The Influence of Shareholders on Corporate Social Responsibility

ABSTRACT. Shareholders are an important group of stakeholders influencing management and corporate activity through the two channels of shareholder activism and socially responsible investing. The main ways shareholders engage corporations on their social performance have undergone changes since the 1960s, both in their prevalence and their characteristics. In addition to providing essential background information on the two shareholder engagement strategies, this paper draws parallels with and connections to the overall historical development of Corporate Social Responsibility (CSR). This paper also highlights those organizations or events that have been pivotal in the historical development of the shareholder-CSR relationship to indicate future avenues for more in-depth research.JEL Codes: G34; M14; 016Keywords: Corporate Social Performance; Corporate Social Responsibility; shareholder activism; shareholder engagement; socially responsible investing; stakeholder dialogue1. IntroductionShareholders are an important (if not the most important) group of stakeholders driving management and corporate activity. Since the 1960s, the demands of a significant percentage of shareholders have expanded to include non-financial expectations of corporate conduct (Schueth 2003). Shareholders who are concerned with social as well as financial aspects of their investments have expressed these concerns mainly in two ways. The first consists of shareholder activism, which is a more active form of shareholder influence; the second consists of socially responsible investing (SRI), which is more passive but also more prevalent in the investing public. The main ways shareholders engage corporations on their social performance have undergone changes since the 1960s, both in their prevalence and their characteristics.This paper provides information on how shareholders have influenced corporate social responsibility through the two channels of shareholder activism and SRI over the past fifty to seventy years. In addition to providing essential background information on the two shareholder engagement strategies, this paper draws parallels with and connections to the overall historical development of Corporate Social Responsibility (CSR). This paper also highlights those organizations or events that have been pivotal in the historical development of the shareholder-CSR relationship to indicate future avenues for more in-depth research.2. Shareholder Activism: From Election of Directors to Shareholder Initiatives2.1. Process and Legal Framework of Shareholder EngagementShareholders are commonly considered the owners of a corporation. In shareholding, the ownership rights are somewhat limited compared to the ownership rights one has over a house or other type of tangible property (shareholders do not have the right to entry, for example) (Marens 2002). Despite these limits, since 1942, the SEC has formally recognized an important right of shareholders with regard to participating actively in "corporate deliberations" (Vogel 1978, 119). Rule 14a-8 of the Securities and Exchange Act of 1934 allows shareholders to submit a shareholder proposal to the corporation where they hold shares for inclusion on the company's annual meeting proxy materials (Loss and Seligman 2004). In addition to voting on governance issues, these shareholder proposals are the main way for shareholders to be "heard" by management and other shareholders, and to have their interests considered in an official setting.To submit a shareholder proposal, several procedural criteria must be met (Rule 14a-8, Securities and Exchange Act of 1934). A shareholder must have held $2,000 worth (or 1 percent) in the company's securities (measured by market value) for at least one year, and must be present or represented at the annual meeting (Loss et al. 2004). Every shareholder is allowed one proposal of a maximum length of 500 words per annual meeting, and the proposal must reach the company at least 120 days before the release of the proxy statements (based on the date of the last annual meeting). …