Rewards or punishments? Both can put business leaders on a track toward corporate social responsibility (CSR).
New research from the BYU Marriott School of Business explores these powerful inducements and offers direction for a world in need of altruism.
At just 300 words—no more, no less—an August 2019 statement issued by the Business Roundtable and signed by 181 prominent CEOs challenged a half-century of convention. The purpose of a corporation, the statement said, is to benefit not just shareholders but also customers, employees, suppliers, and communities. “This new statement,” wrote a signatory, “affirms the essential role corporations can play in improving our society.”1
Why did the private sector—banks, retailers, and tech companies—feel the need for such a public commitment? One global corporate governance expert pointed to “a sustainability problem,” or “an understanding by most senior business leaders . . . that the market system is no longer working for the vast majority despite it being a huge generator of wealth for those at the top.”2
With stock prices increasingly tied to a company’s level of social or eco-consciousness as perceived by investors, another expert noted that powerful shareholder blocs were changing the corporate-governance game: “Confronted with the headwinds they themselves generated, American CEOs seem to have concluded that the best defence is a good offence.”3
Of course, the horizon looks a lot different now than it did in 2019. Battered by a worldwide pandemic, labor shortages, supply shortages, and increasingly visible climate change, business leaders are grappling with the reality that global problems, however far off or inconsequential they appeared before, have arrived and are affecting every aspect of our lives. Ignoring such problems won’t make them go away. But corporate social responsibility, or CSR, can do the next best thing—try to fix them.
The question now isn’t whether there’s enough collective pressure to nudge corporate decision-makers toward altruism. Clearly there is. Instead, the question is about which inducements work best to incentivize corporations to board the train.
What about rankings, raises, awards? What about socially responsible investment (SRI) funds—which now make up about one-third of all US assets under professional management—and all the cachet and earnings that come with them? What about exclusion from such a fund? What about protests or firings or hostile takeovers by shareholder activists? Thankfully, there’s a wagonload of research on this important topic, and much of it comes from the BYU Marriott School of Business.
BYU Marriott assistant professor of organizational behavior Lisa Jones Christensen prefers the field to her comfortable office in the Tanner Building. She has studied poverty and entrepreneurship throughout Central America and East Africa, often working with migrants, refugees, and other marginalized groups. And she is increasingly concerned with the disproportionate effects of pandemics, climate change, pollution, and corruption on these groups. “It’s the poor who suffer most,” she says.
This concern is deep rooted. Before studying business and international development at BYU, Christensen spent a decade in industry at two Silicon Valley companies, riding the dot-com wave of the 1990s. It was a time of intense speculation, and there was money everywhere. But to what end? All that cash seemed to only widen the poverty gap. By the time the dot-com bubble burst, Christensen had quit her job, traveled abroad, gone back to school, and cofounded a nonprofit, HELP International, to aid Honduras after a devastating hurricane hit the country in 1998.
Christensen’s research has since evolved to consider both ends of the economic spectrum—rich and poor, powerful and powerless. After earning a PhD in organizational behavior from the University of North Carolina at Chapel Hill and teaching there for almost a decade, she joined BYU Marriott as an assistant professor in 2016. Today, she’s deeply interested in the UN’s Sustainable Development Goals, or SDGs, which have informed corporate giving programs since 2015. As of this writing, some 10,000 companies and 3,000 other organizations have embraced the UN Global Compact, a voluntary commitment by chief executives to support the SDGs. “They’re not doing it simply for moral or courageous reasons,” Christensen says. “They’re also doing it because it’s strategic, because it helps their bottom line.”
And this gets back to the question at hand: Which inducements best incentivize corporations to choose the altruism route?
When companies prosper, so do their top decision-makers. This can take the form of bonuses, raises, awards, or positive press. On the flip side, business leaders who choose not to tackle global problems—or worse, who willingly create them—could be ousted.
And investors, who often have the power to push companies into or out of prosperity, increasingly demand action. So do regulators. In a recent editorial, the Wall Street Journal observed that “a leading issue [for the Federal Reserve] was the greening of the central bank. Not green as in money, but as in climate regulation.” To pass the Fed’s climate stress tests, banks would eventually need to liquidate fossil-fuel assets and “adjust their balance sheets to take account of the risks from government climate policies like mandates, regulation or carbon taxes.”4 Those who wait to divest could be stuck holding trillions of dollars in stranded assets.
