The roots of corporate social irresponsibility

Pressure. Pressure—or a lack thereof—has been proposed as an antecedent of fraud, greenwashing, and CSiR. Pressure can come in many forms and from different people or institutions. It is not known whether all types of pressure affect decisions in the same way. Scholars have studied how pressure from different stakeholder groups in relation to CSR initiatives influences the adoption of environmental practices. This research considers different degrees of adoption, namely superficial or symbolic adoption at one end, versus substantial adoption or the internalization of environmental practices at the other end.

Evidence suggests that pressure from customers or industry groups relates to superficial or symbolic adoption, whereas pressure from shareholders, banks, financial institutions, or suppliers relates to substantial adoption or ‘corporate greening’. Similarly, researchers have found that stakeholder pressure directed at headquarters relates to decisions to relocate operations to countries where stakeholder pressure is lower or laws are less stringent.

One study showed that pressure from within the organization itself can be associated with CSiR. These researchers demonstrated that firms that achieve performance above social expectations are more likely to engage subsequently in illegal behaviours. The authors reason that the pressure organizations face to surpass their own performance achievements might explain their subsequent illegality. Thus, it appears that the source of the pressure does matter, and it can facilitate or deter CSR progress and even facilitate CSiR.

One form of pressure is time pressure. Organizations are under constant pressure to move quickly in response to increased competition, especially in industries where innovation is critical. Research shows that time pressure impacts performance (including negative behaviors). Morales-Raya and Bansal studied organizational speed in two beverage producers over a ten-year period. They consider the frequency of activity related to CEO tenure, mergers and acquisitions, strategic alliances, and shares traded in their assessment of organizational speed. Their outcome is the number of CSiR events (e.g. product recall, pollution) directed at various stakeholder groups (i.e. shareholders, consumers, environment, and society). Their findings show a greater number of organization¬al mishaps in the beverage producer that scored higher on organization speed.

Further¬more, in a study of CSR managers, Steinmeier reported that they experience in¬tense pressure to improve in the various CSR rankings and face what can be unrealistic performance expectations, which can give rise to CSiR.

Much has been written about the 2010 Deepwater Horizon oil spill in the Gulf of Mexico. In a Federal ruling, BP was found to be primarily responsible (although not solely responsible) for the disaster. Interpretations of the ruling make note of the role that the decision to continue drilling in an effort to save time and money played in the disaster despite evidence from testing that suggested the drilling should stop.

Incentive Systems. The design of incentive systems can encourage the type of risky decision-making that if left unmanaged can result in unethical behavior. One of the high-profile cases that showed the potential negative impact is Enron, where the practices are believed to have contributed to a culture that rewarded risky behavior and a focus on the short term. The ‘rank-and-yank‘ performance review system, heavy reliance on stock options, and potential for large bonuses put pressure on individuals to close deals even if those deals later created little or no value to the company. The company was able to mask the downside of deals gone wrong due to the low transparency that permeated Enron more generally and to the low transparency that was afforded by some of these practices. In a study of CEO pay structure and CSR, Deckop et al. found that a structure that rewards short-term performance relates to less CSR compared to a structure that focuses on long-term performance

The role of organizational climate

Climate is the perceptions that individuals develop from their cumulative experiences at work. Individuals’ interactions with policies, practices, procedures, and the work context more broadly are believed to comprise climate perceptions. The experiences of each employee are referred to as psychological climate where the aggregated composite of the experiences and perceptions of several individuals at work comprises the organizational climate. Climate has been shown to impact work outcomes at the individual, group, and organization level of analysis.

Two types of climates are of particular interest in terms of CSiR:

Ethical climate. Aspects of the work context that are of an ethical or moral nature shape what has been referred to as ethical work climate. Research shows that the perceptions that employees have of the organization’s CSR initiatives relate to their perceptions of ethical climate. Victor and Cullen derived nine dimensions of ethical climate. Five emerge more often in studies of ethical climate in organizational contexts: instrumental, caring, independence, rules, and law and code.

Instrumental climates are believed to motivate decision-making that serves the interests of the organization (or individual), whereas caring climates emphasize decision-making that takes into consideration its impact on others (including society). Independent work climates emphasize the role of individuals’ idiosyncratic moral principles and beliefs rather than those of other individuals or institutions. Rules climates put emphasis on organizational codes of conduct, whereas law/code climates defer to the rule of law (or external codes of conduct).

Meta-analytic research indicates that each ethical climate type relates to less dysfunctional behavior except the instrumental climate, which relates to more dysfunctional behavior. A different meta-analysis also showed that climates that focus on protecting self-interest relate to unethical behavior, whereas climates that focus on following rules and procedures or that focus on concern for the public/customers relate to less unethical behavior.

