Shareholder proposals are non-binding and often face high rejection rates in annual general meetings. However, we draw on stakeholder theory to argue that firms are sensitive to shareholder activism by adopting a holistic approach to corporate legitimacy, extending beyond merely satisfying activists’ demands to consider the broader implications for other stakeholders. Drawing on a longitudinal sample of S&P 500 firms, we show that the intensity of governance and environmental and social shareholder activism positively impacts firms’ governance and socio-environmental performance in subsequent years. Interestingly, we also uncover that firms not only act on their non-financial performance in the areas explicitly advocated by shareholder activists, but, also, in related issues. Moreover, we find that under exposure to reputational threats these indirect effects are boosted. Our findings contribute to advance stakeholder theory by refining our understanding of firms’ responses to external pressures and by offering deeper insights into shareholder activism’s impact on non-financial performance.
