Can Socially Responsible Firms Survive Market Competition?

Transcription

1 Can Socially Responsible Firms Survive Market Competition? An Analysis of Corporate Employee Matching Grant Schemes Ning Gong and Bruce D. Grundy Deakin University & University of Melbourne For Presentation at the IFS, SWUFE 2 July

2 Plan of the talk Briefly review the debate between shareholder vs stakeholder model of corporate objectives; Briefly review some of the recent developments in the research area of CSR and firm performance; What are the main challenges? How do we deal with the challenges in our paper? And what are our findings? 2

3 Corporate Social Responsibility (CSR) and Firm Objective Milton Friedman, The Social Responsibility of Business is to Increase its Profits. To think business should do anything other than make a profit is to preach socialism and undermine free society. (NYT 1970) Yet, CSR has become an increasingly mainstream business activity of firms. 85% of S&P 500 firms report on CSR or sustainability in In 2016, the total corporate giving in the U.S. was at $18.55 billion according to Giving USA CSR goes beyond corporate donations. 3

4 Shareholders vs. stakeholders The debate is related to corporate objectives, i.e., stakeholders vs. shareholders (Tirole, 2006, Ch.1). The shareholder centric view is backed by Fama and Jensen (1983) who emphasize that shareholders are residual claimants. R. Edward Freeman (1984) proposes a stakeholder theory of corporate governance. Who are stakeholders? Employees, creditors, governments & local communities, suppliers, customers, shareholders,, etc. According to this doctrine, managers should maximize a social welfare function. 4

5 Shareholders vs. stakeholders In some cases, there may be no conflict even if firms activities are considered to be socially responsible. Corporate charitable donations can be similar to other business expenses such as advertising or PR expenses, Mescon and Tilson (1987), Galaskiewicz (1997), etc. Some firms can reduce costs of doing business by donating to local educational and environmental groups, Navarro (1988). Rio Tinto s STEM outreach educational program. Review article on CSR by Kitzmueller and Shimshack, (2012, JEL) 5

6 Shareholders vs. stakeholders In other cases, there may be a clear indication that a conflict exists and it may reflect top managers own preferences and therefore is a form of agency costs. Donations to certain preferred charities chosen by CEOs or other senior managers. But more broadly, the social welfare function under the stakeholder theory is not well defined. It is not clear how the weights should be chosen; There are potential conflicts among different classes of stakeholders; There are potential conflicts within the same class of stakeholders. For example, heterogeneous preferences among employees. 6

7 Recent papers on CSR and firm performances Most papers show a positive relationship between CSR and firm performance Deng, Kang, Low (2013 JFE), Edmans (2011, JFE), Ferrell, Liang Renneboog (2016, JFE), Lins, Servaes, Tamayo (2017, JF), and more. Some papers show mixed results as CSR activities may reflect agency issues Cheng, Hong, Shue (2013), Krueger (2015, JFE), etc. Corporate donations serve as a private consumption for managers, originated from free cash flows, Brown, Helland and Smith (2006, JCF), Masulis and Reza (2015, RFS) 7

8 What are the challenges? Since many papers suggest that CSR firms can improve the access to credits, reduce the cost of capital, increase the firm value, improve employee satisfaction, and do many other wonders, one would be curious why not all firms should be acting in a socially responsible way in a competitive market. Perhaps it is better to consider the heterogeneous preferences of shareholders, employees and other stakeholders more carefully. 8

9 What is our approach? In our paper which uses employee matching grants as an example, we assume that (1) employees are heterogeneous in their preferences. For example, some care about environment, and others do not. (2) capital market and labor market are competitive. To survive market competitions, the profits for investors have to be protected and the total pay package of an employee has to be based on his/her marginal labor productivity. 9

10 What are Employee Matching Grant Schemes? Employee matching grant programs are designed to be the means by which companies support employee charitable giving. Companies match donations made by employees at a dollar for dollar, or at a different ratio. 10

11 Microsoft Example Microsoft matches employee gifts of money (one for one) and time ($25 per hour of volunteer time) to non-profits up to $15,000 annually. 11

12 Table 1: Summary of US Employee Matching Grant Programs Panel A: Distribution of maximum amount matched The number of firms is counted at the parent company level. Maximum Amount Number of Firms % 50, , ,000-49, ,000-24, ,000-9, ,000-4, Unspecified Total Panel B: The distribution of the match ratio The maximum for each firm of its regular and qualified match ratios. Match Ratio h = 9 h = 5 h = 4 h = 3 h = 2 h = 1 h < 1 Number of Firms %

