20 January, 2020. University of Groningen,
Faculty of Economics and Business - MSc Strategic Innovation Management
‘The moderating influence of CEO hypocrisy’
Author: THOMAS WIERSINGA Student Number: S2698633
Supervisor: J. Surroca Co-assessor: P. Steinberg
Word Count: 11451
ABSTRACT
This thesis explores the field of organizational Corporate Social Responsibility (CSR) together with the influence of legitimacy threats and CEO hypocrisy. Based on the suggestions and findings of existing literature, I formulate two hypotheses with regard to the relationship between CSR actions and legitimacy threats, and the moderating effect of CEO hypocrisy. These hypotheses are tested on a sample of 238 US stock-listed organizations using of multiple regression analysis. Data included in this sample is obtained from different sources including annual reports, Orbis, and EIKON. In line with previous literature, I find that legitimacy threat has a positive effect on both symbolic as substantive CSR actions. Furthermore, I add to the growing body of literature by showing that the relationship between legitimacy threat and symbolic CSR is positively moderated by CEO hypocrisy. Interestingly, results show evidence for organizational decoupling, a topic of current academic debate and direction for future research.
INTRODUCTION
Recently, customers base their purchase decision more often on the involvement of organizations in Corporate Social Responsibility (CSR) actions (Wagner, Lutz, and Weitz 2009). This importance of CSR for organizations increases the availability of public information about the CSR actions of a particular organization (Wagner et al., 2009). Therefore, organizations that engage in several activities that are legal but unpopular experience increased media scrutiny (Lamin & Zaheer, 2012). Although an organization’s intention can be to maintain its social position and be of influence in its current environment, challenges resulting from e.g. this increased media scrutiny may undermine social relationships and an organization’s position (Oliver, 1991; King, Felin & Whetten, 2010; Fligstein & McAdam, 2011). Therefore, organizations use media as a communication channel to manage these perceived threats by giving signals to the relevant public that they behave according to the norms and values suitable in the environment (Aerts & Cormier, 2009). Dowling and Pfeffer (1975) found that when congruence does not exist between the external perception of an organization’s actions and environmental norms and values, the result can be economic, legal or other negative sanctions for the organization. As a result, organizational behavior needs to be proper, suitable and flexible in reacting to environmental norms and values (Aerts & Cormier, 2009). This is not easy, as Lamin and Zaheer (2012) find that the reaction of organizational behavior can be different among stakeholders. Additionally, the perception of organization legitimacy from stakeholders can affect the organization in different ways (Aerts & Cormier, 2009). Having its legitimacy challenged, an organization’s reaction can have lasting consequences in the short- and long term of its existence (Lamin & Zaheer, 2012). A recent example includes Facebook’s inability to protect its users’ data, resulting in the organization’s lowest stock price in almost 2 years (CBS News, 2018). This shows the result of a legitimacy threat which is reflected by Facebook’s actions and inability to resolve these legitimacy problems.
Corporate Social Responsibility (CSR) actions can be used as a strategy in order to positively influence an organization’s environment and gain legitimacy (Farrington, Curran, Gori, O’Gorman & Queenan, 2017). Farrington et al (2017) argue that by implementing a CSR strategy, an organization can increase its stakeholders trust, and therefore strengthen its legitimacy. There could be other reasons an organization implements CSR actions (e.g. because of a CEO’s ethical belief that the organization should protect the environment), however, most CSR actions are seen as the logical response to legitimacy threats (McDonnell & King, 2013).
2015). Therefore, the leaders of organizations (CEO’s) have a big but difficult role sticking to their previously made promises in their effort not being perceived hypocritical in their decision-making (Brunsson, 2002). CEO credibility is increasingly important because of the threats that result from the perception of a CEO and organizational hypocrisy (Amernic & Craig, 2007). Accordingly, with its legitimacy threatened the organization is likely to respond with CSR actions (Berrone, Gelabert & Fosfuri, 2009), which is expected to increase even more by the effort of a CEO in not being perceived hypocritical. There could be argued that the CEO characteristics of hypocrisy will increase symbolic CSR, as CEOs highly value their credibility and therefore try to influence the opinion of the environment as much as possible (Amernic & Craig, 2007). On the contrary, hypocritical CEOs can use substantive CSR actions in response to legitimacy threats in order to ensure congruence between their external- and internal perception of CSR actions (Dowling & Pfeffer, 1975). As CEOs have a large influence in the decision-making of the firm, I identify the gap in the form of the lack of empirical evidence of the moderating influence of CEO hypocrisy on the relationship between legitimacy threats and CSR actions.
Having identified the literature gap and goal of my research, I define my research question. The missing empirical evidence on the moderating role of CEO hypocrisy results in the question:
RQ: How does the degree to which a CEO is perceived hypocritical moderate the relationship between legitimacy threats and CSR action?
