Deviations from Expected Stakeholder Management, Firm Value, and Corporate Governance

Abstract

In this paper, we examine the relation between deviations from expected investment in stakeholder management and corporate governance. Building good relations with various stakeholders may help create firm value, but investment in stakeholder management beyond what is necessary to create shareholder value may be an agency cost. We propose that high quality corporate governance may mitigate value-destroying investments in stakeholder management. Using an unbalanced panel of 9,051 firm-year observations for 1,631 firms, we find that deviations from expected SM are increasing in CEO portfolio delta. We find, however, that deviations from expected stakeholder management are negatively related to proxies for effective board monitoring. More independent boards effectively control deviations from expected investment in stakeholder management. These results are consistent with both the CEO perquisite and the board monitoring hypotheses. We also document that the effect of governance mechanisms varies by industry (consumer or industrial orientation) and SM dimension; their influence is similar in dimensions expected to provide similar benefits across industry orientation, but differs when the benefits are expected to benefit one industry more than the other. Consistent with Jensen’s “Enlightened Value Maximization” theory, the results show that corporations with good governance pursue shareholder value maximization while constraining unnecessary investment in stakeholders.

Keywords: Corporate Governance, Corporate Social Responsibility, Enlightened Value Maximization, Institutional Ownership, Firm Value, Managerial Ownership Incentives, Stakeholder Theory

JEL Classification: G34, J33, L21, M14, M52