13 Our Main Results Matching grants can act as a coordination mechanism among socially conscious employees to reduce the free-rider problem without reducing profits for investors. However, not all employees are socially conscious. Firms without offering matching grants may attract these type of employees and potentially socially conscious employees as well. The key condition: To survive market competition, employees at firms offering matching grants must either have higher labor productivity or enjoy non-pecuniary benefits, i.e. warm glow. 13

14 Main Messages Corporate donations can serve as a coordination mechanism. Firms can fund matching grants through a reduction in the take-home wages paid to the socially conscious employeedonors. The donations are self-funded by employee-donors. Thus, employees are fairly compensated, investor profits are protected, and charities benefit. The company s Board should be applauded for its social responsibility in implementing a welfare improving outcome for the parties involved. 14

15 Plan for the Remaining Presentation Theoretical analysis: the existence of separating equilibrium that some firms offer matching grants while others do not. The model is based on the theory of voluntary contributions to public goods. Empirical analysis: on differential labor productivity and matching grants from a novel database Alternative necessary condition: employee satisfaction Use the Best 100 Places to Work for list published by Fortune Magazine. 15

16 The model: two types of employees The utility function of a socially conscious employee-donor is (, ) i i U = U xi G, U, U > 0, U, U < 0, U 0, furthermore: lim U( xg, ) =+ and lim U( xg, ) = 0. x x x + g = W, x :private consumption. i i i i g :donation. W: the emplyee's wage. i i Socially conscious employees value the public good, but would still prefer someone else to pay for it. Regular-type employees do not enjoy the provision of public good in their utility function. Employee type is pre-determined 16

17 Donations to a Public Good N = i= 1 Decentralized Donations: G g. N is the number of employees. i G:total provision of the public good. Corporate Lump-sum Donations: G = N g l; which acts as a social planner. Employee Matching Grant Schemes: g l is decided by the firm, N G = (1 + h) g, h : the match ratio. i i= 1 17

18 Two Types of Firms The firm may be socially responsible (type-s) or regular (type-r). A type-s firm makes a donation of g l per employee in the case of lump-sum donation; or offers a matching scheme with a match ratio of h. A type-r firm does not donate to any charitable organizations in any form. The total pay to the employees must be equal to their marginal product of labor to meet market competition requirements. In the case of the lump-sum donation: WS + gl = WR Thus, investors profits are protected. 18

19 Base case: when all employees are socially conscious A socially responsible firm can act as a social planner to coordinate donations (lump-sum donations), reducing freeriding behaviour. (This is an application of the well-known result in public goods theory). Socially conscious employee-donors value a public good, but would still prefer someone else to pay for it. An employee-donor under the decentralized regime will choose to satisfy: g i N N U1 WR gi, gi + gj = U2 WR gi, gi + gj j i j i In the Nash Equilibrium: g = g = g i j 19

20 Base case: when all employees are socially conscious (Continued) Under the decentralized regime U1( WR g, Ng) = U2( WR g, Ng) Under lump-sum corporate donation: U ( W g, Ng ) = NU ( W g, Ng ) (1) (2) Under matching scheme: (3) 1 R l l 2 R l l ( * * ) ( * * R (1 + ), (1 + ) = (1 + ) R (1 + ), (1 + ) ) U W hg hng hu W hg hng 1 2 Comparing three different first-order conditions (1) to (3), we conclude that either lump-sum donation or matching is better than decentralized giving by employees. 20

21 Base case: when all employees are socially conscious (continued) Comparing first-order conditions (2) with (3), the optimal match ratio is h = N-1. At this match ratio, the matching grant scheme is equivalent to the optimal corporate direct lump-sum giving. (Propositions 1 & 2) The analytical results so far imply that if all of the employees are socially conscious, then every firm should coordinate employee donations, either through lump-sum donations or employee matching grant schemes. A number of questions arise: Why do some firms prefer matching grants to lump-sum donation? Why is the match ratio relatively small? 21

22 More Realistic Case: Heterogeneous Employees and Firms There are competing type-r and type-s firms. Assume that the labor productivity is the same in both firms. Firms without donation programs can afford to offer higher take-home salaries, attracting regular employees. But, more interestingly, socially conscious employees at firm S are always better off by defecting to a firm R too! (Proposition 4) Intuition: socially conscious employees can free-ride the public good provided by other employees remaining in firm S. But a defector can still donate after the switch. Conclusion: If the labor productivity remains the same, it is difficult to maintain a matching grant scheme. 22

