CSR is one of those things that seems to only have an up-side to it. After all, how can you be criticized for investing in such worthwhile activities? A recent study from the University of Notre Dame suggests that CSR might not be the risk free activity we perceive it to be after all.
The study suggests that when companies invest in CSR, it raises the probability of the CEO being judged harshly on poor financial returns.
“If a CEO has invested in CSR and the firm performs poorly, they are much more likely to be dismissed,” the researchers say. “On the other hand, if they have invested in CSR and the firm performs well, they are less likely to be fired. This shows that CSR investments can be a double-edged sword—do well and they’ll buffer you from dismissal, do poorly and you’re more likely lose your job.”
The analysis found that CEOs of companies with a high level of CSR investment were 84% more likely to be sacked when profits fell compared to their peers in firms with lower CSR investment. Interestingly however, that same investment would protect the boss from the sack if profits were higher.
The findings emerged after the researchers examined all CEO transitions in the Fortune 500 over a five year period from 2003 to 2008. Alongside these transitions, they analyzed the CSR activities of the firm and their financial performance.
They believe that their findings should help to guide future CSR efforts by highlighting the risk CEOs take when investing in social activities.
“It’s important for us to understand the personal consequences CEOs face when investing in CSR,” they say. “Investments in CSR continue to rise and they are becoming an integral part of modern corporations. At the same time, these highly visible investments are not always profitable. Indeed, studies have not been conclusive on whether there is a clear link between CSR investments and profitability. This leads these highly visible decisions to be scrutinized and contested.”
It suggests that for many investors, they are still very much in the Milton Friedman mindset, that the company exists to make a profit and return for shareholders first and foremost, and everything else is secondary. Whilst there is a growing requirement for firms to act in a socially responsible manner, it seems that incentives and compensation schemes still need to catch up in order to protect bosses that make such investments.