Does ownership matter?  With average holding periods of publicly-traded stock measured in months, share ownership may not effect firm’s long-term practices and activities.  Yet, large shareholders surely have a stronger voice than others and their holding periods are considerably longer. Hence, their preferences might influence the choices made by firms, especially regarding corporate practices around environmental, social, and governance (ESG) issues. Ownership might be particularly relevant when these material owners are governments, members of founding families, or executives of the firms. These and other large owners may not only care about how well their firms perform financially, but also about how they behave—or are perceived to behave. While corporate ESG scores are criticized as being imprecise—and more recently been the subject of severe political backlash—they convey important information on how firms carry out their business, what risks they assume, how they treat various stakeholders, and how they communicate all of this to the world.

We test if material owners are a key driver of firms’ policies and practices regarding corporate sustainability, given their incentives and ability to influence certain ESG initiatives. Our paper studies whether and how the presence of different types of material owners can explain the ESG choices of the businesses they own, using a sample of 3,083 public corporations from 62 different countries over 18 years.

To ensure that shareholders have some degree of control or influence over their firm’s activities, we focus on firms’ material owners, which we define as the ultimate owners behind the firm’s ten largest direct shareholders. Across our sample, these owners include original founders and their families, other individual investors, institutional investors, other corporations, governments, employees, and managers. To differentiate and compare the influence of different owner types, we employ two sets of variables: (1) a series of indicators denoting the presence of one or more or the above-listed owner types among the firm’s material owners; (2) the equity stakes collectively held by each of these categories of owners.  We focus on ESG activities that can be measured consistently across firms and industries. These activities are generally not mandated by governments (even when reporting about them may be) and therefore demonstrate a degree of strategic choice by firms and their owners. We examine not only consolidated ESG scores, but also various subcomponent scores.

After controlling for industry, country, firm size, financial performance and other factors that might influence corporate ESG practices, we find that ownership matters. We find significant relationships between ownership and ESG performance. Firms with material non-family management or government stakes tend to outperform with respect to ESG (compared to those with institutional owners). These results are not wholly surprising. Governments would naturally care about many public issues that the E and S metrics capture. Managers may have career interests advanced by burnishing their ESG credentials or may use the firm as an expression of their values.  

Perhaps the most counter-intuitive—and consistently strong—finding is that firms with founding family or other individual stakes consistency underperform with respect to ESG. The narrative of family-owned firms is that they take decisions over long horizons, care deeply about employees and communities, and “do the right thing.” Yet publicly-traded firms with family owners did not demonstrate these traits with respect to their performance on ESG; E, S, or G; or the many subcomponents that constitute these measures.  In our presentations to family owners, these results generated considerable resistance and reflection. 

Looking more closely, we find that the negative association between family ownership and ESG is strongly mediated by the interaction between ownership and management.  Firms with family owners—but not family CEOs—perform very poorly on all ESG measures.  One interpretation is that when the holding is simply a financial investment—rather than still a management stake—family owners may treat the firm more instrumentally. This seems true for both founders and descendants, with coefficients for both similar in size and statistical significance.

When a family owner has management control through a CEO, however, the results are markedly different.  The presence of founder-CEOs-owners and descendant-CEO-owners significantly predicts higher ESG scores. The impact of descendant-CEO coefficients are large enough to offset the negative family ownership effect in later-generation firms. In short, when descendants are in charge, their firms tend to be more ESG-oriented than others.

Ownership does indeed matter—as does management.  Our findings are robust to alternative ESG metrics; alternative ownership measures, and alternative estimation methods. We believe that these results are helpful in helping better understand the preferences of different types of owners, while also valuable in challenging owners’ self-perceptions of their behavior. We hope that these results will continue to spark conversations by owners about their roles in society.