Why and when owners affect firms’ corporate social responsibility performance
- While owners, especially controlling ones, play a critical role in firms’ strategic decisions, they face ethical dilemmas between funding CSR initiatives and prioritising personal gains.
- The potential for conflicts between controlling and minority shareholders motivates ultimate controlling owners to promote CSR to build legitimacy.
- Strengthening governance mechanisms and promoting higher ethical standards in business can encourage controlling owners to drive better CSR performance, benefiting both society and business stakeholders.
Firms are increasingly aware of the need to actively manage their business activities’ environmental, social, and governance (ESG) implications. Among the many ESG considerations that firms face today, one perplexing factor has been the role of owners in their firms’ corporate social responsibility (CSR) performance. While owners, especially controlling owners with the highest control rights over their firms, play an increasingly prominent role in their firms’ strategic decisions, they face diverging ethical preferences between funding and potentially benefiting from their CSR.
CSR involves initiatives that voluntarily integrate social and environmental concerns into a firm’s business operations and stakeholder interactions. These initiatives have significant immediate costs, while their potential benefits to the firm and its owners remain uncertain.
Despite owners’ crucial role in shaping firms’ CSR, research focusing on direct, immediate owners has struggled to explain why and when owners will promote or suppress their CSR performance. To advance our understanding of the roles of owners, we focus on the essential but overlooked roles of ultimate controlling owners who hold substantial decision-making power and exert effective control over firms.
Exerting control
Ultimate controlling owners are prevalent in both developed and emerging economies, and they wield significant control over their firms, often surpassing their ownership (or cash-flow) rights. They exert control through various intricate ownership structures and arrangements, such as indirect pyramid ownership structures, deviations from the one-share-one-vote rule (or dual-class share structure), and complex cross-holdings.
We propose an original theory to explain why ultimate controlling owners with greater control rights will promote CSR performance in their firms. We tested our theory using a sample of 852 publicly listed Chinese firms from 2008 to 2017 and found that ultimate controlling owners with greater control rights promote better CSR performance in their firms.
This is because ultimate controlling owners with greater control rights face more substantial external stakeholder pressure because of the higher potential for principal–principal conflicts. Through their dominant control rights, ultimate controlling owners can easily prioritise their self-interests at the expense of minority owners and other stakeholders and minimal cost or risk to themselves. However, the possibility of principal–principal conflicts and expropriation behaviours by ultimate controlling owners are frowned on by minority owners and other stakeholders because such actions can lead to weaker firm performance, heightened risks of organisational distress, and even disruptions in the stock market by encouraging excessive speculation. In particular, market regulators view expropriation by ultimate controlling owners as exploitative and not conforming to market and societal norms. Consequently, ultimate controlling owners with greater control rights are motivated to promote CSR performance in their firms to demonstrate that they are responsible and accountable owners who prioritise the collective interests of stakeholders, thereby gaining legitimacy and goodwill from their stakeholders.
We also found that ultimate controlling owners with greater control rights will promote better CSR performance to a greater extent when they share similar corporate names with their firms and receive increased financial analyst coverage. When ultimate controlling owners and their subsidiaries and affiliated firms share similar corporate names, key stakeholders can more directly connect firms’ CSR performance to their ultimate controlling owners. This explicit association allows ultimate controlling owners to more directly demonstrate to their stakeholders that they are responsible owners and help them gain legitimacy and goodwill. Similarly, increased financial analyst coverage enhances a firm’s visibility, subjecting it to greater public scrutiny and acting as a bridge through which key stakeholders can access information about a firm’s CSR performance and, in turn, enables firms to benefit from their socially responsible practices.
Our study contributes to a more nuanced understanding of how differences in ownership structure and owner type associated with ultimate controlling owners shape their motives and power to affect CSR performance in their firms. By shifting our focus to ultimate controlling owners, we establish these dominant owners as the focal owners of interest when investigating the impact of owners on their firms’ CSR performance instead of direct, immediate owners emphasised in previous studies. Doing so gives us more accurate insights into the relationship between owners and their firms’ CSR performance. Our comprehensive theoretical framework also elucidates the underlying processes and boundary conditions of why and when owners affect their firm’s CSR performance.
Ethical and practical implications
Our study also has some important ethical and practical implications. Scholars and regulators are often conflicted over the ethical roles of ultimate controlling owners. Large owners have competing incentives to ethically ensure good governance on the one hand and unethically expropriate wealth at the expense of others on the other hand. In many Western developed market-oriented markets, ultimate controlling owners are frowned upon, given their potential for principal–principal conflicts and expropriation risks that harm the interests of other key stakeholders. However, within broader social, political, and economic contexts, ultimate controlling owners still need to secure the moral right to operate and demonstrate that they are ethically responsible owners who safeguard the interests of all stakeholders.
Moreover, many ultimate controlling owners (for example, state- or family-owned) have broader objectives beyond simple financial returns, which can bring about net positive and more equitable returns to society. Hence, ultimate controlling owners are not inherently good or bad, and changing the prevailing ownership structure is less important to promote CSR performance. Instead, policymakers and regulators can advocate CSR as an essential and legitimate corporate activity to encourage ultimate controlling owners to actively promote CSR performance in their firms and contribute positively to society.
Furthermore, when firms are controlled through indirect, intricate ownership structures, regulators and social activists should focus on ultimate controlling owners rather than direct, immediate owners when advocating for firms to promote ethical business practices and to do more for society. Hence, social initiatives are more likely to advance in economies with ultimate controlling owners when stakeholders interact directly with these owners. Such interactions with ultimate controlling owners are more efficient and effective in bringing about sustainable ethical and social development. Lastly, external observers of businesses (in our case, financial analyst coverage) can influence the extent to which firm owners will promote CSR performance. This suggests that improving external governance mechanisms that promote higher ethical values and social expectations can encourage owners to promote better CSR performance in their firms and contribute to society.
This article is based on a study entitled “Goodwill Hunting: Why and When Ultimate Controlling Owners Affect Their Firms’ Corporate Social Responsibility Performance,” published in the Journal of Business Ethics by Yusen Dong, Pengcheng Ma, Lanzhu Sun, and Daniel Han Ming Chng.
Yusen Dong is an Assistant Professor at the Bay Area International Business School of Beijing Normal University. He graduated from the CEIBS-Shanghai Jiao Tong University Joint PhD programme. Pengcheng Ma is an Assistant Professor at Renmin Business School of Renmin University of China. Lanzhu Sun is a PhD candidate at Tsinghua University. Daniel Chng is a Professor of Strategy and Entrepreneurship at CEIBS. This article first appeared on the CEIBS website.
