A large stream of literature in economics, finance, and accounting suggests that managers’ decisions are influenced by their labor market prospects. Absent perfect information about managers’ ability, the labor market often takes a firm’s current and past performance as a signal of the quality of its CEO. While prior research has primarily focused on financial performance as a measure of corporate performance, recent studies show that various stakeholders have been increasingly focusing on social performance as a performance metric. For example, some asset managers incorporate environmental, social, and governance concerns into their investing decisions. We extend the literature by examining whether a firm’s social performance is used by the executive labor market to assess managerial quality.
Whether socially responsible investments are value-enhancing or value-destroying for shareholders has been controversial. Some believe that investment in corporate social responsibility (CSR) is a manifestation of agency problems inside the firm. This view suggests that managers engage in CSR activities to benefit themselves at the expense of shareholders. CSR engagement is then likely viewed as a negative indicator of CEO quality and should impair CEOs’ labor market prospects.
Alternatively, others view CSR as having a positive impact on firm value for several reasons. First, CSR practices allow management to take a long-term perspective and maximize profits, consistent with shareholder interests. Second, CSR activities are a form of delegated philanthropy, which can maximize shareholder welfare and serve as an efficient way to express personal values of firms’ investors. Third, to the extent that CSR policies reveal managers’ belief in doing the right thing, a firm’s social performance can signal CEOs’ ethical standards. All these arguments indicate that CEOs with strong social performance will be rewarded with better job prospects.
We investigate whether a firm’s social performance is related to the CEO’s future job market opportunities with a sample of CEO departures from U.S. public companies from 1993 to 2012. We focus on CEOs who are active on the job market, and we track their post-departure employment up to 2016. A firm’s social performance is measured with a summary CSR score that reflects various aspects of social responsibility using MSCI ESG STATS (MSCI hereafter). We classify a company as having strong social performance if it has more CSR strengths than concerns.
Our analysis indicates that CEOs leaving firms with strong CSR performance are more likely to be hired as executives by another firm. The employment gap is also significantly shorter for CEOs leaving firms with strong social performance than for those from firms with weak social performance. Further, we find that CEOs with strong CSR performance are more likely to secure executive positions at public firms, where executive positions in general associated are more visible and higher paying than comparable positions at privately held companies. CEOs leaving CSR firms to join another public firm are more likely to be hired by larger firms and to receive higher total compensation. These results suggest that the managerial labor market rewards CEOs for their social performance.
A premise for the labor market to reward CEOs based on the social performance of the previous employer is that they have significant influence over a firm’s CSR activities. Consistent with this conjecture, we find that: (1) the CSR score of the previous employer decreases more after the departure of a CSR CEO than after the departure of a non-CSR CEO, and (2) the CSR score of the subsequent employer increases more after a CSR CEO joins the new firm, relative to a non-CSR CEO. We also measure the extent to which a CEO is linked to her firm’s CSR activities by how often the CEO’s name is mentioned in discussions of a firm’s CSR activities. We find that CEOs from CSR firms have better careers when their names are mentioned more in CSR news releases.
Finally, we investigate whether internal corporate governance mechanisms also value CSR performance. We find that major environmental problems substantially increase the probability of CEO turnover, suggesting that internal governance mechanisms discipline CSR performance. Further, CEOs are more (less) likely to be forced out when there is a substantial decrease (increase) in CSR performance, providing further support for the internal corporate governance mechanisms.
Overall, we show that potential employers consider corporate social performance as an indicator of managerial quality and reward socially conscious CEOs with favorable career prospects. As the labor market for managers shapes CEO behavior, our findings have implications for understanding managerial incentives to engage in CSR. Further, the reward for CEOs’ previous CSR engagement suggests that shareholders’ overall view of CSR is positive, i.e., they believe that such engagement can be informative about CEOs’ ethical standards and ability to create shareholder value through social awareness.
This post comes to us from professors Xin Dai at Drexel University, Feng Gao at Rutgers University, Ling Lei Lisic at Virginia Tech, and Ivy Zhang at the University of California, Riverside. It is based on their recent article, “Corporate Social Performance and Managerial Labor Market,” available here.