Corporate Social Responsibility versus Corporate Shareholder Responsibility: A Family Firm Perspective

Transcription

1 Corporate Social Responsibility versus Corporate Shareholder Responsibility: A Family Firm Perspective Amal Abeysekera & Chitru Fernando JCF Special Issue Conference December 19, 2017

2 1. Motivation 2.This Study Businessmen should pursue those policies, to make those decisions, or follow those lines of action which are desirable in terms of the objectives and values of our society. H.R. Bowen (1953) 3.Findings The social responsibility of a business is to increase its profits. M. Friedman (1970)

3 1. CSR is orthogonal to corporate shareholder responsibility 1. Motivation 2.This Study 3.Findings Hamilton, Jo, and Statman (1993), Bauer, Koedijk, and Otten (2005), Schröder (2007),Masulis and Reza (2015), Cheng, Hong, and Shue (2016), and Ghoul et al. (2016) 2. CSR is positively related to shareholder value Derwall et al. (2005), Kempf and Osthoff (2007), Sharfman and Fernando (2008), Deng, Kang, and Low (2013), Chava (2014), Flammer (2015), Lins, Servaes, and Tamayo(2017) 3. Some CSR actions benefit shareholders while others do not Krueger(2015) and Fernando, Sharfman, and Uysal (2017)

4 1. Motivation Friedman (1970) also noted that unlike corporate executives, sole proprietors are free to spend the earnings from their ventures on socially responsible causes. 2.This Study 3.Findings This paper: When it comes to CSR Policy, do family firms behave more like sole proprietorships (serving family interests by investing in socially responsible causes) or follow Friedman s guidance about how publicly-held corporations should behave (serving interests of all shareholders)?

5 Mitigating/Exacerbating Type I versus Type II agency problem? (Villalonga and Amit, 2006) 1. Motivation 2.This Study 3.Findings Type I: With ownership concentration, family owners have the ability and incentive to monitor the manager. Since their own wealth is at stake, family shareholders likely to be more dedicated principals and more effective shareholders, thereby reducing the type I agency conflict (Anderson and Reeb,2003; Maury, 2006; Fahlenbrach, 2009) Type II: Family firms focus more on non-economic benefits (socioemotional wealth; Gomez- Mejia et al, 2007) to controlling family that bring no financial benefits to noncontrolling shareholders. Incentives for expropriation are higher for family owners (Anderson, Reeb and Zhao, 2012; Chen, Cheng and Dai, 2013) Family firm policy toward CSR provides an interesting setting to study the tension between these two conflicts

6 1. Motivation 2.This Study 3.Findings We use environmental performance as proxy for CSR Financial consequences of environmental performance of firms are considerably larger than for other socially relevant corporate policies Shareholders incur large costs when firms are held to be socially irresponsible 2010 BP Gulf of Mexico oil spill; cost of losses, damages and fines to BP shareholders >$60 billion 2015 Smarco Iron Ore Dam Disaster; estimated cost $27 billion 1984 Bhopal Gas Leak; Union Carbide Corporation paid $470 million in 1989 in fines

7 1. Motivation 2.This Study Introduction We use KLD data to capture environmental strengths and concerns of firms Fernando, Sharfman and Uysal [FSU] (2017) show that: Environmental investments that reduce negative environmental outcomes and thereby reduce a firm s risk exposure are shareholder value enhancing (concerns) Environmental investments that go beyond both legal requirement and any conceivable risk rational, while potentially good socially, are not shareholder value enhancing (strengths) 3.Findings Strengths 1. Beneficial Products and Services 2. Pollution Prevention 3. Recycling 4. Clean Energy 5. Other Concerns 1. Hazardous Waste 2. Regulatory Compliance 3. Ozone Depleting Chemicals 4. Substantial Emissions 5. Agricultural Chemicals 6. Climate Change 7. Other

8 1. Motivation 2.This Study 3.Findings Investing in building environmental strengths ( strengths from social standpoint) FFs are, on average, significantly lower than non-family firms (NFFs) in their environmental strength ratings Mitigating environmental concerns No significant difference between FFs and NFFs in their environmental concern ratings

