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The impact of ownership on building sustainable and responsible business

Villalonga B.

Equity ownership of corporations is a critical factor in building sustainable and responsible businesses. The paper sets out to review previous studies of this relationship and adopts a multidisciplinary approach to identify gaps in the understanding of how ownership impacts business practices and policies.

Given the sharp decrease in the number of public corporations in certain equity markets in the last two decades, the relationship between the environmental and social activity of different types of organisations, and their financial performance is an important focus. The author notes that the corporate form is properly the choice of the equity owners, who also choose how to manifest their environmental or social concerns through their investment and management processes.

Early studies of the relationship and correlation between better environmental, social and governance practices and financial performance show mixed results but later studies indicate a positive relationship, particularly over the long run. Equity owners supporting a sustainable business model may agree to transfer value from shareholders (themselves) to other stakeholders but it is not clear whether that represents net value creation, or a trade-off between financial and non-financial performance.

The sheer perception of a trade-off may deter investors from engaging in, let alone driving sustainable business practices, but some studies demonstrate that the trust built by investing in social capital is particularly valuable when the overall level of trust in corporations and markets suffers a negative shock, and that CSR (corporate social responsibility) is positively related to firm value.

Other motivations may bolster an impression of corporate social responsibility, without underlying substance, and provide an effective entrenchment strategy for inefficient CEOs. Managerial engagement in responsible business practice has also been decried as a form of agency behaviour, enhancing personal reputation at the expense of shareholders.

The author notes that no research to date has examined the relations between financial returns to shareholders and taxes paid as a form of social contribution, nor the trade-off that might exist between taxes paid and direct investments in CSR practices.

From purely incremental steps to radical business transformations, the research explores ways corporations can build a sustainable and responsible business. It is important to recognise the range of approaches, since there is likely to be a mutual dependency between each one, and the business ownership.

Different corporate forms do appear to create different types of social value. There is plenty of literature on co-operatives and social enterprises but little information comparing their social performance to other organisations.

Family owners, for example, target profit maximisation but also tend to protect their ‘socio-economic’ wealth, despite limited resources. Many have significant philanthropic activities, which prioritise social purpose even at net cost.

Institutional investors have a range of passive to active strategies from positive and negative screening to fully engaged impact investing, but which stakeholders bear the costs and benefits of these is still not clear.

Ownership by the same institutional investor across firms that are horizontally or vertically related make socially responsible behaviour more likely and effective, but they depend on other highly variable factors such as competitive advantage, activist engagement and customer awareness.

The paper also notes the role of stakeholders including employees, customers, suppliers, local communities, the government or proxy advisors in building responsible businesses. The question remains as to which is most effective at transforming the ecosystem. Some research indicates that internal managers are often the ones to initiate CSR practices, while activist investors have an increasingly powerful voice.

Overall, much more research is needed into the long-term impact of different types of investors, the trade-off between long-term benefits and short term costs for shareholders and stakeholders. Better data, longer time series and better research methodologies may help address causality and identification issues.

For further information please contact the Project Manager on FOTC@thebritishacademy.ac.uk.

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