boards, devise strategy inter alia with a view for it to be compatible with prevailing social norms and culture (Adams and Licht 2022; Gartenberg and Zenger 2023).  As such, it is fully compatible with standard Stakeholder Theory. 

The present paper’s setting is less conducive to testing this “socio” hypothesis, however, as it deals with top-tier firms in a single country, such that it may be challenging to identify variation in social norms, to which firms might be responding.  Further work could look into within-US regional differences – e.g., with regard to cultural individualism (Bazzi, Fiszbein, and Gebresilasse 2020).

The "cognitive" component of the framework appears to be more limited.  According to Pfarrer et al. (2018), it "focuses on the roles of managers’ and observers’ attention; the bounded rationality of their cognitions, intuitions, and emotions; and the use of biases and heuristics…". These concepts connote several major research streams – e.g., by Daniel Kahneman and Gerd Gigerenzer on the use of heuristics in decision making, Herbert Simon's concept of satisficing (i.e., "good enough" thinking), and most notably, Keith Stanovich and his co-authors' groundbreaking work on System 1/System 2 thought processes.  The latter in particular points to thinking that is quick, intuitive, effortless, and non-reasoned versus slower and deliberative thinking. 

Boards’ shareholder-vs.-stakeholder strategic decisions rarely are reflexive responses to an immediate stimulus, however.  At least for S&P 500 firms it seems reasonable to assume that such decisions usually require and receive deliberation and careful consideration of relevant factors.  Legal doctrine on the duty of care and the Business Judgment Rule further calls for well-informed decision making and careful weighing of alternatives.  To the extent that the "socio-cognitive" framework indeed relies on System 1-like thinking at the board, it might need more development and substantiation.

A promising direction for research of board members’ thinking about ESG factors would be to examine motivational factors - “what makes them tick?”, so to speak. Thus, without denying possible effects of cognitive biases, it could be that directors respond to shareholder proposals also in light of their individual need for cognitive closure (Licht 2004) – namely, a motivation to reach a definite answer, any answer as opposed to confusion and ambiguity (Kruglanski and Webster 1996).

An important and possibly more potent factor in shaping board members’ thinking about stakeholders is their personal value preferences (e.g., Agle, Mitchell, and Sonnenfeld 1999; Adams, Licht, and Sagiv 2011).  Board members around the world vary in their individual principled stances on shareholderism versus stakeholderism– stances that correlate with their personal values in strategic decision making, as documented in joint work with Renée Adams (Adams and Licht 2022). Moreover, we observe individual variation in terms of cultural background, in line with Aguilera et al.’s claim about boards’ sensitivity to social norms.

Aguilera et al.’s thus provides a valuable contribution to an emerging literature that underscores heterogeneity among board members in individual psychological and cultural attributes that are closely linked to strategy formation regarding stakeholders.

____________________

This article is based on my discussion of Aguilera et al.’s paper, delivered at the 2024 IESE-ECGI Corporate Governance Conference, held at IESE Madrid, 15 April 2024.  

-------------------------------

By Amir N. Licht, Reichman University, ECGI

The ECGI does not, consistent with its constitutional purpose, have a view or opinion. If you wish to respond to this article, you can submit a blog article or 'letter to the editor' by clicking here.