Inducing Corporate Social Responsibility: Should Investors Reward the Responsible or Punish the Irresponsible?
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ORIGINAL PAPER
Inducing Corporate Social Responsibility: Should Investors Reward the Responsible or Punish the Irresponsible? Tyson B. Mackey1 · Alison Mackey1 · Lisa Jones Christensen2 · Jason J. Lepore3 Received: 21 March 2020 / Accepted: 31 October 2020 © Springer Nature B.V. 2020
Abstract Investors with a pro-social or sustainability agenda increasingly attempt to influence firm managers to adopt socially responsible behavior, either through positive/reward tactics or negative/punishment tactics. This paper considers how investors can use each approach to differentially influence managers to make more CSR investments. The paper uses game theory with an all-pay contest structure to model how a large institutional investor could reward firms for CSR activities by creating a socially responsible investment fund (reward contest) or punish firms via shareholder activism (punishment contest). We identify conditions under which the punishment contest induces a higher level of CSR activity among firms compared to the reward contest. Managers bearing substantial private costs stemming from the activism is one such condition. Spillover effects are seen as the other managers in the economy engage in CSR to avoid being punished by the investor’s activism. This level of engagement is not the case when rewards are used—only those managers with an expectation of being rewarded increase their CSR activity in that scenario. This suggests, for example, that incorporating thresholds or tiers (e.g. gold, silver, and bronze-level winners) can increase the effectiveness of reward contests. Implications for designing both positive and negative CSR inducements are explored. We also identify the ethical dilemmas that relate to such influence attempts. Keywords Corporate social responsibility · CSR · Socially responsible investing · SRI · Share-holder activism · Stakeholders · Investors · Inducements · All-pay contests · Rewards · Punishments · Managerial incentives
Introduction Stakeholders increasingly attempt to induce firm managers to adopt socially or environmentally responsible behavior (Bhattacharyya et al. 2008; Flammer et al. 2019; Reid and Toffel 2009). Stakeholders who desire corporate social responsibility (CSR) utilize either positively or negatively framed inducement tactics to influence firm managers to modify their behavior (Reid and Toffel 2009; Chatterji and Toffel 2010; Wowak et al. 2017). Positively framed
* Alison Mackey [email protected] Tyson B. Mackey [email protected] 1
Organization and Consumer Studies, Clarkson University, 8 Clarkson Ave., Potsdam, NY 13699, USA
2
Management, Brigham Young University, Provo, UT, USA
3
Economics, California Polytechnic State University, San Luis Obispo, CA, USA
inducements include designing public ratings and rankings (Chatterji and Toffel 2010) or offering targeted infusions of capital (Hill et al. 2007) and emphasize the promise of reward to induce more CSR. In contrast, negatively framed inducements include orchestrating boycotts or protests (King
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