Why won't they listen to us: Stakeholder pressure, managerial discretion and corporate social performance

Abstract

Public corporations are under immense pressure from their stakeholders to improve the corporate social (including environmental) performance (CSP). But do increased stakeholder demands result in subsequent improvements in CSP? In this dissertation, I argue that stakeholder pressure is successful in enhancing the corporation's sensitivity to stakeholder issues through improvements in the stakeholder governance mechanisms - institutions that safeguard stakeholder interests and maximize stakeholder welfare - within the firm. Using advanced panel-data analysis techniques, I confirm that stakeholder pressure is successful in influencing firms to improve weaknesses in stakeholder governance mechanisms. I also introduce the role of managerial discretion in devising and influencing stakeholder governance mechanisms. I find that stakeholder pressure is less effective in improving weaknesses in stakeholder governance mechanisms in organizational and environmental contexts where managers exercise discretion. Further, stakeholder governance mechanisms partially mediate the relationship between stakeholder pressure and subsequent CSP.

In the second part of the study, I focus on the practical implications of discretionary managerial spending on corporate financial performance (CFP). Nearly two decades of research investigating the CSP-CFP relationship has yielded mixed results. I propose and test a set of models that include managerial discretion contexts as moderators of this relationship. Results indicate that the CSP-CFP relationship ceases to be statistically significant when rigorous empirical testing is conducted. Finally, I re-investigate the link between CSP and CFP with a particular emphasis on the discretionary nature of CSP spending. Firms may choose to invest in CSP due to a variety of endogenous pressures, and if there is evidence of self-selection by firms to pursue social performance, omission of these antecedents of CSP from an analysis of the CSP-CFP relationship may provide inconsistent results. I employ statistical corrections for these selection model issues to re-estimate the CSP-CFP link using stakeholder pressure as a predictor of a firm's decision to engage in CSP. I find that once sample selection errors are fixed, CSP is indeed positively related to CFP. Implications, directions for future research and possible extensions are also discussed.