Such regulations are being driven by global targets to reduce carbon emissions, such as those agreed upon at the UN Climate Change Conference last November. Currently, the United States aims to achieve net-zero greenhouse gas emissions by 2050, with several benchmarks along the way. Wouldn’t it be better for companies to begin this transition before it’s compulsory? “We’re exploring that bleeding edge,” Christensen says. “This stuff matters everywhere.”
A Lesson from Engine No. 1
At Clarkson University in Upstate New York, husband-and-wife assistant professors Ty and Alison Mackey recently coauthored a paper with Christensen, their former BYU Marriott classmate. The team’s latest research explores whether pro-CSR investors ought to reward responsible companies or punish irresponsible ones. This research is based on modeling the Mackeys started a dozen years ago—sometime after meeting and marrying at BYU, earning master’s and doctoral degrees, and becoming academics, but before investors paid as much attention to CSR activities as they do now.
“This was a crazy idea at first,” Alison says, crediting Ty with the research concept, which was arguably ahead of its time. “We sent it to journals. People rejected it because it wasn’t founded in reality.”
By using game theory, the authors showed that if a large institutional investor wanted to influence firm managers to adopt socially responsible behavior and could either reward firms by creating an SRI fund (a carrot) or punish firms via shareholder activism (a stick), the stick would produce better results. “Across a pretty broad set of circumstances,” Ty says, “you’re more likely to create more social good with the acquisition fund, punishing the worst rather than rewarding the best performers.”
One reason the stick proved more effective, Alison says, is that carrots only work if you’re really close to getting the carrot. Otherwise, why try?
After recruiting Christensen as a coauthor, as well as Jason Lepore from California Polytechnic State University, the Mackeys shopped their paper around again. Editors at the Journal of Business Ethics found the theory intriguing and liked the data, so they published it in November 2020.
In a surprising twist, the scenario Ty and Alison had researched for more than a decade played out one month later as Exxon Mobil made headlines while facing opposition from an activist investment firm called Engine No. 1.
“In December 2020, we start looking at an activist investor, Chris James, who invests in Exxon, gets enough board seats to start getting rid of management that’s not sustainably oriented, and starts to shift the company,” Alison says. “This sends shockwaves through the world in the sense that managers are starting to think, ‘This could happen to me too.’”
In a nod to the 1930 children’s book The Little Engine That Could, the New York Times called James’s Engine No. 1—which seized three of Exxon’s board seats in 2021—“the little hedge fund taking down big oil.”5 It was, the New York Times observed, a “stunning result [that] turned the sleepy world of boardroom elections into front-page news as climate activists declared a major triumph, and a blindsided Exxon was left to ponder its defeat.”6
“In a sense,” Alison reflects, “Exxon was exactly like our paper. They were the worst firm out there, and this investor said, ‘Where could I do my best? I’m going to go influence this firm.’”
This type of influencing is hard to pull off, Ty adds. “It’s trickier than just buying up shares for your ESG fund,” he says, referring to a type of investing that uses environmental, social, and governance (ESG) criteria to evaluate company stock prices through nonfinancial factors such as sustainability plans, diversity statements, or data privacy policies.
To illustrate his point, Ty describes a recently derailed attempt by Citigroup and other investors to buy up coal mines and shut them down. Because profits would eventually dry up, this action was a tough sell, even for ESG investors. As one Bloomberg columnist put it, “The people who would be good stewards of coal mines are the people who never ever want to own a coal mine. Oh well!”7
The Problem with Full Steam Ahead
Back in the Tanner Building, BYU Marriott associate professor of strategy Ben Lewis has been researching inducements—carrots, mostly—for more than a decade. If anyone knows how companies respond to third-party rankings and ratings, it’s him.
One of the first magazines to publish CSR rankings, Lewis says, was Business Ethics—not to be confused with the Journal of Business Ethics. The magazine sourced data for its 100 Best Corporate Citizens list from a research and analytics firm called KLD. While the magazine hoped its rankings would increase the incentives for publicly traded companies to act in a socially responsible manner, Lewis found that firms barely included on the inaugural list were actually penalized by investors. Why? Because shareholders still reigned supreme—not customers, not employees, not suppliers, not communities.
