What are the 2 differences in shareholder compositions?
- Transient vs long-term investors: transient trade for short term and quickly while long-term believe in future potential in firm
- Passive (index) investors vs more active investors: Index investors has many stocks, people can buy to diversify, they are more passive. Activist investors have a different strategic vision and believe shareholder interests are different than current management.
What are proxy advisors and what criticism exists?
Advise on course of organization through shareholder voting rights. They don’t own stocks themselves, so some controversy since they don’t have a direct stake.
Proxy advisors focus more on social connections of outside directors
What criticism of legislation (SOX and Dodd-Frank Act) exists?
Creates a minimum level for firms, for some this might be too much and for other suitable or too low. Adhering to SOX can be costly, so the question is whether it is worth it.
What effect does disclosure have?
A disciplining effect
Why is disclosure important and what 2 specific roles does it fulfi?
It is important for information asymmetry: investors and debt suppliers know less about firm so periodic supply of information is required.
1. Valuation role: investors & debt supplier decisions
2. Stewardship role: how well have stewards acted in the interests of the shareholders.
In what way is ESG a response to market failure?
Certain societal and environmental factors are not included in accounting system. It is a given that production also has an impact on society where it operates, but this is not included in accounting systems.
What trade off exists between government intervention and market failure?
Regulation brings bureaucracy and compliance costs while the market brings social costs. Both systems are not optimal, you need to weigh which is less costly.
What is another reason why ESG is important? 4 reasons
- It can be part of your value proposition (Tony Chocolonely).
- Firms also require human capital, they prefer working at firms with certain image and societal awareness
- There is ESG risk which you can cover
- You can receive fines
What are the 2 perspective sof double materiality?
Outside-in and inside-out
How ESG issues affect organization’s activities and performance (what impact can developments in your sustainability have on the long term of your business)
What is the impact of business activities on ESG issues
In what way can ESG be seen as a sort IA?
- Companies can sacrifice short term profits to attract ESG sensitive customer and employees
- Relates to shareholder/stakeholder discussion, might also be shareholder related as they can benefit from ESG investments not yet incorporated in stock price
What difficult trade of exists in moving towards stakeholder-oriented ESG?
You land in a sort of politics, where you have to balance the stakes of different parties.
In an ESG business case, investments beyond certain point can be negative for shareholder returns. Investing leads to negative returns, while not investing leads to criticism.
What is another motive relating to stakeholder-oriented ESG?
ESG can be seen as a necessary requirement for your legitimacy to operate as a firm, and of course compliance.
What is a reason to join the Science Based Targets initiative (SBTi)
Greenwashing, credibility is hard to confirm. Joining SBTi is a credible way to differentiate (relates to signalling)
What can be said about ESG measurement?
Measuring ESG is very difficult. The measure changes throughout time and you also need to consider the total impact. There are many ESG agencies with ratings, these are only loosely correlated. It is very difficult to measure accurately.
What describes heuristics?
Heuristics used in decision making and the resulting biases are predictable. Humans never collect and use all information, we are cognitively limited. This means we use shortcuts to make decisions. These are highly efficient, but also lead to errors.
In what way can framing be seen in reporting of companies?
Firms try to avoid reporting small losses with methods. The economic materiality is mall between a small profit or loss, yet firms try hard to avoid small losses (loss-aversion).
What should a bonus system not do?
Bonuses are external motivation, they can however replace intrinsic motivation with external motivation. You should not create a bonus system that degrades internal motivation.
