Why Would the Social Behavior of Good Firms Improve and that of Bad Firms Worsen?

Brayden King & Mary-Hunter McDonnell, Good Firms, Good Targets: The Relationship Between Corporate Social Responsibility, Reputation, and Activist Targeting, in Corporate Social Responsibility in a Globalizing World (2012), available at SSRN.

The global financial crisis fueled public discontent with the economic and political outcomes of capitalist regimes. This caused a mistrust of large businesses, with outrage towards the multinational banking sector in particular. It is therefore no surprise that corporations are increasingly the targets of mass social protests. To take a few prominent examples, in the US, the Occupy Wall Street movement has been challenging the legitimacy of American capitalism, and demanding a deep transformation in the relationship between government, corporations, and the public. In Spain, against a background of skyrocketing unemployment rates, the 15-M Movement has been calling into question the distribution of political power and institutionalized corruption. At the same time, in Israel, unprecedented mass protests during the summer of 2011 called into question the excessive market power of conglomerates, the high cost of basic necessities, and the contraction of the welfare state. These instances of mass social protest pose a threat to corporations’ and public agencies’ legitimacy, reputation and smooth operations.

How do corporations respond to, and manage, the threats imposed by social activism, and what are the consequences of their strategies? One would expect, and indeed hope, that democratic pressures – i.e. social activism – would render irresponsible corporations more responsive to societal expectations and demands. And second, we would like to think that social activism is targeted at irresponsible firms, whereas socially responsive and responsible corporations are rewarded inasmuch as they are less likely to be targeted by activists. King and McDonnell investigate the latter expectation and find that precisely the opposite is true.

Specifically, they outline and test two competing hypotheses, which they label “the reputational halo effect” versus “the reputational liability effect.”  The former hypothesis predicts that firms that engage in more pro-social activities and/or those with positive reputations are less likely to be targeted by social activists. Their good reputations and social deeds act as a shield that protects them when things occasionally go wrong, or at times of general social upheaval.  The rival hypothesis suggests that corporate social responsibility (CSR), and/or positive reputations more generally, increase a firm’s risk of being targeted by social activists. The authors’ statistical analysis demonstrates that firms’ likelihood of being targeted by activist boycotts increases with higher levels of CSR  engagement (measured in terms of CSR announcements in the 6 months prior to a boycott), as well as with more positive pre-boycott reputations. Namely, good reputations and CSR activities act as a liability and not as a shield. The finding that a more positive reputation, which first and foremost reflects a firm’s profitability and commercial success, increases the firm’s likelihood of being targeted by activists should come as little surprise or concern, as we already know that social movements seek to enhance the impact of their campaigns by targeting visible and reputable firms. However, the finding that a firm’s pre-boycott announcement of CSR activities increase its risk of being targeted is more surprising and troubling (unless we think that CSR announcements are a poor predictor of a firm’s actual pre-boycott behavior, and that activists astutely see through corporate rhetoric).

The implications of the above findings, as outlined by the authors, are that socially responsible firms are more likely to attract social pressure, and consequently to further increase their already high CSR investment (and hopefully not just their CSR rhetoric). By comparison, irresponsible firms are paradoxically less likely to attract social activists’ attention, and are consequently under little pressure to improve their poor social performance. This seems like a normatively unsatisfactory outcome, which calls for consideration by social activists as well as for further research.