Prosocial managers, employee motivation, and the creation of shareholder value

We argue that when contracts are incomplete it is not necessarily in the interest even of money maximizing shareholders to pick a manager who intends to maximize shareholder value. We first show in a formal model, as well as using observational data from over 900 firms and in a series of lab experiments that choosing a manager who has a preference to spend resources for social causes can increase employee motivation. In turn, losses in shareholder value due to investments in social causes may be offset by gains in employees' performance. The selection of a manager with social interests serves as a commitment device that raises employee motivation.