Why some CEOs back social activities when profits are down
New research has debunked the myth that risk-averse CEOs are less likely to engage with social issues, showing that a downturn in financial results changes their behaviour.
New research by Melbourne Business School Professor of Management Alex Newman has shown that financial performance can change the way a CEO engages with corporate social responsibility (CSR), upending well-established assumptions.
Traditionally, research has led to the assumption that prevention-focused CEOs, that is CEOs who are averse to risk, engage in less CSR than promotion-focused CEOs who are motivated to achieve gains and take chances.
However, this research has been purely based off a CEO’s psychological attributes, failing to take into account how, if at all, a company’s financial performance might affect their behaviour.
“The logic was that promotion-focused CEOs emphasise the opportunity for gains from CSR investment whereas prevention-focused CEOs focus on the risk, the potential for loss,” Professor Newman said.
“However, this logic is flawed because it ignores the impact of financial performance which we know is the primary strategic goal for most organisations.
Now, Professor Newman and colleagues have shown that not only does financial performance have an impact, it actually inverts these expected behaviours.
“Promotion-focused CEOs were only more likely to engage in CSR when their firms were performing well,” Professor Newman said.
“CEOs who were motivated to minimise losses and mitigate risks on the other hand, were actually more likely to engage in CSR when profits were down.”
Their findings published in the Journal of Business Research, showed the innate biases that exist, and Professor Newman said that this is something CEOs should be aware of when they are making key strategic decisions.
“The findings are also useful for boards who are trying to understand their own CEOs motivation towards CSR initiatives.”
The importance of a CEOs CSR engagement
In recent years, corporate social responsibility (CSR) has fast become an important objective for CEOs and their firms.
With rising concerns about climate change, environmental sustainability and social impact, customers are becoming more discerning about the organisations they interact with, and investors are increasingly more concerned about where their money is going.
As a result, CEOs who engage in CSR have become critical to success for many companies.
“Given the increased importance of corporate social responsibility as a strategic goal, we thought it surprising that there was not much research that had been devoted to understanding how a firm’s corporate financial performance might interact with CEO’s psychological attributes so as to accentuate or attenuate the firm’s engagement in CSR,” Professor Newman said.
“We therefore sought to address this gap.”
Promotion or Prevention
Using data from over 1,250 firms, the paper compared the behaviour of promotion-focused CEOs with prevention-focused ones and whether there were shifts in how either style engaged with CSR activities when financial performance changed.
“The old hypothesis, that promotion-focused CEOs would engage with the CSR rang true when their firm was performing well,” Professor Newman said.
“However once the firm started underperforming, we saw the motivation of these CEOs to be socially responsible drop.”
The converse was true for prevention-focused CEOS.
“It was when their firm was performing above expectations that we saw them lose motivation, perhaps out of fear they would upset the positive trajectory,“ Professor Newman said.
Practical takeaways
The research highlights that financial performance cannot be ignored as a contributing factor in strategic decisions.
“A CEOs decision to engage in risk-taking activities such as mergers and acquisitions, and research and development activities changes depending on how their company is performing,” Professor Newman said.
“Not only that, but their behaviour is quite easily predicted dependent on their motivational style. That is something that CEOs should keep in mind – they need to be aware of their own bias.”
The research also debunks the assumption that prevention-focused CEOs won't be motivated to engage in CSR.
“For boards looking to understand their CEOs and their motivations towards CSR commitments, this is important,” Professor Newman said.
To read the full research paper by Professor Newman, Dr Jian Liang, Dr Ameeta Jain, Associate Professor Matthew Mount and Assistant Professor Jooyoung Kim, visit Motivated to be socially responsible? CEO regulatory focus, firm performance, and corporate social responsibility.
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