How Investors Can (and Can't) Create Social Value

33 Pages Posted: 29 Mar 2018 Last revised: 9 May 2018

Paul Brest

Hewlett Foundation

Ronald J. Gilson

Stanford Law School; Columbia Law School; European Corporate Governance Institute (ECGI)

Mark A. Wolfson

Stanford Graduate School of Business

Date Written: March 1, 2018

Abstract

Most investors have a single goal: to earn the highest financial return. These socially-neutral investors maximize their risk-adjusted returns and would not accept a lower financial return from an investment that also produced social benefits. An increasing number of socially-motivated investors have goals beyond maximizing profits. Some seek investments that are aligned with their social values (value alignment), for example by only owning stock in companies whose activities are consistent with the investor’s moral or social values. Others may also want their investment to make portfolio companies create more social value (social value creation). The thrust of this essay is that while it is relatively easy to achieve value alignment, creating social value is far more difficult. The literature published by asset managers, foundations, and trade associations voices considerable optimism that socially-motivated investors can create social value, particularly through non-concessionary investments. We are skeptical about many of these assertions; their language is often too loose to support a disciplined assessment whether social value was created, and the absence of fees keyed to social, rather than financial, value creation fuels that skepticism. To address this problem, we first offer a taxonomy of socially-motivated investments so that investors can clearly articulate their goals, and asset managers can clearly articulate what they offer and how their performance should be measured. We then address three big questions. First, can investments in public companies create social value whether or not with concessions on return? Second, can investments in private companies create social value, again whether or not with return concessions? Third, can investors, working with socially motivated stakeholders, cause public companies to create social value?

Keywords: socially-motivated investment, impact investing, socially motivated proxy contests

JEL Classification: G11, G23, G32, K22, L31, O16

Suggested Citation

Brest, Paul and Gilson, Ronald J. and Wolfson, Mark A., How Investors Can (and Can't) Create Social Value (March 1, 2018). European Corporate Governance Institute (ECGI) - Law Working Paper No. 394/2018; Columbia Law and Economics Working Paper No. 583; Stanford Law and Economics Olin Working Paper No. 520; Stanford University Graduate School of Business Research Paper No. 18-23. Available at SSRN: https://ssrn.com/abstract=3150347 or http://dx.doi.org/10.2139/ssrn.3150347

Paul Andrew Brest

Hewlett Foundation ( email )

525 Middlefield Rd., Suite 200
Menlo Park, CA 94025
United States

Ronald J. Gilson (Contact Author)

Stanford Law School ( email )

559 Nathan Abbott Way
Stanford, CA 94305-8610
United States
650-723-0614 (Phone)
650-725-0253 (Fax)

Columbia Law School ( email )

435 West 116th Street
New York, NY 10025
United States
212-854-1655 (Phone)
212-854-7946 (Fax)

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Mark A. Wolfson

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
(650) 723-0311 (Phone)
(650) 723-4010 (Fax)

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