Business Across Borders

Community Benefits Agreements (CBAs) Can Significantly Impact a Company’s Market Value

Without a signed CBA, local communities with strong property rights and/or history of protest are more likely to cause companies costly disruptions and delays.

Across industries ... a well-located site or a land area rich in natural resources – requires the consent of the local community.

Recent court battles and protest movements related to the Dakota Access oil pipeline have brought national attention to the ways large-scale projects can transform local communities, and vice versa. As this example illustrates, conflicts between companies and community leaders can result in increased operational costs, lowered market value, and blocked entry to new markets.
New research by NYU Stern Professor Sinziana Dorobantu and co-author, Kate Odziemkowska, documents the impact of Community Benefits Agreements (CBAs) – legally enforceable contracts that govern relationships between companies and local communities and ensure compensation for a community’s resources – on a company’s bottom line.
In this first-of-its-kind study, the co-authors calculated the probability that a company will sign a CBA and analyzed market reactions to the unexpected announcement of nearly 150 agreements between local indigenous communities and Canadian mining companies. Because information about compensation remains classified even after signing, the market response reflects shareholders’ perception of the value of the agreement itself rather than its specific terms. 
The researchers found:
  • Local communities with strong property rights, a history of social protests, and/or a history of legal action are more likely to conflict with a company, leading to disruption, delays, and a negative impact on value.
  • CBAs are intended to minimize conflicts that may disrupt access to resources by establishing a legally binding contract between companies and local communities, wherein the community consents to the development of a project with an agreed upon distribution of value.
  • Although CBAs can enhance access to land and other resources, they are costly for companies, and shareholders do not always consider them to be an added value. However, when communities have strong property rights or histories of action, shareholders view CBAs more favorably and market value increases correspondingly. 
The latest in a series of work on shareholder and stakeholder relationships, this study offers important insight for companies as they embark on projects with significant impact on local communities. “Across industries, from mining to real estate to the energy sector,  access to specific resources –   a well-located site or a land area rich in natural resources – requires the consent of the local community,” Professor Dorobantu explained. “Without it, operations are often disrupted, leading to costly adjustments, damaged reputations, and heightened social conflict.”
The working paper, “Valuing Stakeholder Governance: Property Rights, Stakeholder Mobilization, and the Value of Community Benefits Agreements,” is now available on SSRN.