By penalized, Lewis means this: “You’re actually better off financially if you don’t make the list than if you’re at the bottom,” he explains. Lewis can access a business’s profile and see how investors react to the news of its ranking, a reaction based on stock price variations. Business Ethics has never identified runners-up—the 101st or 102nd best corporate citizens, for example—and those businesses aren’t affected by the rankings. But those companies on the bottom of the list, say 99th or 100th place, lose about 1.3 percent in value on the day of the announcement. That’s because they appear to be in last place, far behind more committed, generous companies. It’s an optics problem, but there’s more to it. “If you’re going to play the rankings game, you need to be all in,” Lewis says.
Lewis coauthored a paper in 2018 about the Business Ethics rankings with another BYU Marriott associate professor, Chad Carlos, who teaches entrepreneurship. Both professors earned PhDs from Cornell University and joined BYU Marriott within a year of each other—Carlos in 2012, Lewis in 2013. In 2017, they coauthored a paper on “greenwashing,” or environmental hypocrisy, and “greenhushing,” or strategic silence. In it, they explored how companies can communicate CSR efforts, protect their reputation, and avoid corporate mishaps on social media.
“A timely example,” Lewis and Carlos wrote in a blog post in 2018, was “the backlash levied against McDonald’s after it rolled out a campaign in conjunction with International Women’s Day to turn their iconic golden arches upside down to form a W as a signal of their support for women. Critics immediately labelled this as an act of hypocrisy, claiming that such a statement was inconsistent with McDonald’s history of underpaying workers, many of whom are working mothers, and the company’s active efforts to lobby against increases in minimum wages.”8
Going full steam when monitoring corporate accountability can be problematic, Carlos and Lewis conclude, particularly when those efforts stifle the very practices they intend to encourage.
By now it should surprise no one that when the Business Roundtable issued its statement redefining the purpose of a corporation to serve a broader set of stakeholders, the statement was both celebrated and derided. On the one hand, the cultural shift it embodied was seen as a desirable move toward moral capitalism. On the other, it was viewed more as a hope than a strategy.
For Christensen, actions speak louder than words. In a paper coauthored with Adam Clark and Steve Kofford, both PhD candidates at the University of Utah, Christensen explores “stakeholder-oriented firms”—or companies that aim to benefit all stakeholders, not just shareholders. What makes stakeholder-oriented firms authentic in their CSR activity, the researchers ask. “When do you cross the threshold from ingenuine to genuine?” Kofford, Clark, and Christensen ask. “And what does it take to have altruistic motives? How do you know?”
Part of the answer, according to Christensen, “is that you only know when they start to lose money but they stick to it. Part of the answer is they do it early, before everyone else thinks it’s got value.” Authenticity matters. So does timing.
“CSR has become so strategic that there’s just a short window when you can have an advantage,” she says, “and then you just have parity. If everyone’s divesting of sin stocks [such as gun manufacturers or casinos], if everyone’s investing in women-owned businesses, you’re not out front. You have no competitive advantage.”
This knowledge can help investors identify companies motivated to repair—not fuel—global problems. “If you invest and you care, eventually you’re going to want to put your money into a firm with genuine CSR,” says Christensen.
Whatever form it takes—charitable donations, voluntary reductions in emissions or waste, improved worker conditions, support for vulnerable populations—genuine CSR activity can help a company win legitimacy, build a culture, and even gain a competitive advantage. Those business leaders who fail to act on their own may eventually face their own high-speed locomotive, compelling them to act or pay a price. There are carrots and sticks enough to nudge decision-makers down either track.
Written by Bremen Leak
Illustrations by Jim Tsinganos
About the Author
Bremen Leak, who earned a BA in communications from BYU in 2005, leads strategic planning for sustainability and resiliency at BYU.
Squeaky-Wheel Rankings: Notes from a CSR Reporter
By Bremen Leak
Earlier in my career, as a reporter in New York City, I covered CSR. The job was simple: follow the money, write about the impact. Around Thanksgiving each year, my team at BusinessWeek (now Bloomberg Businessweek) published a ranking of the most charitable companies in America. We used tax records, company reports, interviews, and consultations with industry watchdogs such as Charity Navigator to compile our list.
In 2005, Walmart ranked highest, with cash and in-kind donations worth $188 million. Never mind that at the time the retailer was under fire for all sorts of business malfeasance—mistreatment of workers, mistreatment of suppliers, embezzlement in the boardroom. That year alone, two labor unions denounced the company, and Walmart responded with an aggressive ad campaign of its own. My suspicion is that after a year of protests, court cases, and all-around bad press, the title of America’s Most Generous Company could not have come sooner for Walmart shareholders.