9 1. Motivation 1 2.This Study 3.Findings When it comes to CSR, FFs are more responsible to shareholders than NFFs When shareholder interests and societal interests coincide, FFs are at least as good as NFF in protecting shareholder interests When shareholder interests and societal interests diverge FFs are significantly more on the side of shareholders Findings also contrast with studies that show family firms being less responsible to their non-family shareholders First to investigate the relationship between CSR and family ownership in U.S. firms while providing some causal evidence Ghoul et al (2017) Dyer and Whetten (2006), Berrone et al (2010) Our study contributes to Emerging finance literature on Corporate Social Responsibility Literature on Family Firms

10 1. Sample 2. Summary Statistics Family ownership data provided by Ronald Anderson Combined and augmented sample from Anderson, Duru and Reeb (2009) and Anderson, Reeb and Zhao (2012) Exclude: public utilities, financial firms, foreign firms, firms listed as master limited partnerships and firms with share price less than $0.25 Dummy variable equals one when the family owns (or votes) a 5% or larger stake Sample consists of 2,000 largest firms for 2001 to 2010 Merge with KLD data for 2001 to 2009 Results in 232 firms COMPUSTAT, CRSP, I/B/E/S, IRRC, CDA/Spectrum 13F Holdings, KLD

11 1. Sample 2. Summary Statistics Binary indicators of environmental strengths and concerns Strengths: activities that go beyond legal requirements/cannot be justified by any risk rationale Concerns: directly related to the firm s risk profile and financial costs If a firm meets KLD analysts criteria, for each strength/concern it is assigned a value of one, and zero otherwise Five sub-indicators of environmental strengths and seven sub-indicators of environmental concerns

12 1. Sample 2. Summary Statistics

13 1. Main Analysis 2. IV + matched sample 3.Alternative base 4. Other Robustness Tests

14 1. Main Analysis 2. IV + matched sample 3. Alternative base 4. Other Robustness Tests Robustness check due to potential endogeneity of Family firm dummy Use of an instrumental variable analysis Use of a matched sample analysis IV: fraction of board members with the same family name Firms with a higher value for this IV are more likely to be FFs although NFFs could also have board members with the same family name but not from the same family No reason to believe this IV is causally related to the firm s CSR activities Estimated using both linear and non-linear models in the first stage. Matched sample analysis Propensity Score Matching on Size, Book-to-market, and two-digit SIC code

15 1. Main Analysis 2. IV + matched sample 3. Alternative base 4. Other Robustness Tests

16 and Methodology 1. Main Analysis 2. IV + matched sample 3. Alternative base 4. Other Robustness Tests

17 1. Main Analysis Thomson Reuters ASSET4 2. IV + matched sample 3. Alternative base 4. Other Robustness Tests Classify indicator variables as strengths and concerns Does the company make use of renewable energy? Is the company under the spotlight of the media because of a controversy linked to the environmental impact of its operations on natural resources or local communities? Reports mostly indicator variables for strengths

18 1. Main Analysis 2. IV + matched sample 3. Alternative base 4. Other Robustness Tests

19 1. Main Analysis 2. IV + matched sample 3. Alternative base 4. Other Robustness Tests Reputation Effect Interaction between the family firm dummy and a dummy indicating whether the founder s name is a part of the firm name Reputation does not seem to matter for strengths FFs without founder s name as a part of the firm name actually have lower concerns compared NFFS Impact of the 2008 Financial Crisis Create a dummy for the crisis period ( ) and interact it with the family firm dummy Find the interaction term to be insignificant for both strengths and concerns Regulatory Stringency Create a variable to capture the regulatory stringency in each state following King and Lenox (2002) The results persist after controlling for this variable

20 We study differences in policy toward CSR between FFs and NFFs When it comes to CSR, FFs are more responsible to shareholders than NFFs When shareholder interests and societal interests coincide, FFs are at least as good as NFF in protecting shareholder interests When shareholder interests and societal interests diverge FFs are significantly more on the side of shareholders Findings also contrast with studies that show family firms being less responsible to their non-family shareholders Our study contributes to Emerging finance literature on Corporate Social Responsibility Literature on Family Firms

21 Thank You!