When the Harvard Business Review named Pablo Isla of Spanish retailer Inditex the Top CEO of 2017, it may have struck some as an odd choice. “Measured on financial returns alone, Isla comes in 18th in our ranking,” reads the article accompanying the list. But, it continues, “his company’s performance on environmental, social, and governance factors, which count for 20 percent of a leader’s score, propelled him to the top spot.”
Such is the new rubric in the age of corporate social responsibility, or CSR. Investors and customers increasingly demand that corporations not only make a profit, but also ameliorate their negative impact on the world, whether by reducing waste and greenhouse gas emissions, cutting sweatshops out of a supply chain, or improving labor standards for workers.
Dylan Minor conducted a study with Caroline Flammer of Boston University and Bryan Hong of the University of Western Ontario, looking closely at corporations that base executive pay partly on CSR performance. To Minor’s surprise, the research revealed that CSR contracting actually hit its mark, leading companies to reduce emissions, increase eco-friendly or “green” patents, and improve social responsibility ratings across the board. Those actions, in turn, increased companies’ value over the long run.
Abstract study (source SSRN)
This study examines the integration of corporate social responsibility (CSR) criteria in executive compensation, a relatively recent practice in corporate governance. We construct a novel database of CSR contracting and document that CSR contracting has become more prevalent over time. We further find that the adoption of CSR contracting leads to i) an increase in long-term orientation; ii) an increase in firm value; iii) an increase in social and environmental performance; iv) a reduction in emissions; and v) an increase in green innovations. These findings are consistent with our theoretical arguments predicting that CSR contracting helps direct management’s attention to stakeholders that are less salient but financially material to the firm in the long run, thereby enhancing corporate governance.
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