To its credit, Walmart hasn’t stopped trying. In 2021 the retailer gave away $1.4 billion in cash and in-kind donations, including $43 million for COVID-19 response efforts. In a first for the company, Walmart also closed a $2-billion bond for sustainability projects, and published its 16th annual ESG report. After Walmart’s CEO began a two-year term as chair of the Business Roundtable in 2020, Barron’s, a sister publication to the Wall Street Journal, published this provocative headline: “Walmart Is Adopting Socially Responsible Policies. ESG Funds Are Taking Notice.”
Maybe they are. I’m no longer a reporter, but I’m still fascinated by stories such as Walmart’s. In a bad year, CSR can offer a second chance at grace. But done right, corporate social responsibility offers more: a hopeful path forward.
Sustainability in the Classroom: New Courses at BYU Marriott
By Bremen Leak
Broadly, sustainability relates to our natural, built, and social domains. It’s a topic in high demand at BYU Marriott, where new courses are shaping a generation of stewards. Here are two of them.
GSCM 414: Introduction to Sustainable Business is an undergraduate course taught by assistant professor of global supply chain Clark Pixton. The students, when sharing their motivations for taking the course, speak of career-defining opportunities: improving society, protecting the environment, innovating new solutions. Others speak of a moral obligation to God or future generations. Still others express a personal commitment to gain knowledge and lead by example. “I feel that the only way you make an impact,” one student tells the class, “is by starting with yourself and then branching out as much as you can.” Another student agrees, saying, “When I don’t turn off lights or recycle, I don’t see the effect, but when you multiply that by millions or billions, there’s a huge effect. It’s going to take every single one of us to have the collective impact we need, and this class will give us the tools we need to influence others in a positive way.”
MPA 689R: Equity and Inclusion in Public Service is a graduate course led by Anthony Bates and Robert Christensen, professors in the Romney Institute of Public Service and Ethics. Equity and inclusion, they say, are not only constitutional and moral mandates but also requirements for just and sustainable societies. In this class, aspiring policymakers and public servants learn about social policy as well as solutions for equitable and inclusive organizations, which can elevate the human condition. In sincere and personal discussions on race, class, gender, and other topics, tears are sometimes shed. “What motivates a public servant is a higher sense of purpose,” says Christensen. “It’s knowing that you’re working to help all of God’s children thrive.”
- Alex Gorsky, quoted in “Business Roundtable Redefines the Purpose of a Corporation to Promote ‘An Economy That Serves All Americans,’” Business Roundtable, August 19, 2019, businessroundtable.org/business-roundtable-redefines-the-purpose-of-a-corporation-to-promote-an-economy-that-serves-all-americans.
- Ed Waitzer, quoted in Adria Vasil, “Dear Business Roundtable CEOs: Some Tips on Avoiding Purpose-Washing,” Corporate Knights, September 6, 2019, corporateknights.com/perspectives/how-business-roundtable-can-avoid-purpose-washing.
- Katharina Pistor, “Why America’s CEOs Have Turned Against Shareholders,” Globe and Mail, August 26, 2019, theglobeandmail.com/business/commentary/article-why-americas-ceos-have-turned-against-shareholders.
- Editorial Board, “The Greening of the Federal Reserve,” Wall Street Journal, January 11, 2022, wsj.com/articles/the-greening-of-the-federal-reserve-jerome-powell-climate-11641941000.
- Jessica Camille Aguirre, “The Little Hedge Fund Taking Down Big Oil,” New York Times Magazine, June 23, 2021, nytimes.com/2021/06/23/magazine/exxon-mobil-engine-no-1-board.html.
- Matt Phillips, “Exxon’s Board Defeat Signals the Rise of Social-Good Activists,” New York Times, June 9, 2021, nytimes.com/2021/06/09/business/exxon-mobil-engine-no1-activist.html.
- Matt Levine, “JPMorgan Sent the Wrong Emails,” Bloomberg, December 20, 2021, bloomberg.com/opinion/articles/2021-12-20/jpmorgan-sent-the-wrong-emails.
- W. Chad Carlos and Ben W. Lewis, “Strategic Silence: Why Are Some Companies Not Publicising Their Environmental Certifications?” lse Business Review (blog), September 24, 2018, blogs.lse.ac.uk/businessreview/2018/09/24/strategic-silence-why-are-some-companies-not-publicising-their-environmental-certifications.