LITERATURE REVIEW
Before I discuss and the influence of CEO hypocrisy on the relationship between organizational legitimacy and CSR actions, in the literature review I will systematically give an overview of (1) organizational legitimacy, (2) threats to an organization’s legitimacy, (3) how organizations respond to those threats, and (4) the influence of hypocrisy on the relationship between threats and responses. Organizational Legitimacy
Organizational legitimacy is defined as ‘a generalized perception or assumption that the actions of an entity are desirable, proper, or appropriate within some socially constructed system of norms, values, beliefs and definitions’ (Suchman, 1995, p. 574). Suchman (1995) adds to this definition that the pressure to conform to cultural norms is high, and therefore influences an organization. Establishing legitimacy is important for an organization, as it leads to stability and the institutional environment is expected to support organizations that look meaningful, trustworthy, and stable (Suchman, 1995). This process is expected to repeat because legitimacy is integrated in a system of institutionalized norms and values, and therefore can be seen as self-replicating (Suchman, 1995). In turn, legitimacy influences the institutional environment’s response to its CSR actions, and how these actions are perceived (Suchman, 1995). Additionally, legitimacy increases the sustainability of an organization’s operability and subsequently improves an organization’s competitive advantage as it allows for better employee attraction, social tie improvement and access to more resources (Pfeffer & Salancik, 1978; Oliver, 1991). Consequently, acquiring legitimacy is, and should be, a strategic priority for organizations (Scott, 1995; Deephouse, 1999).
debate about the influence of differential practices and the relation between those practices in order to obtain the approval of society (Berrone et al., 2009).
Legitimacy Threats
Threats to organizational legitimacy are inevitable (McDonnell & King, 2013), and even organizations with a strong legitimate basis can experience these threats (Bansal & Clelland, 2004). While an organization wants to maintain its current existing relationships and position, e.g. movements and media attacks can threaten its legitimacy (Oliver, 1991; Fligstein, 1997, 2001; Whetten & Mackey, 2002). Threats to organizational legitimacy question the organization’s dedication to socially desirable norms, makes stakeholders doubt the positive image created by an organization, and can make an organization’s position in the industry crumble (Fombrun & Shanley, 1990; Whetten & Mackey, 2002). Even the most stable organizations can be weakened by e.g. innovations, decision-making failures, and external shocks, therefore, organizational legitimacy is an important issue (Suchmann, 1995). For example, this is shown by Facebook, one of the most influential and largest organizations of the recent decade, who experienced a large stock price drop due to the inability to react on inventive hacking technology that threatened its users’ data (CBS News, 2018). A direct consequence is that Facebook will not be included in the S&P ESG index as Facebook’s ESG Score dropped in the previous years due to multiple of these controversies (CNBC News, 2019). This can have consequences for the whole organization as Whetten (1988) argues that losing this organizational legitimacy can lead to the demise of the whole organization. Legitimacy threatening events could disrupt the perception of current organizational norms and values while increasing information asymmetry and stakeholder uncertainty (Bartunek, Krim, Necochea & Humphries, 1999; Weick, 1995). If organizations are unable to cope with these legitimacy threats, so if organizations are unable to fully understand and reduce this information asymmetry, the inability to respond to these legitimacy threats will generate an organizational crisis (Pearson & Clair, 1998). Pearson and Clair (1998) find that during a so called ‘legitimacy crisis’ organizational stakeholders withdraw their support which can turn into skepticism against the whole organization. Multiple scholars found evidence that due to increased scrutiny and the result of skepticism, the organization’s flexibility to respond to legitimacy threats by e.g. decoupling can be more difficult (Ashforth & Gibbs, 1990; Suchman, 1995).
In Response to Legitimacy Threats
legitimacy threats (Berrone, et al., 2009). Within the boundaries of the institutional theory, substantive CSR actions are changes in the organization’s core actions, and includes risks, which should eventually result in improving an organization’s environmental performance and legitimacy (Hyatt & Berente, 2017). On the other hand, symbolic CSR actions are defined as CSR actions that are more oriented to external claims and information disclosure (Hawn & Ioannou, 2016), and can be used as the effective responses to external claims in achieving legitimacy by aligning their actions with stakeholder requirements and the pressure to uphold internal flexibility (Meyer & Rowan, 1977; Berrone et al., 2009). It is argued that symbolic CSR actions try to influence external perceptions of the organization being involved with evident actions in order to reap the benefits resulting from these actions (Berrone, et al. 2009).
