Georgios Serafeim

The Impact of Corporate Sustainability on Organizational Processes and Performance

We investigate the effect of corporate sustainability on organizational processes and performance. Using a matched sample of 180 U.S. companies, we find that corporations that voluntarily adopted sustainability policies by 1993-termed as high sustainability companies-exhibit by 2009 distinct organizational processes compared to a matched sample of companies that adopted almost none of these policies-termed as low sustainability companies. The boards of directors of high sustainability companies are more likely to be formally responsible for sustainability, and top executive compensation incentives are more likely to be a function of sustainability metrics. High sustainability companies are more likely to have established processes for stakeholder engagement, to be more long-term oriented, and to exhibit higher measurement and disclosure of nonfinancial information. Finally, high sustainability companies significantly outperform their counterparts over the long term, both in terms of stock market and accounting performance. This paper was accepted by Bruno Cassiman, business strategy.

Resources or Power? Implications of Social Networks on Compensation and Firm Performance

Using a sample of 4,278 listed UK firms, we construct a social network of directorship-interlocks that comprises 31,495 directors. We use social capital theory and techniques developed in social network analysis to measure a directors connectedness and investigate whether this connectedness is associated with their compensation level and their firms overall performance. We find connectedness is positively associated with compensation and with the firms future performance. The results do not support the view that executive and outside directors use their connections to extract economic rents. Rather the company compensates these individuals for the resources these better connections provide to the firm.

Integrated Reporting and Investor Clientele

In this paper, I examine the relation between Integrated Reporting (IR) and the composition of a firm’s investor base. I hypothesize and find that firms that practice IR have a more long-term oriented investor base with more dedicated and fewer transient investors. This result is more pronounced for firms with high growth opportunities, not controlled by a family, operating in ‘sin’ industries, and exhibiting more stable IR practice over time. I find that the results are robust to the inclusion of firm fixed effects, controls for the quantity of sustainability disclosure, and alternative ways of measuring IR. Moreover, I show that investor activism on environmental or social issues or a large number of concerns about a firm’s environmental or social impact leads a firm to practice more IR and that this investor or crisis-induced IR affects the composition of a firm’s investor base.

The Effect of Institutional Factors on the Value of Corporate Diversification

Using a large sample of diversified firms from 38 countries we investigate the influence of several national-level institutional factors or ‘institutional voids’ on the value of corporate diversification. Specifically, we explore whether the presence of frictions in a country’s capital markets, labor markets, and product markets, affect the excess value of diversified firms. We find that the value of diversified firms relative to their single-segment peers is higher in countries with less efficient capital and labor markets, but find no evidence that product market efficiency affects the relative value of diversification. These results provide support for the theory of internal capital markets that argues that internal capital allocation would be relatively more beneficial in the presence of frictions in the external capital markets. In addition, the results show that diversification can be beneficial in the presence of frictions in the labor market.

What Factors Drive Analyst Forecasts

Using survey data to judge how analyst forecasts are related to evaluations of companies’ industry competitiveness, strategic choices, and internal capabilities, the authors found that analyst forecasts are associated with many of the factors that money managers rate as important in their assessments of analyst contributions. They also found wide variation in ratings consistency across variables among analysts covering the same company. On average, consistency is higher for sell-side analysts than for buy-side analysts. Although extensive research has been conducted on analysts’ earnings forecasts and recommendations, relatively little has been written about the factors that underlie them. In our study, we examined which industry, leadership, and company factors are related to analysts’ forecasts of financial and stock performance. We also examined whether analysts covering the same company make consistent assessments of its industry, leadership, and company capabilities. To study these questions, we used data from a survey of 967 analysts who rated 837 companies on their projected future performance, industry economics, company capabilities, and leadership. Analysts were asked to provide forecasts of growth in revenues, earnings, and stock price, as well as gross margins, for up to three companies they covered. For each company, they were also asked to rate industry, company, and leadership factors that prior research suggests influence future performance. These factors include the competitiveness and growth of each company’s industry, whether it competes primarily on the basis of innovation or price, its strategy execution and communication, its innovativeness, existing financial resources, the quality of its top management, whether management sets high performance standards, and its governance. We found a strong relationship between analysts’ forecasts of a company’s performance and their assessments of its industry growth, industry competition, quality of its management, commitment to high performance expectations, ability to execute strategy, and innovation. We found that several factors are generally unimportant, including governance, transparent strategy communication (especially for buy-side analysts), competition via superior products/services, financial strength, and understanding one’s competitors. Considerable variation in ratings consistency exists across factors among analysts who cover the same company. Analyst ratings are relatively more consistent for company revenue forecasts, balance sheet strength, strategy execution, and strategy communication than for industry competitiveness, forecasted stock appreciation, low-price strategy, and understanding one’s competitors. Consistency is significantly higher for sell-side analysts than for their buy-side peers, perhaps reflecting sell-side pressure to herd. Finally, we found no evidence that analysts are more consistent on financial forecast factors than on internal capability factors.

