Higher Highs and Lower Lows: The Role of Corporate Social Responsibility in CEO Dismissal

Research summary: Investing a firm's resources in corporate social responsibility (CSR) initiatives remains a contentious issue. While research suggests firm financial performance is the primary driver of CEO dismissal, we propose that CSR will provide important additional context when interpreting a firm's financial performance. Consistent with this prediction, our results suggest that past CSR decisions amplify the negative relationship between financial performance and CEO dismissal. Specifically, we find that greater prior investments in CSR appear to expose CEOs of firms with poor financial performance to a greater risk of dismissal. In contrast, greater past investments in CSR appear to help shield CEOs of firms with good financial performance from dismissal. These findings provide novel insight into how CEOs' career outcomes may be affected by earlier CSR decisions. Managerial summary: In this study, we examined a potential personal consequence for CEOs related to corporate social responsibility (CSR). We explored the role prior investments in CSR play when a board evaluates the firm's financial performance and considers whether or not to fire the CEO. Our results suggest that while financial performance sets the overall tone of a CEO's evaluation, CSR amplifies that baseline evaluation. Specifically, our results suggest that greater past investments in CSR appear to (a) greatly increase the likelihood of CEO dismissal when financial performance is poor, and (b) somewhat reduce the likelihood of CEO dismissal when financial performance is good. Thus, striving to deliver profits in a socially responsible manner may have both positive and negative personal consequences. Copyright © 2017 John Wiley & Sons, Ltd.     

Corporate responsibility and financial performance: the role of intangible resources

This paper examines the effects of a firm's intangible resources in mediating the relationship between corporate responsibility and financial performance. We hypothesize that previous empirical findings of a positive relationship between social and financial performance may be spurious because the researchers failed to account for the mediating effects of intangible resources. Our results indicate that there is no direct relationship between corporate responsibility and financial performance—merely an indirect relationship that relies on the mediating effect of a firm's intangible resources. We demonstrate our theoretical contention with the use of a database comprising 599 companies from 28 countries. Copyright © 2009 John Wiley & Sons, Ltd.     

Managers' conservatism and corporate performance

This article argues that conservatism as a personal value among senior managers significantly affects corporate performance. A scale to measure conservatism was developed and its measurement properties were tested on several hundred executives. Empirical results were consistent with the hypotheses that conservatism among senior management teams is negatively associated with the firm's social responsiveness as well as certain aspects of financial performance.     

Near and dear? The role of location in CSR engagement

Research summary : Building on economic geography and institutional theory, we develop and test theory relating geographic variables to the strength of corporate social responsibility (CSR) engagement and the cost of equity capital. For a large sample of U.S. firms over the period 1998–2009, we find strong and robust evidence that firms located in areas characterized by high levels of local CSR density score higher in CSR engagement. In addition, firms located close to major cities and financial centers exhibit higher CSR engagement compared to firms located in more remote areas. Moreover, the effect of CSR engagement on reducing equity financing costs is even greater for firms in high CSR density areas than for firms in low CSR density areas. Managerial summary : Does the location of CSR engagement by firms affect the strength of CSR engagement by their neighbors? Does the geography of engagement have an impact on financial performance? Our findings show that a firm's CSR engagement increases in areas where there is dense CSR engagement and when it is located near large cities. In these areas, norms, values, and knowledge related to CSR are transmitted to firms through face‐to‐face meetings and frequent social interactions with groups such as peers, labor unions, news media, universities, and community organizations, which tend to be concentrated in large cities. Our findings further highlight that CSR engagement reduces equity financing costs for firms in areas where CSR is widely practiced. Copyright © 2015 John Wiley & Sons, Ltd.     

Stepping across for social approval: Ties to independent foundations' boards after financial restatement

Research Summary: Integrating research on independent philanthropy and organizational misconduct, we argue that affiliations with independent foundations provide social approval benefits for firms that restate their financials. We use a panel of S&P 500 companies from 2004 to 2011 to investigate the addition of foundation board ties by restating firms. CEOs of restating firms add more new foundation board ties than CEOs of non‐restating firms, while existing corporate philanthropy and greater corporate reputation diminish this effect. We also find that new ties to foundations boards influences media tenor for restating firms more than it does for non‐restating peers. Our study offers a nuanced analysis of the post‐crisis actions of restating firms relative to non‐restating peers and highlights the relevance of ties to nonprofit boards for corporate governance. Managerial Summary: Firms oftentimes fire their top executives in the aftermath of misconduct, but such response is itself disruptive for the firm's operations. Instead, we suggest that forging ties to independent foundations can help firms in such contexts without unsettling effects. Our results show that, after a restatement event, CEOs of misconduct firms are especially likely to join new foundation boards as trustees and thus seem to be aware of the benefits of these associations. CEOs from firms with existing in‐house philanthropy or a high reputation do not join as many new foundations' boards of trustees. We also find that new firm‐foundation links are promptly and positively evaluated by the media, thus helping misconduct firms regain social approval.     

