Business Ethics and Shareholder Value

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This study examines the relationship between business ethics and shareholder value. More specifically the questions of whether there is a relationship between the two, whether it is a strong relationship, and whether that relationship positively or negatively affects an organization, are addressed. According to Schwartz (2018), the concept of business ethics is defined as the learning of proper business guidelines and practices in relation to potentially contentious matters such as corruption, company governance, insider dealing, corporate social responsibility, fiduciary responsibilities, and discrimination. The statute often steers business ethics while, at the same time, business ethics give a fundamental framework that companies may adhere to gain public acceptance (Schwartz, 2018).

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To better understand the relationship between business ethics and shareholder value we must first establish a theoretical framework from which to structure our assumptions. For the purpose of this paper we draw from the Shareholder Value Maximization model, the Stakeholder Model of Corporate Governance, and the concept of ethics as defined through the lense of Corporate Social Responsibility (CSR).

Friedman’s (1970) shareholder value maximization model argues that the only duty of managers is to maximize shareholder profit, as long as they stay within the bounds of the law. However, if a manager adopts this theory into practice, there is a higher likelihood ethical business standards will be broken or discarded. For example, a firm may dispose of its untreated waste into a local river to save on the cost of treatment, destroying the environment and the quality of life for the people living in the area. Unethical decisions made by management, such as the one listed above, that focus solely on immediate profit maximization with no regard for the additional impact of those actions, has lead scholars and executives to reexamine, and take a broader look as to what equates to profit.

The stakeholder model of corporate governance (Freeman, 1984), goes beyond maximizing shareholder value by forwarding a firm’s ability to generate wealth over time, or its long term value, is determined by its relationship with its broad spectrum of critical stakeholders. Stakeholders include both those who have a direct stake or investment, as well as those who are peripherally impacted by a firm’s actions, such as community members living close to a factory or headquarters, or individuals employed by the firm.

They suggest that, in accordance with stakeholder theory, stakeholders, such a employees, should be empowered to communicate with and about their firm. Smith (2018) goes further and argues that since employees are the ones who create the company’s products, and external stakeholders use the products, firms should welcome active feedback during the decision making process even if profit decreases. Denning (2017) claims common-sense tells us that the purpose of a business is to make money, but suggests firms should operate from the perspective that that shares will earn higher future values over time. A firm’s priority should be strategically extending their reach into the future, while making shares as attractive as possible to current and future shareholders. 

The components of CSR fall into roughly three categories: environmental responsibility, social/philanthropic initiatives, and ethical business/economic practices. Each of these three categories include a number of subcategories that fall within their scope and we will examine those further. Examples of CSR practices include choosing to use renewable energy sources, disposing of waste in a safe way, sponsoring various social events, engaging fairly with developing nations or even selling used cooking oil to be processed into flex-fuel (which has an ethical and financial benefit!). A specific example of an organization that has adopted CSR policies within core business strategy is the Co-operative Bank PLC. This bank has implemented green banking, and they place an emphasis environmental friendly practices. They are a paperless organization intent on reducing their carbon footprint (Chew, Boon Cheong & Hong Tan, Lay & Rizal Hamid, Syaiful, 2016).


The purpose of this study is to focus on the gaps in the growing body of research on shareholder value, and ethical organizational behaviors. We look to find which industries participate in each of the aforementioned components of CSR. We look to find which component of CSR is viewed in the most positive light by shareholders and external stakeholders.

Literature Review

Often there is a financial investment when an organization adopts CSR practices, for example the cost of solar panels if a firm decides to the use green energy. Are ethical initiatives investments without payoffs? Friedman (1970) would equate the cost of ethical initiatives to taking money directly from the pockets of shareholders. We do not believe this to be the case, and find the question asked by Godfrey, Merrill, and Hansen (2008) to be more informative and representative of a long-term business strategy: When do shareholders gain if a firm’s strategies include disbursing corporate resources through participation in social initiatives? (p. 426).

In our comprehensive review of the literature we have found that if the definition of shareholder value is limited to profit only then the case for engaging in CSR practices is weaker, but not negated. If a comprehensive, holistic view is taken (long-term gains) the value of CSR is clear (Hogarth et al, 2018; Gomez et al 2017; Patrizia 2012). Why does CSR seem to increase long-term value of a firm? Corporate identity is recognized as a source of competitive advantage (Balmer and Gray, 2000), and includes components such as organizational philosophy, values, history, strategy, business scope, and communication–characteristics of an entity that comprise its unique brand and approach, all of which add value. Berrone, Surroca, and Trib? (2005) suggest a firm’s ethical values and behaviors (and communications regarding such) are a component of corporate identity, and may enhance corporate performance as well. It could be argued that a company that is consistently socially, environmentally, and financially responsible should have a stronger reputation for keeping its commitments that are related to implicit contracts (i.e., job security, clean living conditions for local communities, proper quality and environmental impacts of products and services used as inputs, and excellence in customer service). (Gomez, Przychodzen, & Przychodzen,  2017, pg XX).

