Corporate Governance and the Rise of Integrating Corporate Social Responsibility Criteria in Executive Compensation: Antecedents and Outcomes

Abstract

This study examines the antecedents and consequences of integrating corporate social responsibility (CSR) criteria in executive compensation, a relatively recent practice in corporate governance. Using a novel database of CSR contracting, we find that CSR contracting is more prevalent in emission-intensive industries and has become more prevalent over time. When we examine the impact of CSR contracting on firm-level outcomes, we find that the adoption of CSR contracting leads to i) a reduction in managerial short-termism; ii) an increase in firm value; iii) an increase in social and environmental performance (especially with respect to the environment and communities); iv) a reduction in emissions; and v) an increase in green innovations. These findings are consistent with our theoretical arguments highlighting a new form of agency conflict — the misalignment between shareholders' and managers' preferences for stakeholder engagement — and suggesting that CSR contracting enhances corporate governance.