Executive turnover in the stock option backdating wave: The impact of social context

While boards are known to react to corporate misconduct by removing the executives responsible, little is known about whether the board's response is shaped by the firm's social context. Using the 2006 stock option backdating scandal, in which firms manipulated stock option grant dates, we examine the impact of two dimensions of social context—the pervasiveness of the misconduct and the media attention to the misconduct. We find that firms implicated later in the backdating scandal are less likely to experience executive turnover than those implicated earlier. We also find that the amount of media attention to backdating at the time a firm is implicated in the scandal increases the likelihood that the firm experiences executive turnover.Copyright © 2012 John Wiley & Sons, Ltd.     

Whom are you promoting? Positive voluntary public disclosures and executive turnover

Research summary: This paper uses signaling theory to bring together two complementary research streams that have largely ignored each other: strategic human resource management and media relations management. We argue that when publicly traded firms voluntarily and publicly disclose positive information about their value creation and appropriation activities, they also send positive signals to managerial labor markets regarding executives' capabilities. Accordingly, we hypothesize a positive association between public disclosures and voluntary executive turnover. An analysis of pharmaceutical and communications equipment firms from 1990 to 2004 supports this prediction, underscoring the need to understand better the effects of voluntary public disclosures on a firm's ability to protect its human capital. More generally, our results highlight the importance of considering the impact of a single signal on multiple receivers. Managerial summary: Given the organizational benefits of positive media coverage, the considerable effort that firms put into managing their image in the media is not surprising. We argue and show, however, that when a firm enhances its public image it also improves its executives' positions in the managerial labor market and, by so doing, increases their likelihood of voluntarily leaving the firm. In particular, we find that corporate press releases, an important mechanism for managing information released in the public domain to signal a firm's competitive advantages, may result in unintentional loss of senior management talent. This trade‐off suggests that firms should increase coordination between their strategy, human resources, and corporate communications/investor relations departments to ensure that they collectively weigh the benefits and costs of publicly disclosing value‐relevant information. Copyright © 2015 John Wiley & Sons, Ltd.     

Firm litigation risk and the insurance value of corporate social performance

This paper advances the risk management perspective that superior social performance enhances firm value by serving as an ex ante valuable insurance mechanism. We posit that good social performance is more valuable as an insurance mechanism for firms with higher litigation risks. Moreover, value generation of corporate social performance (CSP) depends on whether a firm has gained pragmatic legitimacy (i.e., a firm's financial health) and moral legitimacy (i.e., whether or not a firm operates in a socially contested industry) among its stakeholders. We find that the value of CSP as insurance against litigation risk is practically significant, adding 2 to 4 percent to firm value. But CSP is less likely to create value if the firm is in financial distress or is operating in socially contested industries. Copyright © 2013 John Wiley & Sons, Ltd.     

Does it pay to be really good? addressing the shape of the relationship between social and financial performance

Building on the theoretical argument that a firm's ability to profit from social responsibility depends upon its stakeholder influence capacity (SIC), we bring together contrasting literatures on the relationship between corporate social performance (CSP) and corporate financial performance (CFP) to hypothesize that the CSP‐CFP relationship is U‐shaped. Our results support this hypothesis. We find that firms with low CSP have higher CFP than firms with moderate CSP, but firms with high CSP have the highest CFP. This supports the theoretical argument that SIC underlies the ability to transform social responsibility into profit. Copyright © 2012 John Wiley & Sons, Ltd.     

Institutional ownership,capital structure,and firm performance

In most studies of ownership and firm performance, researchers have assumed different forms of ownership do not interact in their effect on firm strategy or performance. Focusing on the role of institutional owners, this study poses two related questions: (1) What are the relationships between outside institutional shareholdings, on the one hand, and a firm's capital structure and performance, on the other? and; (2) Does the size of stockholdings by corporate executives, family owners, and insider-institutions modify those relationships? The data, collected from 40 pairs of manufacturing firms selected from as many industries over a 3-year period, shows that the size of outside institutional stockholdings has a significant effect on the firm's capital structure. We have also found that family and inside institutional owners' shareholdings moderate the relationship between outside institutional shareholdings and capital structure. Likewise, corporate executives' shareholdings supplement the relationship between outside institutional shareholdings and firms' performance. These findings suggest that internal and external coalitions interact with each other to influence the firm's conduct.     

