Foreign subsidiary CSR as a buffer against parent firm reputation risk

Abstract

This study examines the influence of parent firm reputation risk on the level of corporate social responsibility activities of foreign subsidiaries. We first argue that a strong reputation risk spillover occurs from parent firms to their foreign subsidiaries due to the high visibility of multinationals, the control of parent firms over their subsidiaries, and the liability of foreignness associated with foreign firms in host countries. Then, we argue that subsidiaries may resort to CSR in their host country to reduce the spillover effect. Thus, we hypothesize a positive relationship between parent firm reputation risk and foreign subsidiary CSR activities. Moreover, we explore several contingency factors at both the parent firm and subsidiary levels that affect the extent of spillover and the need for subsidiaries to use CSR as a buffer against parent firm reputation risk. We find that the positive relationship between parent firm reputation risk and foreign subsidiary CSR activities is weaker for foreign subsidiaries that directly report to the parent firm, with longer operations in the host country and larger institutional distance between host and home countries. Using a unique sample of subsidiaries of large multinationals in China from 2009 to 2016, we find general support for our arguments.

Abstraite

Cette étude examine l’influence du risque de réputation de la société mère sur le niveau des activités de responsabilité sociale des filiales étrangères. Nous soutenons d’abord qu’un fort effet de propagation de risque de réputation se produit entre les sociétés mères et leurs filiales étrangères en raison de la grande visibilité des multinationales, du contrôle des sociétés mères sur leurs filiales et du handicap de l’extranéité associés aux entreprises étrangères dans les pays d’accueil. Ensuite, nous soutenons que les filiales peuvent recourir à la RSE dans leur pays d’accueil pour réduire l’effet de propagation. Ainsi, nous supposons une relation positive entre le risque de réputation de la société mère et les activités de RSE des filiales étrangères. De plus, nous explorons plusieurs facteurs de contingence au niveau de la société mère et des filiales qui affectent l’étendue des retombées et la nécessité pour les filiales d’utiliser la RSE comme tampon contre le risque de réputation de la société mère. Nous constatons que la relation positive entre le risque de réputation de la société mère et les activités de RSE des filiales étrangères est plus faible pour les filiales étrangères qui rapportent directement à la société mère, avec des opérations plus longues dans le pays d’accueil et une plus grande distance institutionnelle entre les pays d’accueil et d’origine. En utilisant un échantillon unique de filiales de grandes multinationales en Chine de 2009 à 2016, nous trouvons un soutien général à nos arguments.

Abstracta

Este estudio examina la influencia del riesgo de reputación de una empresa matriz en el nivel de las actividades de responsabilidad social corporativa de las filiales extranjeras. Primero argumentamos que un contagio fuerte riesgo reputacional ocurre de las empresas matrices hacia sus filiales extranjeras debido a la alta visibilidad de las multinacionales, el control de las empresas matrices sobre sus filiales, y la desventaja de extranjería asociada a las empresas extranjeras en países anfitriones. Luego, sostenemos que las filiales pueden recurrir a la RSC en sus países anfitriones para reducir el efecto de contagio. De este modo, planteamos la hipótesis que una relación positiva entre el riesgo reputacional de la empresa matriz y las actividades de RSE en la filial extranjera. Además, exploramos varios factores de contingencia tanto al nivel de la empresa matriz como de la filial que afectan el alcance del contagio y la necesidad de las filiales de usar RSE como amortiguador para el riesgo reputacional de la empresa matriz. Encontramos que la relación positiva entre el riesgo reputacional de la empresa matriz y las actividades de RSC de la subsidiaria extranjera es más débil para las filiales extranjeras que reportan directamente a la empresa matriz, con operaciones más largas en el país anfitrión y una distancia institucional más amplia entre los países de origen y anfitrión. Usando una muestra única de filiales de grandes multinacionales en China entre 2009 al 2016, encontramos apoyo general para nuestros argumentos.

Resumo

Este estudo examina a influência do risco de reputação da empresa controladora no nível de atividades de responsabilidade social corporativa de subsidiárias estrangeiras. Primeiro, argumentamos que ocorre um forte transbordamento do risco de reputação de empresas controladoras para suas subsidiárias estrangeiras devido à alta visibilidade de multinacionais, ao domínio de empresas controladoras sobre suas subsidiárias, e à desvantagem de ser estrangeiro associada a empresas estrangeiras nos países anfitriões. Em seguida, argumentamos que subsidiárias podem recorrer à CSR em seu país anfitrião para reduzir o efeito de transbordamento. Assim, levantamos a hipótese de uma relação positiva entre o risco de reputação da empresa controladora e atividades de CSR de subsidiárias estrangeiras. Além disso, exploramos vários fatores contingenciais tanto nos níveis da empresa controladora quanto da subsidiária que afetam a extensão do transbordamento e a necessidade de subsidiárias usarem CSR como um amortecedor contra o risco de reputação da empresa controladora. Concluímos que a relação positiva entre o risco de reputação da empresa controladora e as atividades de CSR das subsidiárias estrangeiras é mais fraca para subsidiárias estrangeiras que se reportam diretamente à empresa controladora, com operações mais longas no país anfitrião, e maior distância institucional entre os países anfitrião e de origem. Usando uma amostra única de subsidiárias de grandes multinacionais na China de 2009 a 2016, encontramos suporte geral para nossos argumentos.

