A study at Drexel University’s LeBow College of Business shows that the US managerial labor market takes into account corporate social performance when assessing the quality of Chief Executive Officers.
- In addition to using corporate financial performance as a signal of managerial ability, CEOs are also assessed based on the social performance of their firm. In fact, CEOs are more likely to leave office when there is a significant decline in their firm’s social performance. On the contrary, the likelihood of CEO turnover decreases when corporate social performance improves significantly.
- CEOs leaving public companies with strong social performance are more likely to secure new executive positions. In addition, their employment gap is shorter than CEOs from companies with weak social performance.
- Among the CEOs who secure new executive positions in US public companies, those coming from companies with stronger social performance are also more likely to move to larger public companies and to receive higher compensation.
Summary of Complete Findings
The managerial labor market is a powerful disciplinary and incentive mechanism for Chief Executive Officers (CEOs) in US public companies. It influences managerial decisions, including risk-taking, capital structure, and investment. Ultimately, it encourages CEOs to take actions that enhance the value of their companies. As CEOs’ abilities are not directly observable, the labor market assesses managerial talent based on their outputs; and, in particular, the financial performance of their employers.
Corporate social performance has attracted increasing attention from shareholders and other stakeholders because of the growing importance of sustainable investment. In its 2020 biennial review, the Global Sustainable Alliance estimated that the global investment industry managed $35.3 trillion of sustainable investment assets, an increase of 15% in two years, and equating to 36% of all professionally managed assets worldwide.
This study examines whether and how the managerial labor market considers a company’s social performance when assessing CEOs’ abilities. It uses the social ratings issued by MSCI ESG STATS, which reflect various aspects of corporate social responsibility (CSR).
After controlling for financial performance, the researchers first show that the likelihood of CEO turnover is positively correlated with a significant decline and negatively correlated with a significant improvement in the social performance of their firms. A decline (improvement) is considered significant when the CSR performance of a firm moves from the top to the bottom (from the bottom to the top) quartile of the distribution of the CSR score by company and by year.
The finding suggests that the board of directors considers good social performance a positive indicator of CEO ability. It also provides evidence that internal corporate governance mechanisms discipline executives’ social performance by affecting their probability of keeping their job.
Strong corporate social performance can convey positive information about CEO quality in two ways. First, CEOs of companies with good CSR may be perceived as having the expertise to create shareholder wealth while balancing the needs of other stakeholders. With various stakeholders - including regulators, paying increasing attention to CSR activities - such expertise can be in high demand as a growing number of potential employers aim to achieve a balance between social responsibility and value maximization. Second, CSR activities are often associated with an image of integrity, which can reflect on the personal qualities of CEOs who champion them.
When investigating how the managerial labor market reflects social responsibility, the researchers find that CEOs leaving companies with strong social performance are more likely to secure new executive positions, have a shorter employment gap between jobs, join larger public companies, and get paid higher remuneration. Specifically, 61% of CEOs leaving a company with strong CSR performance join a larger public firm compared to only 46% of CEOs leaving a company with low CSR. Similarly, 68% of CEOs leaving a company with strong CSR performance get another executive position that pays higher compensation than their previous employer compared to only 49% of CEOs leaving a company with low CSR.
An important assumption of the study is that a company’s social performance can be largely attributed to its CEO. If the CEO’s decisions drive a company’s CSR performance, a company with good CSR is more likely to experience a decline in CSR performance after the departure of its CEO. Similarly, the subsequent employer’s CSR performance will likely improve after the appointment of a new CEO from a company with good CSR. These relationships are confirmed by the data, suggesting that indeed much of companies’ social performance can be attributed to the discretion of their CEOs.
Finally, the researchers measure the extent to which CEOs are linked to their companies’ CSR activities by examining how frequently the name of a CEO is mentioned in the Corporate Social Responsibility Newswire, a digital media platform that distributes the latest positive CSR news. They find that CEOs have better career outcomes when their names are mentioned more frequently in CSR news releases.
In conclusion, this study suggests that CEOs with a reputation for committing to social good have more favorable job market prospects. Current and potential employers not only consider financial performance as an indicator of managerial quality, but also value corporate social performance.
“Corporate Social Performance and Managerial Labor Market” by Xin Dai (Drexel University), Feng Gao (Rutgers University), Ling Lei Lisic (Virginia Tech), Ivy Zhang (University of California, Riverside), was published in Review of Accounting Studies, 2021.
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