Profits vs. People: Investors Say Layoffs Cross a Moral Line

Economist Milton Friedman famously argued that a firm’s sole focus should be maximizing profits for shareholders—not “social responsibilities” unrelated to finance.

But these days, many investors care how companies influence their communities, says Harvard Business School Associate Professor Elisabeth Kempf. In fact, most people that she and fellow researchers surveyed said that companies shouldn’t lay off workers even if the cuts create value for shareholders.

Kempf probes the causes that matter to investors and why in the recent working paper “Corporate Actions as Moral Issues.” She finds that layoffs and CEO pay concern investors more than workforce diversity and fossil fuel use—two areas of focus in social impact investing. These investors see company actions through a strong moral lens and are more likely to empathize when corporate actions adversely affect people to whom they feel connected.

The paper offers insights especially for the growing area of environmental, social, and governance (ESG) investing as managers choose where to place priorities. And at a time when skepticism about corporate motives runs high, the findings offer a path forward for restoring confidence in American businesses.

“It shows that people want to do the right thing,” says Kempf. “It shows people are looking at a lot of different things when they're evaluating company decisions.”

Kempf collaborated on the research with Zwetelina Iliewa, assistant professor at the University of Bonn, and Oliver Spalt, professor at the University of Mannheim.

How ‘right’ and ‘wrong’ are a company’s actions

Previous studies have examined ESG investing and the attitudes of socially conscious investors toward issues such as renewable energy and workforce diversity. But the authors wanted to explore whether investors’ concerns applied to a broader range of corporate actions, and what were the underlying drivers of those concerns.

The authors asked more than 2,000 online respondents, both investors and non-investors, to react to 10 hypothetical corporate actions by a fictional “XYZCorp,” described as a typical firm in the S&P 500. The actions ranged from fossil fuel use to tax avoidance. The survey was conducted during May and June 2024.

The authors asked respondents to rank all 10 actions based on moral concern, from “most right/least wrong” to “most wrong/least right.” Respondents were explicitly told that the outcomes of the actions were certain and legal, and would deliver the same financial value to shareholders.

Money isn’t everything—even for investors

The results showed a clear deviation from the “Friedman doctrine” of shareholder primacy both for stock market investors and non-investors.

By “substantial margins,” corporate layoffs and CEO pay issues were the top-ranked concerns of respondents. Rankings were based on a scale of 1 to 10, with 10 being the most opposed to a specific corporate action or “most wrong.”

The team also found that:

• More than 85 percent of the respondents said that the company shouldn’t lay off workers “even if firing employees would provide a large, positive, and certain financial value for shareholders.”

• Confidence in corporate America would increase by 1 point on a 5 point scale if firms avoided CEO pay increases and 0.9 points if firms eschewed layoffs.

To be sure, respondents didn’t completely oppose budget cuts. Only 20 percent said the hypothetical company should forgo cost cutting after merging with another firm.

Still, Kempf says the data reveals how investors’ objectives often go deeper than increasing their wealth.

“Financial value for the company and for its shareholders is obviously a very important factor,” she says. “But people do seem to deviate from the pure Friedman idea that it's only financial value that matters.”

Probing the partisan divisions

The authors were surprised that respondents weren’t more concerned about diversity and energy. After all, the two issues are often prominently mentioned as top ESG-investment priorities by many fund managers and other investors.

But they note that survey results, which reflect the views of both Republican and Democrats, show clear partisan divisions on many issues.

“Fossil fuel usage and diversity targets are where we see the biggest partisan gaps,” says Kempf, who studies political polarization within the corporate world. “But it should be noted that there’s also much alignment on other issues, like on layoffs and increasing CEOs pay. There’s a surprising amount of agreement that those are morally questionable decisions.”

On average, Republicans are more likely than Democrats to prioritize financial values over social responsibilities.

A moral lens on business and stakeholders

To help gauge whether respondents were answering questions sincerely, the authors told survey participants that they might be selected, via a lottery, to receive $50 that they could either keep for themselves or donate to a real-world charity of their choice.

Respondents tended to “put their money where their mouths are” by donating the $50 to charities that align with their values rather than keep it, suggesting their preferences were genuine. Charities were selected to mirror the categories in the study: for instance, one of the charities, YWCA, focuses on empowering women and minorities.

The authors conclude that what ultimately drives respondents’ preferences: A moral view on corporate actions, specifically an outlook based on “moral universalism,” or a value system that takes into account the well-being of stakeholders, with an important dimension being how close or connected people feel to those stakeholders.

Kempf says the findings could help managers focus on the ethical or social efforts that matter most to their shareholders.

“If the goal of a company is to truly make shareholders better off, it’s important to understand what they’re really thinking, how the public perceives corporations, and how much backlash could there be to certain actions,” she explains.

Managers of ESG funds could also leverage the research to sharpen their investment strategies.

“There's now a huge asset management industry out there catering to (non-monetary) corporate issues,” says Kempf. “This could help them understand what people are looking for when they're evaluating corporate behavior and making investment decisions.”

Image by HBSWK with assets from AdobeStock.