抽象

本研究考察了母公司声誉风险对外国子公司的企业社会责任活动水平的影响。我们首先认为, 由于跨国公司的高知名度、母公司对子公司的控制以及与在东道国的外国公司相关的外来者劣势, 母公司向其外国子公司发生大量的声誉风险外溢。然后, 我们认为, 子公司可能会在其东道国诉诸企业社会责任(CSR), 以减少溢出效应。因此, 我们假设母公司声誉风险与外国子公司CSR活动之间存在正相关关系。此外, 我们在母公司和子公司层面探索了几个调节变量, 这些因素会影响溢出程度以及子公司用CSR作为抵御母公司声誉风险的缓冲需求。我们发现, 对于直接向母公司报告的子公司、在东道国运营时间更长的子公司以及东道国与母国之间制度距离更大的子公司, 母公司声誉风险与外国子公司CSR活动之间的正相关性较弱。使用2009至2016年间中国大型跨国公司子公司的独特样本, 我们发现我们的论点得到了普遍支持。

Appendix: Description of key variables

CSR Score

Four dimensions of CSR scores exist in the database, as described in Figure 5 and Table 5. We select three out of the four dimensions (i.e., ESG) for two reasons. First, our measure of parent firm reputation risk focuses on ESG, which are the commonly adopted CSR dimensions in the majority of studies. Second, the fourth dimension—market—contains factors, such as patents and R&D expenditures, which are not directly related to firm social activities.

Figure 5

Measurement system of CSR score.

Table 5 Specific measures of China’s CSR development index

According to Huang, Zhong, Zhang, and Zhai (2016), the detailed procedure of CSR data construction is described as follows (translated from Chinese):

First, according to the relative importance of different dimensions of CSR, we decide the weights of the four dimensions. Second, according to the importance of different industries, we determine the weights of specific indicators within each dimension. Third, we give specific scores for each indicator according to information disclosed on the CSR activities of each firm. The general rule is: if a firm releases data or information on one indicator, then it receives a score of one, otherwise it receives a score of zero. The score of a CSR dimension is the sum of the scores of all indicators in this dimension. Fourth, according to the weights and scores, we calculate an initial CSR score of a firm in an industry: initial CSR score of a firm = $\mathop \sum \limits_{j = 1,2,3,4} Aj \cdot Wj$, where Aj is the score of a firm in one dimension, Wj is the weight of that dimension. Fifth, if a firm only operate in one industry, then the initial score is the final CSR score of that firm. If a firm is a conglomerate, then its final CSR score = $\mathop \sum \limits_{j = 1 \ldots k} Bj \cdot Ij$, where Bj is the CSR score of the firm in industry j, Ij is the weight of that industry. The weight of different industries is decided by the social sensitivity of an industry, which is captured primarily by environmental and consumer sensitivities. Industries that are energy-consuming and polluting are highly environmentally sensitive, as are industries that deal directly with consumers. (Huang et al., 2016: 34–35)

For the selection of indicators/benchmarks, Huang et al. (2016) explained:

International CSR initiatives and indicator systems referenced for the Index include: CSR guide issued by ISO (ISO26000), Global Reporting Initiative (GRI)’s sustainability reporting guidelines (G4), Fortune 100 Responsibility Ranking Index, Dow Jones Sustainability Index, and BiTC CSR Index. Domestic CSR initiatives include Guidelines on Implementation of Social Responsibility for SOE, GB/T 36000-2015 CSR Guidelines, Shenzhen Stock Exchange Guidelines on CSR, Hong Kong Stock Exchange ESG Reporting Guidelines, and CSR Report Writing Guidelines for Chinese Firms (CASS-CSR4.0). We also reference Fortune 500 CSR reports to decide the specific indicators to be used for different industries. (Huang et al., 2016: 29)

With respect to industry-specific calculations, Huang et al. (2016) did not provide detailed explanations. They merely wrote:

Considering different CSR topics across different industries, we start from general topics and first construct general topics indicator system. Then, we incorporate industry-specific topics and construct industry-specific topic indicator system. Finally, we have a ‘general + industry-specific topics’ indicator system, which we use for the calculation of CSR scores. (Huang et al., 2016: 34)

We further examined earlier versions of the report and found the following descriptions regarding industry-specific calculation (Chen, Huang, Peng, & Zhong, 2009), which may provide additional information for the criteria they use:

The difference in responsible topics across different industries is large. For example, industries such as electricity and petrochemical consume a lot of energy and resources and also produce a large amount of polluted water, air, and residuals. For these industries, the environmental dimension has high weight and they have complex environmental indicators. On the contrary, financial firms consume less energy and produce less pollution. Their primary environmental responsibility is green credit, environmental insurance, and green office. Therefore, for the financial industry, the environmental dimension has low weight and it has relatively simple environmental indicators. (Chen et al., 2009: 4)

Reputation Risk

RepRisk adopts a three-stage procedure to construct RRI. First, RepRisk has a proprietary search algorithm that traces worldwide media sources in 15 languages on a daily basis. The media sources include news media outlets, websites of government and NGOs, blogs, and social media. Second, RepRisk has trained analysts who select and classify significant events. The events are classified on the basis of the number of affected countries, company/companies that are involved in the issue, the severity of the crisis, and reach/importance of the media that reported the issue. The severity of crisis is rated on a scale of 1 (low) to 3 (high). The severity is determined via a rule-based method as a function of three dimensions, that is, (a) the consequence of the risk incident (e.g., with respect to health and safety: no further consequences, injury, or death); (b) the extent of the risk incident (i.e., one person, a group of people, a large number of people); (c) whether the risk is caused by an accident, by negligence, or intent, or even in a systematic way. The reach of the media in which the crisis is reported is rated on a scale of 1 (low) to 3 (high). For instance, independent watchdog reports are classified as 1, whereas major news outlets, such as the BBC and WSJ, are classified as 3. Third, selected and categorized data are verified by an independent senior analyst for accuracy.