Studying corporate social responsibility and social investing is hard because it's so interdisciplinary. People in Management, Finance, and Economics start from such different places that it's hard to get them to agree even on basic premises.
For example, is the company run solely for the benefit of shareholders, as finance students are taught? Or should shareholders be viewed as just one of a constellation of competing interests, as stakeholder theory assumes?
But financial theory is increasingly starting to look a lot like stakeholder theory. Miller & Modigliani's famous theorem opened the doors to a broader view of capital - a view in which shareholders are not 'owners' but suppliers of a commodity known as equity capital. Like all suppliers they have to be paid...but getting paid is not the same as having every activity of the enterprise dedicated to your enrichment.
Some practitioners seem to believe this now. Arnott and Bernstein's work in the early part of this decade was deeply influential and, as I read it, advocates radical skepticism. It implies that most returns have historically come from dividends, and shareholders should therefore be primarily focused on dividends when looking forward.
Now theoretically this is ok - in theory, all earnings are ultimately paid out as dividends. But in practice it doesn't seem to work out that way. For the past four quarters S&P 500 companies paid out only about 30% of their earnings in dividends (23.43 in dividends per S&P share vs. 82.10 in EPS, according to Baseline/FirstCall).
So where are the rest of those earnings going? They're supposed to be reinvested for the benefit of shareholders, through profitable investment in plant and equipment, acquisitions, or share repurchase. But Arnott & Bernstein believe these retained funds will generate low incremental returns for shareholders:
"[R]etained earnings are often not reinvested at a return that rivals externally available investments; earnings and dividend growth are faster when payout ratios are high than when they are low, perhaps because corporate managers are then forced to be more selective about reinvestment alternatives."
So what stakeholder theorists predict, Arnott and Bernstein confirm. Shareholders do not rule the roost: they are a supplier to be compensated, but they do not, in aggregate, claim the full distributable earnings of the firm.
So should social investors cheer or boo? We certainly use the language of stakeholder theory a lot - when we want a company to behave better we cite the interests of non-financial stakeholders such as employees and the community. And we don't like it when someone invokes shareholders' interests to argue against social proposals.
But we should be careful what we wish for. Do we really want shareholders to to have less influence? This is what Hawley and Williams are talking about - over the past generation ownership of large corporations has changed dramatically, and there are often chains of intermediaries between the investor and corporate management - they view the resulting loss of influence as a significant problem. Robert Monks would, I'm sure, agree.
So I think the work of Arnott and Bernstein confirms the intuition of stakeholder theorists in a really interesting way. But it leaves us with two big questions:
1) E - D= ?
2) Is that good?