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Full Summary of all lectures, guest lectures and lecture notes (includes paper explanations!) for Sustainable Finance & Value Creation: $6.90
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Full Summary of all lectures, guest lectures and lecture notes (includes paper explanations!) for Sustainable Finance & Value Creation:

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Full summary of all lectures and guest lectures & includes lecture notes. In addition, also the mandatory paper outputs (tables and figures) are explained.

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  • March 25, 2024
  • 42
  • 2023/2024
  • Summary
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Enhanced Shareholder Value Creation
1) Shareholder Value Maximization
 Traditional view = creating value for shareholders and CG should prevent execs to pursue own
interest.
FCF = (1 – t) * EBIT + Depreciation – CAPX – Change in NWC

2) Enhanced Shareholder Value Maximization
Consider interest of stakeholder  this will serve Long Term SVM
 LT value depends on stakeholders:
o Employees: human capital
o Community of taxpayers: (institutional) infrastructure or Local community
o Customers: revenues
o Firms: supply chain
Legal Context:
 In Europe: Civil law  Stakeholder is embedded in law
 In US: Common law with shareholder primacy
 In UK: Stakeholders are mentioned in UK Co Act.

There can be a trade-off between shareholder and stakeholder value (how far will you go to create
shareholder value via stakeholder value ten koste van shareholders). For example:
- ClimateChange: Oil and gas company: invest more in oil wells involves tradeoff between
shareholder interests and society’s interests in reducing climate risks.

ESVM = SVM: Conditions for equivalence of ESVM and SVM:
A1: Corporate leaders are not myopic (kortzichtig) and consider LT consequences of their choices on
LT shareholder value.
A2: Corporate leaders are well informed about consequences of their choices.
A3: Courts avoid micromanagement of corporate decisions and defer to the discretion of corporate
leaders under the business judgment rule.
A4: Only changes in actual treatment of stakeholders, and not merely linguistic changes (taalkundige
veranderingen) in formulation of decision are taken to be actual changes.

ESVM < > SVM: leads to fuller consideration of stakeholder effects. Conditions:
1. Focus on the Long Term
2. Education and informational value of ESVM
3. Using ESVM as an excuse to deviate from value max?

SVM is good under:
 Perfect competitive economy with no agent able to affect prices.
 No externalities (=everything that is not priced but has a cost on stakeholders).
 Then: SVM -> increase in value increases wealth of shareholders without anyone being worse
off.

SVM breaks down under:
 Imperfect competition: danger of monopoly (dominant single seller) / monopsony (dominant
single buyer). (e.g. Turing Pharmaceuticals (CEO Martin Shkreli))
 Common ownership: Maximizing value of a portfolio rather than an individual firm
(Maximize firm A with the use of firm B).
 Externalities: Damage-inducing activities (e.g. pollution) are often inseparable from
production activities  Regulation is suboptimal. Regulation is mostly only within national
frontiers, so not global.  Why would shareholders agree to separation of value
maximization and paying for externalities? (Friedman Separation Theorem)
 Pure SVM is amoral (=without thoughts about good and bad)

3) Shareholder Welfare Maximization

1

,= SVM + regulation AND/OR shareholder voting on ESG issues
Problem: Voting outcome is non-binding in US and UK & Will shareholders vote?

Corporate Purpose Statement:
= Defines the reason your company exists. It also illustrates how your product or service positively
impacts the people you serve.
ESG-has higher returns:
- In equilibrium: lower returns
- Out of equilibrium: high returns
 Out of equilibrium: a shock (e.g. a higher ESG score) -> demand goes up -> price goes up ->
high initial return -> longer term higher prices = lower returns
 Advantage of CP
o The commitment -> trust
o Also: while many stakeholders are protected by contracts.
o For shareholder: legal shareholder protection is needed and focus on shareholder
primacy.
 Even if one show that purpose statements cause success, the implications would be doubly
unclear:
o First, purpose (statements) may only work for the few firms that have (voluntarily)
adopted them.
o Second, a regulator can only set minimum requirements for mandatory purpose
statements.

