We provide a theoretical framework showing how CSR activities can insure a firm against lost reputation in the face of adverse events. We offer evidence for this linkage through a case study and a multi-year analysis of stock price responses for S&P 500 companies following product recalls. We find that firms with better CSR ratings fare better than those that do not. Furthermore, a firm that is exceptional in both doing good and avoiding harm suffers virtually no reputational damage following events. Using the results of the study, we offer a guide to managers for determining the appropriate amount and mix of CSR to undertake.
Research Summary: This study examines the integration of corporate social responsibility (CSR) criteria in executive compensation, a relatively recent practice in corporate governance. We construct a novel database of CSR contracting and document that CSR contracting has become more prevalent over time. We further find that the adoption of CSR contracting leads to (a) an increase in longterm orientation; (b) an increase in firm value; (c) an increase in social and environmental initiatives; (d) a reduction in emissions; and (e) an increase in green innovations. These findings are consistent with our theoretical arguments predicting that CSR contracting helps direct management's attention to stakeholders that are less salient but financially material to the firm in the long run, thereby enhancing corporate governance. Managerial Summary: This paper examines the effectiveness and implications of integrating environmental and social performance criteria in executive compensation (CSR contracting)-a recent practice in corporate governance that is becoming more and more prevalent. We show that CSR contracting mitigates corporate shorttermism and improves business performance. Firms that adopt CSR contracting experience a significant increase in firm value, which foreshadows an increase in long-term operating profits. Furthermore, firms that adopt CSR contracting improve their environmental and social performance, especially with respect to the environment and local communities. Overall, our findings suggest that CSR contracting directs management's attention to stakeholders that are less salient but financially material to the firm in
We link the corporate governance literature in financial economics to the agency cost perspective of Corporate Social Responsibility (CSR) to derive theoretical predictions about the relationship between corporate governance and the existence of executive compensation incentives for CSR. We test our predictions using novel executive compensation contract data, and find that firms with more shareholder-friendly corporate governance are more likely to provide compensation to executives linked to firm social performance outcomes. Also, providing executives with direct incentives for CSR is an effective tool to increase firm social performance. The findings provide evidence identifying corporate governance as a determinant of managerial incentives for social performance, and suggest that CSR activities are more likely to be beneficial to shareholders, as opposed to an agency cost.
We link the corporate governance literature in financial economics to the agency cost perspective of Corporate Social Responsibility (CSR) to derive theoretical predictions about the relationship between corporate governance and the existence of executive compensation incentives for CSR. We test our predictions using novel executive compensation contract data, and find that firms with more shareholder-friendly corporate governance are more likely to provide compensation to executives linked to firm social performance outcomes. Also, providing executives with direct incentives for CSR is an effective tool to increase firm social performance. The findings provide evidence identifying corporate governance as a determinant of managerial incentives for social performance, and suggest that CSR activities are more likely to be beneficial to shareholders, as opposed to an agency cost.
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