From Governance Proposals to Environmental and Social Outcomes: Cross-Issue Responses to Shareholder Activism

Prior research establishes that shareholder activism targeting environmental and social issues generates measurable improvements within those specific domains. We extend this literature by examining whether intense activist pressure on governance issues may also drive firms to enhance their environmental or social performance, a phenomenon we term cross-issue response . Specifically, we argue that to reinforce firms’ moral capital and maintain their legitimacy, as a response to shareholder proposals connected to governance issues, firms will enhance their environmental and social performance. Using a longitudinal sample of S&P 500 firms, we uncover that the intensity of governance shareholder activism positively influences environmental and social performance in subsequent years. In addition, we analyze how firms’ cross-issue responses are contingent upon key organizational factors, such as weak governance performance, reputational threats, and the presence of dedicated institutional investors. Our study advances debates in business ethics by showing that firms engage in cross-issue responses, linked to goodwill and ethical behavior, to generate moral capital and reinforce their legitimacy.