Connecting Personal Values of CEOs to their Commitment to CSR: An Interview with Otgontsetseg Erhemjamts

Submitted by Kelly Eisenhardt

Understanding personal values of CEOs informs employees and investors about a company’s commitment to ethics and corporate social responsibility. In a paper titled “Relation between personal values of CEOs and their commitment to corporate social responsibility”, Professor Erhemjamts and her student Sarah Maher examined corporate social responsibility (CSR) ratings of S&P500 companies along with social capital of the states their CEOs grew up in. They found that firms with CEOs who grew up in high social capital states tend to exhibit greater commitment to community and employee relations, as well as higher overall CSR scores.

Otgontsetseg Erhemjamts is an Associate Professor of Finance at Bentley University. Her primary research interests are corporate social responsibility, corporate finance, and corporate governance topics. She has published in peer-reviewed academic journals including the Journal of Business Ethics; Journal of Banking and Finance; Journal of Money, Credit, and Banking; Journal of Financial Research; The Financial Review; and Journal of Risk & Insurance. She teaches graduate and undergraduate courses in investments, and equity research. Professor Erhemjamts holds a PhD in Finance from Georgia State University. Her student, Sarah Maher, graduated from Bentley University in May 2016, and works as a corporate debt origination analyst at BNP Paribas USA.

How do a CEO’s formative years affect their values and view on CSR?

In the beginning of our research, we thought about possible ways to capture one’s personal values and how those values might relate to executive-level decision making later on in life. We thought that the state-level social capital measure developed by Robert Putnam was a great way to proxy for the environment someone grew up in and the values this person developed during his formative years. Putnam defines social capital as how tight networks and norms of civic engagement is in a particular state. When people are active in their neighborhoods, clubs, and civic organizations, members of the community trust one another and they reciprocate in kind.

It is well accepted that during our formative years, our parents, teachers, and loved ones have a major influence on our outlook in life. To get to CEO’s personal values, we track down a CEO’s home town and home state. We then take the social capital of the home state of the CEO as a proxy for his/her personal values. Our conjecture is that growing up in a high social capital state should affect the values that a person carries throughout his/her life in a way that social networks and community engagement will be important for him/her. In the context of CEOs, their personal values can affect corporate policies, and changes they bring about in the organization.

A good example might be the link between personal values of CEOs and corporate social responsibility. CEOs that grew up in high social capital states are likely to emphasize the need for corporate social responsibility in their businesses. North and South Dakota, Vermont, Minnesota, Montana, New Hampshire, Wyoming, Wisconsin, Maine, Massachusetts, basically northern states closer to the Canadian border measure high on social capital.

For further information on social capital, check out www.bowlingalone.com. There are fascinating statistics about how social capital is correlated with social and economic outcomes such as educational performance, child welfare, crime, tax evasion, and economic inequality.

Is there an issue or a trend that prompted your research?

Yes, there has been a recent trend in many academic studies showing how the personal attributes of a CEO affect their firm’s CSR policies. Some studies found that female CEOs, younger CEOs, and CEOs that donate to both Republican and Democratic parties are significantly more likely to invest in CSR. Others found that Democratic founders, CEOs, and directors care more about CSR than their Republican counterparts. There was another article recently that connected CEOs’ religiosity and their CSR attitude. It was found that if a CEO is highly religious, it can lead to a negative impact on diversity, but a positive impact on charity.

One fascinating paper by Cronqvist and Yu, discussed in the Harvard Business Review, shared statistics regarding CEOs who have daughters as running more socially responsible firms. It appears that having a daughter shapes her father’s preferences in a way that it makes him want to be more ethical and leave a better world for her.  This paper inspired us to think about how CEOs’ personal values shaped in their formative years may influence their decision-making related to CSR.   

In sum, existing studies suggest that the CEO’s gender, family background, religion, age, and political leanings all affect the firm’s corporate social responsibility policies. We aim to contribute to this literature by examining the link between a CEO’s formative years and the values they carry forward into their professional life.