In spite of the fact that organizations cannot adopt all of the values, standards and norms opposed by external stakeholders, they can adopt and adjust to some of them in order to legitimate their environmental actions (Okhmatovskiy & David, 2011). Organizations adopting these substantive CSR actions add to the natural environment while gaining competitive advantage by leaving a reliable impression at their stakeholders (Porter & Van der Linde, 1995). Furthermore, Hyatt and Berente (2017) find that substantive CSR actions are needed to back up symbolic CSR actions, in order for an organization to avoid being perceived as hypocritical. Legitimacy threats therefore lead to an increased use of substantive CSR actions (Hyatt & Berente, 2017). Based on these arguments, I hypothesize:
H1a: Legitimacy threats increase the use of substantive CSR actions in response to environmental issues
management prefers symbolic rather than substantive actions in response to legitimacy threats. Westphal and Zajac (1994) add evidence that only adopting and not implementing governance structures can be enough to satisfy particular stakeholders. The goal of symbolic CSR actions is to influence stakeholder perceptions in order to increase an organization’s positive visibility to obtain more legitimacy (Berrone, Gelabert, Fosfuri, 2009). Because these legitimacy threats lead organizations to apply symbolic CSR actions, I hypothesize:
H1b: Legitimacy threats increase the use of symbolic CSR actions in response to environmental issues
Role of hypocritical CEOs
Within the boundaries of institutional theory, corporate greenwash appears when organizations deliberately overstate the disclosure of their symbolic CSR actions to gain a positive image, while this is inconsistent with its actual (substantive) CSR actions (Testa, Miroshnychenko, Frey, 2018). Bansal and Clelland (2004) call this ‘beneficial to firms and costly to society’. Testa et al (2018) define greenwashing as ‘the external projection of a positive image of a firm, which is not reflected in its internal behaviors regarding environmental issues’ (p. 288). The external perception of judgement that arises when an organization makes claims which are inconsistent with its behavior is defined as corporate hypocrisy (Brunsson, 2002; Effron, Lucas & O’Connor, 2015). Recent research by Zavyalova, Pfarrer, Reger and Shapiro (2012) find that e.g. media scrutiny can be the result of ‘hypocritical’ organizational CSR actions in response to a legitimacy threat. Being perceived hypocritical in the institutional environment can therefore have negative results for an organization (Bansal & Clelland, 2004; King, 2008).
Because of this, organizational legitimacy is threatened as it is more difficult to maintain an organization’s current relationships and position, and it has to deal with all kinds of negative consequences of this legitimacy threat (Oliver, 1991; Fligstein, 1997, Whetten & Mackey, 2002. Some literature finds evidence that CEOs and organizations can be reluctant to disclose their CSR actions, however, an organization cannot afford to be reluctant with the disclosure of their CSR actions in order to decrease information asymmetry (Bansal & Roth, 2000; Carlos & Lewis, 2018). As an organization would rather communicate more about their CSR actions to comply with environmental norms and values than they would communicate less, I hypothesize:
H2b: Symbolic CSR actions will be more likely in response to a legitimacy threat the higher the degree of hypocrisy of the CEO
Logically, if an organization is threatened it is more difficult to maintain the organization’s current legitimacy within the organizational environment due to the increased monitoring of e.g. the institutional environment (Carlos & Lewis, 2018). However, organizational legitimacy is gained by creating a positive image by actually increasing an organization’s substantive CSR actions by which the organization adheres to environmental norms and values (Testa et al., 2018). To avoid being perceived hypocritical, a CEO’s are likely to respond with CSR actions to these legitimacy threats to avoid losing credibility (Carlos & Lewis, 2018). As I already argued that hypocritical CEO’s increase symbolic CSR actions, the incoherence between CSR disclosure and CSR actions would be noticed due to the consequences of organizational legitimacy threats (Kim & Lyon, 2014). In the same regard, substantive CSR actions are more likely to occur in order to avoid being perceived as an even more hypocritical CEO, and therefore an even more hypocritical organization (Hyatt & Berente, 2017). Because substantive CSR actions actually change an organization’s core actions and improve organizational legitimacy (and therefore legitimately defending the organization against legitimacy threats), I argue that the influence of CEO hypocrisy increases the need for substantive CSR actions:
CONCEPTUAL MODEL
Figure 1: Conceptual model
METHODOLOGY
Throughout research into the relationship between organizational legitimacy threats, CSR actions and the influence of hypocrisy, institutional theory and impression management literature have been dominant in explaining CSR reactions to legitimacy threats (e.g. Berrone, et al., 2009; Hyatt & Berente, 2017). However, this literature did not yet empirically test the moderating effect of the degree to which a CEO is perceived hypocritical on this relationship. As a result, I will follow the by Van Aken, Berends and van der Bij (2012) suggested theory testing approach to fill this research gap on the moderating influence of hypocritical CEO’s. In this way, my research will be comprehensive as the problem-solving will be based on a systematic review of current literature, critical as I will indicate the value but also the limitations of the literature, and adds to literature gap as elaborated on before (Van Aken, et al., 2012).
DATA COLLECTION
compute the control variable R&D Intensity), reducing the sample size significantly. Finally, I base my sample on organizations that have and Bureau van Dijk (BvD) indicator A+, indicating that no shareholder has more than 25% direct or total ownership in the organization. Because of the use of CEO letters to measure CEO hypocrisy, the influence of the CEO is maximized with a BvD indicator A+ and would otherwise decrease or be influenced by outside parties. By doing this I maximize CEO influence and therefore am more able to measure the influence of hypocrisy on the relation between legitimacy threats and symbolic or substantive CSR actions. The sample of 238 US stock-listed organizations includes all necessary information for the regressions needed and results give good evidence for the hypotheses suggested.
