Higher Highs and Lower Lows: The Role of Corporate Social Responsibility in CEO Dismissal

• Published date: 01 November 2017
• DOI: http://doi.org/10.1002/smj.2646
• Date: 01 November 2017

Strategic Management Journal

Strat. Mgmt. J.,38: 2255–2265 (2017)

Published online EarlyView 20 March 2017 in Wiley Online Library (wileyonlinelibrary.com) DOI: 10.1002/smj.2646

Received 27 January 2016;Final revisionreceived 7 November 2016

Higher Highs and Lower Lows: The Role of Corporate

Social Responsibility in CEO Dismissal

Timothy D. Hubbard,1*Dane M. Christensen,2and Scott D. Graffin3

1Mendoza College of Business, University of Notre Dame, Notre Dame, Indiana

2Lundquist College of Business, University of Oregon, Eugene, Oregon

3Terry College of Business, University of Georgia, Athens, Georgia

Research summary: Investing a rm’s resources in corporate social responsibility (CSR)

initiatives remains a contentious issue. While research suggests rm nancial performance is the

primary driver of CEO dismissal, we propose that CSR will provide important additional context

when interpreting a rm’s nancial performance. Consistent with this prediction, our results

suggest that past CSR decisions amplify the negative relationship between nancial performance

and CEO dismissal. Specically, we nd that greater prior investments in CSR appear to expose

CEOs of rms with poor nancial performance to a greater risk of dismissal. In contrast, greater

past investments in CSR appear to help shield CEOs of rms with good nancial performance from

dismissal. These ndings provide novel insight into how CEOs’ career outcomes may be affected

by earlier CSR decisions.

Managerial summary: In this study, we examined a potential personal consequence for CEOs

related to corporate social responsibility (CSR). We explored the role prior investments in CSR

play when a board evaluates the rm’s nancial performance and considerswhether or not to re

the CEO. Our results suggest that while nancial performance sets the overall tone of a CEO’s

evaluation, CSR amplies that baseline evaluation. Specically, our results suggest that greater

past investments in CSR appear to (a) greatly increase the likelihood of CEO dismissal when

nancial performance is poor, and (b) somewhat reduce the likelihood of CEO dismissal when

nancial performance is good. Thus, striving to deliver prots in a socially responsible manner

may have both positive and negative personal consequences. Copyright © 2017 John Wiley &

Sons, Ltd.

Introduction

A CEO’s primary objective is to generate eco-

nomic returns for shareholders (Quigley & Ham-

brick, 2015). Consistent with this idea, rm nan-

cial performance is the primary metric by which

CEOs are evaluated (Grafn, Boivie, & Carpenter,

2013) and it is also the strongest predictor of CEO

Keywords: CEO dismissal; corporate social responsibil-

ity; nancial performance; panel regression; stakeholders

*Correspondence to: Timothy D. Hubbard, Mendoza College of

Business, University of Notre Dame, Notre Dame, IN 46556.

E-mail: thubbard@nd.edu

Copyright © 2017 John Wiley & Sons, Ltd.

termination (Finkelstein, Hambrick, & Cannella,

2009). Some argue, however, that these economic

returns should be pursued in a socially responsi-

ble manner (Freeman, 1984), thereby suggesting

that corporate social responsibility (CSR) is a sec-

ondary objective on which CEOs should focus. As a

result, some CEOs have begun supporting CSR ini-

tiatives, committing signicant corporate resources

(e.g., money, time, attention) to help address social

and environmental problems.

Whether or not CSR activities are in the best

interest of the rm, however, remains a contentious

issue. Proponents of CSR suggest it can help