Conflicting shareholder forces impacting a company.

The Shareholder Value Myth: Unveiling the Hidden Costs of Prosocial Actions

Nico Varela in Business & Economy August 2025 • 4 min read.

"Discover how shareholder influence can drive corporate decisions, sometimes at the expense of overall company performance and other stakeholders."

In today's business world, companies are increasingly judged not only by their financial performance but also by their commitment to social responsibility. Firms are expected to contribute to society through various means, ranging from reducing pollution to improving labor conditions. However, a new study reveals that the pursuit of social good can sometimes come at a hidden cost, challenging the conventional wisdom of shareholder value maximization.

Economic theory suggests that externalities, such as pollution, can be corrected through policies like taxes or property rights. Yet, real-world obstacles, including incomplete information, high transaction costs, and political gridlock, often prevent effective solutions. In response, activism has emerged as a way to address these issues, with affected parties directly negotiating with firms to internalize their externalities. This form of activism seeks to hold companies accountable for their broader impact on society and the environment.

Despite the growing influence of stakeholder activism, critical questions remain about how and why influential stakeholders shape firms' decisions. A recent study sheds light on this dynamic, revealing that certain shareholders, such as institutional investors or ex-founders, wield significant influence over corporate actions, sometimes at the expense of other stakeholders and overall firm value. The research uncovers the hidden costs of prosocial actions, demonstrating how internal conflicts among shareholders can drive corporate responses to societal pressures.

How Shareholder Preferences Impact Company Decisions

Conflicting shareholder forces impacting a company.

A groundbreaking study provides a framework for understanding how shareholders shape firms' costly and visible prosocial actions and assesses their impacts on silent or unheard shareholders. The approach leverages two natural experiments: unexpected emergencies that trigger public pressure and heightened media scrutiny during Annual General Meetings (AGMs). By examining corporate responses to the COVID-19 pandemic and the Russia-Ukraine conflict, the study reveals how shareholder preferences influence corporate decisions.

The study finds that shareholders often support costly prosocial actions, such as COVID-related donations and private sanctions on Russia, when these generate image gains. Conversely, shareholders less publicly associated with a specific firm, like financial corporations with large portfolios, tend to oppose such actions. This divergence in preferences highlights a fundamental conflict: shareholders who capture private returns from prosocial actions advocate for these initiatives, while others prioritize profitability.

Image Gains: Shareholders support prosocial actions that enhance their public image, regardless of the financial cost to the company.
Investment Trade-Offs: Prosocial expenditures can crowd out investments at exposed firms, reducing productivity and profits.
Conflicting Values: Pursuing the values of some shareholders comes at a cost to others, highlighting the need for monitoring motivated by heterogeneous preferences.

The framework uncovers the interplay between shareholder influence and firm objectives, contributing to the debate on activism. Ultimately, prioritizing the values of a few shareholders imposes substantial costs on the broader shareholder base, underscoring the need for strategies that balance diverse interests and mitigate internal conflicts.

Balancing Shareholder Interests and Societal Well-being

The study's findings underscore the importance of considering stakeholder concerns in shaping a firm's strategic decisions. A flexible framework is introduced that leverages novel quasi-experimental variations to analyze how shareholder influence shapes costly prosocial actions. This approach offers insights for future research to strengthen corporate governance and mitigate undue influence, ensuring that the pursuit of some shareholders' interests does not come at the expense of other stakeholders.

About this Article -

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Everything You Need To Know

What is the core argument presented about the impact of shareholder influence on corporate decisions?

The core argument revolves around how shareholder influence can shape corporate decisions, particularly concerning prosocial actions. It suggests that shareholder preferences, especially those seeking 'Image Gains', can drive firms to engage in costly initiatives, sometimes at the expense of overall firm value and other stakeholders. This can lead to internal conflicts among shareholders, with some prioritizing public image and others prioritizing profitability. The study highlights that prioritizing the values of a few shareholders imposes substantial costs on the broader shareholder base.

How do 'Image Gains' influence the decisions of shareholders regarding prosocial actions, and what are the implications of this?

Shareholders often support costly prosocial actions, such as COVID-related donations or private sanctions on Russia, if these actions result in 'Image Gains'. This means that the actions improve their public image or reputation. The implication of this is that companies might undertake initiatives that are not necessarily the most financially sound, but which enhance the image of the shareholders backing them. This can lead to a misalignment of interests, where some shareholders benefit from the enhanced image while others bear the financial burden. Investment Trade-Offs are also important, as prosocial expenditures can crowd out investments at exposed firms, reducing productivity and profits.

What are the specific methods used in the study to understand shareholder influence on corporate decisions?

The study utilizes two natural experiments to understand how shareholders shape firms' costly and visible prosocial actions: unexpected emergencies that trigger public pressure and heightened media scrutiny during Annual General Meetings (AGMs). The research specifically examined corporate responses to the COVID-19 pandemic and the Russia-Ukraine conflict to assess how shareholder preferences influenced corporate decisions. This allows researchers to observe how different shareholder groups react under pressure and make strategic choices.

What are the potential downsides of shareholder-driven prosocial actions, according to the research?

The research highlights several potential downsides. 'Investment Trade-Offs' are a key concern: Prosocial expenditures can crowd out investments at exposed firms, which reduces productivity and profits. It also shows that 'Conflicting Values' exist: Pursuing the values of some shareholders comes at a cost to others, highlighting the need for monitoring motivated by heterogeneous preferences. Furthermore, the study indicates that prioritizing the values of a few shareholders can impose substantial costs on the broader shareholder base, leading to internal conflicts and potentially damaging the overall firm value. The pursuit of social good can come at a hidden cost, challenging the conventional wisdom of shareholder value maximization.

How does the study's framework contribute to the broader discussion on stakeholder activism and corporate governance?

The study's framework contributes by uncovering the interplay between shareholder influence and firm objectives, adding to the debate on activism. The framework is designed to leverage novel quasi-experimental variations to analyze how shareholder influence shapes costly prosocial actions. It offers insights for future research to strengthen corporate governance and mitigate undue influence. The findings underscore the importance of considering stakeholder concerns in shaping a firm's strategic decisions, with the ultimate goal of balancing diverse interests and mitigating internal conflicts to ensure that the pursuit of some shareholders' interests does not come at the expense of other stakeholders.