Socially Responsible Finance and Investing: Financial Institutions, Corporations, Investors, and Activists

CHAPTER 1

Socially Responsible Finance and Investing: An Overview

H. KENT BAKER

University Professor of Finance and Kogod Research Professor, American University

JOHN R. NOFSINGER

Professor of Finance and Nihoul Faculty Fellow,Washington State University

INTRODUCTION

What is the main goal of a business firm? Many have debated this question over the years. The response largely depends on one’s view of to whom the firm is responsible. Some contend that corporations are only responsible to their shareholders and do not have other obligations to society besides complying with applicable laws, ethical standards, and international norms. Hence, corporations should operate to meet the best interests of shareholders within these constraints. Others take the broader view that corporations have responsibilities to stakeholders other than shareholders. Stakeholders refer to those who have an interest or concern in the firm because of how its activities affect them. Stakeholders consist of owners, management, employees, suppliers, customers, the local community, and others.

Donaldson and Preston (1995) discuss three versions of stakeholder theory: normative, instrumental, and descriptive. Normative stakeholder theory views a firm’s behavior through an idealistic social or moral lens. That is, this version focuses on how firms “should” act. Instrumental stakeholder theory views stakeholder relationships as the means to some end, such as maximizing firm value. By contrast, descriptive stakeholder ...