23 Heterogeneous Employees and Heterogeneous Firms Two types of employees co-exist: Socially conscious (i.e. type-s) employees Regular (i.e. type-r) employees gain no utility from the public good If the labor productivity of type-s employees working together at a CSR firm (type-s) is higher by, then type-s firm may have some room to improve its total package offered to its employees to prevent switching, while the nominal take-home salary at type S firm is still below that at type R. * W = W 1 + hg h < W. ( ) ( ) S R R 23

24 Main Result: If > 0 and h is not too high, there exists a separating equilibrium in which socially conscious employees work at type-s firms offering matching grants and regular employees work at type-r firms. (Proposition 5) This answers the question why not all firms uniformly offer matching grants and why match ratios observed in practice are much less than N 1. The numerical example in the paper shows how to find a separating equilibrium. The key condition is that: regular employees will not get a higher wage by working for CSR firms; and socially conscious employees total utility from the package (pay + matched contributions to the public good) is higher than the level achievable by working for regular firms. 24

25 Further Remarks Comparing a lump-sum donation scheme with a matching scheme that raises the same total amount, employees are less likely to switch if the firm is implementing a matching scheme. This is due to the fact that matching reduces the degree of free-riding when employees defect: When a Type-S employee considers defection, type S- firm s total lump-sum donation does not change; However, under the matching scheme, type S-firm s total donation will be reduced by the individual s personal matched amount h g*. 25

26 Empirical Analysis on Labor Productivity The aim: to verify whether labor productivity is higher at firms with matching grant schemes so the separating equilibrium can exist. The matching grant data was collected from in both May 2010 and April 2015 to ensure that firms matching status did not change. The sample firms are limited to those with data available from ExecuComp. Financial information are from Compustat. Labor productivity is measured at the firm-year level as per employee pre-tax operating income after depreciation in excess of the firm s cost of capital. 26

27 Some Observations (Table II) Larger firms, defined by the book value of the assets or the number of employees, more likely to have matching grant schemes. Firms with matching grants have higher labor productivity. Firms offering matching schemes have the measured labor productivity with a median (mean) value of $50,120 per year ($87,440 per year); while firms without such programs have median (mean) labor productivity of $25,640 per year ($48,960 per year). The two-sample t-statistic for a test of the difference in the labor productivity between the two subgroups is (pvalue of ). 27

28 Regression Analysis We first investigate variants of the following relation using data from 2010 through ( ) = α ( ) Y / L + b M + b BVA/ L + b HHI + b R& D + b BLev + b Q + e it, 1 i 2 it. 3 it, 4 it, 1 5 it, 6 it, it, Y/L: labor productivity. M: Dummy for matching scheme. BVA/L: Book Value of Assets per employee. HHI: Herfindahl-Hirschman index based on FF-38 classification. Blev: Book leverage. Lagged R&D; Tobin s Q. Plus, employee relations (from KLD dataset), E-Index, Generous Giver status, etc., depending on the questions raised. 28

29 Regression Analysis on Labor Productivity (Table III): without emp_relation (1) (2) (4) (5) (7) (8) Matching Dummy (6.81)*** (5.818)*** (6.651)*** (5.577)*** (6.644)*** (5.587)*** BVA per Employee (11.83)*** (9.022)*** (9.014)*** HHI (0.481) (0.544) (0.519) R&D (lagged) (1.134) (0.685) (0.666) Leverage (1.915)* (1.009) (1.091) Tobin s Q (9.290)*** (9.532)*** (9.554)*** Sector Effects No No Yes Yes Yes Yes Year Effect No No No No Yes Yes Observations 5,132 4,710 5,132 4,710 5,132 4,710 Adjusted R-squared

30 Labor Productivity, Matching Schemes and Employee Relations Previous literature argue that good employee relations can lead to higher labor productivity (Lazear and Shaw 2007 and Bloom and Van Reenen 2011). Are matching schemes are simply a proxy of good employee relations? We then add an Employee_relation variable, compiled from KLD data base. 30

31 Regression Analysis on Labor Productivity (Table III) : Including emp_relation (3) (6) (9) Matching Dummy (5.457)*** (5.171)*** (5.076)*** BVA per Employee (10.58)*** (7.813)*** (7.809)*** HHI (0.692) (0.725) (0.676) R&D (lagged) (1.275) (0.907) (0.858) Leverage (1.360) (0.530) (0.648) Tobin s Q (8.531)*** (8.846)*** (8.897)*** emp_relation (2.717)*** (3.201)*** (3.785)*** Sector Effects No Yes Yes Year Effect No No Yes Observations 4,286 4,286 4,286 Adjusted R-squared The quality of employee relations does have incremental explanatory power. Importantly, the matching scheme appears to be more than just that of a proxy for good employee relations. 31