MEASUREMENTS
Conducting the empirical analysis, I use two main dependent variables (Substantive CSR actions and Symbolic CSR actions), one independent variable (Legitimacy Threat), and five control variables (firm size, profitability, R&D intensity, debt to equity ratio, and industry). These variables are used and validated by previous CSR literature (e.g. Bansal & Clelland, 2004; Aerts & Cormier, 2009; McDonnel & King, 2013; Hawn & Ioannou, 2016).
Dependent variable. The two dependent variables symbolic CSR actions and substantive CSR actions incorporate information about how an organization reacts to organizational (legitimacy) threats and are measured as a count variable measured on data points covering20 external CSR and 21 internal CSR actions as used available in the EIKON database. Furthermore, I base my classification of substantive (internal) or symbolic (external) CSR actions on indices developed by Hawn & Ioannou (2016), defining symbolic CSR actions as more oriented to claims and disclosure, while substantive CSR actions are more oriented towards policies. This is consistent with previous CSR literature in which internal actions reflect less adaptability and external actions reflect the need to conform to environmental norms (Meyer & Rowan, 1977; Hawn & Ioannou, 2016). I divide these counted variables by the log of total assets of the organization, in line with Hawn and Ioannou (2016).
database. When an organization is involved in a controversy, the ESG score is calculated as the weighted average of the ESG score together with the score on ESG controversy in that particular fiscal year. Based on 23 ESG controversy measures, the EIKON ESG controversy score is calculated. This ESG score also controls for an organization’s past legitimacy threats as this may adversely influence organizational legitimacy (Lamin & Zaheer, 2012).
Moderating variable. The Degree to which the CEO is perceived hypocritical is measured as the inconsistency between CSR actions (substantive & symbolic) when it involves too positive (CEO) statements and negative reported behaviors (Wagner, et al., 2009). I measure this by analyzing annual reports of the organizations in my sample, subtracting the ‘CEO letter to the shareholders’ (CEO letter) from the annual report. Saving these CEO letters as plain text allowed me to upload the results into the Linguistic Inquiry and Word Count (LIWC) text analysis program for an analysis of individual words and sentence structures. LIWC is used in literature for text analysis, as the program can search for several different psychological and linguistic links in the text (e.g. Zavyalova, Pfarrer, Reger & Shapiro, 2012; Aerts & Yan, 2017; Nardella, Brammer, & Surdu, 2019). Furthermore, I follow Zavyalova et al. (2012) and Walter and Yan (2017) in analyzing CEO letters and measuring their positive content of their total affection score. Using the average positive emotions per industry measured in CEO letters from organizations with a low ESG controversy score (ESG controversy score < 50, average positive emotions 90%) as basis, I create a dummy variable coding CEO letters from organizations with a higher ESG controversy score (> 50) than the industry average plus a more positive letter than the industry average as a ‘1’. Furthermore, all other organizations with a low ESG controversy scores or with a high ESG controversy score but with less positive CEO letters as a ‘0’. Excessive positive emotions in a CEO letter which is inconsistent with its reported behaviors are therefore seen as hypocritical. This allows me to measure CEO hypocrisy of the organizations within my sample. The moderating variable also narrowed down my sample size due to the sometimes-limited availability of CEO letters in 2016 annual reports, or the limited availability of annual reports as a whole. Additionally, many firms use 10-K form annual reports, in which it is not necessary to add a CEO letter to shareholders.
Firm Size
Past literature indicates that Firm Size is an influential factor for CSR actions (Aerts & Cormier, 2009; Lamin & Zaheer, 2012; McDonnell & King, 2013; Testa et al., 2018). Firm Size is an antecedent of legitimacy as larger companies are more visible in the general public and have increased scrutiny on their CSR actions, therefore are more willing to invest in CSR actions (Bruysse & Verbeke, 2003). Larger companies are usually in a better position to withhold negative disruptions resulting from legitimacy threats (Lamin & Zaheer, 2012). Furthermore, thanks to their size, larger organizations have more contractual and social ties to their shareholders, which besides their visibility also increases their taken-for-grantedness (Meyer & Rowan, 1977; Fombrun & Shanley, 1990). Firm size is controlled for by the log of total assets in accordance with previous literature (Aerts & Cormier, 2009; Lamin & Zaheer, 2012), and is retrieved for the year 2016.
Return on Assets
The control variable Return on Assets measures the financial performance of the organization, and is the ratio of property, plant and equipment of the total assets of an organization (Bansal & Clelland, 2014). The more profitable and successful an organization is, the more increase in its visibility (Lamin & Zaheer, 2012). Many studies find a positive relation between and organization’s financial performance and (the disclosure of) CSR actions and therefore I control for this potential bias (Cormier & Magnan, 1999; Aerts & Cormier, 2009; Lamin & Zaheer, 2012). Furthermore, I also retrieve this control variable for the year 2016.
