Financial participation in Finland: incidence and determinants

How history can inform corporate responsibility: the statutory rule of profit allocation

Purpose

This study aims to present how a historical governance mechanism (a statutory rule of profit allocation) could answer the practical question of profit allocation, thereby proposing a methodology to enhance future quantitative studies.

Design/methodology/approach

The rule sets profit allocations to a predetermined set of stakeholders in corporate charters. It could be seen as a tool used by historical organisations to enact corporate social responsibility (CSR). The authors propose a straightforward way to calculate the payout ratios promised by this rule to each stakeholder. This methodology was applied to shareholders and used to calculate the promised dividend payout ratios.

Findings

This rule constitutes a natural experiment from which modern organisations could learn to implement the most relevant profit-allocation schemes given their CSR strategy. The authors propose calculating a promised payout ratio that would allow scholars to empirically examine the rule and its effects and provide accurate recommendations to these organisations.

Research limitations/implications

This mechanism allows the study of profit allocations made to stakeholders (not limited to shareholders or employees like it is usually done). The promised payout ratio makes future quantitative investigations possible.

Practical implications

Modern organisations could use the CSR mechanism to allocate profits continuously in formats that would best fit their strategy and environment.

Originality/value

To the best of the author’s knowledge, this is the first article to examine the statutory rule of profit allocation per se, which proposes a new methodology to calculate payout ratios promised by the rule. The idea is to investigate their impact and provide recommendations for modern organisations to adapt.