Recent research has focused on understanding some of the mechanisms that explain how climate works, as well as the conditions that moderate how it works. A study of corporate accountants showed that most ethical climate types have a positive relationship with the importance organizations attach to ethics/social responsibility except for the instrumental climate, which has a negative relationship.

The importance accountants place on corporate ethics/social responsibility in turn relates to their judgments of various ethical actions. Another study found support for the role that moral emotion (e.g. empathy or feelings of sympathy and compassion) plays in explaining the relationship between ethical climate types and ethical behaviour. Researchers showed that both the other-focused ethical climate and a self-focused ethical climate relate to higher ratings of ethical behavior as provided by a supervisor when individuals also report high collective empathy and high ethical efficacy. When only bivariate correlations are considered, a self-focused ethical climate has a negative relationship with ethical behavior, whereas the other-focused ethical climate has a positive relationship with ethical behavior.

Other scholars found support for the interaction between service and ethical climates. They showed that a strong service climate (i.e. employee perceptions of the importance of and support provided for delivering superior customer service) has a more favorable relationship with business outcomes when ethical climate (i.e. employee perceptions of organization’s ethical treatment of customers) is also strong (or unethical behavior is low).

Still other scholars theorize that ethical climate can play a positive role in various efforts at CSR whereas an unethical climate is proposed to explain CSiR behavior such as greenwashing. Researchers even call for a separate construct labeled ‘pro-environmental organizational climate’, which would capture employees’ perceptions of the sustainability-related practices of their organization, with the aim of explaining the antecedents of genuine green behaviors on the part of employees.

Diversity climate. A diversity climate refers to shared perceptions that employees have with respect to the organizations’ practices surrounding tolerance for racial, gender, LGBT, age, and ethnic diversity. Research shows that a strong diversity climate has been associated with increased loyalty, work group performance, retail sales growth, customer satisfaction, and lower turnover intentions.

Research has also shown some of the individual and organizational costs that follow from an antithesis of diversity, such as discrimination, sexual harassment, and various forms of fraud or white-collar crime.

Organizational Culture and Leadership. Organizational culture refers to the set of assumptions and values that guide the behaviors and decisions of its members. Once values are encoded, they are said to be disseminated through rituals, artifacts, symbols, and stories of leaders as a way to emphasize what is important and how to do what needs to be done.

Norms are then established for what constitutes appropriate conduct. Although climate and culture are distinct, some scholars suggest that they represent “the higher-order social-psychological fabric of the organization”.

Different organizational culture types have been shown to relate positively to employee attitudes and operational or financial effectiveness. In a review of organizational misconduct, researchers explain that organizational cultures can endorse, permit, or facilitate certain forms of misconduct while at the same time condemning others. This perspective lends support to arguments (and research findings) that organizations can engage in one form of CSR while simultaneously engaging in another form of CSiR.

In research using the Sustainalytics social ratings, researchers showed that organizational culture is one intangible resource (of the four they studied) that mediates the relationship between CSR and firm performance. They reported that the mediation works in the opposite direction as well (i.e. financial performance to CSR through organizational culture). Thus, research may want to consider the extent to which organizations value sustainability, ethics, equality, or other social responsibilities; the extent to which these values are embedded within the organization’s norms; and the extent to which they are, in fact, practiced.

Leadership also matters. Leaders are the most important figures for shaping the culture of the organization through their day-to-day behaviors including communication. They set the tone for whether the espoused values of the organization are consistent with the enacted values. Commitment to values that support CSR and endorsement of these values matters and can help employees make sense of competing demands that pit profits against social goals.

Research shows that managers’ commitment to CSR values relates to the positive discretionary behaviors of employees, which relate to firm performance. Research has also shown that the pro-environmental behaviors of leaders relate to employees’ passion for the environment and their own behaviors in support of the environment.

As noted earlier, some leaders create positions such as CSR/sustainability managers/executives to facilitate CSR initiatives including the mitigation of CSiR. For example, Volkswagen hired an anticorruption executive to its top management team following its emissions test scandal. Furthermore, re¬search has shown some support for the positive influence that sustainability managers can have on the firm’s environmental performance when their boards also have environmental committees.

Organizational leaders do not always practice what they preach or what they claim in their vision and values statements. One of Enron’s organizational values was integrity. However, leaders oftentimes failed to model this value. The alignment of rhetoric to action can fail: top management’s espoused commitment to CSR does not always match what is implemented, which has been referred to as ‘decoupling’. Decoupling occurs when there is a gap between an organization’s commitment to do something and the actual implementation of that commitment. A company may exaggerate, couple rhetoric and action, or remain silent on its commitment.

For example, the demand for reduced carbon footprints and for healthier products and services does not always coincide with shareholders’ focus on net present value creation. These competing demands drive some firms to decouple CSR rhetoric from action or to misrepresent sustainability information. Research shows that when firms report on their sustainability initiatives, the communication pattern of firms that engage in decoupling has different linguistic properties compared to firms that do not decouple.

