Journal of Business Ethics

, Volume 104, Issue 2, pp 159–173

Vice or Virtue? The Impact of Corporate Social Responsibility on Executive Compensation

Article

Abstract

We empirically examine the impact of corporate social responsibility (CSR) on CEO compensation using a large sample of the US firms from 1996 to 2010. We develop and test two hypotheses, the overinvestment hypothesis based on agency theory and the conflict–resolution hypothesis based on stakeholder theory. We find that the lag of CSR adversely affects both total compensation and cash compensation, after controlling for various firm and board characteristics. Our estimates show that an interquartile increase in CSR is followed by a 4.35% (2.78%) decrease in total (cash) compensation. We also find an inverse association between lagged employee relations and CEO compensation. Our results are robust to the correction for endogeneity using instrumental variable approach. Taken together, our results support the conflict–resolution hypothesis, but not the CSR overinvestment argument.

Keywords

Corporate social responsibility Executive compensation Conflict resolution 

References

  1. Adams, R., & Ferreira, D. (2007). A theory of friendly boards. Journal of Finance, 62, 217–250.CrossRefGoogle Scholar
  2. Aguilera, R., Rupp, D., Williams, C., & Ganapathi, J. (2007). Putting the S Back in CSR: A multi-level theory of social change in organizations. Academy of Management Review, 32(3), 836–863.CrossRefGoogle Scholar
  3. Angrist, J. (2000). Estimation of limited-dependent variable models with dummy endogenous regressors: Simple strategies for empirical practice. NBER#248.Google Scholar
  4. Baker, Jensen, G. M., & Murphy, K. (1988). Compensation and incentives: Practice vs. theory. Journal of Finance, 43, 593–616.CrossRefGoogle Scholar
  5. Barnea, A., & Rubin, A. (2010). Corporate social responsibility as a conflict between shareholders. Journal of Business Ethics, 97, 71–86.CrossRefGoogle Scholar
  6. Baron, D., Harjoto, M., & Jo, H. (2010). The economics and politics of corporate social performance. Working Paper, Stanford University.Google Scholar
  7. Bebchuk, L., & Fried, J. (2003). Executive compensation as an agency problem. Journal of Economic Perspective, 17, 71–92.CrossRefGoogle Scholar
  8. Bertrand, M., & Mullainathan, S. (2001). Are CEOs rewarded for luck? The ones without principals are. Quarterly Journal of Economics, 116, 901–932.CrossRefGoogle Scholar
  9. Biggs, J. (2005). Executive compensation: Perspectives from a former CEO. Columbia University Symposium Paper.Google Scholar
  10. Black, F., & Scholes, M. (1973). The pricing of options and corporate liabilities. Journal of Political Economy, 81, 637–659.CrossRefGoogle Scholar
  11. Bogle, J. (2008). Reflections on CEO compensation. Academy of Management Perspectives, 22, 21–25.CrossRefGoogle Scholar
  12. Boone, A., Field, L., Karpoff, J., & Raheja, C. (2007). The determinants of corporate board size and composition: An empirical analysis. Journal of Financial Economics, 85, 66–101.CrossRefGoogle Scholar
  13. Brickley, J., Coles, J., & Jarrell, G. (1997). Leadership structure: Separating the CEO and chairman of the board. Journal of Corporate Finance, 3, 189–220.CrossRefGoogle Scholar
  14. Calton, J., & Payne, S. (2003). Coping with paradox. Business and Society, 42, 7–42.CrossRefGoogle Scholar
  15. Carlin, P. (1995, February 5). Pure profit—For small companies that stress social values as much as the bottom line, growing up hasn’t been an easy task. Just Ask Ben & Jerry’s, Patagonia and Starbucks, Los Angeles Times.Google Scholar
  16. Carroll, A. (1979). A three-dimensional conceptual model of corporate social performance. Academy of Management Review, 4, 497–505.Google Scholar
  17. Carroll, A. (1991). The pyramid of corporate social responsibility: Toward the moral management of organizational stakeholders. Business Horizons, 34, 39–48.CrossRefGoogle Scholar
  18. Carroll, A. (1999). Corporate social responsibility. Business and Society, 38(3), 268.CrossRefGoogle Scholar
  19. Cespa, G., & Cestone, G. (2007). Corporate social responsibility and managerial entrenchment. Journal of Economics and Management Strategy, 16, 741–771.CrossRefGoogle Scholar