Financial Performance

Research supports the idea that a firm’s investment in CSR should lead to long-term gains. In Gomez, et al.’s (2017), examination of how effective management of social, environmental, and financial factors simultaneously impact various aspects of shareholder value creation and financial performance they found, among other examples of financial reward, evidence of a positive relationship between CSR and market value added (MVA), or the ratio between total market value of an organization and the total capital contributed to the firm. MVA increases when newly raised capital is invested in value-creating projects, and indicates an increase in value that exceeds the incremental capital invested. Gomez, et al., (2017) found that there was more than 8.6% difference in favor of CSR companies across all business sectors. In the financials, materials, IT and energy sectors the differences was even more pronounced, with a difference of 11.8% in favor of firms with CSR.

They suggest social responsibility and business ethics ensure that a level of trust exists between consumers, traders, and the firm; this trust leads to customer loyalty and financial returns. Berrone et al. (2007), equate a firm’s strong ethical identity with a greater degree of stakeholder satisfaction, which positively influences firm performance (measured via Market Value Added & Return on Assets). Strong corporate governance generally leads to better financial returns, and an increase in corporate governance should lead to a boost in the performance of the organization, this correlation is especially clear when leadership engages in ethical behavior (Wang, Li & Sun, 2018). Additionally, firms with loyal administration, equipped with know-how, support and motivation to engage in ethical, sustainable CSR, will result in better administration of the business, positively impacting its efficiency, profitability, and overall performance (Wang, et al., 2018).

Ethical Reputation & Crisis

CSR activities can provide an insurance mechanism to preserve–rather than generate–Corporate Financial Performance (Godfrey, et al., 2008). Godfrey, et al., (2008) found that if a crisis occurs that casts public doubt on the firm’s fundamental character as an honest, promise-keeping entity Institutional CSR (ICSR) activities, or activities targeted at a firm’s secondary stakeholders and/or society in general, have the strongest and largest insurance-like protection. Specifically firms not engaging in ICSR activities lost, on average, $72.4 million, while firms that did engage in these activities lost only $22.8 million, less than one-third of their counterparts. Almost $50 million worth of insurance protection from investing in ICSR activites (pg. 442). This clearly supports the argument that engaging in CSR is of financial value for shareholders. Building on these findings we offer:

H1: Environmental component of CSR will offer the greatest reputational protection during crisis.


Wang, et al., (2018) claim the Management View of adopting CSR is generally one-sided or selfish, because it is influenced by the pressure to increase wealth for their shareholders while minimizing the cost of business. Management is not motivated to support employees in doing good deeds, instead they want to preserve or raise their image. We agree with Godfrey, et al.’s, (2008) suggestion that organizations that engage in CSR activities should not communicate to the public that they are completely altruistic, but to show that the firm is not completely self-interested. This belies the generally accepted notion embraced by the public at large, that businesses exist to produce a profit and will serve only itself in this endeavor.

Proactive Value Added

The DJSI claims A range of issues such as labor disputes, accidents, human rights abuses or environmental disasters can harm a company’s reputation, resulting in financial consequences ranging from lost business, lost customers and declining sales, to liabilities, litigation or fines, all of which may have an impact on shareholder value. The Media-Stakeholder Analysis (MSA) process analyzes the companies’ responses to such environmental, economic or social crisis situations that may have a negative impact on their core business or reputation.

Much of the literature uses financial metrics (e.g., MVA, ROA, etc.) generated in past years to measure how businesses that adopt CSR practices compare to those that do not. We would like to see if there is a proactive measure, or variable, that firms already engaging in CSR can take to maximize the returns they are already seeing, so we put forth: 

RQ1: Is there a proactive way to quantify the value added by incorporating CSR practices?


        Similar to Gomez, et al. (2017), to meet our criteria for the aspects of CSR, the given company must demonstrate that its social activities are integrated into its core business strategy and decision-making process, and not one-time activities that are generally used for an opportunity for positive press, with no long-term plan or benefit to the community.

