Global Corporate Governance

Kose John, Anil K. Makhija, Stephen P. Ferris, Kose John, Anil K. Makhija, Stephen P. Ferris

• Publisher: Emerald Publishing Limited
• Year: 2017
• Print ISBN: 9781786351661
• eBook ISBN: 9781787143401
• Topic: Business
• Subtopic: Corporate Governance
• Index: Business

Advances in Financial Economics Volume 19 deals with International Corporate Governance, particularly the role played by boards of directors, internal organization design and governance mechanisms, franchise agreements, the effect of regulation and policy, the market for corporate control, and strategic alliances.

SOCIO-PSYCHOLOGICAL MOTIVES OF SOCIALLY RESPONSIBLE INVESTORS

Julia M. Puaschunder

ABSTRACT

The 2008/2009 World Financial Crisis underlined the importance of social responsibility for the sustainable functioning of economic markets. Heralding an age of novel heterodox economic thinking, the call for integrating social facets into mainstream economic models has reached unprecedented momentum. Financial Social Responsibility bridges the finance world with society in socially conscientious investments. Socially Responsible Investment (SRI) integrates corporate social responsibility in investment choices. In the aftermath of the 2008/2009 World Financial Crisis, SRI is an idea whose time has come. Socially conscientious asset allocation styles add to expected yield and volatility of securities social, environmental, and institutional considerations. In screenings, shareholder advocacy, community investing, social venture capital funding and political divestiture, socially conscientious investors hone their interest to align financial profit maximization strategies with social concerns. In a long history of classic finance theory having blacked out moral and ethical considerations of investment decision making, our knowledge of socio-economic motives for SRI is limited. Apart from economic profitability calculus and strategic leadership advantages, this paper sheds light on socio-psychological motives underlying SRI. Altruism, need for innovation and entrepreneurial zest alongside utility derived from social status enhancement prospects and transparency may steer investors’ social conscientiousness. Self-enhancement and social expression of future-oriented SRI options may supplement profit maximization goals. Theoretically introducing potential SRI motives serves as a first step toward an empirical validation of Financial Social Responsibility to improve the interplay of financial markets and the real economy. The pursuit of crisis-robust and sustainable financial markets through strengthened Financial Social Responsibility targets at creating lasting societal value for this generation and the following.

Keywords: Behavioral economics; corporate social responsibility; financial social responsibility; socio-economics; socially responsible investment; socio-psychological motives

INTRODUCTION

We live in the “Age of Responsibility.” In the aftermath of the 2008/2009 World Financial Crisis, the societal call for responsible market behavior has reached unprecedented momentum. Responsibility is part of the human nature and complements corporate activities and financial considerations. The economic, legal, social, and philanthropic responsibilities of the corporate sector are attributed in Corporate Social Responsibility (CSR). Financial Social Responsibility is foremost addressed by Socially Responsible Investment (SRI). Globalization, political changes and societal trends, but also the current state of the world economy, have leveraged a societal demand for ingraining responsibility into market systems.

Our time has been referred to as the “Age of Responsibility” in US president Barack Obama’s inauguration speech on January 21, 2009 (Washington Post, January 21, 2009). In the wake of the 2008 financial crisis, Obama called for a new spirit of responsibility that serves the greater goals of society. According to World Bank President Robert Zoellick the “new era of responsibility” features “changed attitudes and co-operative policies” steering responsible corporate conduct and socially responsible investment as means of societal progress (Financial Times, January 25, 2009).

Apart from governmentally enacted social responsibility of financial markets, human social responsibility emerged in modern economies in the wake of globalization, political and societal trends. In recent decades, multinational corporate conduct exhibited heightened levels of responsibility vis-à-vis society. Having gained in economic weight and political power, the majority of corporations tapped into improving the societal conditions by contributing to a wide range of social needs beyond the mere fulfillment of shareholder obligations and customer demands (De Silva & Amerasinghe, 2004; Kettl, 2006). Global players stepped in where traditional governments refrained from social service provision – foremost through privatization or welfare reforms. International corporations also filled opening governance gaps when governments could not administer or enforce citizenship rights, new regulations were politically not desirable, feasible or even when governments had failed to provide social services (Steurer, 2010). By striving to meet citizenship goals, corporate executives integrated responsibility into ethical leadership that served multiple stakeholders in balancing economic goals with societal demands (DeThomasis & St. Anthony, 2006).

Today CSR has leveraged into a pivotal factor to align profit maximization with concern for societal well-being and environmental sustainability. Corporations contribute to social causes beyond mere economic and legal obligations (Elkington, 1998; Lea, 2002; Livesey, 2002; Matten & Crane, 2005; Wolff, 2002). Nowadays almost all corporations have embedded social responsibility in their codes of conduct, introduced CSR in their stakeholder relations and incorporated social conscientious practices in their management (Crane, Matten, & Moon, 2004; Werther & Chandler, 2006). The emergence of CSR as a corporate mainstream is accompanied by CSR oversight by stakeholders advocating for corporate social conduct (Reinhardt, Stavins, & Vietor, 2008). By ingraining economic, legal, ethical, and societal aspects into corporate conduct, CSR attributes the greater goal of enhancing the overall quality of life for this generation and the following (Carroll, 1979).