  20. Chatterji, A. D. L., & Toffel, M. (2009). How well do social ratings actually measure corporate social responsibility? Journal of Economics and Management Strategy, 18, 125–169.CrossRefGoogle Scholar
  21. Chung, K., & Jo, H. (1996). The impact of security analysts’ monitoring and marketing functions on the market value of firms. Journal of Financial and Quantitative Analysis, 31(4), 493–512.CrossRefGoogle Scholar
  22. Chung, K., & Pruitt, S. A. (1994). A simple approximation of Tobin’s q. Financial Management, 23, 70–74.CrossRefGoogle Scholar
  23. Core, J. R. H., & Larcker, D. (1999). Corporate governance, chief executive officer compensation and firm performance. Journal of Financial Economics, 51, 371–406.CrossRefGoogle Scholar
  24. Cronqvist, H., Heyman, F., Nilsson, M., Svaleryd, H., & Vlachos, J. (2009). Do entrenched managers pay their workers more? Journal of Finance, 64(1), 309–339.CrossRefGoogle Scholar
  25. Desai, S., Brief, A., & George, J. (2010). When executive rake in millions: Meanness in organizations. Working Paper, Harvard University, Presented at the 23rd Annual International Association of Conflict Management conference, Boston, MA, June 24–27.Google Scholar
  26. DesJardins, J. (2009). An introduction to business ethics. New York: McGraw Hill Higher Education.Google Scholar
  27. Donaldson, T., & Preston, L. (1995). The stakeholder theory of the corporation: Concepts, evidence, and implications. Academy of Management Review, 20(1), 65–91.Google Scholar
  28. Fama, E., & French, K. (1997). Industry costs of equity. Journal of Financial Economics, 43, 153–197.CrossRefGoogle Scholar
  29. Fisman, R., Heal, G., & Nair, V. (2005). A model of corporate philanthropy. Working Paper, Columbia University.Google Scholar
  30. Florin, B. Hallock, K. F., & Webber, D. (2010). Executive pay and firm performance: methodological considerations and future directions. Working Paper, Cornell University ILR School.Google Scholar
  31. Freeman, R. (1984). Strategic management: A stakeholder approach. Boston, MA: Pitman Publishing Inc.Google Scholar
  32. Friedman, M. (1970). Money and income: comment on Tobin. Quarterly Journal of Economics, 84, 318–327.CrossRefGoogle Scholar
  33. Frydman, C., & Jenter, D. (2010). CEO compensation. Working Paper, Massachusetts Institute of Technology and Stanford University.Google Scholar
  34. Gatewood, R., & Carroll, A. (1991). Assessment of ethical performance of organization members: A conceptual framework. Academy of Management Review, 16(4), 667–690.Google Scholar
  35. Harjoto, M., & Jo, H. (2011). Corporate governance and CSR nexus. Journal of Business Ethics, 100(1), 45–67.Google Scholar
  36. Harris, M., & Raviv, A. (2008). A theory of board control and size. Review of Financial Studies, 21(4), 1797–1832.CrossRefGoogle Scholar
  37. Hennigan, M. (2007, December 19). Executive pay and inequality in the winner-take-all society. Finfacts Business News Center.Google Scholar
  38. Hermalin, B. (2005). Trends in corporate governance. Journal of Finance, 60(5), 2351–2384.CrossRefGoogle Scholar
  39. Hill, R. P., Ainscough, T., Shank, T., & Manullang, D. (2007). Corporate social responsibility and socially responsible investing: A global perspective. Journal of Business Ethics, 70, 165–174.CrossRefGoogle Scholar
  40. Hillman, A., & Keim, G. (2001). Shareholder value, stakeholder management and social issues: What’s the bottom line? Strategic Management Journal, 22, 125–139.CrossRefGoogle Scholar
  41. Hwang, B., & Kim, S. (2009). It pays to have friends. Journal of Financial Economics, 93, 138–158.CrossRefGoogle Scholar
  42. Jensen, M. (2002). Value maximization, stakeholder theory, and the corporate objective function. Business Ethics Quarterly, 12, 235–256.CrossRefGoogle Scholar
  43. Jensen, M., & Meckling, W. (1976). Theory of firm: Managerial behavior, agency costs, and capital structure. Journal of Financial Economics, 3, 305–360.CrossRefGoogle Scholar
  44. Jensen, M., & Murphy, K. (1990). Performance pay and top management incentives. Journal of Political Economy, 98(2), 225–264.CrossRefGoogle Scholar
  45. Jo, H., & Harjoto, M. (2011a). The causal effect of corporate governance on corporate social responsibility. Working Paper, Santa Clara University.Google Scholar
