Why Companies Shouldn’t Maximize Only Profits
Two economists argue that directors have a duty to maximize shareholders’ welfare, not value.
Why Companies Shouldn’t Maximize Only ProfitsMore and more companies are putting resources toward endeavors not meant to directly maximize profits, such as helping the environment or being more socially responsible.
And research by Chicago Booth’s Samuel Hartzmark and Abigail Sussman suggests that most investors are fine with this—on average, investors like companies that are more sustainable.
Two economists argue that directors have a duty to maximize shareholders’ welfare, not value.
Why Companies Shouldn’t Maximize Only ProfitsNobel Laureate Oliver Hart of Harvard and Chicago Booth’s Luigi Zingales reject the view that shareholders care only about money.
Morningstar, one of the leading US investment research companies, in March 2016 published sustainability ratings for more than 20,000 mutual funds collectively holding upwards of $8 trillion. Morningstar awarded each mutual fund between one and five globes depending on how sustainable it was deemed to be. Funds with the lowest 10 percent of sustainability scores received one globe, while those with the highest 10 percent received five.
Investors rewarded funds rated high in sustainability and punished those rated low. Between $12 billion and $22 billion flowed out of the one-globe mutual funds, while between $22 billion and $34 billion flowed into five-globe funds, according to Hartzmark and Sussman. The lowest-rated funds were more likely to close altogether after the outflows.
Cumulative amount of money investors moved into or out of mutual funds
As a percentage of fund size
Hartzmark and Sussman, 2017
Investors responded to funds rated high or low in sustainability, interpreting five-globe ratings and one-globe ratings as clear positive or negative signals. Meanwhile, investors largely ignored the ratings for funds in between these two extremes, as well as the underlying details that were available about the ratings.
Hartzmark and Sussman find that investors believe more-sustainable companies will experience higher future returns with lower risk, although the researchers don’t find evidence that sustainable companies actually outperform on a risk-adjusted basis. Institutional investors behaved similarly to noninstitutional investors, the data suggest.
“The average market participant in US open-end mutual funds puts a positive value on sustainability,” Hartzmark and Sussman conclude.
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