R&D Intensity
Past literature indicates that higher R&D expenditure suggests that organizations are increasingly willing to invest in CSR actions as they expect to be more involved in CSR actions with their product innovations (McWilliams & Siegel, 2001). Organizations that are innovative (in R&D), need to be involved in CSR actions. To control for this relationship between innovativeness and CSR actions I follow the literature in using this already established construct of dividing R&D expenditures by the organization’s total sales (Baysinger & Hoskisson, 1989; Gerhardt, Yunlu & Murphy, 2012). I control for this variable for the year 2016.
Debt-to-Equity ratio
could influence the willingness to undertake CSR actions. Furthermore, the DtE ratio is related to willingness for an organization to take risks and is therefore also controlled for in 2016 (Dam & Scholtens, 2012).
Industry
Because of differences between industries, a factor variable is created using data from EIKON based on existing literature (Aerts & Cormier, 2009; McDonnell & King, 2013; Hawn & Ioannou, 2016). These dummy variables are based on organizational SIC Codes indicating in which industry the organization is positioned. These 4 number digits refer to which industry an organization belongs and therefore allow to make a dummy variable per industry. After narrowing down my sample, the remaining organizations are positioned in the mining (13); manufacturing (187); Trade (10); and the services industries (28). Because of multicollinearity problems, I remove the industry manufacturing from the regression analysis, and create three dummies to control for the mining, trade and services industries. These dummies are coded ‘1’ for the organizations in their industry, and ‘0’ for all other industries. Therefore, I interpret the dummies as control for the difference between the organizations in the manufacturing industry and the other industries.
ANALYSIS
TABLE 1: Regression Equations for the Models
{Model 1} Y1 SYM = β0 + βcontrols
{Model 2} Y1 SUB = β0 + βcontrols
{Model 3} Y2 SYM = β0 + β1LegT + βcontrols
{Model 4} Y2 SUB = β0 + β1LegT + βcontrols
{Model 5} Y2 SYM = β0 + β1LegT + (β1LegT x β2Hyp) + βcontrols
{Model 5} Y2 SUB = β0 + β1LegT + (β1LegT x β2Hyp) + βcontrols
RESULTS
This paragraph explains the output results, and visualizes the equations and outputs described in the methodology section before. These statistical descriptives and analyses include tests for multicollinearity, normality, homogeneity, and the main regression results from the different models. The correlations and descriptive statistics are to be found in table 2 on the next page.
Descriptive statistics
TABLE 2: Descriptive statistics and Correlations
Var. SYM_CSR SUB_CSR LEG_T HYP LOG_A DtE ROA R&D_INT IND_MIN IND_TR IND_SER
SYM_CSR 1,000 SUB_CSR 0,402*** 1,000 LEG_T 0,374*** 0,659*** 1,000 HYP 0,644*** 0,340*** 0,222*** 1,000 LOG_A 0,388*** -0,064 0,099 0,317*** 1,000 DtE 0,157** -0,083 -0,108* -0,032 -0,012 1,000 ROA 0,161** 0,120* 0,081 0,064 -0,105 -0,257*** 1,000 R&D_INT -0,137** -0,044 -0,232*** -0,035 -0,165** -0,092 -0,330*** 1,000 IND_MIN -0,042 -0,032 0,150** 0,082 0,173*** -0,292*** -0,351*** -0,006 1,000 IND_TR 0,042 0,042 0,087 0,029 0,170*** -0,050 0,015 -0,041 -0,048 1,000 IND_SER -0,094 -0,094 -0,087 -0,084 -0,084 0,334*** 0,055 0,033 -0,090 -0,074 1,000 VIF - - 1,16 1,14 1,12 1,27 1,38 1,20 1,26 1,05 1,14
REGRESSION RESULTS
Table 3 provides the results from the regression analysis performed on symbolic and substantive CSR actions in Model 1 and Model 2. Model 1 and Model 2 both tests all control variables on respectively Symbolic CSR Actions and Substantive CSR actions, and are therefore used as baseline. Model 1 is significant at a 99% level (Prob. > F. = 0,000; R-Squared = 0,208) for symbolic CSR actions and all control variables. Model 2 is not significant and does not have large explanatory power (Prob. > F = 0,264; R-Squared = 0,037), which will increase after adding the independent and moderating variable. After having computed these values I will introduce the effects of legitimacy threat (Model 3 and Model 4) and the moderating effect of hypocrisy (Model 5 and Model 6).
TABLE 3: Interaction Control Variables
Model 3 and Model 4 test the effect of an organization’s ESG score on the use of symbolic and substantive CSR actions. I use this ESG score to analyze the effect organizational legitimacy threats have on an organization’s symbolic CSR actions (see Control Variables). In comparison with the measurement of symbolic CSR in Model 1, Model 3 is also significant at a 99% level (p < 0,01), but has an increased R-Square from 0,328. Adding the influence of legitimacy threats therefore increases the explanatory power of the model. The first Hypothesis (1a) predicted that the more legitimacy threats an organization gets to endure, the more symbolic CSR actions it will undertake. Model 3 shows a positive
{Model 1} {Model 2}
Variable SYM_CSR SUB_CSR
Coefficient Significance Coefficient Significance
coefficient (0,010) for legitimacy threats which is significant at a 99% level (p = 0,000), indicating that the more legitimacy threats an organization gets to endure, the more symbolic CSR actions it will undertake. Therefore, I find support for, and accept hypothesis 1a based on Model 3. With regard to the control variables in the Model 3, Log Assets, Debt to Equity ratio and Return on Assets are all show a positive coefficient and have an increased significance of respectively p < 0,01 and p < 0,05. This shows that the larger the size of an organization, the greater the risk the organization is willing to take. Accordingly, the greater the visibility and performance of an organization, the more external CSR actions the organization is willing to take.
