Former CEOs chairing the board: does it matter to corporate social and environmental investments?

This paper explores the impact of leadership turnover on corporate commitment to social and environmental responsibility during normal and turbulent times. In addition to ensuring their companies’ operational and financial performance, firm leaders often face many additional challenges, such as societal inequality, climate change, financial crises, and even health crises, such as the recent pandemic (AI-Shaer et al. 2023; Cheah and Lim 2023; Chen et al. 2023; Unsal and Hassan 2023; Zhao et al. 2023). Even though such challenges may well be beyond the remit of any individual corporate leader and can be seen as defocusing CEOs from the main task at hand, contributing to addressing them can result in spillovers that can benefit the firm. Companies with superior Corporate Social Responsibility (CSR) performance are more likely to gain more favourable access to finance, lower cost of capital, higher customer loyalty, stronger competitive advantage, and hence a larger market share, even during times of crisis (see Albuquerque et al. 2020; Badía et al. 2020a; Ding et al. 2021). On the other hand, however, CSR may represent an agency problem as it may be undertaken by corporate management at the expense of shareholders’ wealth (Bae et al. 2021; Chen et al. 2018; Manchiraju and Rajgopal 2017). Indeed, the prior literature has provided evidence showing that CSR can be driven by managerial narcissism to benefit executives’ own interests through e.g. empire-building to increase their reputations and influence their industry (see Gul et al. 2020; Petrenko et al. 2016; Tang et al. 2018). Nevertheless, the board of directors can mitigate the CSR-related agency problem, as effective corporate governance mechanisms can reduce the possibility that executives have a self-interested CSR orientation (Aguilera et al. 2021; Badía et al. 2020b; Wang et al. 2023).

Such issues may be of higher relative importance when there is a change in leadership. Newly appointed CEOs are expected to develop a firm’s future strategies on CSR (Georgakakis and Ruigrok 2017). New CEOs are self-motivated to demonstrate to the board and shareholders their capability to lead the company by aligning firm operations with industry dynamics and a constantly changing business environment (Quigley and Hambrick 2012). When it comes to voluntary CSR activities, which represent a long-term strategic investment with an unforeseeable and intangible outcome, new CEOs may cut down CSR spending to invest more in other projects that can generate immediate returns. Still, reducing CSR investment may affect the social capital that the former leader has generated via committing to long-term value creation (Lins et al. 2017). In such a case, a board can restrain new CEOs who try to execute excessive changes to existing CSR practices. The board’s effectiveness in steering the new CEO’s behaviours could be potentially enhanced by the presence of the former CEO, who stays on the board as Chairman (i.e., Chair-Former-CEO, or CFCEO) (Quigley and Hambrick 2012). We follow DataStream to define the CFCEO as a Chair who was CEO in previous years and CnotFCEO as a Chair who was never the CEO of the firm or is currently also the CEO.

Prior literature has provided ample evidence that the board of directors (Amin et al. 2020; de Viller et al. 2011; Oh et al. 2019) and CEO leadership (Waldman et al. 2006; McCarthy et al. 2017; Hegde and Mishra 2019) play a central role in determining the intensity of CSR activities across distinctive institutional contexts. However, such studies have not examined the impact that the presence of a CFCEO can have on its CSR commitments and strategy. CFCEOs have extensive work experience and a deep understanding of the firm’s strengths and weaknesses and external contextual dynamics. In fact, according to a recent report, a CEO is more likely to be promoted to chair the board if they have achieved not only excellent records of running the company but also shown commitment to creating long-term value for shareholders, the company, and the wider society (Quigley and Hambrick 2012). Therefore, to maintain continuity, the CFCEO may monitor, advise, or encourage and collaborate with incumbent CEOs to sustain a long-term commitment to investing in CSR activities and relevant social capital creation.

Given the above gap, the primary purpose of this article is to empirically examine the association between the presence of a CFCEO and CSR. We posit that the presence of a CFCEO can encourage the successor CEO to remain committed to implementing existing CSR strategies, enhancing social capital and the trust conferred by a broader range of relevant stakeholders. CFCEOs can play a vital role in encouraging new CEOs to cherish practices that may take a long time to establish and create value for all relevant stakeholders. Based on a sample of US S&P 1500 firms characterised by efficient and established corporate governance mechanisms, our findings present strong evidence of the significantly positive role of CFCEOs in increasing social and environmental investment intensity.

