This chapter provides an overview of the existing literature about the intrinsic and external motivation of CEOs to set and achieve CSR targets. Also their interrelated effect will be discussed.
The literature gives four justifications why companies may engage in corporate social responsibility (CSR) on voluntary basis: 1) moral obligation, 2) sustainability, 3) license to operate, and 4) reputation (Porter and Kramer 2006). The moral argument – companies have a duty to be good citizens and to “do the right thing”. Companies are asked to achieve commercial success in ways that honor ethical values and respect people, communities, and the natural environment. The sustainability argument – companies are asked to meet the needs of the present without compromising the ability of future generations to meet their own needs. The license to operate notion highlights the fact that every company needs tacit or explicit permission from governments, communities, and numerous other stakeholders to do business. Finally, the reputation argument suggests that CSR initiatives will improve a company’s image, strengthen its brand, enliven morale and even raise the value of its stock.
In summary, there are several justifications why companies want to engage in CSR activities. Where CSR is about the behavior and strategy of the firm, corporate social performance (CSP) is the outcome of this behavior. To measure and present their CSP, companies set targets. Research of Eccles et al. (2014) provides evidence that high sustainability companies (corporations that voluntarily adopted sustainability policies by 1993) significantly outperform their counterparts over the long-term, both in terms of stock market as well as accounting performance. Therefore, shareholders want their firm to set meaningful and aggressive CSR targets in order to improve their CSP.
There is a large difference between the way companies use and disclose CSR targets. CSR activities and strategies are decided and executed by the CEO of the firm, who is going to consider the personal benefits and cost when deciding if, and to what extent, to engage in CSR. Therefore the extent to which companies will set and achieve CSR targets depends on the intrinsic and extrinsic motivation of the CEO to engage in CSR. Intrinsic motivation refers to doing something because it is inherently interesting or enjoyable, while extrinsic motivation refers to doing something because it leads to a separable outcome (Deci & Ryan, 1985).
Executives’ values and CSP
Why two CEOs of comparable companies with the same external incentives may have a totally different CSR strategy can be explained by the upper echelons theory, which is formed by Hambrick and Mason (1984). The upper echelons theory is built on the concept of bounded rationality and the idea is that top executives act on the basis of their personalized interpretations of the strategic situations they face (Cyvert and March, 1963; Hambrick & Mason, 1984). These personalized interpretations are formed by the executives’ experiences, values and personalities (Hambrick & Mason, 1984). Especially when making complex decisions, like strategic choices, organizational outcomes become reflections of executives themselves (Mischel, 1977). Therefore we can assume that the way a company deals with CSR issues, is depending on the values of their CEO.
The literature provides substantial support for the premise that executives’ political ideologies reflect their values (Rosenberg, 1956; Layman, 1997; Barnea and Schwartz, 1998; Goren, Federico, and Kittilson, 2009). Ideology refers to any abstract, internally coherent system of belief and meaning and are characterized by stability, consistency, logic and political sophistication (Allport, 1962; Converse, 1964; Gerring, 1997). Jost (2006) argued that people generally do think, feel, and behave in ideologically meaningful ways, even if they are not perfectly aware about their ideological tendency. Therefore we can assume that political ideologies are a reflection of CEOs values and beliefs.
According to Jost (2006), the liberal-conservative distinction “has been the single most useful and parsimonious way to classify political attitudes for more than 200 years.” Conservative parties tend to value individualism, free market mechanisms and proclaim a limited role for the state. Liberals, by contrast, want to exert more control over the market, and place a higher value on achieving social and economic equality (Detomasi, 2008; Jost et al., 2008). Based on this theory, Chin et al. (2013) examined the influence of CEOs’ political ideology, specifically political conservatism vs. liberalism, on organizational CSR behavior. Results indicate that the political ideologies of CEOs are manifested in their firms’ CSR profiles. Compared with conservative CEOs, liberal CEOs exhibit greater advances in CSR. Therefore we can assume that, politically liberal CEOs, relative to conservative CEOs, have more intrinsic motivation to advance CSR initiatives.