32 Additional Concerns Does the matching grant scheme is simply a proxy for hightech industry which happens to have a higher level of labor productivity in general? NO. See Table V. Matching schemes may reflect entrenched manager s preference. Is the relationship valid for poorly governed firms? Yes. The correlation between matching grants and labor productivity remains positive for poorly governed firms. See Table IV. Perhaps the matching scheme is just like the other type of general corporate philanthropy? No. There are distinct roles between matching schemes and general corporate philanthropy. See Table VI. 32

33 Achieving a Separating Equilibrium: An alternative condition Difference in labor productivity is not the only necessary condition to achieve a separating equilibrium. An alternative necessary condition is that type-s employees enjoy warm-glow when working with like-minded colleagues at type S-firms. We test this by using the Fortune Magazine s Best 100 Places to Work For in America list from

34 Appearance on the Fortune Magazine Best 100 Places to Work For : Table VIII This table summarizes the frequency of appearance of firms with and without matching grant schemes in Fortune Magazine s 100 Best Places to Work for in America lists between 2010 and 2013 inclusive. The Probit analysis in on the next slide. Matching Scheme No Matching Scheme Total On the 100 Best List 85 (5.15%) 39 (1.34%) 124 Not on the 100 Best List 1,566 (94.85%) 2,866 (98.66%) 4,432 Total 1,651 2,905 4,556 Pearson χ 2 (1) = ; p-value =

35 Probit Regressions: Table VIII (1) (2) (3) (4) (5) (6) Matching Dummy M (3.97)*** (2.38)** (2.24)** (4.16)*** (2.52)** (2.20)** BVA per employee (3.93)*** (2.89)*** HHI ( 0.84) ( 1.47) R&D (lagged) (1.64) (1.82)* Profitability (2.89)*** (0.96) High-tech dummy (1.44) (0.42) E-index ( 0.84) ( 0.61) emp_relation (7.38)*** (6.17)*** (6.43)*** (5.60)*** Sector Effects No No No Yes Yes Yes Observations 4,520 4,159 3,798 3,207 2,921 2,651 Pseudo R

36 Labor productivity, 100 Best list, and matching grants: the interplay Consistent with a collective warm glow associated with working at a firm with a matching scheme, firms with matching schemes are more likely to be included on the 100 Best list (see Table VIII). For 100 Best firms, there is no relation between matching schemes and labor productivity; but there is a significantly positive relationship for Non- 100 Best firms (see Table IX). 36

37 Labor productivity, matching grants and the 100 Best list: Table IX 100 Best firms Non- 100 Best firms (4) (5) (6) (7) (8) (9) Matching Dummy M (0.183) (0.188) ( 0.193) (5.083)*** (5.094)*** (4.917)*** BVA per employee (4.897)*** (4.875)*** (5.507)*** (6.932)*** (6.951)*** (6.897)*** HHI (0.819) (0.794) (0.850) (0.929) (0.920) (1.102) R&D (lagged) ( 0.676) ( 0.487) ( 0.119) (0.944) (1.047) (1.096) Leverage (0.126) (0.117) (0.699) (1.723)* (1.683)* (0.894) Tobin s Q ( ) ( ) (0.486) (7.650)*** (7.739)*** (7.199)*** High-tech dummy (0.0838) ( ) ( 1.885)* ( 1.792)* E-index ) ( 1.836)* emp_relation (2.339)** (2.355)** (1.527) (3.391)*** (3.297)*** (2.844)*** Sector & year effects Yes Yes Yes Yes Yes Yes Observations ,730 3,730 3,400 Adjusted R

38 Discussions and Open Questions For the existence of separating equilibrium, the positive correlation between matching schemes and labor productivity is required. The causality, although very interesting, is not of immediate relevance to our research question. Open questions: What factors determine whether a particular firm chooses to be socially-responsible by adopting a matching grant scheme? Are socially-conscious employees more likely to have particular skills and in turn a higher proportion of firms in industries demanding those skills choose to be socially-responsible? We wish to have richer data sets: employee wage data and turnover data. 38

39 Conclusions When a socially-responsible firm sets up an employee matching scheme, it can reduce free-riding by employeedonors who value the public good. But, unless teams of such employees are either more productive or enjoy warm glow, all workers will defect to regular firms offering higher take-home wages. Given greater productivity or warm glow, CSR firms can compete by offering low match ratios. We have empirical support that labor productivity is higher at firms offering employee matching grants. Employees may also be more satisfied at those firms, judging from the frequency of appearance on the best 100 list. 39