B Corp and Benefit Corporation
B Corp = for-profit company, certified by the nonprofit B Labs. These companies commit to:
 Accountability: Directors required to consider impact on all stakeholders.
 Transparency: publish reports of overall social and environmental performance.
 Performance: achieve minimum verified score on the B Impact
Assessment; and recertification is required every 2 years against
evolving standard.
 Availability: B Corps certificate available to every business
regardless of corporate structure, state, or county of incorporation.
 Exception: after 2 years of being a certified B Corp,
transition your corporate structure to a PBC (or public
benefit corporation by state designation).
 Cost: B Lab certification fees from $500 to $50,000/year; based
on revenues.

(Public) Benefit corporation = legal entity with in its acts of incorporation
a public benefit
 Accountability: Directors required to consider impact on all stakeholders.
 Transparency: publish public reports of overall social and environmental performance.
(Exception: Delaware PBCs not required to report publicly or against a third party standard).
 Performance: co reports self-reported metrics and evaluations to shareholders.
 Availability: PBCs are legal entity choices in 30 US states and D.C.
 Cost: PBC state filing fees range from $70-$200.
 Purpose: PBCs = provide option of combining for profit + social impact purposes/interests.
- France: Entreprise a mission = legal entity in France allowed focus on stakeholders

Legal Origin and CSR
PAPER: On the Foundations of Corporate Social Responsibility (Liang, H. and L. Renneboog,
2017)
What fundamental forces steer corporations to behave as good citizens rather than as pure profit
maximizers?
 The “law and finance” view:

2

,  Corporate law address agency conflicts between managers and shareholders.
 Common law is superior in providing fertile ground for shareholder protection.
 Shareholder protection  financial development  efficient resource allocation 
Better economic development and social welfare
 The stakeholder view

 Civil laws are superior in providing fertile ground for stakeholder protection.

 Stakeholder protection  reducing market externalities  social welfare
 The institutional view (“conventional wisdom”)
 Political institutions shape corporate governance structures and aggregate social
preferences.
 To foster CSR and sustainability: democracy and constraints on government need to
come first.
 The development view:

 Institutions are the consequence, rather than preconditions, of economic development.

 Democracy and executive constraints hinder good economic outcomes (e.g. CSR and
sustainability): difficulty in consensus building.

Legal origins: only consistent predictors of CSR
 Civil law firms outperform common law firms in CSR issues.
 Scandinavian firms outperform the rest of the world in CSR.

Channels between LOs and CSR:
 2SLS (not IV)
 Shareholder litigation
 Employment laws
 Collective relations laws
 Degree of state
involvement in the
economy
 Super majority rules

- The adjacent table
shows the difference
between (e.g.) civil law
vs. common law for
different dependent
variables.
- Overal IVA Rating
(Intangible Value
Assessment (IVA))
- The table shows that
Civil law has a
coefficient which is
18.676 higher than
common law for the first column.
- French has a higher coefficient than English with 16.044, what is highly significant, for the
first column.
- The difference between civil and common law is the biggest for Eco Value.




3

, - The dependent variable is
CSR score.
- French origin countries have
the highest CSR score in
comparison with German
and Scandinavian origin
countries. Given the highest
coefficient in column 1.
- Countries with a higher GDP care
more for CSR, because positive
coefficient.
- Firms that are in a country that
are more globalized are more in
CSR, because positive coefficients.



Testing for LO and Scandals & Disasters:
Quasi-natural experiments and Diff-in-Diff analysis for causation:




 Reaction to 2008 Chinese milk scandal by firms in food- related industries from different
legal regimes (treatment = civil law)
 Corporate donations as a reaction to 2004 Asian tsunami by firms from different legal
regimes (treatment = civil law)
 Environmental performance upgrade by firms in energy- related industries from different legal
regimes as a reaction to 2010 Deepwater Horizon oil spill (treatment = civil law)
 The table above shows that after the Chinese milk scandal in 2008, the product responsibility
and product safety is higher for civil law countries.
 The same counts for cash
donations after the Indian
Ocean Tsunami in 2004.




For the test above, they also conducted
a placebo test, to test for the effect on
other industries:

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