Stakeholder Orientation, Environmental Performance and Financial Benefits

In this paper, we examine the impact of stakeholder orientation on environmental performance and financial benefits from environmental performance. We use firm-level data from Canada and the United States spanning the years 2002 to 2020 and classify all Canadian firms and those U.S. firms located in states that have passed constituency statutes as stakeholder-oriented. We first show that Canadian firms and stakeholder-oriented U.S. firms have better environmental performance than shareholder-oriented U.S. firms. We then find that good environmental performance increases profits and valuations for all firms in the U.S., but especially for shareholder-oriented firms. For Canadian firms overall there is no consistent financial impact. Moreover, the financial impact of environmental performance becomes negative for Canadian firms after the Supreme Court decision in 2008 on BCE Inc. vs. 1976 Debentureholders, stating that the duty of the board of

directors is to act in the best interest of the corporation, not its shareholders. The U.S. results for valuations are robust after taking into account potential endogeneity issues using instrumental variables and dynamic panel regressions. Thus, our results suggest a trade-off between firm environmental and financial performance under different governance schemes. On the one hand, stakeholder orientation decreases financial benefits from firms’ environmental performance. On the other hand, shareholder orientation may be detrimental to the environment. This has important

policy implications for the current debate on climate change mitigation.