Corporate Social Responsibility,executive Compensation And Relative Performance Evaluation

The concept of corporate social responsibility(CSR)is derived from the developed countries in the western world in the late 19 th century,and is closely associated with American enterprises and their economic industrialization.The emergence of big business led to the expansion of the power of corporations in the economy and in society,and the ever-increasing discrepancy between the impact of businesses on the economy,the political landscape,and society at large and the responsibility these businesses face toward society and the environment has led to a greater degree of focus upon the relationship between corporations and society.Increasingly,there are demands that corporations should bear social responsibility proportional to the amount of power that they wield,and for corporations to begin nurturing "corporate conscience".The implement of CSR started relatively late in China.Since the late 1970 s,our country fully implements economic reform and opening-up policy,makes a series of institutional changes,to develop market economy,and improve the investment environment to attract foreign capital and expand foreign trade,in order to promote the rapid growth of the national economy.Meanwhile,resource consumption,environmental pollution,product safety,employee protection and business ethics,CSR issues continue to emerge,which brought serious challenges to the harmony and sustainable development of the businesses,governments,society and environment.Zhou(2006)classifies the process by which CSR has been inducted into the Chinese economy in three broad stages.The first stage occurred between 1996-2000,during which the concept of CSR first appeared in China,when international companies began assessing Chinese suppliers to their businesses according to this matrix.During the second stage,which occurred between 2000-2004,both the Chinese government and academics adopted a wait-and-see attitude toward whether corporations should bear social responsibility,with the main point of concern being that should corporations fail to bear social responsibility,this might prove to be an impediment toward non-tariff barriers of Chinese exports.Starting from 2004,the government,the media and corporations have begun working together to promote the idea of CSR in China and to move forward on the process of its implementation.On October 2006,our government clearly made the goal of establishing a harmonious society in 2020.From the level of economic growth and business,the sustainability and CSR and building a harmonious society target are in the same strain,and therefore CSR cause the attention of the central government.During the 16 th APEC Economic Leaders meeting in November 2008,it was mentioned that corporations need to foster a greater awareness of global responsibility,and consciously move toward incorporating social responsibility into their business strategies,abide by its domestic legal obligations as well as internationally accepted business practices,and work to improve their business model while aligning and maximizing business and social benefit.This was the first time since the economic crisis of 2008 that the Chinese government has clearly stated its position on the corporation’s need to bear social responsibility,and with this statement has made it clear that the environment within China is such that the need for corporations to bear social responsibility is no longer simply an economic question of the corporations’ own operating decisions,but rather has evolved to become a political question of strategy and future development.In other words,CSR has become an important and highly-buzzed point of consideration within the contemporary Chinese political landscape.With CSR elevated to the level of international strategic development and thrust into the spotlight of the central government,CSR has become an important measurement matrix for cooperate personnel caught up in the tournament theory while fighting for promotions.At the same time,the proliferation if CSR in China may very well be a direct result of governmental interference: in order to meet political obligations,government officials may forcibly compel state-owned enterprises(SOE)with natural connections to government to take on a greater degree of social responsibility.This may very well provide SOE executives with rent-seeking opportunities,letting them promote themselves and elevate regional governmental political achievements.In our country,taking responsibility is not only an economic issue of the enterprise,but also become a political issue which rising to the strategic level.Which are different with the western countries who taking social responsibility for maximizing shareholder value or moral purpose.This paper taking "corporate social responsibility,executive compensation and relative performance evaluation" as the topic,we investigate when taking CSR having impact on financial performance,how do this relationship affect the implementation of relative performance evaluation(RPE).On the basis of relevant literature review,firstly,according to game theory,we analyze the external drive of taking social responsibility from the perspective of government regulation;Based on the principal-agent theory,we analyze the internal drive of taking social responsibility from the perspective of executive incentives,if we ignore the social responsibility,it will generate the problem of information asymmetry of the manager market.Secondly,we discuss the unique background of our country from the perspective of political interference and rent-seeking,we summarize the development process of CSR,and then we analyze the realities of CSR.Based on the above theoretical analysis and our unique background,taking Chinese listed companies as example,we explore the impact of CSR on RPE.Firstly,we explore the impact of CSR on financial performance,because compensation based on financial performance,and the implementation of RPE give a more accurate evaluation of financial performance.So we firstly explore the relationship of CSR and financial performance,and this empirical analysis provides a theoretical support for the follow-up analysis.Secondly,we investigate the impact of CSR on the compensation-performance sensitivity of SOE executives,because compensation-performance sensitivity may serve as a bridge between CSR and RPE.On one hand,when CSR lowers financial performance,management may due to a reluctance to inadvertently lower their owns compensation end up not wishing to implement RPE;on the other hand,compensation-performance sensitivity is a factor that influences RPE implementation,and so if CSR affects compensation-performance sensitivity,this will also affect the implementation of RPE.Finally,we explore the impact of CSR on RPE implementation.On one hand,when CSR lowers financial performance,management may due to a reluctance to inadvertently lower their own compensation end up not wishing to implement RPE,because RPE filters out the impact of external