Abstract
We develop a theory of stakeholder governance examining how green stakeholders influence organizations. Conflicts of interest arise from heterogeneous green preferences and intensify as they diverge. Changes in green preferences can generate unexpected outcomes by shifting control rights: greener stakeholders may reduce organizational sustainability, while browner ones might enhance it. We show that a top-down approach consistently improves organizational sustainability, while a bottom-up approach can harm it. We also uncover an asymmetry in compensation and delegation decisions between green and brown principals, driven by the public good nature of social payoffs. These findings have implications for manager–employee, investor–entrepreneur, and board–CEO relationships.