The impact of earnings expectations on corporate downsizing

Research Summary: We propose that due to financial market pressures, managers are forward‐looking in their search and decision processes and focus on meeting performance targets set by the financial community. Using panel data on S&P 100 companies, we find that pressure felt by management to meet the analyst consensus earnings estimate influences the extent of corporate downsizing. Moreover, our results show that high levels of institutional investor stock ownership and CEO power attenuate managers’ sensitivity to financial market pressures, while high levels of analyst coverage increase their sensitivity. Managerial Summary: In this study we examine how financial market pressures influence managers’ downsizing decisions. We argue that investment analysts’ earnings estimates represent important performance targets to which managers aspire. If firms fail to meet analysts’ expectations, the stock price will suffer. This study shows that managers utilize corporate downsizing to address the potential shortfall between a firm's future performance and the analyst consensus earnings estimate. In addition, we find that managers’ concerns over meeting analysts’ earnings estimates are influenced by various contextual factors such as institutional investor stock ownership, CEO power, and high levels of analyst coverage.     

Measuring and Utilizing Corporate Risk Tolerance to Improve Investment Decision Making

Strategic investment decisions are generally characterized by financial risk as well as an irrevocable commitment of significant amounts of capital. The firm's willingness to undertake financial risks plays an important role in the investment decision making process. A comprehensive economic decision analysis to evaluate strategic investment decisions requires a measure of the firm's tolerance for financial risk. This article describes a decision analysis–based technique for assessing managerial risk tolerance as well as managers' ability to be consistent in terms of their financial risk taking. These assessments are then utilized to assist the firm in establishing a corporate risk policy that can guide strategic decisions under uncertainty. The study firm is a business unit within a U.S.-based major oil company with an annual capital budget of approximately $400 million. Our findings suggest that managers are generally risk averse but struggle in terms of being consistent in their financial risk-taking decisions. This work enabled the firm to implement a financial risk tolerance that could be utilized in the economic decision analysis of investment decisions.     

Factors influencing divestment decision-making: Evidence from a field study

This research investigates factors which influenced the corporate-level divestment decisions of large, diversified firms. Field research, including interviews with corporate executives of 40 large diversified firms, provided the data to test propositions developed from various literature sources. In general, thefindings from this research indicate that a business unit's strength, its relationship to other units in its firm and its parent firm's financial position compared to its competitors are important divestment influences, whereas other factors such as general economic conditions are not. Some of the findings are consistent with conventional management wisdom, but others are counterintuitive.     

How do country‐level governance characteristics impact the relationship between R&D and firm value?

This article addresses the question of how country‐level governance characteristics moderate the market valuation of research and development (R&D). Using a valuation model and panel data from companies in the European Union, United States, and Japan, we find that effective corporate governance allows the market to better assess a firm's R&D investments. This finding is the conjunction with the effect of the legal system, the financial system, and mechanisms of control. First, as effectiveness of investor protection increases, the market valuation of R&D projects also increases. Second, more developed financial systems do a better job assessing R&D. Third, effective control mechanisms reinforce the positive effect of R&D on a firm's market value. In sum, our findings shed light on how policymakers can increase the benefits from firms' R&D spending and thus foster economic growth and social welfare using these country‐level governance characteristics.     

Awards: A strategic management perspective

Research summary : Awards are a valuable strategic resource. Motivation theory and the emerging body of empirical literature suggest that awards can have a significant effect on employee motivation and corporate performance, though not always in the intended direction. Awards can also destroy value. The organizational award literature has so far largely neglected this important issue. We develop a synthesis of the dimensions critical for successful award bestowals, and analyze under which conditions awards generate firm‐specific value that is sustained and difficult for competitors to imitate. The process of value creation and capture is contingent on the given firm's organizational characteristics and nature of production. The article concludes by laying out empirical implications. JEL codes: M52, M54, J24, J30. Managerial summary : Awards are widely used in the corporate sector. They fundamentally differ from monetary incentives, which risk crowding out employees' intrinsic motivation. Among the variety of awards, two general types can be distinguished: confirmatory awards based on explicit, pre‐determined performance criteria, and discretionary awards, which rely on broad performance evaluations and may be used ex post to honor outstanding performance. Appropriately designed and adjusted to the specific firm's characteristics, awards enhance employees' motivation and corporate performance. They express recognition and support their recipients' perceived competence and social status. Awards help to retain valuable employees and to establish role models. However, awards may also backfire, for instance, when they provoke envy among coworkers. We propose when awards risk destroying value and when they are particularly useful. Copyright © 2015 John Wiley & Sons, Ltd.     

