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Managerial Short-Termism and Corporate Social Performance: The Moderating Role of External Monitoring

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Abstract

While commentators have long decried managerial short-termism, the deleterious effects of managerial short-termism on corporate social performance (CSP), and how to ameliorate those negative effects, remain underexplored. Specifically, due to the difficulty of unobtrusively measuring what is fundamentally a cognition in managers, empirical evidence at the organizational level of managerial short-termism’s effect on CSP is relatively sparse. Here, we measure managerial short-termism by content analyzing firms’ publicly filed annual reports (10-Ks). Using a combined dataset for 1,665 U.S. firms for the period 2000–2012, we show that managerial short-termism is negatively associated with CSP. However, we also show that this effect can be reduced through increased external monitoring by important stakeholders who value CSP. Specifically, we show that increasing dedicated institutional ownership and increasing analyst coverage both decrease the negative effect of managerial short-termism on CSP. We contribute to theory by predicting and showing the negative effect of managerial short-termism on CSP, and how external monitoring can reduce its deleterious effects. We contribute to practice by showing how this managerial cognition can be identified, and how its negative effects can be ameliorated, at the organizational level.

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Notes

  1. We note that some scholars have suggested that CSP is an extension of the concept of corporate social responsibility (CSR), focusing on achievements, as opposed to more generalized notions of firm social responsibility or accountability, while other scholars have suggested that CSR not leading to better CSP is disingenuous or vacuous (e.g., Carroll & Brown, 2018). We specifically use the term “CSP” to show that we measure observable, actual firm outcomes, as opposed to more the general notion of corporate accountability or responsibility.

  2. Previous research has distinguished between and among related concepts, including such concepts as “time horizon,” “temporal orientation,” “time orientation,” and “investment horizon” (Reilly et al., 2016). Here, we use the term “short-termism” to represent a managerial preference for actions in the short-term, that could have negative consequences in the long term. This definition mirrors the definition in the seminal studies of short-termism. For example, Marginson & McAulay, (2008, p. 274) defined short-termism, as “indicat[ing] a preference for actions in the near term that have detrimental consequences for the long term.” Similarly, Laverty (1996, p. 826) stated that short-termism relates to, “decisions and outcomes that pursue a course of action that is best for the short-term but suboptimal over the long run.”.

  3. We appreciate an anonymous reviewer raising this important point.

  4. We note that due to changes in reporting, KLD data following 2012 is not comparable with the data prior to 2012 (Awaysheh et al., 2020).

  5. We are indebted to an anonymous reviewer for making this valuable suggestion.

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Acknowledgements

The authors gratefully acknowledge the immensely constructive and developmental comments from the Guest Editors, Wendelin Küpers, E. Gunter Schumacher, and David Wasieleski and from two anonymous reviewers. The authors are also greatly indebted to Philip Bromiley and Horacio E. Rousseau for their comments on earlier drafts of the manuscript. All errors remain solely the responsibility of the authors.

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  1. Wake Forest University, School of Business, Winston-Salem, NC, USA

    Stephen J. Smulowitz

  2. IMD, Global Board Center, Lausanne, Switzerland

    Didier Cossin & Hongze Lu

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Appendix

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Table 3 Word list for short-termism
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Table 4 Comparison of term-document matrix to previous studies
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Smulowitz, S.J., Cossin, D. & Lu, H. Managerial Short-Termism and Corporate Social Performance: The Moderating Role of External Monitoring. J Bus Ethics 188, 759–778 (2023). https://doi.org/10.1007/s10551-023-05498-7

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