TABLE 4: Regression Results Legitimacy Threats
The same regression is used to measure the effect of organizational legitimacy threats on CSR actions in Model 4, showing a positive coefficient of 0,024 which is significant at a 99% level (p = 0,000). Therefore, I do also find support for hypothesis 1b based on Model 4, indicating that the more legitimacy threats the organization gets to endure, the more substantive CSR actions it will undertake. With regard to the control variables, Log_Assets shows a negative coefficient (-0,089) with a weak significance of p = 0,076. This would indicate weak evidence that the greater the size of the organization, the less internal CSR actions the organization is willing to take at the same level of legitimacy threat. Control variables R&D Intensity and Industry Mining both positive (0,160 and 0,270) and are significant on a 95% level.
{Model 3} {Model 4}
Variable SYM_CSR SUB_CSR
Coefficient Significance Coefficient Significance
This indicates that larger organizations and organizations from the mining industry in the United States are more willing to improve their substantive CSR actions in comparison with other industries the same level of legitimacy threat. With the gathered evidence, I do accept both hypotheses 1a and 1b which is in line with previous research about internal and external CSR (e.g. McWilliams & Siegel, 2001; Aerts & Cormier, 2009).
TABLE 5: Regression Results Hypocrisy
Table 5 provides the results from the multiple regression analysis performed on substantive CSR actions in Model 5, and Model 6 including the moderating effect of hypocrisy. When the moderation effect of hypocrisy is added to the regressions, the R-squared increases for both the models including symbolic and substantive CSR actions (respectively R-Squared = 0.574 and 0.541). As discussed in the measurement section, a dummy variable is created with no hypocrisy = 0 and hypocrisy = 1. In Model 5, legitimacy threat has a positive coefficient (0,006) again at a significance at a 99% level, indicating the more legitimacy threat an organization gets to endure, the more willing it is to undertake symbolic CSR actions matching the results of previous Model 3. The control variables Log_Asset and Debt to Equity ratio both have a positive coefficient at a 99% significance, only Return on Assets does not have a significant result in Model 5 in comparison with Model 3. Furthermore, for the first time the control
{Model 5} {Model 6}
Variable SYM_CSR SUB_CSR
Coefficient Significance Coefficient Significance
variables Industry Mining is significant (respectively p < 0,05), however negative, providing evidence that the mining industry decrease their efforts to undertake symbolic CSR actions. The effect of legitimacy threats on symbolic CSR actions is positively moderated by the hypocrisy variable (coef. 0,012 and p = < 0,05). This shows evidence for my second hypothesis indicating that CEO hypocrisy positively moderates the effect of legitimacy threats on symbolic CSR action. Therefore, I find evidence to accept hypothesis 2a and can conclude that organizations with a hypocritical CEO undertake more symbolic CSR actions in response to legitimacy threats to suit environmental norms and values.
In Model 6 legitimacy threat has a positive coefficient (0,023) again at a significance at a 99% level, indicating the more legitimacy threat an organization gets to endure, the more willing it is to undertake substantive CSR actions as shown in Model 4. However, the negative coefficient of the hypocrisy moderator is interesting unfortunately I find the insignificance value of p = 0,164 which makes it unable to interpret this moderating influence of CEO hypocrisy on substantive CSR actions of an organization. Due to this insignificance result (p > 0,10) I do not find evidence to accept hypothesis 2b. Therefore, I am not able to conclude if hypocrisy has a positive (probably negative) moderating effect on the relation between legitimacy threat and substantive CSR actions. However, what is interesting to see is the significant positive direct effect of hypocrisy on substantive CSR actions (p < 0,05). This would mean that hypocritical CEOs are more willing to actually change an organizations CSR actions due to their opportunism in leading the organization, even without the threat of legitimacy loss. In combination with previous results, I argue that hypocrisy does not necessarily have to be bad in this regard, if eventually things will change in the organization. I will elaborate further upon this in the discussion section and the section with suggestions for further research. Furthermore, control variables Firm size and Industry Mining show negative results with a significance respectively (p < 0,01; p < 0,05). This indicates that increase in organizational size, the risk an organization is willing to take and being part of the mining industry decreases substantive CSR actions. Again R&D Intensity is significant (p < 0,05) and positive which matches the results and conclusions from Model 4.
