Do Regulators Go Easier on Socially Responsible Firms?

What does a for-profit company gain by investing in social or environmental responsibility? One answer is reputation. Customers may react more positively to a socially responsible firm; so might potential hires. But a new working paper suggests that customers and employees aren’t the only ones who can be influenced by social responsibility. The authors argue that regulators notice it, too. Princeton economists Harrison Hong and Inessa Liskovich studied how steeply U.S. companies are fined by the Department of Justice and the SEC for bribing foreign governments. Their research showed the more socially responsible the company at fault, the lower the fine. Hong and Liskovich looked at violations of the Foreign Corrupt Practices Act (FPCA) from 1990 to 2013, as well as the fines that were levied. Then they compared that data to violators’ social responsibility scores, from a widely used index that assesses things like community relations, environmental impact, and how a firm treats its employees. A relatively small difference in social responsibility — the equivalent of a strong employee retirement program vs. an average one — was associated with $2 million less in fines. The researchers ruled out a number of possible explanations: it wasn’t that the bribes by socially responsible firms were smaller, or that those firms were more cooperative with investigators. And it wasn’t that they donated more to political campaigns, another possible avenue for subtly influencing regulators. Finally, the authors were able to rule out reverse causality, the idea that lighter fines made companies appear more deserving of a higher social responsibility score. (Firms with better CSR scores prior to their investigations still received lesser fines.) The authors even used text mining to demonstrate that regulators’ press releases used more positive language when describing the fines for socially responsible firms. Still, there’s one explanation the paper can’t rule out. What if socially responsible firms are more proactive about detecting bribery and self-reporting it, and, as a result, regulators go easy on them? That’s related to cooperation, but slightly different. It’s been demonstrated that when bribery is first detected by a firm itself it tends to be punished less harshly. And socially responsible firms are more likely to have internal anticorruption practices, Perhaps socially responsible firms face smaller fines because they’re more likely to come clean. When I asked the authors about that possibility they noted that they looked at the link between fines and each subset of corporate responsibility. Community relations, responsible products, and good employee relations were most associated with lower fines. “These are not related to anti-corruption programs,” said Liskovich. (Still, without data on self-reporting or the presence of anti-corruption programs it’s hard to know for sure if there’s a link.) “One implication of our analysis is that firms might very well have a strategic motive to be socially responsible as a form of insurance in case of unfavorable regulation,” the researchers conclude in the paper. That’s the cynical take: firms invest in CSR to appear more virtuous than they actually are. Suddenly, the fact that socially responsible companies outperform their peers even looks a bit nefarious. The more optimistic take is that the researchers set out to see whether people — in this case regulators — are more positively inclined toward responsible firms. And they’re not the first to find that, yes, people really are. That’s an argument for the effectiveness of CSR, not against it. If the link between regulatory scrutiny and social responsibility is real, that’s problematic, and something policymakers will have to address. But it doesn’t change the fact that a company’s reputation really is improved by investing in social and environmental responsibility. If even regulators in the middle of bribery investigations perceive companies differently because of CSR, think of what it could do for customers and employees. About the Research: “Crime, Punishment and the Halo Effect of Corporate Social Responsibility,” by Harrison Hong and Inessa Liskovich This article was originally published online on June 26, 2015.

Do Regulators Go Easier on Socially Responsible Firms?

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