Investor activism through shareholder proposals has increasingly focused on social and environmental issues over the past five years. The authors analyzed over 2,600 shareholder proposals from 1997-2012 and found that 58% concerned issues deemed immaterial to financial performance by SASB standards. However, targeting both material and immaterial issues through proposals was associated with improved company ESG performance. Proposals on material issues were also linked to increased market valuation, while those on immaterial issues saw decreased valuation. The authors suggest management may respond to immaterial issues due to misaligned incentives, an inability to distinguish materiality, or to distract from material issues. Overall, investor activism can drive both social responsibility and financial outcomes when focused on material ESG issues.

1. (Mt) – APA format paper social responsibility
The Fastest-Growing Cause for Shareholders is Sustainability By George Serafeim July 12,
2016 Ask someone to name the demands that activist hedge funds make of companies, and
they’ll likely list corporate governance issues such as board changes and executive
compensation, or perhaps some form of restructuring. In fact, the largest number of
shareholder resolutions filed by investors — the method through which activists work —
now concern social and environmental issues. This is a recent phenomenon, according to
my research: The number of these resolutions has increased dramatically over the past five
years. Political spending, climate change, diversity, and human rights are now some of the
most frequent resolutions that investors file. This data suggests the need to rethink how we
view investor activism. Done well, it can improve a company’s sustainability in addition to
performance. Activism takes many different forms, but usually it begins with investors
holding private conversations with company management on the need to change a process,
business model, or management practice. When management fails to adequately respond to
investor queries or concerns, investors typically file shareholder resolutions that ask all of
the company’s shareholders to vote on a specific topic. If the company agrees to comply
with the request or to take alternative measures that address the investors’ concerns before
the resolution is subject to a vote at the annual general meeting, the investors withdraw the
resolution. Otherwise, shareholders vote on the resolution. Evidence on the financial value
of investor activism is sparse, since collecting data on the private engagement efforts of
different investors is difficult. To gain further insights into the sustainability and financial
outcomes associated with shareholder advocacy efforts, Jody Grewal, Aaron Yoon, and I
analyzed 2,665 shareholder proposals submitted between 1997 and 2012 in a new paper.
As we saw in a previous paper and discussed in a previous HBR article, not all
environmental, social, and governance (ESG) issues are equally financially important across
industries. For instance, managing environmental impact is a very important element of
business strategy for firms in the fossil fuel or transportation industries, but less so for
financial institutio ns or health care companies. In contrast, fair marketing and advertising
of products is very important for companies in these sectors. Using the data infrastructure
that was created only recently by the Sustainability Accounting Standards Board (SASB), my
coauthors and I were able to classify these proposals as addressing either financially
material or immaterial topics. SASB develops industry-by- industry accounting standards
that identify the material ESG issues that could have financial implications. SASB uses the
U.S. Supreme Court’s definition of material information as information presenting “a

2. substantial likelihood that the disclosure of the omitted fact would have been viewed by the
reasonable investor as having significantly altered the ‘total mix’ of information made
available.” We found that 58% of the shareholder proposals in our sample were filed on
immaterial issues. The high percentage of proposals on immaterial issues is further
evidence that investors aren’t motivated only by short-term profit. Rather, it reflects the
pro-social objectives of a large number of sponsors of such proposals. Overall, we found that
when investors file a shareholder proposal on an ESG issue, performance of the company on
that ESG issue improves whether the issue is material or immaterial. Thus, even though
such proposals rarely receive the majority support necessary in the event of a vote, they still
have had an effect on corporate management, with managers investing resources and
improving performance on issues of diversity, energy efficiency, water consumption, and
product safety. We also found that targeted firms experienced changes in market valuation
subsequent to filing shareholder proposals. However, proposals had a substantially
different effect depending on whether they related to immaterial or material issues.
Proposals on immaterial issues were associated with subsequent declines in market
valuation. In contrast, proposals on material issues were associated with subsequent
increases in market valuation, even several years after the proposal. This suggests that
pressure on companies to address ESG issues that are not financially material for the firm
but are relevant to other stakeholders could lead to decreases in financial value, while the
opposite is true for proposals on material issues. Some policy experts have argued that
environmental and social issues divert the attention of senior management and directors
away from more-important work, thereby destroying value. We show that this position is
supported in cases of financially immaterial ESG proposals. However, our results suggest
that one should be careful about overgeneralizing, since a significant number of ESG
proposals are financially material and associated with subsequent increases in market
valuation. Why would managers choose to respond to investors’ requests on immaterial
issues if doing so decreases financial value? After all, activists usually don’t have the
necessary votes to compel management to respond. We found evidence for three different
explanations. First, responding to immaterial issues was more common when the incentives
of managers and investors were misaligned. Perhaps management agrees to initiatives that
destroy financial value because they themselves somehow benefit. Second, we found some
evidence that management struggled to distinguish between material and immaterial
requests. Perhaps management responds to immaterial investor requests because they
mistakenly believe that doing so will increase the company’s value. Third, we found that
management responded to immaterial issues to divert attention away from material ones.
Perhaps a bank is more likely to reduce its use of fossil fuels (an immaterial issue) if doing
so distracts investors or the public from problems with false advertising (a material issue).
Much of the discussion around investor activism has concentrated on how such activism
might increase the short-term orientation of corporate America, but it is important to
realize that investor activism takes many different forms. A substantial amount of investor
activism appears to be motivated by social or environmental aims. Investors can be a driver
for social responsibility and, at least when focused on material issues, can improve both

3. societal and financial outcomes at the same time. Access original version of the article at
https://hbr.org/2016/07/the-fastest-growing-cause-forshareholders- is-sustainability