Warning to CEOs - CSR May Get You Fired, Study Finds
24 October 2017 at 10:07 am
Investing in product safety, employee diversity and carbon footprint reduction are all examples of corporate social responsibility (CSR) that can result in high praise for a chief executive – or get them fired, according to new research from the US University of Notre Dame.
The study Higher Highs and Lower Lows: The Role of Corporate Social Responsibility in CEO Dismissal found that when CEOs chose to invest in CSR, it changed the likelihood they would be fired based on the firm’s financial returns.
“If a CEO has invested in CSR and the firm performs poorly, they are much more likely to be dismissed,” co-author and behavioural strategist Tim Hubbard said.
“On the other hand, if they have invested in CSR and the firm performs well, they are less likely to be fired. This shows that CSR investments can be a double-edged sword — do well and they’ll buffer you from dismissal, do poorly and you’re more likely lose your job.”
The research showed that the effects of a CEO’s past investments in CSR were substantial and could linger.
“CEOs running firms with higher levels of CSR are 84 per cent more likely to be dismissed when financial performance is poor, compared to their counterparts at firms with lower levels of CSR,” Hubbard said.
“However, research also indicates that prior CSR investments reduce a CEO’s likelihood of dismissal by 53 per cent when profits are higher.”
The researchers examined all CEO transitions in the Fortune 500 from 2003 to 2008 to assess whether or not they were voluntary or the CEO was fired. They looked at each company’s prior corporate social activities based on third-party assessments and their financial performance, then assessed how CSR and financial returns worked together to lead to CEO dismissal.
Hubbard said as a consequence, stakeholders interested in seeing a CSR uptick, should understand that “CEOs make such investments at great personal risk”.
“It’s important for us to understand the personal consequences CEOs face when investing in CSR,” he said.
“Investments in CSR continue to rise and they are becoming an integral part of modern corporations. At the same time, these highly visible investments are not always profitable.
“Indeed, studies have not been conclusive on whether there is a clear link between CSR investments and profitability.This leads these highly visible decisions to be scrutinised and contested.”
Hubbard said the purpose of a company was to produce a profit, but it was also becoming well accepted that this should be accomplished in a “socially responsible manner”.
“If shareholders and boards expect CEOs to take these actions, they may need to consider incentives and compensation schemes that protect them in some way,” he said.
“That would help the CEO to be more comfortable making these contentious, highly scrutinised investments.”