We also find different effects of CFCEOs on such performance during exogenous shocks. Specifically, our analyses show that the CFCEO can maintain and increase CSR intensity by improving social and environmental performance. This effect is more pronounced during the COVID-19 pandemic, caused by an unforeseen coronavirus disruption, compared with the global financial crisis of 2007-9, which resulted from unethical business behaviours. In the case of the financial crisis, firms either maintained the same CSR levels or reduced their latitude due to the shortage of slack resources (Fehre and Weber 2016). A possible explanation is that the board had no choice but to approve cuts to social and environmental spending in response to their jeopardised operations, cash flows and threats to survival. However, the negative consequences of the global economic recession have raised public awareness of the relationship between business and society. To rebuild social connections with a broader range of relevant stakeholders, many businesses decided to invest more resources in social and environmental activities in the aftermath of the financial crisis in 2007/09. As such, we would argue that when the COVID-19 pandemic hit in early 2020 the CFCEOs and other board members may have encouraged the current leadership to sustain the firms’ social capital by maintaining long-term value creation through increased CSR engagement. Also, given the unprecedented nature of the pandemic, business leaders may have underestimated how long this would last and expected only a short-term impact. As such, they did not change their long-term orientation. By doing so, companies can maintain social capital and enhance public trust in their operations.

Our study makes some important contributions and has practical implications. Firstly, our study contributes to the literature on leadership turnover by enriching our understanding of how board chairman succession can impact social and environmentally responsible activities. To this end, we empirically test whether former CEOs who are voted to chair the board of directors, due to their ongoing commitments to creating more long-term value for the focal firms, can continue to supervise and advise incumbent CEOs to maintain a superior CSR performance. We argue that the CFCEOs may supervise, advise, and collaborate with incumbent CEOs more effectively than new ones because the latter may be motivated to achieve a short-term return to show off their capability at the expense of the firm’s long-term value.

Secondly, we contribute to the corporate governance and CSR literature by examining the role that CFCEOs play in influencing firms’ strategic changes relating to CSR intensity. By adopting the theoretical lenses of two theories, we conceptualize and empirically test how a CFCEO could affect the performance of firms’ CSR activities. As such, we contribute to CSR research (e.g., Kumar et al. 2019; Brunton et al. 2017; Miras-Rodríguez et al. 2014) by offering strong evidence that a CEO’s retention as the Chairman can either maintain or increase the company’s investment in social and environmental activities, benefiting all relevant stakeholders. Previous literature has offered ample evidence that firm leaders can affect their firms’ CSR practices. However, it focuses on individual leaders’ features, experience and personalities (e.g., CEO and other top executives’ characteristics, past life and work experiences). However, limited studies (e.g., Quigley and Hambrick 2012) pay attention to the significant role played by the board chairpersons, whose main tasks include ensuring corporate compliance with corporate governance systems, setting up the agenda, leading effective communication with CEOs and other executive and independent directors, facilitating the discussion, and maintaining a healthy atmosphere in the boardroom. As such, our study contributes to CSR literature by offering robust evidence that the board chair succession and the relationship (and interactions) between the board chair and CEO can have a noticeable influence on voluntary investment decisions about social and environmental responsibility, which may result in benefits in various forms in the long run.

