By Michael Hardy | Spring 2018

A CEO who invests in corporate responsibility practices takes a risk, according to new research.

In 2006, TIAA-CREF sold its 50 million shares of Coca-Cola stock after reports emerged of the soft drink giant violating labor and environmental laws around the world. With the motto, “We serve those who do good,” TIAA-CREF bills itself as a socially responsible financial services firm. So when KLD Research & Analytics, which rates corporations on their social responsibility, dropped Coca-Cola’s ranking, TIAA-CREF decided to divest.

Corporate Social Responsibility, or CSR, is a controversial subject. Since at least the 1970s, when Milton Friedman and a group of like-minded economists launched the “shareholder value” revolution, most companies have viewed maximizing profits for their investors as their primary responsibility. In recent decades, though, critics have argued that shareholders are just one group among a corporation’s many stakeholders — including the firm’s employees, its customers and the communities where the firm does business. All of the stakeholders deserve to benefit from the firm’s success, this argument goes, not just the stockholders.

That view is gaining increasing acceptance in the corporate world. Almost three-quarters of all Standard & Poor’s 500 firms in the U.S. now produce an annual CSR report, and 40 percent of shareholder proposals focus on social and environmental issues. In a sense, corporate leaders are responding to the need of socially conscious investors, who continue to ask more of corporations. An estimated $4 trillion is currently invested in socially responsible investment funds such as TIAA-CREF.

“There’s strong pressure from the public,” said Timothy Hubbard, a Management & Organization professor at Mendoza. “Consumers and employees — as well as investors — are becoming more sensitive to social responsibility. For example, people no longer want to buy clothing from companies that outsource their production to countries with poor working standards. If you think about young people coming out of college today, they want to work for socially responsible firms. They don’t want to work for firms that are mistreating the environment or treating their workers improperly.”

But there are real risks for CEOs who invest in corporate responsibility, as Hubbard’s research has demonstrated.

Hubbard studies how chief executive officers make decisions about CSR investment. Despite extensive research, no direct correlation has yet been found between CSR and firm performance, which means that responsible companies aren’t consistently more or less profitable than irresponsible companies that do not invest in CSR initiatives. Given that inconclusive evidence, Hubbard wondered “should chief executive officers invest in these areas when there’s not a clear, direct payoff?”

To answer that question, Hubbard and his colleagues Dane M. Christensen of the University of Oregon and Scott D. Graffin of the University of Georgia decided to study the personal consequences for CEOs who make substantial CSR investments. They assigned all Fortune 500 corporations annual CSR scores based on the industry-standard KLD Analytics ratings, then looked to see whether changes in that score affected the likelihood of CEO dismissal between 2003 and 2008.

To their surprise, they couldn’t find any correlation; CEOs who invested in CSR initiatives weren’t any more or less likely to get fired. (In all, 104 Fortune 500 CEOs were dismissed over the study’s five-year time frame.) It was only when the researchers included firm performance in their analysis that the effects of CSR investment became noticeable.

At companies that performed poorly, they found, CEOs who had invested in CSR were 84 percent more likely to get fired than CEOs who hadn’t prioritized social responsibility. Hubbard attributes this to the high visibility of CSR investment — when firms are struggling, boards of directors look for something to blame, and CSR is too often an easy scapegoat regardless of its actual culpability.

But on the other end of the spectrum — at companies that performed well — it was another story entirely. Here, boards of directors seemed to reward CSR investment. Socially minded CEOs were 53 percent less likely to lose their jobs than more traditional CEOs. Generally, CEOs of successful firms are less likely to be fired. But Hubbard hypothesized that if an otherwise successful CEO experiences a misstep or other transgression, his or her prior investment in CSR may make boards more inclined to offer a second chance.

“Think of it as a risk-reward scenario,” Hubbard said. “High levels of CSR coupled with high performance sets up a buffering effect, leading to greater job security.” On the other hand, invest in CSR, suffer poor performance, and you have doubled the likelihood of being sacked. Why are the potential consequences of CSR so much more severe than the potential benefits?

“Negative actions and events,” Hubbard explained, “are more salient in peoples’ minds, so when they perform poorly, people take notice.”

Given the personal risk of investing in CSR, why do CEOs still do so? “The business landscape is changing. Social responsibility has become mainstream,” says Hubbard. “These things are much more visible these days. If you go back 15 or 20 years, companies weren’t producing CSR reports. They weren’t highlighting what they were doing when it came to the environment.”

Hubbard argues that corporate directors should give the benefit of the doubt to socially minded CEOs when they hit a rough patch, rather than tossing them aside for a more traditional leader. Directors can do this by clearly spelling out their CSR goals for the CEO in contracts and communications, giving the CEO the security to strive toward those goals without worrying about job security.

“If it’s been five years and they’re still losing money, of course they should be replaced,” Hubbard acknowledged. “But granting them a bit of a buffer, I think, would be the right thing to do.”

Tim Hubbard is an assistant professor of Management & Organization. His research focuses on strategic leadership, with a particular emphasis on behavioral strategy. He received his Ph.D. from the University of Georgia and holds degrees from the Thunderbird School of Global Management and the University of Illinois.