Managing the Conflicting Interests of Workers and Shareholders: Evidence from Pension-Assumption Manipulations

Whereas research on corporate governance typically attends to the conflicting interests between shareholders and executives, in practice executives must frequently adjudicate the demands of multiple stakeholders. To investigate how executives cope with the divergent interests of workers and shareholders, the author examines how much firms claim they will earn on the assets in their defined benefit (DB) pension plans. In a DB arrangement, employees forgo wages in the present in order to receive postretirement income, and they rely on executives to properly fund and manage plan assets. Executives, however, can increase the amount they expect the firm to earn on plan assets, which increases firm earnings in the current period but may undermine workers’ retirement security if expectations do not match actual returns over time. The author shows that the influence and interests of employees and shareholders as well as the decision-making schemas of the CEO affect whether executives exercise this discretion.