factors on firm performance;this results in the firm performance looking lower relative to the reference firm’s performance,which subsequently results in management compensation also decreasing.Furthermore,while considering the long-term profitability of the firm,stockowners may similarly wish to decrease the implementation of RPE and encourage corporations to bear more CSR.On the other hand,management’s compensation-performance sensitivity has a certain degree of impact on the implementation of RPE.More specifically,when financial performance decreases as a result of CSR,when management can wield its power to lower the degree of management-compensation sensitivity in order to prevent compensation form decreasing along with financial performance,then the implementation of RPE for executives becomes less important.Our main conclusions are as follows:Firstly,we find that the probability of taking CSR are negatively related with financial performance.The more the enterprise pay attention to the different aspects of the CSR,the more reduced of its performance.The five aspects of CSR(environment,employees,consumption,communities and other stakeholders)are negatively related with financial performance.The relationship between CSR and financial performance are more pronounced in the SOE.The relationship between CSR and financial performance of SOE are more pronounced in the area of more serious government intervention.Secondly,we find that the probability of taking CSR are negatively related with the compensation-performance sensitivity of SOE executives.The more the enterprise pay attention to the different aspects of the CSR,the more reduced of the compensationperformance sensitivity of executives.The five aspects of CSR(environment,employees,consumption,communities and other stakeholders)are negatively related with the compensation-performance sensitivity of executives.The negative relationship between CSR and compensation-performance sensitivity of SOE executives is due to the power of SOE’s executives.The relationship between CSR and compensation-performance sensitivity of SOE are more pronounced in the area of more serious government intervention.Thirdly,we find that the probability of taking CSR are negatively related with the implementation of RPE in SOE.The more the enterprise pay attention to the different aspects of the CSR,the more reduced of its implementation of RPE.The five aspects of CSR(environment,employees,consumption,communities and other stakeholders)are negatively related with the implementation of RPE.The negative relationship between CSR and the implementation of RPE of SOE executives is due to the power of SOE’s executives.The relationship between CSR and the implementation of RPE of SOE are more pronounced in the area of more serious government intervention.The results outlined above indicate the following:Firstly,the promotion of CSR in China has a different set of motivations from its promotion in developed countries in the western world.When CSR as a subject is elevated to the level of national strategy and development in China,CSR becomes more a reflection of regional government officials’ will and its implementation a result of governmental mandate.When government officials need to accomplish a certain level of political tasks,they may mandate SOEs with natural connections to government take on CSR.Secondly,government officials may mandate SOEs with natural connections to government take on CSR,and this may offer SOE executives a rent-seeking opportunity to pursue self-promotion and professional advancement.Since SOE management can use CSR as a tool for maximizing personal benefit,when CSR lowers the financial performance of the firm,management has incentive to use its power and influence to lower the compensationperformance sensitivity,in order to prevent their compensation from decreasing along with financial performance.Furthermore,when management uses its influence to lower the compensation-performance sensitivity,they simultaneously also decrease the implementation of RPE in order to similarly safeguard their own compensation.Our findings enrich the literature of CSR,financial performance,the compensationperformance sensitivity of executives and RPE,provide adequate theoretical foundation and empirical basis for future research.Our paper at least has the following contributions:Firstly,according to game theory,we analyze the external drive of taking social responsibility from the perspective of government regulation;based on the principal-agent theory,we analyze the internal drive of taking social responsibility from the perspective of executive incentives,if we ignore the social responsibility,it will generate the problem of information asymmetry of the manager market.Our findings enrich the literature of CSR,government regulation and executive Compensation incentive.Secondly,the implement of CSR started relatively late in China,the scope of the literature of CSR is relatively narrow.The firm in our country taking social responsibility for the political reason,or under the government intervention,such as,redundancy,and taking CSR might be a kind of rent-seeking behavior.Which are different with the western countries who taking social responsibility for maximizing shareholder value or moral purpose.Based on our unique background,and from the perspective of political rent-seeking,our findings enrich the literature of CSR.Thirdly,RPE in the salary contracts are filter out some common factors that affect performance in the same industry or market,so it is more accurate for evaluating the effort of managers.RPE is attractive in theory,but whether use it is still not come to a consensus.Some scholars began to focus on the factors which influenced the implementation of RPE,such as ownership nature of ultimate controller(Chen et al.,2012),product market competition(Zhou et al.,2014).We focus on the impact of taking CSR on the implementation of RPE using Social Responsibility Report,our finding enriches the related literature.Fourthly,there are a branch of literature focus on the managerial Compensation incentive,but only a little of literature from the perspective of CSR,some literature focuses on the impact of redundancy burden on the compensation-performance sensitivity of executives in the SOE(Zhang et al.,2013),some literature focuses on the impact of executive promotion(Liu and Xiao,2015;Liao and Shen,2014).We focus on the impact of taking CSR on the compensation-performance sensitivity of SOE using Social Responsibility Report,our finding enriches the related literature.Finally,a branch of literature focuses on the relationship between the probability of taking CSR on financial performance,but it is not come to a consensus(Margolis et al.,2007).One of the most important reasons is the presence of endogenous problems,whether taking CSR and financial performance affect each other(Margolis et al.,2007).We use the difference-in-difference method to control endogeneity,focus on the impact of CSR on financial performance,enriches the related literature.