Thirdly, our work adds to corporate governance and CSR research in times of crisis by comparing and contrasting the impact of the global financial crisis and the COVID-19 pandemic on the link between the CFCEO and CSR performance. We provide strong evidence showing that after the 2007–2009 financial crisis, top corporate executives (including Board Chairs and CEOs) and shareholders became aware of the relevance of CSR to their businesses. Meanwhile, CEOs who focus on creating and maximising the long-term value of the firm are more likely to be selected to be the chairman in the boardroom and will continue to play a key role in monitoring, supervising, and working with incumbent CEOs to maintain superior CSR performance to enhance the connection with relevant stakeholders, preventing the adverse impact of future social and economic crises when short-termism undermines firms’ value in the long run. Indeed, our findings demonstrate that after the financial crisis in 2007–2009, when former CEOs became the board chairs, their firms appeared to maintain a positive CSR investment regardless of specific purposes. Collectively, CFCEOs and other top executives seem to act ethically for intrinsic, not just instrumental profit-oriented, values when continuing their CSR investment decisions, even when they faced the recent time of crisis, i.e., the COVID-19 pandemic health crisis, which caused a devastating impact on social and economic spheres and a market crash across the world.

Finally, our empirical findings offer valuable practical implications. For example, if shareholders and board members select a former CEO to chair the board, she or he is more likely to have shown their commitment to creating long-term value for the firm. That can, in turn, lead to the synergy of CFCEOs’ valuable work experience and public trust due to their persistent CSR commitment and the knowledge and capability of new CEOs, regardless of whether they are appointed internally or externally. This will increase or maintain the firm’s social and environmental investment.

Firms do not operate in isolation from the external world. They have relationships with many constituent groups, and these stakeholders both influence and are influenced by the firm’s actions. These stakeholders can determine the success or failure of a modern business enterprise (Maharaj 2008). This is why it is incumbent on the organisation to consider all stakeholders’ interests and needs. Therefore, the board of directors, as the “supra-top management team” (Finkelstein et al. 2009; p.22), should act as the chamberlain of stakeholders’ interests simultaneously by overseeing management, reviewing the firm’s financial performance, approving the allocation of funds, and ensuring compliance with the law and corporate responsibility matters (Main et al. 1995).

Agency theory (see Jensen and Meckling 1976; Fama and Jensen 1983) suggests a conflict between the interests of the principals (shareholders) and those of the agents (managers, as self-interested actors) running the company on their behalf. It principally supports the CEO’s monetary motives to align the financial interests of shareholders and managers. As a control mechanism intended to deal with the conflict of interests, the board of directors’ key role is to mitigate agency conflicts, reduce the information asymmetry between management and shareholders, and lessen agency costs through governance structures and financial incentives to influence CEO behaviour (Sajko et al. 2021). However, boards regularly fail at this fundamental task (see Gilley et al. 2019), and the agency perspective has been challenged (see McWilliams and Siegel 2001). One important aspect that has not been considered is the role of a heterogeneous board’s abilities to improve its monitoring function (Hillman and Dalziel 2003). Board members bring various qualities that may impact firm decisions and performance. An effective board will have a sound balance of well-chosen, competent directors with firm-specific knowledge, experience, skills, and expertise essential for effective governance to meet the rapidly changing global marketplace (Harper 2007). Pfeffer and Salancik (1978) state that “when an organization appoints an individual to a board, it expects the individual will come to support the organization, will concern himself with its problems, will favorably present it to others, and will try to aid it” (p. 163). Boards exercise independent control and serve as strategic consultants to top managers.

