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Journal of Business Ethics
Published in: Journal of Business Ethics 1/2022

16-11-2020 | Original Paper

Inducing Corporate Social Responsibility: Should Investors Reward the Responsible or Punish the Irresponsible?

Authors: Tyson B. Mackey, Alison Mackey, Lisa Jones Christensen, Jason J. Lepore

Published in: Journal of Business Ethics | Issue 1/2022

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Abstract

Investors with a pro-social or sustainability agenda increasingly attempt to influence firm managers to adopt socially responsible behavior, either through positive/reward tactics or negative/punishment tactics. This paper considers how investors can use each approach to differentially influence managers to make more CSR investments. The paper uses game theory with an all-pay contest structure to model how a large institutional investor could reward firms for CSR activities by creating a socially responsible investment fund (reward contest) or punish firms via shareholder activism (punishment contest). We identify conditions under which the punishment contest induces a higher level of CSR activity among firms compared to the reward contest. Managers bearing substantial private costs stemming from the activism is one such condition. Spillover effects are seen as the other managers in the economy engage in CSR to avoid being punished by the investor’s activism. This level of engagement is not the case when rewards are used—only those managers with an expectation of being rewarded increase their CSR activity in that scenario. This suggests, for example, that incorporating thresholds or tiers (e.g. gold, silver, and bronze-level winners) can increase the effectiveness of reward contests. Implications for designing both positive and negative CSR inducements are explored. We also identify the ethical dilemmas that relate to such influence attempts.
previous article When Does Corporate Social Responsibility Backfire in Acquisitions? Signal Incongruence and Acquirer Returns
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Appendix
Available only for authorised users
Footnotes
1
Given the rise in the number and type of newer organizational forms, such as B-Corps, social purpose firms, and low-profit LLCs—types of firms which have some level of social benefit “baked into” their organizational governance, could increase the likelihood of negative influence tactics rising. Specifically, as more firms make legally binding decisions about CSR topics, they run the risk that some stakeholders may become frustrated with how much CSR the firm does or does not pursue. Thus, the generalizability of punishment contests may be increasing to the extent that more firms embrace these newer organizational forms.
 
2
Defining CSR to be costly enables us to isolate the effect from the investor’s inducement tactic from other potential stakeholder inducements (cf. Flammer 2015). For example, customers can induce managers to adopt CSR activities when they are willing to pay premium prices for products. Here, for parsimony, we assume the net present impact of the CSR activities is negative so the only inducement a manager feels stems directly from the investor’s tactics (cf., Mackey et al. 2007). Costly CSR also introduces a theoretically interesting nuance about the kind of CSR that many stakeholders likely prefer or deem more “authentic” (Benabou and Tirole 2006; Cording et al. 2014; Godfrey 2005; Makov and Newman 2016; Newman and Cain 2014).
 
3
The proceeding analysis relies heavily on results established in Siegel (2009) and Lepore et. al (2012). Baye et al. (1996), Clark and Riis (1998) and Gonzalez-Diaz (2012) all make important contributions to understanding equilibria of all-pay contests with perfect information.
 
4
Importantly, Proposition 1 is a sufficient condition. Simply stated, if Proposition 1 does not hold, it does not then necessarily imply that the reward-based contest is better than the punishment-based contest.
 
5
Notice from Proposition 1 that the heterogeneity term, (a2/(nan − a1)) is multiplied by the manager’s stock holdings α, so in the case of low stockholdings, heterogeneity in CSR abilities will not as easily be a factor against obtaining the sufficient condition.
 
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Metadata
Title
Inducing Corporate Social Responsibility: Should Investors Reward the Responsible or Punish the Irresponsible?
Authors
Tyson B. Mackey
Alison Mackey
Lisa Jones Christensen
Jason J. Lepore
Publication date
16-11-2020
Publisher
Springer Netherlands
Published in
Journal of Business Ethics / Issue 1/2022
Print ISSN: 0167-4544
Electronic ISSN: 1573-0697
DOI
https://doi.org/10.1007/s10551-020-04669-0

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