DISCUSSION
environmental norms and values, this organizational legitimacy is threatened (Dowling & Pfeffer, 1975). Literature found that CSR actions can be effectively used as a strategy in order to positively influence an organization’s environment and gain or regain organizational legitimacy (Farrington, et al., 2017). An interesting phenomenon however, is the influence of CEO hypocrisy on the effect that legitimacy threat has on CSR actions (Amernic & Craig, 2007) which is a relatively growing research field.
THEORETICAL IMPLICATIONS
My findings provide implications for the literature body of CSR, organizational hypocrisy, and finally organizational decoupling. Firstly, the results show that indeed the increase of legitimacy threat increases organizational willingness to undertake both symbolic and substantive CSR actions. These results are in line with previous literature about CSR disclosure and environmental legitimacy (Aerts & Cormier, 2009) and the use of CSR actions as strategic resources to increase competitive advantage and counter legitimacy threats (McWilliams & Siegel, 2001; Branco & Rodrigues, 2006). This certainly does not end the discussion on symbolic and substantive CSR actions as there is still debate about the effects of proactive versus reactive CSR actions (Aerts & Cormier, 2009; McDonnell & King, 2013) and the effect of the gap between symbolic and substantive CSR actions (Hawn & Ioannou, 2016) where I will elaborate upon in the next paragraph. Besides the evidence of the increase in CSR actions due to legitimacy threats, organizations should be involved in CSR actions more often as literature shows that this could have a positive influence on, for example, market value (Hawn & Ioannou, 2016) and environmental legitimacy (Aerts & Cormier, 2009). In reaction to legitimacy threats, impression management literature elaborates on measures which could improve e.g. an organization’s social ties or reputation in order to maintain or restore its legitimacy (Elsbach & Sutton, 1992; Elsbach, 1994; Bansal & Clelland, 2004; McDonnell & King, 2013). In my research I find evidence in Model 3 and Model 4 in line with literature on symbolic and substantive CSR actions, however, there is still discussion to what extent these CSR actions should increase.
conducting more symbolic (external) CSR actions would positively influence an organization’s financial performance in response to legitimacy threats (Kim & Lyon, 2014; Schons & Stenmeier, 2016). Thirdly, I only find evidence for the positive relation between the moderating role of hypocrisy and symbolic CSR, while finding a negative, but insignificant, result on substantive CSR. This is in line with organizational decoupling literature, in which is argued that congruence does not necessarily need to exist between symbolic and substantive CSR actions. Hawn and Ioannou (2016) however, find that the wider the gap between internal CSR actions and external CSR actions, the lower the market value of an organization. This is in line with earlier findings in organizational decoupling literature, showing that the impact of symbolic CSR actions is more effective in combination with substantive CSR actions (Berrone, Gelabert, & Fosfuri, 2009). Although there is research in the field that contrast these findings arguing that decoupling has negative implications for an organization’s financial performance (e.g. Testa et al., 2018), I find evidence in line with the literature of organizational decoupling which shows that during legitimacy threats ‘hypocritical’ organizations are more likely to use symbolic CSR. These results should be interpreted with caution, as for example Carlos and Lewis (2018) argue that in response symbolic CSR actions are only effective when not implemented in the same domain as the legitimacy threat. Furthermore, literature generally interprets results found concerning CSR actions with caution as multiple variables influence CSR actions and hypocrisy. Organizations that actively engage in symbolic and substantive CSR actions also pursue an organizational differentiation strategy with regard to CSR actions, which makes it difficult to interpret CSR actions results without simultaneously controlling for R&D (McWilliam & Siegel, 2001). Evidence from previous literature suggest that small differences between symbolic CSR actions and substantive CSR actions positively influence organizational performance. Therefore, the results of the hypocritical behavior of a CEO could have a positive influence on the organizational performance by widening the gap between these CSR actions which is generally in line with the literature on organizational decoupling. My findings show that without legitimacy threat an organization with a hypocritical CEO is willing to undertake more substantive CSR actions. If an organization experiences legitimacy threats however, the hypocritical CEO is more likely to respond with symbolic CSR actions in order to adhere to environmental norms and values. This can possibly be explained by the CEO belief that symbolic CSR actions are better in response to legitimacy threats, but is definitely an interesting topic for future research.
actions, suggesting that organizations with more resources are expected to be able to use symbolic CSR more effectively, confirming statements made in previous literature (Lamin & Zaheer, 2012). I find moderate evidence that R&D intensity does positively increase substantive CSR, logically suggesting that the more R&D intensity provides more incentive for the organization to increase its internal CSR actions presumably based on these results based on this literature. Additionally, I find that being an organization in the mining industry negatively influences substantive CSR actions. This could possibly be explained as the mining industry is an conservative industry, and therefore are cautious with innovating and implementing substantive CSR actions. Finally, an interesting result occurred as adding the moderating variable hypocrisy to the regression equation results in no significant relation between firm size and symbolic CSR, which could be more extensively investigated in future research but unfortunately cannot be interpreted.
