How Corporate Charitable Giving Reduces the Costs of Formal Controls

Bernhard E Reichert,Matthias Sohn

doi:10.1007/s10551-020-04695-y

Bernhard E Reichert, Matthias Sohn

Open Access

https://doi.org/10.1007/s10551-020-04695-y

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Abstract

Formal control systems are a common instrument to align employees’ interests with those of managers and companies. However, research shows that employees perceive formal controls as a sign of distrust and restraint, which can lead to costs of control in the form of lower employee cooperation and effort (e.g., Falk and Kosfeld 2006; Christ 2013). We propose that charitable giving reduces these costs of control. We draw on the halo effect and propose that corporate charitable giving alters employees’ perception of and reaction to formal controls. In a laboratory experiment, we find that charitable giving by a company creates a higher level of employee trust in a manager who decides to implement a control and a more positive assessment of formal control. These positive effects of charitable giving lead to lower costs of control compared to the absence of charitable giving. We thereby provide an example of how charitable giving as a corporate social responsibility (CSR) activity yields positive benefits by altering the behavior of internal company stakeholders.

Highlights

Formal control systems are ubiquitous instruments used to address agency problems (Merchant and van der Stede 2017)
We examine two effects: (1) the effectiveness of our charity manipulation and (2) the costs of control when the company does not engage in charitable giving
We find that participants’ economic identification (Z-score = 2.449, p value = 0.007), emotional identification (Z-score = 3.659, p value < 0.001), and consideration of contributing resources (Z-score = 1.817, p value = 0.036) are statistically significantly lower when the third-party recipient is unspecified compared to when Philadelphia Animal Welfare Society (PAWS) is the recipient

Summary

Introduction

Controls can crowd out employee preferences for social norms such as fairness, reciprocity, and trust toward a manager implementing formal controls. This crowding-out process decreases employee work effort, motivation, and goodwill toward the manager. These costly adverse reactions impose costs of control (Falk and Kosfeld 2006). We propose that these costs of control are altered when a company engages in charitable giving. The costs of control are lower compared to the absence of corporate charitable giving

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