The relationship between corporate social responsibility and shareholder value: an empirical test of the risk management hypothesis

Do shareholders gain when managers disperse corporate resources through activities classified as corporate social responsibility (CSR)? Strategy scholars have recently developed a theoretical model that links such activities to shareholder value when a firm suffers a negative event; we test key portions of this theory of the ‘insurance‐like’ property of CSR activity. We posit that such activity leads to positive attributions from stakeholders, who then temper their negative judgments and sanctions toward firms because of this goodwill. We extend the risk management model by theorizing that some types of CSR activities will be more likely to create goodwill and offer insurance‐like protection than other types. We delineate several firm and event specific characteristics that we expect to influence the link between CSR activities and an insurance effect. We then test our model using an event study of 178 negative legal/regulatory actions against firms throughout the 11 years from 1993–2003. We find that participation in institutional CSR activities—those aimed at a firm's secondary stakeholders or society at large—provides an ‘insurance‐like’ benefit, while participation in technical CSRs—those activities targeting a firm's trading partners—yields no such benefits. We conclude by considering the implications of our findings for future theorizing and research into the economic value of CSR engagement. Copyright © 2008 John Wiley & Sons, Ltd.     

Stock market reaction to CEO certification: the signaling role of CEO background

As a direct result of the corporate scandals that started with Enron and led to general unrest in the financial markets, the Securities and Exchange Commission required chief executive officers (CEOs) and chief financial officers of large publicly traded companies to certify their financial statements. Using market signaling theory, we propose that attributes of the CEO send important signals to the investment community as to the credibility of the CEO certification and thus the quality of the firm's financial statements, which in turn impact the stock market reaction to the CEO certification. We find that a CEO's shareholdings and external directorships are positively related to the abnormal returns of CEO certification. Further, the stock market penalizes a firm with a CEO who is associated with the firm's prior financial restatement and rewards a firm with a CEO who is appointed after the firm's prior financial restatement. Copyright © 2009 John Wiley & Sons, Ltd.     

The informational relevance of corporate social responsibility: evidence from DS400 index reconstitutions

This study examines the relationship between corporate social responsibility and financial performance by analyzing the intra‐industry wealth impact of additions and deletions to the Domini Social 400 index. Results from the event study analysis indicate that additions to the index generate a positive share price response for the announcement firm and a negative response by rival firms. The opposite reaction is observed for index deletions. Additionally, the share price response is more pronounced for informationally opaque industries. Our study highlights the importance of external monitoring agencies in providing meaningful information that helps resolve investor uncertainty regarding the quality of a firm's relationships with its primary stakeholders. Copyright © 2011 John Wiley & Sons, Ltd.     

Is doing more doing better? The relationship between responsible supply chain management and corporate reputation

Responsible supply chain management (RSCM) can help protect a firm's corporate reputation by shielding it from negative media attention and consumer boycotts. RSCM can also enhance a firm's corporate reputation, which allows firms to secure business contracts and penetrate new market segments successfully. This study empirically examines: (i) the extent to which responsible supply chain management practices is driven by a desire to protect corporate reputation; and (ii) whether responsible supply chain management can enhance corporate reputation and thereby generate competitive advantage to the firm. We draw on primary and secondary datasets across seven firms, spanning the publishing, technology, beverage, tobacco, finance and home improvement sectors. We find compelling evidence to suggest that firms often engage in RSCM due to a desire to protect corporate reputation. Similarly, we find empirical evidence to suggest that responsible supply chain practices can enhance reputation and thereby create competitive benefits, although this link is not as profound as the relationship between RSCM and reputation protection and there are significant variations across industries. These findings have significant implications for marketing theory and, in particular, industrial marketers, who are increasingly expected to implement responsible supply chain practices.     

Corporate ownership and managerial short-termism: Results from a Finnish study of management perceptions

Increased media exposure to layoffs and corporate quarterly financial reporting have created arguable a common perception—especially favored by the media itself—that the companies have been forced to improve their financial performance from quarter to quarter. Academically, the relevant question is whether companies themselves feel that they are exposed to short-term pressure to perform even if it means that they have to compromise company's long-term future. This paper studies this issue using results from a survey conducted among the 500 largest companies in Finland. The results indicate that companies in general feel moderate short-term pressure, with reasonable dispersion across firms. There seems to be a link between the degree of pressure felt, and the firm's ownership structure, i.e. we find some support for the existence of potentially short-term versus long-term owners. We also find significant ownership related differences, in line with expectations, in how such short-term pressure is reflected in actual decision variables such as the investment criteria used.