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

Abstract

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.

Changing words: How temporal consistency in a CEO's use of language toward shareholders and stakeholders affects CEO dismissal

“…From the perspective of outside directors who adopt shareholder-value principle, the CEO's focus on stakeholder-related activities is considered to be wasteful at worst and irrelevant at best (Jensen, 2001;Sundaram & Inkpen, 2004). Consistent with this argument, Coombs and Gilley (2005) found that directors punish CEOs who pursue stakeholderrelated activities by reducing their salaries, and Hubbard et al (2017) found that directors are likely to fire CEOs who engage in CSR activities, especially in the midst of poor financial performance.…”

“…In the United States, directors are expected to adopt the shareholder‐value orientation when they perform their duty (Hubbard, Christensen, & Graffin, ; Tuggle, Sirmon, Reutzel, & Bierman, ). Because the business environment emphasizes directors' role as independent, vigilant monitors who ensure that the CEO focuses on shareholder value, directors may look for signs of the CEO's attention to shareholder value when they evaluate the CEO.…”

“…In the United States, directors are expected to adopt the shareholder-value orientation when they perform their duty (Hubbard, Christensen, & Graffin, 2017;Tuggle, Sirmon, Reutzel, & Bierman, 2010 (Boivie, Bednar, Aguilera, & Andrus, 2016;Forbes & Milliken, 1999). As such, directors' decisions about CEOs are shaped by subjective indicators of shareholder-value orientation, including language that signals the CEO's espousal of shareholder-value principle.…”

“…Hubbard et al () used a sample based on Fortune 500 firms spanning the years 2003–2008 and identified 28.9% of succession cases in their sample as dismissals. Wiersema and Zhang () used a sample based on S&P 500 companies for the years 2000–2005 and classified 30.0% of succession cases as dismissals.…”

Determinants of Corporate Environmental and Social Disclosures in China: A Comparative Study within High-profile Industries

“…The first stream includes studies on developing the measures and the instruments of corporate social responsibility, involving mainly the scale of CSR based on stakeholders' perception or from institutional demand (Lu & Abeysekera, 2017;Chow & Chen, 2012;Zhang et al, 2014;Ong et al, 2016). Another stream focuses on the drivers of CSR, including testing the relevance of CSR with firm performance (Zhu & Zhang, 2015;Chen et al, 2018), corporate governance (Jo & Harjoto, 2012;Flammer et al, 2017;Hubbard et al, 2017;Harjoto & Jo, 2011), or ownership structures (Khan et al, 2013;Li & Zhang 2010;Ghazali, 2007).…”