CEO Materialism and Corporate Social Responsibility

Robert H. Davidson is Assistant Professor at Georgetown University McDonough School of Business. This post is based on a recent paper by Professor Davidson; Aiyesha Dey, Associate Professor of Accounting at University of Minnesota Carlson School of Management; and Abbie J. Smith, Professor of Accounting at University of Chicago Booth School of Business.

Fortune Global 500 firms spend over $15 billion a year on corporate philanthropy and countless hours and dollars on a host of social responsibility (CSR) activities. Corporate social responsibility refers to “managements’ obligation to set policies, make decisions and follow courses of action beyond the requirements of the law that are desirable in terms of the values and objectives of society.” Further, the ethical component of CSR proposed in the literature implies that morals or ethics of individual managers are an important factor in a firm’s CSR practices. This aspect of CSR brings into focus the point that key individuals may be instrumental in formulating and implementing firms’ CSR policy. This raises the question of the importance of individuals’ values, traits and motives in pursuing CSR. In our paper, CEO Materialism and Corporate Social Responsibility, we take a first step in this direction, and examine how CEO behavior outside the workplace, as measured by their materialism (relative ownership of luxury goods) is related to their firms’ CSR performance.

We interpret a CEO’s ownership of luxury goods, including expensive cars, boats, and real estate, as an indication of relatively high “materialism.” The psychology literature defines materialism as a way of life where an individual displays an attachment to worldly possessions and material needs and desires (Richins and Rudmin 1994). This literature documents experimental findings on how materialism is related to an individual’s behaviors towards other people and society, and motivates intriguing theories regarding an executive’s commitment to CSR.

We first examine the extent to which CEOs versus firms influence CSR decisions. When estimating models with both firm and CEO fixed effects we find that CEO fixed effects explain 52%-74% of the variation in their firms’ CSR scores across all social dimensions (Community, Diversity, Employee Relations, Environment and Product Safety). In contrast, firm fixed effects explain 11%-32% of the variance in CSR scores. These results imply that the CEO effect on the variation in CSR scores is likely to be first-order.

We then examine whether materialistic CEOs head firms with lower CSR scores and find that firms led by materialistic CEOs have lower CSR scores in all five CSR categories and a lower aggregate score. Firms with materialistic CEOs have fewer CSR strengths and more CSR weaknesses, with the magnitude greater regarding CSR strengths. We find that CSR scores increase when a frugal CEO replaces a materialistic CEO and that CSR scores decrease when a materialistic CEO replaces a frugal CEO. Analyzing within CEO variation, we find that increases in a CEO’s level of materialism during his tenure are associated with decreases in the CSR scores in his firm, driven by both decreases in CSR strengths and increases in CSR weaknesses.

Finally, we investigate whether the link between CSR and operating performance varies with CEO materialism. We find that CSR scores in firms run by frugal (i.e., non-materialistic) CEOs are positively associated with accounting profitability. In contrast, we find that CSR scores in firms led by materialistic CEOs have no relation to accounting performance on average. We probe further into the relation between CSR scores, operating performance, and CEO type, and find that in firms run by materialistic CEOs, the link between CSR scores and operating performance is more negative for CEOs that are more powerful (as measured by the pay slice of the CEO relative to other top five executives developed by Bebchuk, Cremers and Peyer (2011)). However, the link between CSR and performance marginally increases with CEO power for firms run by frugal CEOs.

Our analyses contribute to the CSR literature by providing the first empirical study on the role of unobserved managerial heterogeneity in explaining the variation in CSR scores across firms. Examining the role of individual CEOs in explaining CSR scores is especially important given the voluntary nature of CSR activities and the critical role that individual CEOs play in determining the CSR practices in their firms. In fact, we show that the CEO is responsible for 63% of the variation in a firm’s overall net CSR scores, while firm effects explain 20% of the variation. Our findings add to the growing research on the importance of latent factors such as a CEO’s ability, risk preferences, and personality in shaping corporate outcomes.

This is also the first article to provide evidence that firms’ CSR scores vary with one specific measure of a CEO’s personality, (i.e., his materialism). Results suggest that materialism is responsible for a significant portion of the “CEO effect” (approximately 15%) in explaining variation in firms’ net CSR scores. Our cross sectional models and predecessor-successor analyses indicate that firms led by materialistic CEOs (vs. frugal CEOs) have lower CSR scores. Further, CSR scores decline with the acquisition of luxury goods over the tenure of materialistic CEOs.

The paper is available for download here.

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