Do CEOs Invest in Corporate Social Responsibility for Personal Insurance Purposes?

Abstract

We ask whether CEOs invest in corporate social responsibility (CSR) for personal insurance-like protection. To address this question, we examine the setting of CEO clawback provisions, which are compensation contract provisions that enable boards of directors to recoup CEO compensation upon financial restatements or misconduct. Clawbacks increase the individual-level risk of recoupment on CEOs’ wealth, which in turn increases incentives for CEOs to incur insurance-like protection. We find that firms led by CEOs with clawback provisions take on more CSR activities. The effect is stronger when CEOs perceive insurance-like benefits of CSR to be higher – when corporate governance is weaker, future restatements are more likely, the amount of compensation at stake is larger, the CEO is less confident, and board directors have more discretion over clawback enforcement. We also find that CSR activities conducted under this motive may not be optimal for firm value. Our study contributes to the theory on the risk-management role of CSR and research on how CEO characteristics and incentives affect their decision to engage in CSR. While prior research on the risk-management role of CSR has predominantly focused on insurance-like benefits at the firm-level, there has been scant evidence on whether such benefits can act as a motivation for CEOs to actively engage in CSR to incur these benefits for themselves at the individual CEO-level. Furthermore, many studies have explored the CEO related antecedents of CSR activities, but to our knowledge we are one of the first to bring the risk-management role of CSR to the CEOs’ individual-level as an incentive to engage in CSR, shedding light on how the incentives and contractual conditions of CEOs can affect their propensity to engage in CSR activities, even as unintended consequences.

Keywords: corporate social responsibility, insurance-like benefit, executive compensation clawback provisions, corporate governance, stakeholder relations