One of the primary responsibilities of the CEO of any major corporation is to articulate the firm’s financial goals as a focus for its strategy and mission. They receive the highest compensation because the direction they provide for the company is largely responsible for its success. A new study has found that firms led by greedier CEOs, who are driven by the pursuit of extraordinary or excessive material wealth before the 2008 global financial crisis, suffered more severe consequences because of the shock and took a longer time to recover.
How CEO greed impacts the company’s stance
In a study titled "CEO Greed, Corporate Social Responsibility, and Organizational Resilience to Systemic Shocks," which was published by SAGE Journal of Management, authors described how top executives of a company affect the well-being of the multiple stakeholders as well as the long-run organization outcomes.
Miha Sajko from the University of Antwerp and colleagues used a sample of 301 CEOs of public US organizations and analyzed the stock prices of the companies they led. Their purpose was to study the greed among these leaders and their implications on corporate social responsibility (CSR). The authors likewise analyzed how their greed or lack thereof affected the firms’ resilience to the 2008 global financial crisis.
Self-interest vs. societal interests
CSR is a business model or management concept that helps a company be socially accountable to the public, its stakeholders, and to itself. To engage in CSR, it means that the company operates in ways that enhance society and the environment instead of contributing negatively to them in the ordinary course of business. Depending on the industry or the company, CSR is a broad concept and can take on many forms. Through volunteer efforts, CSR programs, and philanthropy, businesses can benefit society while boosting their brands.
This management concept is about finding a balance between the interest of the stakeholders, such as customers and employees, and the organization. It also takes into consideration the interest of the society at large. Often, firms see CSR as a costly investment in the short term but it pays off in the long term.
In the same way, greed is linked to an excessive form of self-interest. University of Antwerp and Tilburg University researchers found that the greedier a CEO is, the less they invest in CSR and this negative effect became stronger when it corresponds with the compensation policies of the company that encouraged short-term financial results.
It was also found that the lack of stakeholder engagement or not investing in CSR made firms more vulnerable to the global financial crisis and external shocks. Since there was a lack of support from the stakeholders, internal buffers, and depletion of resources, companies that were led by greedier CEOs took a longer time to recover from the financial crisis. It also took them a long time to get their share prices back the level before the financial crisis.
Greed over responsibility and its effect
In 2009, former US President Barack Obama reflected on the devastating consequences of the 2008 GFC in his address to the employees of General Motors. At that time, he condemned the “attitude that’s prevailed from Washington to Wall Street to Detroit for too long.” It is the attitude that valued wealth over work, greed over responsibility, or selfishness over sacrifice. While others believe that putting yourself and your interests first is not shortsighted or selfish but makes you smart and rational, media and scholars have suggested that the unconstrained selfishness of the top executives may be detrimental to the welfare of the broader society and the livelihood of organizations.
The authors of the recent study considered greed as an individual-level motive that is characterized by an “extreme form of self-interested behavior” and low concern for the welfare of others.
Benefits of investing in CSR
Sajko and the team added that there are two ways that CSR builds the resilience of a company. One is that it builds the stability of the firm by strengthening the relationship between the stakeholders and the firm and by creating interdependencies. Second, investing in CSR leads to greater flexibility as firms with broad stakeholder engagement gain access to the distinctive and diverse point of view. Thus, it increases the set of possible adjustments that the company can do to the external changes. For the basis of such insights, they concluded that firms led by greedy CEOs will experience greater losses even in the short run as manifested by the drop in the companies’ stock price.
The authors believe that their findings will be helpful to the literature on the drivers of executive behavior. They also mentioned the upper-echelons (UE) perspective, management theory that states that the organization's outcomes are partially predicted by the managerial background characteristics of the top-level management team as set forth by Donald C. Hambrick and P. Mason in 1984.
On the other hand, the agency theory tradition established the importance of monetary incentives as instruments to influence the behavior of CEOs. CSR scholars believe that certain pay packages help steer the CEOs to adopt to longer time horizons, leading them to strengthen and establish their relationships with the stakeholders.
By combining the UE perspective and the agency theory to predict how and why CEOs shape the companies’ CSR profiles, the study responds to calls of integrating the nonpecuniary and pecuniary moves as for strategic decision making.
According to a 2018 survey by Deloitte Insight, 77% of the global respondents consider social responsibility but only 18% said that it was a top priority and is reflected in their strategy. The majority (56%) of the respondents said it is not their company’s focus or not well-developed or invested in and 26% consider it high on their list of priorities.
According to the 2017 Cone Communications CSR Study, global consumers consider the company’s CSR commitments when they look to which firms they want to do business in their communities (84%), what investments to make (67%), and where to seek employment (79%).
Social value data provider Impact also published that 94% of Gen Z think that companies should address critical issues and 55% of consumers are willing to pay extra for services and products from firms that have dedicated social impact plans.
With the stakes higher than ever for firms, CSR matters. Companies and their top executives should consider the role they play in shaping society as a whole.