Journal of Business Ethics

, Volume 149, Issue 3, pp 747–768 | Cite as

Managerial Compensation and Firm Value in the Presence of Socially Responsible Investors

  • Pierre Chaigneau


Shareholders with standard monetary preferences will give a manager incentives to increase firm profits, which can be achieved with equity grants. When shareholders are socially responsible, in the sense that they also value corporate social performance, it is not clear which incentives the manager should receive. Yet, in a standard principal–agent model, we show that the optimal contract is surprisingly simple: it consists in giving equity holdings to the manager. This is notably because the stock price will incorporate expected profits as well as the social performance of the firm, to the extent that it is valued by shareholders. Consequently, equity holdings give the manager incentives to jointly maximize the profits and the social performance of the firm according to shareholders’ preferences. To facilitate alignment of interests, more socially responsible firms will optimally hire more socially responsible managers. We conclude that neither the shareholder primacy model nor equity-based managerial compensation is necessarily inconsistent with the attainment of social objectives.


Corporate social performance (CSP) Corporate social responsibility (CSR) Executive compensation Fiduciary duty Incentive contracts Principal–agent model Socially responsible investment (SRI) 

JEL Classification

D21 D64 G34 K20 


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Copyright information

© Springer Science+Business Media Dordrecht 2016

Authors and Affiliations

  1. 1.HEC MontréalMontrealCanada

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