Soothing Whispers: Shareholder engagement in the wake of stakeholder controversies

Abstract

We explore the interdependence between stakeholder controversies and shareholder engagement on environmental and social issues and how it affects corporate financial performance. Viewing shareholder impact as a distributed and dynamic process, we theorize that shareholder dialogue can affect investors’ risk perceptions. As an ambivalent signal, its impact may be negative or positive, contingent on media-covered stakeholder controversies. In the absence of those controversies, shareholder dialogue may highlight the existence of environmental and social liabilities in targeted companies. In the presence of stakeholder controversies, however, shareholder dialogue may reassure the investment community about shareholders’ commitment to and confidence about improving environmental and social policies and practices. We test our hypotheses on a proprietary dataset of 771 S&P 500 companies between 2007 and 2019 that covers 176 environmental and social shareholder dialogues. We find that, in the wake of stakeholder controversies, shareholder dialogue moderates the negative effects of controversies on targeted companies’ financial performance, consistent with our theory that shareholder dialogue may mitigate investors’ perceptions of risk. Our findings contribute to the understanding of shareholder engagement and, more broadly, of stakeholder–shareholder dynamics.