Sir. Oliver Hart, Ph.D., talks to Prof. Yang.
Nobel Prize winner Sir Oliver Hart, Ph.D. (left), discusses Shareholder Welfare Maximization with Bryant University Vice President for International Affairs Charles J. Smiley Chair Professor of Science and Technology Hong Yang, Ph.D. during the December 1 Bryant University Climate Change and Sustainability Speaker Series event.
Nobel recipient advocates for the role of shareholder voice in building a better world
Dec 07, 2023, by Stephen Kostrzewa
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Many voices, speaking in concert, carry the loudest message, economist and Nobel Prize winner Sir Oliver Hart, Ph.D., told the audience gathered for the fourth lecture in the 2023 Bryant University Climate Change and Sustainability Speaker Series, held December 1. By coordinating efforts, and votes, he suggested, investors can shape the actions of businesses, large and small, and work toward building a better future.

The Bryant University Climate Change and Sustainability Speaker Series, co-sponsored by the university’s Office of the Provost, Bryant’s Office for Sustainability, and the NASA RI Space Grant Consortium, seeks to bring together diverse voices across a range of fields and industries to discuss how we might combat climate change and build a better, more sustainable future. More than 150 people, both in person and online, attended the December 1 talk, during which Hart, the Lewis P. and Linda L. Geyser University Professor at Harvard University and the co-recipient of the 2016 Nobel Prize in Economic Sciences, suggested that we rethink some of the pillars of financial, and corporate, decision making.

In an increasingly complicated — and divided — world, Hart argued, it is more important than ever that investors and shareholders make their wishes known. The idea of simply “divesting” from problematic companies and organizations, he noted, would not necessarily solve the issues in their practices or approach; it would just remove voices pushing for social and environmental responsibility — to potentially be replaced by voices without the same scruples.

“If you divest, if you get out or exit, you can perhaps sleep better at night. It might make you feel good but is it actually going to have an impact on anything?” he asked.

Instead, Hart advocated, investors, through making their wishes known, can help steer companies toward a more responsible path.

The idea that corporations should consider social impact, Hart noted, is a relatively new one. According to the accepted wisdom, he said, companies have a single objective: “Shareholder Value Maximization” (SVM) — or making shareholders as much money as possible within the law.

“There, of course, will be trade-offs. Everything in economics involves trade-offs.”

He explained the conventional thinking as such: “Shareholders have the votes, and what do the shareholders want? Well, they want to be as wealthy as possible.”

However, in recent years, Hart suggested, investors — especially young investors — have become more sensitive to environmental and social issues. That shift, he noted, should potentially give rise to a new focus: “Shareholder Welfare Maximization” (SWM) — where concerns extend beyond the bottom line.

“Ultimately, shareholders are people like you and me; they have ethical concerns, moral concerns,” said Hart. Sometimes, he offered, their thinking might come down to simple, hard considerations. “It may be that this company's behavior is going to lead to a hotter world, and they don't want to live in a hotter world.”

There are even times, he suggested, where the socially responsible option might pay off in the future, or aid other industries, offering a win-win for both SVM and SWM.

At other times, however, Hart acknowledged, the two focuses — maximizing profits vs. maximizing social good — would potentially come into direct conflict with one another. “There, of course, will be trade-offs,” he said. “Everything in economics involves trade-offs.”

It is at those points of conflict, he said, that the shareholder votes are most important.

Complicating matters, Hart pointed out is that most stocks in the United States are currently owned through mutual funds, and intermediaries like BlackRock and State Street, which can make it more difficult for individual investors to best make a positive impact.

Again, he noted, most financial management institutions currently take the view that their fiduciary duty to their investors requires them to consider only long-run financial return. However, he argued, fiduciary duty should mean acting on behalf of your investors — and that means finding out what they actually want.

“If an idea is logically wrong, my view is that it will eventually fail.”

Hart offered a range of ways through which financial management organizations might better follow the will of investors, from eliciting investors’ preferences and then casting their votes based on the majority to offering investors funds with a clear and predetermined voting strategy and letting them choose among them.

Turning the ship from SVM to SWM, Hart said, would be difficult and may take a long time, noting how deeply entrenched current beliefs and practices were. But it would not be impossible, he suggested.

“If an idea is logically wrong, my view is that it will eventually fail,” he noted.

At the conclusion of his presentation, Hart took part in a conversation with Bryant University Vice President for International Affairs Charles J. Smiley Chair Professor of Science and Technology Hong Yang, Ph.D. and answered questions on issues including improving shareholder engagement, weighing environmental impact, and the role college students could play in shaping a better world.

Change, he reminded the next generation of professionals, only comes with investment, advocacy, and support. “My advice is to be active and engaged,” he encouraged the audience.

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