Executive Compensation and CSP
It can be the case that CEO’s are more interested in their reputation for great financial results and therefore prefer lowering CSR costs. As mentioned before, this is possible due to their values and lack of intrinsic motivation to perform CSR activities. In this case there is a misalignment of the interest of CEO and shareholders, which is an example of the principal-agent problem. Based on the agency theory, shareholders can decide to introduce CSP based incentives for the CEO. The agency theory assumes that managers are egoistic and must be given incentives to act in the best interests of the firm (Jensen and Meckling 1976). To align the interests between CEO and shareholders, firms have the option to incentive CEO’s through compensations plans. In this way the lack of intrinsic motivation will be supplemented or compensated by external incentives.
Some studies already examined the influence of CSP targets in incentive systems on CSP results (Russo and Harrison 2005; Maas, 2015). Russo and Harrison (2005) provide weak support for the idea that incentive systems can elicit desired environmental outcomes. However, remuneration policies seems to follow from emissions and not the other way around. Maas (2015) found that the use of CSP targets in executive compensation do not automatically lead to better CSP results. Based on these studies, we can conclude that the use of CSP targets in executive compensation and CSP improvement might not be related (or might only be weakly related).
This is possibly due to the fact that both studies did not take into account the intrinsic values of the CEO, while this might be important for the effectiveness of the CSP based incentives. Osterloh and Frey (2000) found that under certain conditions external incentives, in particular money, crowd out intrinsic motivation and therefore have a negative effect on the actual performance. This will happen when the following three conditions are met. First, there must exist an intrinsic motivation. Second, the external incentive is perceived as controlling. Third, the external incentive does not compensate the loss of intrinsic motivation. This is called the crowding-out effect (Frey, 1997) and is confirmed by field research (Frey and Jegen, 2001; Weibel et al., 2007).
The crowding-out effect consist of thee sub-effects: the over-justification-, the spill-over-, and the multi-tasking-effect (Rost and Osterloh, 2009). These sub-effect will be described based on the paper of Rost & Osterloh (2009).
Over-justification-effect: If intrinsically motivated persons are caused to act according to external incentives, their intrinsic motivation is reduced. They also tend to enjoy their work less because their autonomy is reduced. If the reduced intrinsic motivation is not compensated by external motivation, like money, the performance will decrease (Weibel et al., 2007).
Spill-over effect: If previously intrinsically motivated persons are rewarded monetarily for a certain task, the intrinsic motivation is not only reduced for that particular task, but also for tasks in other domains. For example, a child who is rewarded for clearing the table, will also ask to be rewarded when disposing of the garbage (Frey and Osterloh, 1997). As a consequence of this spill-over-effect, total efforts over multiple areas tend to be reduced when extrinsic incentives are applied.
Multi-tasking-effect. When people get paid for certain tasks, they will only concentrate on tasks with monetary rewards and neglect anything else (Pfaff and Stefani 2003). For example, transactions which are hard to measure, such as organizational citizenship, are ignored. Besides that, the strong focus on certain performance measures promotes manipulation by CEOs. Therefore creative accounting, cooking the books and income smoothing has increased, after pay-for-performance is introduced (Murphy, 2000). Rynes et al. (2005) conclude that Pay-for-Performance is so powerful that it is challenging to avoid motivating wrong behavior with compensation systems.
Summarizing, the theory indicates that personal values of CEOs, which are manifested in their political ideology, influence their CSR behavior. Politically liberal CEOs, relative to conservative CEOs, have more intrinsic motivation to perform CSR activities. Based on the agency theory, companies use CSP linked incentives to align the interest between the CEO and shareholders. However, this concept ignores the differences in intrinsic motivation of the CEOs. Some CEOs do not need any extrinsic motivation and the crowding-out effect even suggests that incentivizing might have a negative influence on the performance. Based on the theory, we expect that the crowding out effect also applies to liberal CEOs. Their values provide intrinsic motivation to engage in CSR activities. CSP based compensation will crow-out this intrinsic motivation. This leads to the following hypothesis…