In our recent study, we ran an in-depth analysis of the impact of compensation incentives on actual CSR performance.
We used a cross-industry sample of 746 listed American companies over a 12-year period, from 2002 to 2013. Our research adopted a dynamic perspective to explain the effectiveness of using these systems over time. In addition, taking on a corporate governance perspective helped us to tease out what we found in exploring the joint use of executive compensation incentives with other CSR-related governance systems.
Specifically, our work is the first study to investigate how organizational learning affects the relationship between executive compensation and corporate social responsibility performance over time. Adopting CSR-based incentives entails complexities related to measuring results and setting reference targets. These complexities can only be solved by starting to use this tool. From the perspective of corporate governance, we explored the moderating role of three specific systems: the publication of a report on corporate social responsibility, the request for a CSR audit by an external firm and the establishment of a committee hoc within the BoD.
CSR reports provide detailed segmentation of corporate social responsibility performance, risks and actions. Such documents are written and published to show the company is making an effort to reduce the information asymmetry between it and the public regarding social and environmental concerns. CSR audits, instead, involve the voluntary purchase of external assurances on CSR reports. This control mechanism serves to enhance the credibility of the information disclosed, which in turn goes to mitigate the potential information asymmetry with external stakeholders and compensates for the fact that it is impossible to observe managers’ behavior. In some cases, corporate reputation or image concerns vis-à-vis shareholders and other stakeholders may also prompt companies to engage in some sort of instrumental reporting in the form of “greenwashing.” CSR committees are groups of senior directors, executives and other managers who are tasked with advisory duties related to corporate social responsibility. In the field of CSR management, a committee can be a powerful tool to provide managers with the right knowledge and to foster their performance.
Our hypotheses are confirmed by the results of analyzing the research sample. What first emerges is that the mere use of CSR-linked incentives does not immediately foster CSR performance. In fact, we begin to see concrete positive effects from the third year on, and the effectiveness of this system escalates continuously in subsequent years. Therefore, we find a significant phenomenon of capitalization over time. The ability to leverage learning is best when two other CSR-focused governance systems such as reports and committees are jointly employed. They play a positive moderating role in terms of the effects that remuneration incentives have on company CSR performance, demonstrating how CSR performance is the result of a broad cultural change in the company, to be managed on different levels. The CSR audit, on the other hand, does not seem to moderate the relationship: in this sense, obtaining external certification may simply play a formal, non-substantial role.