Dependent Variables

We studied companies that were included in the The Dow Jones Sustainability World Index. The DJSI tracks the performance of the top 10% of the 2,500 largest companies in the S&P Global Broad Market IndexSM that lead the field in terms of sustainability.       

Independent Variables

        We pulled financial reports from the OSIRIS Database (developed by Bureau Van Dijk / A Moody’s Analytics Company). Osiris has information on listed, and major unlisted/delisted, companies across the globe. The information is detailed, comprehensive, and includes insights that go beyond standard financial reports. Different templates are used to show accounts in the correct formats for their company type and location. These include:

Company financials in a standardized and “as reported” formats; restated reports, ratings, sec filings via edgar online and other regulatory filings, searchable corporate actions and dividends, detailed earnings estimates and buy/sell recommendations, country profiles and outlooks from the eiu, directors and contacts, images of annual and interim reports plus corporate and social responsibility documents; detailed stock data; detailed corporate structures; market research; business and company-related news; m&a deals and rumors; directors section including biographies; very detailed information on companies’ activities

N = 1,227 organizations included in both the DJSI & OSIRIS Databases over the course of 5 years (2011-2016)

Results H1: Of the 1,227 organizations that were represented in both databases from 2011-2016, 864 encountered crises. H1 was partially supported, in that there was a strong correlation between firms that engaged in sustainable environmental practices, that experienced quick ( within 6 months) financial recovery. HOWEVER there was a stronger pearson correlation coefficient (r = .87) between CSR social  dimension and quick financial recovery after a crisis.

H1 Results Interpretation:

We believe this alludes to the importance of employees as assets. How employees speak about the organization they work for lends to positive or negative associations of stakeholders. It is the ethical, sustainable, responsibility of management to protect its employees

Human Capital Development

Labor Practice Indicators & Human Rights

Corporate Citizenship & Philanthropy

RQ1 Results: We measured and controlled for a number of variables (R&D initiatives, M&A rumors) drawn from the OSIRIS reports. The greatest positive correlations exist between CSR and value added is the the number of media mentions it receives.

RQ1 Results Interpretation

From these results we conclude stakeholders are more likely to support an organization that frequently engages in CSR, that is frequently part of how it is talked about, because it feels less like a publicity stunt.

CSR acts as a buffer during crisis, but proactively adds value to shareholders when it is ingrained in corporate culture and is consistently marketed.


Possible Future Research: During M&A, do organizations that engage in CSR activities receive better terms because they have higher intangible value (goodwill)?

RQ2: Is there a global region where engaging in CSR activities result in a greater positive shareholder value over time?

RQ2 results: We found no statistically significant relationship between region and financial impact.

Limitation: we focused only on large global organizations- would this relationship exist between smaller or mid-sized firms and the local regions they serve?

Data Analysis and Results

Data analysis and results, organize according to the research question(s)


Findings or interpretation of results | Generalizations | Limitations | Implications

In addition to adding long-term financial value, we believe organizations that incorporate CSR as part of their core business practice benefit from added intangible value (goodwill). An organization’s reputation holds long-term value, and it is our assessment that corporate entities cannot risk breaking moral, sustainable standards for the benefit of short-term profit, while maintaining standards of going concern beyond their current fiscal period.

From a marketing perspective, a CSR program is a marketing driven initiative that impacts the communities a company is active in, with the goal of building brand loyalty and making a difference. According to Nielsen, almost 66% of consumers are willing to pay extra for products and services that come from companies committed to positive social and environmental impact.

Along those lines, Hart & Zingales (2017) argue that companies need to maximize shareholders welfare, not the value. They use the example of Wal-Mart’s removal of high-capacity magazines from its stores in the wake of a number of mass shootings that used that product in 2017. Wal-Mart’s action had the potential to cost money to shareholders by reducing sales that could have come from that product, but the national press spoke to the public’s view of the organization’s ethical corporate behavior (a positive, especially since Wal-Mart has had a number of negative ethical business claims lodged against them).


Governments of the world should promote corporate social responsibility in the private business and small and medium-sized companies. This is because corporate social responsibility by the big companies have a influence on the business and the surrounding community. Countries like Spain have experienced success in the area of encouraging CSR among its large companies; this practice should be replicated to the small business. In conclusion, the maximization of shareholder value is not in sync with moral corporate standards. Institutions that act unethically end up remunerating for the penalties in the performance of the stock price. These penalties end up ruining the reputation of the company, as a result, the stock is affected negatively.

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Business Ethics And Shareholder Value. (2020, Mar 23). Retrieved January 30, 2023 , from

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