Firm Competitiveness and Detection of Bribery

Using survey data from firms around the world I analyze how detection of bribery has impacted a firm’s competitiveness over the past year. Managers report that the most significant impact was on employee morale, followed by business relations, and then reputation and regulatory relations. The impact on stock price has been much less significant and this could be attributed to stock prices not reflecting the impact on employee morale and business relations in less competitive labor and product markets. To better understand these bribery cases I analyze detailed data on the identity of the main perpetrator, detection method and organizational response following detection and find that both the method of detection and how an organization responds are systematically related to the seniority or type of the perpetrator. Finally, I examine how these factors are associated with the impact on competitiveness and find that internally initiated bribery from senior executives is more likely to be associated with a significant impact on firm competitiveness. Bribery detected by the control systems of the firm is less likely to be associated with a significant impact on regulatory relations. Finally, bribery cases where the main perpetrator is dismissed are less likely to be associated with a significant impact on firm competitiveness. These results shed light on the costs of bribery after detection.

The Role of the Corporation in Society: An Alternative View and Opportunities for Future Research

A long-standing ideology in business education has been that a corporation is run for the sole interest of its shareholders. I present an alternative view where increasing concentration of economic activity and power in the world’s largest corporations, the Global 1000, has opened the way for managers to consider the interests of a broader set of stakeholders rather than only shareholders. Having documented that this alternative view better fits actual corporate conduct, I discuss opportunities for future research. Specifically, I call for research on the materiality of environmental and social issues for the future financial performance of corporations, the design of incentive and control systems to guide strategy execution, corporate reporting, and the role of investors in this new paradigm.

Why and How Investors Use ESG Information: Evidence from a Global Survey

Using survey data from a sample of senior investment professionals from mainstream (i.e. not SRI funds) investment organizations we provide insights into why and how investors use reported environmental, social and governance (ESG) information. Relevance to investment performance is the most frequent motivation for use of ESG data followed by client demand and product strategy, bringing change in companies, and then ethical considerations. Important impediments to the use of ESG information are the lack of reporting standards and as a result lack of comparability, reliability, quantifiability and timeliness. Among the different ESG investment styles, negative screening is perceived as the least investment beneficial while full integration into stock valuation and engagement are considered more beneficial but they are all practiced with equal frequency. Current practices of different ESG styles, especially screening, are driven by product and ethical considerations. In contrast, integration is driven by relevance to investment performance. Future practices of ESG styles are driven by relevance to investment performance, bringing change in companies, and concerns about data reliability.

Market Reaction to Mandatory Nonfinancial Disclosure

This paper examines the equity market reaction to events associated with the passage of a directive in the European Union (EU) mandating increased nonfinancial disclosure, which affected firms listed on EU exchanges or having significant operations in the EU. The mandated disclosures relate to firms’ environmental, social, and governance performance. Using a cross-country sample, we first document an on average negative market reaction to events increasing the likelihood of passage for this regulation, consistent with equity investors anticipating net costs with the directive’s passage for most firms. Exploiting cross-sectional variation, we then predict and document a more negative market reaction for firms having: (i) low pre-directive nonfinancial disclosure levels, consistent with investors anticipating these future disclosures to reveal worse-than-expected news; (ii) weaker performance on nonfinancial issues, consistent with expectations for these firms to incur future costs to internalize current externalities; and (iii) lower ownership by institutional asset owners, consistent with such investors demanding further disclosures than mandated by the directive. The average market reaction for firms with superior nonfinancial performance and disclosure in our sample is positive, suggesting that investors expect net benefits from the passage of the directive for these firms.

Who Pays for White-Collar Crime?

We examine the severity of punishments for employees who perpetrate economic crimes to understand how aggressively organizations enforce compliance with management control systems. Our dataset comprises 608 organizations around the world that identified they experienced economic crime. We find wide variation in rates of dismissal and legal action against the primary perpetrators. Further, punishment rates are lower for senior management than for middle managers and junior staff. We document that the negative relation between seniority and punishment severity holds only for senior male perpetrators; senior female perpetrators receive harsher punishments than senior males. These findings are more pronounced in organizations that operate in countries with more gender inequality, have less frequent updates to internal control, do not report the crime to regulators, and do not disclose their identity in the survey. We interpret these findings as evidence of agency costs by punishment decision-makers in setting more lenient punishments for senior perpetrators from their own male social networks.