While agency theory emphasises managerial opportunism, agency costs, and the board’s role as a control mechanism, it pays less attention to the innate and external characteristics of individual executives. To address this, one could consider the upper echelons theory, which focuses on the importance of powerful organisational actors’ psychological and other observable characteristics in interpreting the external environment, forming firms’ strategic decisions and organisational outcomes (Hambrick 2007). According to this theory, “organizational outcomes—strategic choices and performance levels—are partially predicted by managerial background characteristics” (Hambrick and Mason 1984; p.193). One of the main tenets of upper echelons theory is that the choices of decision-makers can vary broadly, making it possible for them to inject their unique features (e.g., leadership qualities) into such strategic decisions to impact firm performance (Waldman et al. 2004). Supporting this view, McGuire et al. (2003, p.343) argue that “managerial beliefs and discretion, rather than the constraints and incentives provided by corporate governance, are likely to be the principal drivers of exemplary social performance”. In this sense, top executives play a vital role in interpreting social and environmental activities. Upper echelons theory suggests that the managerial background characteristics of top managers predict strategic decision-making processes and ultimately organizational outcomes, such as financial performance (Hambrick 2007; Finkelstein et al. 2009; Abatecola and Cristofaro 2020). According to their interpretation of reality, executives make strategic choices stemming from their cognitive base values, functional tracks, career experiences, beliefs, perceptions, personalities, educational backgrounds, and ethical conduct norms. As such, corporate governance is a multifaceted task that occurs through individual executives’ attributes and their combined impact (Abatecola and Cristofaro 2020; p.117). According to prior studies, CEOs’ observable background, experience, and personal characteristics are essential proxies for their underlying psychological properties (Hambrick and Mason 1984). For instance, Manner (2010) found that CEOs’ educational background, career experience, and gender are positively related to exemplary CSR ratings. Slater and Dixon-Fowler (2009) conclude that CEOs with international assignment experience and an output functional background are positively associated with greater CSR. Firms led by CEOs with MBA degrees are more likely to disclose environmental information voluntarily (Lewis et al. 2014), and hence, positively impact on a firm’s CSR performance (Sun et al. 2021). Similarly, career experiences, one of the observable socio-demographic variables originally suggested by Hambrick and Mason (1984), can be expected to significantly affect the types of action taken by a CEO.

Apart from the CEOs’ observable traits and characteristics, a Board chair who formerly served as the CEO of the same firm might be advantageous because of the in-depth industry familiarity and knowledge gained with experience and working team relationships (Hambrick and Mason 1984). Such experience and expertise can be invaluable when it comes to externally facing activities related to corporate social responsibility. Social and environmental investment intensity is the consequence of a long-term strategic orientation since socially responsible investments have uncertain outcomes and require a long time to pay off (Oh et al. 2016). Therefore, it could be the outcome of the strategic decision-makers’ characteristics associated with career experience and risk-taking ethos to bear the uncertainty.

CSR is the extent to which organisations actively engage in social activities that respond to stakeholders’ needs (Mäkinen and Kourula 2012; Schwartz and Carroll 2003) and develop sustainable systems that affect corporate economic performance (Duque-Grisales et al. 2021). Growing awareness of environmental protection, product safety, and continued global economic integration has made CSR a vital initiative to gain and maintain legitimacy, cope with challenges, and minimise corporate risk (Sun et al. 2021). As such, responsiveness to CSR/ESG matters has become essential to firms’ overall value-creation efforts. CSR/ ESG performance is a strategic decision underpinned by an ethical stance of firms towards stakeholders and the larger society. ESG can affect a company’s ability to achieve its business strategy and create value. Companies investing in ESG activities can enhance shareholder value by reducing the stock volatility and the firm’s risk (Badía et al. 2022), improving reputation and competitive advantage and reaching new markets while contributing to society’s sustainable development.

Given our research objectives, we follow existing CSR literature (e.g., Servaes and Tamayo 2013) by focusing on the environmental (E) and social (S) dimensions of ESG ratings. The governance (G) dimension is not included, as it should not be considered a CSR merit (see Lins et al. 2017). Previous literature, albeit limited, has suggested that if the former CEOs stay on the board as the chair, the board of directors appear to be more effective in monitoring, supervising, and advising the succeeding CEO in leading the company to avoid aggressive strategic change and maintain a stable firm performance (Quigley and Hambrick 2012; Krause et al. 2014). Our study contributes to this body of literature by investigating the potential effects of the presence of CFCEOs, i.e., the board of directors chaired by the former CEO of the same firm, on the social and environmental performance of S&P 1,500 firms between 2002 and 2020. To mitigate the endogeneity issue, we incorporate two exogenous shocks to test the effects between CFCEO and ES scores during two times of crisis, i.e., the financial crisis of 2007-9 and the COVID-19 pandemic 2020.

