Corporate social responsibility as an employee governance tool: Evidence from a quasi‐experiment

• Published date: 01 February 2017
• Author: Caroline Flammer,Jiao Luo
• Date: 01 February 2017
• DOI: http://doi.org/10.1002/smj.2492

Strategic Management Journal

Strat. Mgmt. J.,38: 163–183 (2017)

Published online EarlyView 17 March 2016 in Wiley Online Library (wileyonlinelibrary.com) DOI: 10.1002/smj.2492

Received 5 September 2014;Final revision received29 November 2015

CORPORATE SOCIAL RESPONSIBILITY

AS AN EMPLOYEE GOVERNANCE TOOL: EVIDENCE

FROM A QUASI-EXPERIMENT

CAROLINE FLAMMER1and JIAO LUO2*

1Questrom School of Business, Boston University, Boston, Massachusetts, U.S.A.

2Carlson School of Management, University of Minnesota, Minneapolis, Minnesota,

U.S.A.

Research summary: This study examines whether companies employ corporatesocial responsibil-

ity (CSR) to improve employee engagement and mitigate adverse behavior at the workplace (e.g.,

shirking, absenteeism). Weexploit plausibly exogenous changes in state unemployment insurance

(UI) benets from 1991 to 2013. Higher UI benets reducethe cost of being unemployed and hence

increase employees’ incentives to engage in adverse behavior. We nd that higher UI benets are

associated with higher engagement in employee-relatedCSR. This nding suggests that companies

use CSR as a strategic management tool—specically,an employee governance tool—to increase

employee engagement and counter the possibility of adverse behavior. We further examine plau-

sible mechanisms underlying this relationship.

Managerial summary: This study examines whether companies employ corporate social respon-

sibility (CSR) to improve employee engagement and mitigate adverse behavior at the workplace

(e.g., shirking, absenteeism). Wend that companies react to increased risk of adverse behavior by

strategically increasingtheir investment in employee-related CSR (e.g., work-life balance benets,

health and safety policies). Our ndings have important managerial implications. In particular,

they suggest that CSR may help companies motivate and engage their employees. Hence, compa-

nies dealing with employees that are unmotivated, regularly absent, or engage in other forms of

adverse behavior,may nd it worthwhile to design and implement effective CSR practices. Further,

our ndings suggest that CSR can be used as employee governance tool. Accordingly, managers

could benet from integratingCSR considerations into their strategic planning. Copyright © 2015

John Wiley & Sons, Ltd.

INTRODUCTION

It is often argued that employees are a rm’s

most valuable asset and a key source of compet-

itive advantage (e.g., Coff, 1997). For example,

Jack Welch—former CEO of General Electric

and named “Manager of the Century” by Fortune

Keywords: employee engagement; adverse behavior;

employee governance; corporate social responsibility;

unemployment insurance

*Correspondence to: Jiao Luo, Carlson School of Management,

University of Minnesota, 321 19th Avenue South, Ofce 3-360,

Minneapolis, MN 55455, U.S.A. E-mail: luoj@umn.edu

Copyright © 2015 John Wiley & Sons, Ltd.

magazine— argues that “[a]ny company trying to

compete must gure out a way to engage the mind of

every employee” (Buckingham and Coffman, 1999:

273). A primary difculty in managing employees

is adverse behavior—also known as “moral hazard”

in the economics literature. Adverse behavior arises

in situations where the interests of employees and

the rm are misaligned, and employees’ motivation

and effort are imperfectly observed.

Situations of adverse behavior at the work-

place come in many avors. They include coun-

terproductive employee behavior such as showing

reduced interest, effort, or attentiveness (Rusbult

et al., 1988); employee theft or fraud (Dickens et al.,

164 C. Flammer and J. Luo

1989; Pierce, Snow, and McAfee, 2015; Schnat-

terly, 2003); avoiding cognitively difcult activities

(Bertrand and Mullainathan, 2003); being chroni-

cally late or absent (Markham and McKee, 1991;

Scoppa, 2010); or disengaged behavior such as

using company time for personal business and

on-the-job searches for better jobs (e.g., Acemoglu

and Shimer, 2000; Rusbult etal., 1988) —all of

which incur large economic costs to the rm.