In line with these trends, CSR has become an en vogue topic in academia. Academics challenge Milton Friedman’s proclamation of profit maximization as the primary intention for business activities and investigate innovative public-private partnerships (PPPs) to contribute to social welfare (Moon, Crane, & Matten, 2003; Nelson, 2004; Prahalad & Hammond, 2003). Under the guidance of international organizations, CSR developed into a means of global governance social service provision in innovative PPPs that tackle social deficiencies in the private sector.

Concurrent with corporations having started to pay attention to social responsibility, ethical considerations have become part of the finance world. Developing an interest in corporate social conduct, conscientious investors nowadays fund socially responsible corporations (Ahmad, 2008; Sparkes, 2002; The Wall Street Journal, August 21, 2008). In SRI securities are not only selected for their expected yield and volatility, but also for social, environmental and institutional aspects. In the special case of political divestiture, socially responsible investors refrain from contributing to politically incorrect market regimes. With trends predicting continuing globalization, corporate conduct disclosure and societal crises beyond the control of single nation states, the demand for corporate social responsibilities is believed to continuously rise (Beck, 1998; Bekefi, 2006; Fitzgerald & Cormack, 2007; Livesey, 2002; Scholte, 2000).

In the aftermath of the 2008/2009 World Financial Crisis, SRI has become a prominent term (The Wall Street Journal, August 21, 2008; The Economist, January 17, 2008). With ongoing “Occupy” movements around the world, the call for responsibility within corporate and financial markets has reached unprecedented momentum. Mainstream economic theories are challenged for having been preoccupied with demonstrating how markets are largely efficient, unregulated market forces working toward the best interest of the single market participant and the collective of societal constituents (Stiglitz, 2003). Financial crises theories have largely ignored socio-psychological notions of economic systems and socio-psychological facets of market participants (Soros, 2008). To avert a recurrent financial disaster in the future, a heterodox investigation of social responsibility of market actors is demanded by political and financial leaders. As for gaining an accurate understanding of economic markets, future research must widen the interdisciplinary lens and consider socio-psychological motives in corporate, economic, and financial theories and models.

Gaining insight on the socio-psychological roots of Financial Social Responsibility could help delineating circumstances under which social responsibility is likely to occur, yet also grant insights on how to steer social conscientiousness in private sector markets. Unraveling socio-psychological triggers for financial social conscientiousness within corporate and financial markets provides an opportunity to foster a harmonious interplay of financial markets and real market economies.

As a first step in this direction, the following piece theoretically explores potential socio-psychological motives of socially responsible market actors. The paper opens with describing SRI in order to propose a theoretical framework of socio-psychological SRI motives including personal and social needs that may complement rational profit maximization endeavors and leadership advantages. Utility derived from altruism, innovation, transparency and social status prospects in the wake of ethicality are introduced as potential SRI drivers. In addition, self-enhancement and social expression of future-oriented SRI options may supplement profit maximization goals. Conclusions aid the ongoing adaptation and adoption of SRI with a special attention to the interplay of public and private contributions. In sum, this paper explores innovative ways in which financial markets create value for society by the successful implementation of Financial Social Responsibility fostering the overarching goal of improving the living conditions for this generation and the following.

SOCIALLY RESPONSIBLE INVESTMENT (SRI)

Today social responsibility has emerged into an en vogue topic for the corporate world and the finance sector. Contrary to classic finance theory that attributes investments to be primarily based on expected utility and volatility, the consideration of social responsibility in financial investment decisions has gained unprecedented momentum (The Economist, January 17, 2008; The Wall Street Journal, August 21, 2008).

Financial Social Responsibility is foremost addressed in SRI, which integrates personal values and social concerns into financial investments (Schueth, 2003). SRI is an asset allocation style, by which securities are not only selected on the basis of profit return and risk probabilities, but foremost in regards to social and environmental contributions of the issuing entities (Beltratti, 2003; Williams, 2005).

Socially responsible investors allocate financial resources based on profit maximization goals as well as societal implications. Pursuing economic and social value maximization alike, socially responsible investors incorporate CSR into financial decision making (Renneboog, Horst, & Zhang, 2007; Schueth, 2003; Steurer, Margula, & Martinuzzi, 2008). Socially conscientious investors fund socially responsible corporations based on evaluations of the CSR performance as well as social and environmental risks of corporate conduct. Thereby SRI becomes an investment philosophy that combines profit maximization with intrinsic and social values (Ahmad, 2008; Livesey, 2002; Matten & Crane, 2005; Wolff, 2002). SRI allows the pursuit of financial goals while catalyzing positive change in the corporate, finance, and political arena (Mohr, Webb, & Harris, 2001; Schueth, 2003).

As of today, SRI accounts for an emerging multi-stakeholder phenomenon with multi-faceted expressions. SRI features various forms and foci to align financial considerations with ethical, moral, and social endeavors. Contemporary SRI practices comprise socially responsible screenings, shareholder advocacy, community investing, and social venture capital funding (Steurer et al., 2008). Screenings integrate the evaluation of corporate financial and social performances into portfolio selections. Positive screenings target at corporations with sound social and environmental respon...

Table of contents

• Cover
• Title Page
• Financial Performance and the Competitive Effects of Corporate Social Responsibility
• Regulation and the Ownership Structure of European Listed Firms
• Determinants of Corporate Leverage in Publicly Listed GCC Companies – Conventional versus Sukuk
• Large Shareholders and Target Returns: International Evidence†
• A Gender Gap in Executive Cash Compensation in Thailand: A View of the Expectancy Theory
• CEO Compensation Practices around Spinoffs
• Socio-Psychological Motives of Socially Responsible Investors
• Index