“We would like to invest more in corporate social responsibility (CSR), but if we would, our shareholders would protest”. That in essence is a common defense of corporate boards for not investing more in CSR programs, such as implementing diversity and fair labor practices or environmentally friendly policies. The tension between Unilever’s CEO (till 2019) and “sustainability guru” Paul Polman and the company’s shareholders, which eventually lead to Polman’s premature resignation, serves as one example.
As part of an international study, DoIP researcher Emilio Marti investigates if more generally shareholder’s conservatism is really a valid excuse for not investing more in CSR. Unfortunately, that excuse holds water. The returns on investments in CSR are usually longer term, relatively risky and rather difficult to measure. Shareholders who focus on short-term return, such as hedge funds, therefore tend to consider investments in CSR as wasteful. Hedge funds have a short term horizon; they invest in companies for less then two years hoping for a clear profit in that time frame. The research found that in fact hedge funds tend to target socially responsible firms for investment, because they see opportunities to realize short term gains by intervening and changing the “pro CSR” strategy. Such interventions by hedge funds, e.g. by demanding board representation, cost cutting or redistribution of cash to shareholders, are often very taxing and disruptive for the targeted firm and negatively affect its investments in CSR. Moreover, this creates fear among other companies to invest in CSR policies. The study suggests that companies would benefit from protection against such hedge fund attacks, e.g. by new laws that limit the power of shareholders who have only recently acquired equity. The results from the study are used to inspire new legislation in several countries, including the Netherlands.