In response to the fear of a drop in share price associated with investments in environmental initiatives, some firms even underreport environmental achievements rather than overreport, which is known as ‘brownwashing’. This underreporting can occur not just for sustainability efforts bot for everything from charitable donations to employee benefits spending to the diversity of board members.

The role of boards of directors

Boards of directors have great influence over organizational activities and play an important role in deciding on the degree to which an organization will invest resources in CSR. Researchers who have studied the relationship between board characteristics and CSR or CSiR have found a positive relationship for the independence of directors, board size and board diversity including more favorable CSR outcomes or less fraud.

When researchers analyzed the environmental performance of a sample of 1,216 firms  over a two-year period, they found a positive relationship between environmental strengths and the independence of the board members and the number of directors. Another study also reported a positive relationship between board independence, board size, and CSR in a sample of 107 U.S. banks.

Elsewhere, a conceptual paper on ‘leadership centrality’ proposed that centralized leadership can motivate CSiR when paired with a high need for personal power. High leadership centrality occurs when the chair of the board of directors is the CEO himself or herself and several board interlocks exist (i.e. members of senior leadership teams serve on each other’s boards). In contrast, shared leadership and a high need for social power (i.e. use power to help develop others) are less likely to motivate CSiR.

One study reported a positive relationship between a firm’s carbon disclosure score and both board size and board nationality (i.e. percentage of foreign directors). Another found similar support for the independence of board members, board member diversity, and CSR performance. In contrast, in an analysis of 104 U.S. firms from 2010 to 2012, researchers found no relationship between the independence of board members and a firm’s charitable donations. However, that study did find support for a positive relationship between the proportion of female board members and the firm’s charitable donations.

Another study considered securities fraud in a sample of 1,484 firms from the China Securities Regulatory Commission. Half of these firms served as a control group, while the other half had some reference to an enforcement action. Researchers found a negative relationship between the proportion of female board chairs (or the proportion of female directors) and fraud.

Research has shown some support for the role that environmental experience among board members plays in achieving CSR progress. In an analysis of 294 U.S. firms drawn from the KLD database for 2000 to 2008, firms whose board members had accumulated more environmental experience achieved environmental strengths scores that were above the industry average.

Organizations in which boards establish specialized committees to oversee environmental strategies have been shown to report stronger environmental performance.  This effect was found to be stronger for firms employing a sustainability manager. The results from this preliminary set of studies suggests that board composition and expertise matters for CSR and CSiR.

Unethical firm behaviour, greenwashing, and CSiR more generally have led to calls for further regulation in an attempt to standardize reporting guidelines. There are advocates for more regulation as well as opponents, yielding a rich debate around whether or not regulation is a solution or even part of the solution to advancing CSR or minimizing CSiR. Regulation has been viewed as a form of pressure that should motivate organizations to take important steps towards ethical behavior or toward meaningful progress on environmental initiatives.

However, regulation can be poorly designed, resulting in resistance and diminished effectiveness. The context in which it is adopted can also impede its effectiveness. Furthermore, it has been argued that regulation has done little in the past to eliminate other forms of wrongdoing or to spur CSR initiatives. More recently, some have argued that the Sarbanes Oxley Act of 2002 has not had the intended effect of mitigating organizational wrongdoing.It has also been argued that deregulated environments are ripe for organizational wrongdoing and that voluntary CSR efforts can be met with resistance, depending on the source of pressure,  and can secure limited beneficial outcomes absent sanctions.

In contrast, voluntary initiatives have been shown to have ¬the potential to achieve more than mere compliance with regulation, since they are internally motivated. Although the debate typically focuses on whether or not¬ to regulate, per¬haps the debate should also consider a combination of regulation and voluntary initiatives that is informed by the context.

In closing

Corporate social responsibility continues to motivate organizations to adopt more responsible business practices. This motivation is driven in part by pressure from different stakeholders. Nevertheless, the context in organizations is ripe for risky behavior giving rise to CSiR instead of CSR or to both. Thus, leaders continue to face the challenge of how to motivate strong but ethical performance while preserving the environment and natural resources for future generations.

Maria Rotundo is a Professor of Organizational Behaviour and HR Management at the Rotman School of Management. This article summarizes her chapter, “Corporate social irresponsibility in spite of efforts to act responsibly: The nature, measurement, and contextual antecedents of CSR and CSiR by Organizations”, which was published in the Oxford Handbook of Corporate Social Responsibility: Psychological and Organizational Perspectives (2nd Edition, Oxford University Press).

This article originally appeared in a recent issue of Rotman Management, the magazine of the University of Toronto's Rotman School of Management. www.rotman.utoronto.ca/connect/rotman-mag.