Accordingly, guring out how to engage and effec-

tively manage employees in general (i.e., regard-

less of their skill and rank)— and employees with

valuable skills and knowledge in particular— is

essential for rms’ competitiveness and at the very

core of strategic management (e.g., Castanias and

Helfat, 1991, 2001; Coff, 1997; Gottschalg and

Zollo, 2007; Makadok, 2003).

The extant literature in management and

economics has long recognized the strategic impor-

tance of overcoming this challenge and aligning

individual with organizational interests as a poten-

tial source for generating a sustainable competitive

advantage (e.g., Gottschalg and Zollo, 2007).

While the management literature emphasizes the

role of employee motivation and engagement

in sustaining a competitive advantage, the eco-

nomics literature highlights the need to incentivize

employees to work efciently. In essence, these

two strands of literature are two sides of the same

coin. They both suggest that employees compare

their available options. If employees perceive the

current employment to be superior in relation to

their alternative options, then their job motivation

is higher, and they are less likely to engage in

adverse behavior at the workplace. It follows that

rms can mitigate employees’ propensity to engage

in adverse behavior— or conversely, improve

employees’ job motivation and engagement—by

enhancing employees’ perception of the current

employment compared to their alternative options,

or by improving the monitoring of their employees

(e.g., Coff, 1997).

To align individual with organizational inter-

ests, rms can use various employee governance

tools. Yet,designing effective employee governance

tools is challenging.1This challenge has spurred a

1In particular, an effective employee governance tool needs to

consider the implications for both rent creation and appropria-

tion. Considering the latter is particularly relevant for managing

employees with valuable skills and knowledge.Given their strate-

gic importance for achieving a sustainable competitiveadvantage,

large literature. Broadly speaking, the extant litera-

ture in management and economics focuses on the

design of monetary incentives, and argues that tying

worker compensation directly to rm outcomes via

performance pay can help align the interests of

employees with those of the rm (e.g., Holmstrom,

1979). Nevertheless, a large literature points at the

pitfalls of monetary incentives (see the reviews of

Akerlof and Kranton, 2005; Gibbons, 1998; Pren-

dergast, 1999). First, performance-pay compensa-

tion schemes can be based only on variables that

are observable to management (e.g., output or prof-

its). However, such variables are imperfect indi-

cators of individual effort—for example, output

often derives from workers’ collective efforts in

a team (e.g., Holmstrom, 1982). Second, mone-

tary incentive schemes can create incentives for

workers to “game the system” (Frank and Obloj,

2014; Larkin, 2014; Oyer, 1998), sabotage the

work of their co-workers (e.g., Lazear, 1989), or

engage in corporate misconduct (Harris and Bromi-

ley, 2007). Third, if the job involves multiple tasks,

employees have an incentive to overperform on the

tasks that are well rewarded and underperform on

other tasks (e.g., Holmstrom and Milgrom, 1991).

Fourth, performance-pay compensation schemes

often show a weak link between pay and per-

formance, and trigger equity concerns and dis-

satisfaction (e.g., Larkin, Pierce, and Gino, 2012;

Nickerson and Zenger, 2008; Pfeffer and Langton,

1993; Zenger, 1992). Finally,and importantly, mon-

etary incentives can easily be imitated by other

rms and hence may not be effective in sustaining a

rm’s competitive advantage (Coff, 1997). Overall,

the theoretical arguments and empirical evidence in

support of the effectiveness of monetary incentives

to motivate employees and alleviate adverse behav-

ior at the workplace remain tenuous, and the ques-

tion of how to achieve these objectives remains a

challenging issue.2

they have increased bargaining power and, as a result, are better

able to appropriate rents (e.g., Castanias and Helfat, 1991, 2001;

Coff, 1999). Relatedly, these key employees may be reluctant to

make project- and rm-specic investments as such investments

are not easily redeployable and would place them in a weaker bar-

gaining position (Wang,He, and Mahoney, 2009; Wang and Lim,

2008; Wang and Wong, 2012).

2Another type of incentives are awards (e.g., Gallus and Frey,

2015; Gubler, Larkin, and Pierce, 2015). Awards are generally

seen as cheap and easy alternatives to pay-for-performance. Yet,

recent research shows that awards are also subject to major pit-

falls. In particular,Gubler et al. (2015) show that even purely sym-

bolic awards generate gaming behavior and crowd out intrinsic

Copyright © 2015 John Wiley & Sons, Ltd. Strat. Mgmt. J.,38: 163–183 (2017)

DOI: 10.1002/smj