LIMITATIONS AND FUTURE RESEARCH
This study has some limitations which should be interpreted with caution, and could be used as future research directions for the literature regarding organizational hypocrisy, CSR, and organizational decoupling. First of all, this research only uses US stock listed organizations in its sample, therefore I urge to interpret the results with caution as they may not be applicable in the rest of the world. With this study I tried to give a general overview of the influence of hypocrisy, which could obviously differ per country, industry, and environmental situation an organization finds itself in. I narrowed down the initial database of 2537 organizations to a sample of 238 based on the availability of data on EIKON, Orbis, and the availability of CEO letters to shareholders. While I measure hypocritical behavior trough CEO letters in the annual report, future research could try to find other ways to measure hypocrisy, e.g. the perception of groups or institutions about hypocritical behavior, the influence of board hypocrisy or organizational hypocrisy. This would presumably increase the sample as the availability of CEO letters did significantly narrow down the initial sample. Although the results are generally in line with previous literature, I would opt for a longitudinal study about the influence of hypocrisy which would validate the growing literature body even more. Furthermore, some indices measuring symbolic and substantive CSR actions (Hawn & Ioannou, 2016) are not available anymore due to the merger from the ASSET4 database to become EIKON. Other variables could be searched for to increase the representation of symbolic and substantive CSR actions in organizations.
PRACTICAL IMPLICATIONS AND FINAL REMARK
APPENDICES
A1. INTERNAL CSR Indices (Hawn & Ioannou, 2016)
1. Percentage of women in the board
2. Percentage of non-executive board members on the audit committee as stipulated by the company 3. Percentage of non-executive board members on the nomination committee
4. Percentage of independent board members as reported by the company
5. Does the company have a policy to support the skills training or career development of its employees? 6. Does the company have a policy to improve employee health & safety within the company and its supply
chain?
7. Does the company use environmental criteria (ISO 14000, energy consumption, etc.) in the selection process of its suppliers or sourcing partners?
8. Does the company make use of renewable energy?
9. Does the company have a policy to improve its energy efficiency? 10. Does the company have a policy to improve its water efficiency?
11. Does the company develop products or technologies that are used for water treatment, purification, or that improve water-use efficiency?
12. Does the company have a policy to reduce emissions?
13. Does the company have a policy for ensuring equal treatment of minority shareholders, facilitating shareholder engagement, or limiting the use of anti-takeover devices?
14. Does the company’s statutes or by-laws require that stock options be only granted with a vote at a shareholder meeting?
15. Does the company have a policy for performance-oriented compensation that attracts and retains the senior executives and board members?
16. Does the company have a policy for maintaining a well-balanced membership of the board?
17. Does the company have an audit committee with at least three members and at least one ‘financial expert’ within the meaning of Sarbanes-Oxley?
18. Does the company have a CSR committee or team?
19. Does the company have a policy to guarantee the freedom of association universally applied independent of local laws? AND Does the company have a policy for the exclusion of child, forced, or compulsory labor?
20. Does the company have a competitive employee benefits policy or ensure good employee relations within its supply chain? AND Does the company have a policy for maintaining long-term growth and stability? 21. Does the company have a work-life balance policy? AND Does the company have a diversity and equal
A2. EXTERNAL CSR Indices (Hawn & Ioannou, 2016)
1. Does the company reportedly develop or market products and services that foster specific health and safety benefits for the consumers (healthy, organic, or nutritional food, safe cars, etc.)?
2. Does the company claim to favor promotion from within?
3. Does the company report on policies or programs on HIV/AIDS for the workplace or beyond?
4. Does the company report on crisis management systems or reputation disaster recovery plans to reduce or minimize the effects of reputation disasters?
5. Does the company report about environmentally friendly or green sites or offices?
6. Does the company report on initiatives to reduce, reuse, substitute, or phase out toxic chemicals or substances?
7. Does the company report on initiatives to reduce the environmental impact of transportation of its products or its staff?
8. Does the company report on initiatives to recycle, reduce, reuse, substitute, treat, or phase out total waste? 9. Does the company report on initiatives to reduce, substitute, or phase out volatile organic compounds
(VOC)?
10. Does the company report on initiatives to reduce, reuse, recycle, substitute, or phase out Sox (sulphur oxides) or NOx (nitrogen oxides) emissions?
11. Is the company’s CSR report published in accordance with the GRI guidelines?
12. Does the company’s extra financial report take into account the global activities of the company? 13. Does the company report or show to be ready to end a partnership with a sourcing partner if human rights
criteria are not met?
14. Does the company report or show to use human rights criteria in the selection or monitoring process of its suppliers or sourcing partners?
15. Does the company claim to provide daycare services for its employees?
16. Does the company have a policy to strive to be a good corporate citizen or endorse the Global Sullivan Principles? AND Does the company have a policy to respect business ethics or does it follow the OECD guidelines?
17. Does the company have signed the UN Global Compact?
18. Does the company have an external auditor of its CSR/H&S/Sustainability report?
19. Does the company claim to provide flexible working hours or working hours that promote a work-life balance?
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