  46. Jo, H., & Harjoto, M. (2011b). Corporate governance and firm value: The impact of corporate social responsibility. Journal of Business Ethics (in press).Google Scholar
  47. Mahoney, L., & Thorne, L. (2005). Corporate social responsibility and long-term compensation: Evidence from Canada. Journal of Business Ethics, 57, 241–253.CrossRefGoogle Scholar
  48. Mahoney, L., & Thorne, L. (2006). An examination of the structure of executive compensation and corporate social responsibility: A Canadian Investigation. Journal of Business Ethics, 69, 149–162.CrossRefGoogle Scholar
  49. McWilliams, A., & Siegel, D. (2001). Corporate social responsibility: A theory of the firm perspective. Academy of Management Review, 28, 117–127.Google Scholar
  50. Milbourn, T. (2003). CEO reputation and stock-based compensation. Journal of Financial Economics, 68(2), 233–262.CrossRefGoogle Scholar
  51. Moffitt, R. (1999). New developments in econometric methods for labor market analysis. In O. Ashenfelter & D. Card (Eds.), The handbook of labor economics, Chap. 24 (Vol. IIIA). Amsterdam: North-Holland.Google Scholar
  52. Moriarty, J. (2005). Do CEOs get paid too much? Business Ethics Quarterly, 15(2), 257–281.Google Scholar
  53. Murphy, K. (1999). Executive compensation. Amsterdam: North Holland.Google Scholar
  54. O’Brien G. (2010, April 4). The week in ethics: The hidden costs in excessive executive compensation. The Week in Ethics: Columns on Ethics, Leadership, and Life.Google Scholar
  55. Piore, A. (2010, July 12). Talking to shareholders: The IR charm offensive. IR Magazine-Inside Investor Relations.Google Scholar
  56. Pitman, J. (2009, July). Bonfire of the bonuses. Management Today, pp. 47–51.Google Scholar
  57. Posner, R. (2009). Are American CEOs overpaid, and, if so, what should be done about it? Duke Law Journal, 58, 1013–1048.Google Scholar
  58. Potts, M. (2006). CEO compensation and virtue ethics. In R. W. Kolb (Ed.), The ethics of executive compensation. Oxford: Blackwell Publishing Ltd.Google Scholar
  59. Raheja, C. (2005). Determinants of board size and composition: A theory of corporate boards. Journal of Financial and Quantitative Analysis, 40, 283–306.CrossRefGoogle Scholar
  60. Ricart, J., Rodriguez, M., & Sanchez, P. (2005). Sustainability in the boardroom: An empirical investigation of Dow Jones Sustainability World Index leaders. Corporate Governance, 5, 24–41.CrossRefGoogle Scholar
  61. Rosen, S. (1982). Authority, control, and the distribution of earnings. Bell Journal of Economics, 13, 311–323.CrossRefGoogle Scholar
  62. Rosenstein, S., & Wyatt, J. (1990). Outside directors, board independence and shareholder wealth. Journal of Financial Economics, 26, 175–191.CrossRefGoogle Scholar
  63. Scherer, A., Palazzo, G., & Baumann, D. (2006). Global rules and private actors—Towards a new role of the TNC in global governance. Business Ethics Quarterly, 16, 502–532.Google Scholar
  64. Spitzeck, H. (2009). The development of governance structures for corporate responsibility. Corporate Governance, 9, 495–505.CrossRefGoogle Scholar
  65. Staiger, D., & Stock, J. H. (1997). Instrumental variables regression with weak instruments. Econometrica, 65, 557–586.CrossRefGoogle Scholar
  66. Tobin, J. (1958). Estimation of relationships for limited dependent variables. Econometrica, 26, 24–36.CrossRefGoogle Scholar
  67. Waddock, S., & Graves, S. (1997). The corporate social performance-financial performance link. Strategic Management Journal, 18, 303–319.CrossRefGoogle Scholar
  68. Weisbach, M. (1988). Outside directors and CEO turnover. Journal of Financial Economics, 20, 431–460.CrossRefGoogle Scholar
  69. White, H. (1980). Heteroscedasticity-consistent covariance matrix estimator and direct test for heteroscedasticity. Econometrica, 48, 817–838.CrossRefGoogle Scholar
  70. Wood, D. J. (1991). Corporate social performance revisited. Academy of Management Review, 16, 691–718.Google Scholar
  71. Yermack, D. (1996). Higher market valuation of companies with a small board of directors. Journal of Financial Economics, 40, 185–211.CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media B.V. 2011

Authors and Affiliations

  1. 1.Department of Finance, Leavey School of BusinessSanta Clara UniversitySanta ClaraUSA

Personalised recommendations