Social and environmental investment has become an essential pillar of organisational strategies in enhancing corporate reputation and firm value (e.g., Chintrakarn et al. 2021; Boone et al. 2020). Prior research has found that CSR activity is driven by financial (e.g., profitability, capital structure) and non-financial factors, such as corporate governance. In this study, we focused on the latter. More specifically, given that prior literature has provided evidence on the board of directors (Amin et al. 2020; de Viller et al. 2011; Oh et al. 2019) and CEO leadership (Waldman et al. 2006; McCarthy et al. 2017; Hegde and Mishra 2019) when it comes to the intensity of CSR activities, we focused on leadership continuity and the potential impact this could have on CSR activities. Our objective was to examine if the presence of a former CEO becoming the Chair of the Board of Directors can encourage the incumbent CEO to remain committed to CSR. The presence of a CFCEO may encourage the incumbent CEO to sustain long-term investment in CSR activities. The influence that such a presence can exert could be important in ensuring the continuity of a strategy and associated practices that took time to establish and create value for stakeholders. While the Chair/CEO succession is critical for strategic (re)alignment (Pfeffer and Salancik 1978), the monitoring effectiveness by the Chair in relation to the new CEO’s behaviour can be indispensable. New CEOs are likely to take their institutions in new directions to the extent they have the discretion to do so (Hambrick and Finkelstein, 1987). Our study suggests that the continuing presence in a firm of the predecessor CEO as board chair could encourage stability, which can help an organisation’s long-term sustainability goal. While considering a set of comprehensive control variables that can affect firms’ social and environmental activity, we found that CFCEOs can encourage incumbent CEOs to remain committed to social and environmental activities. This is consistent with the findings of Quigley and Hambrick (2012, p. 853), who stated that “as long as the predecessor remains as chair, company performance tends to adhere to pre-succession levels. New CEOs who are restricted in their actions are correspondingly restricted in the degree to which they can alter performance”. A former CEO is more likely to be selected as the chairman of the board of directors if they have a strong record in running the company, a deeper understanding of the firm’s culture and the industry dynamics, and a pursuit of long-term value for not only the firm’s shareholders, but also other relevant stakeholders through committed social and environmental activities. With this assumption, we find that if a former CEO stays on the board as the Chair, they can effectively monitor and advise the new CEO to maintain the firm’s focus on long-term value creation via sustained social and environmental performance instead of short-term returns that newly appointed CEOs are likely to showcase. Our results on such CSR-relevant activity, therefore, extend the findings of Quigley and Hambrick (2012), who focus on the restrictive influences of predecessors retained as board chairs on (i) successor discretion, (ii) strategic change and (iii) overall financial performance.

Our findings support Hypothesis 1 that a CFCEO has a significant role in increasing social and environmental ratings. Based on upper echelons theory, we argue that CFCEOs may rely on prior work experience and knowledge about the firm and its industry to monitor, advise or persuade incumbent executives to remain committed to the firm’s long-term value by continually investing in social and environmental activities. We cannot precisely estimate the result’s economic significance because social and environmental performance is measured by social and environmental scores that reflect point values rather than actual dollars spent. However, we can contextualise the economic effects by suggesting that the firms with the presence of a CFCEO exhibit higher social and environmental performance ratings by approximately 0.021 to 0.028 points than their peers without a CFCEO. Similarly, our empirical evidence also supports Hypothesis 2. Our findings suggest that there are differential effects of CFCEOs on social and environmental performance during times of crisis, such as the economic recession in 2007-9 and the COVID-19 pandemic crisis in 2020. Beyond the contextual differences that such crises may have, both cases were global and have had an immense impact on all aspects of our societies beyond firm financial performances. As such, understanding the role that CRS can play can offer valuable insights when it comes to preparing for the next crisis. Unfortunately, it is not a matter of “if” a crisis will take place, but “when”. To this end, and to explain why we found differences between the two cases, one may refer to how, over the last decade, social and environmental performance has been valued more highly by market participants. The positive association between a CFCEO and the firm’s social and environmental performance was found to be more pronounced during the COVID-19 pandemic crisis than during the economic recession back in 2007-9. Extending existing knowledge of governance-CSR associations (e.g., Jo and Harjoto 2011; Oh et al. 2019; Chintrakarn et al. 2021), our study suggests that the presence of a CFCEO is an important driver for corporate executives to commit to fostering continuity and in turn a resilient relationship with their stakeholders. Such resilience could be critical when the next crisis threatens the firm’s survival.