How can the values of senior management affect the priority of CSR within the organization?

As I mentioned earlier, we used social capital of the CEO’s home state as a measure of his/her personal values.  In order to examine the effect of CEOs’ personal values on their firms’ CSR activity, we need some measure of firm-level CSR.  To capture CSR activities at a firm level, we used the MSCI ESG STATS ratings, where MSCI compiles annual environmental, social, and governance (ESG) ratings of publicly traded companies. MSCI rates companies on over 60 different indicators, organized in seven categories (environment, community, human rights, employee relations, diversity, product, and governance).  They also provide summary strength and concern counts for each of the seven ESG categories.

We first looked at an overall measure of CSR, by adding up all strengths across all categories, and subtracting all concerns across all categories, arriving at a net strength measure. We found that firms with CEOs that grew up in high social capital states have lower number of concerns, and higher number of net strengths compared to CEOs that grew up in low social capital states.

Next, by diving into the categories, we were able to discover further differences among companies run by various CEOs. For example, we found that firms with CEOs that grew up in high social capital states have lower number of concerns in community and employee relations categories. Concerns in community category rated by MSCI include indicators such as community impact, which measures severity of controversies related to firm’s interactions with communities in which it does business.  Concerns in employee relations category include indicators such as controversies related to union relations, employee health and safety, supply chain, child labor, and labor management relations.

What is the correlation between CSR programming and SRI investing when there is C-level support?

While we didn’t look at the link between corporate social performance (CSP) and socially responsible investing (SRI) in this paper, there is a body of literature that examines the relation between CSP and the institutional ownership. Studies found a positive and significant relation between CSP and the number of institutions holding the shares of a company.  There is also a finding that suggests firms with strong CSP attract long-term investors. If we link these existing studies with what we found, we can conjecture that firms with CEOs that grow up in high social capital states will pursue strategies to improve their CSP, and in turn, will attract more institutional ownership.

Has your research found connections between corporate risk and whether or not a company engages in CSR programming?

Yes, firm risk is definitely one of our control variables.  Findings in the existing literature suggest that many firm characteristics affect the CSR policies at the firm level. For example, larger firms tend to draw a higher level of attention from the public, and have greater social impact, suggesting that larger firms are more likely to engage in CSR.  Several studies also document a positive relation between R&D intensity and CSR. R&D intensity is often used as a proxy for the level of product differentiation.

One of my earlier papers (published in the Journal of Business Ethics) found that firm risk, proxied by standard deviation of monthly returns, is negatively related to the number of strengths, as well as net strengths scores, but positively related to the number of concerns that a firm has.  We also found that firm’s financial health, proxied by Altman’s Z-score, was positively related to the number of strengths, as well as net strengths scores, but negatively related to the number of concerns that a firm has.

Can you share a few examples from your research that demonstrate CSR success championed by CEOs?

There are many S&P 500 firms that have CEOs who grew up in high social capital states. For example, Kimberly-Clark Corporation has a total number of 10 strengths and 0 concerns according to MSCI ESG STATS database, while median firm on our sample has 6 strengths and 1 concern. Kimberly-Clark strives to deliver on their value of caring for the communities where they live and work. Highlights in their 13th Sustainability Report include facts such as (i) socially-focused programs exist in 97% of their communities, (ii) 10-year partnership with the Forest Stewardship Council to end deforestation and safeguard forest ecosystems, (iii) 95.6% of manufacturing waste from landfill is diverted, (iv) awarded EPA climate leadership award for excellence in greenhouse gas management, and (v) exceeded the 25% water reduction goal with a 27% reduction rate.  Its’ CEO is Tom J. Falk, who is a 33-year veteran of the company. He grew up in Iowa, which is ranked #7 out of 50 states in social capital according to Robert Putnam.  He was educated at University of Wisconsin, and Wisconsin is ranked #11 in social capital.  Interestingly, Kimberly-Clark is headquartered in Texas, which is a low social capital state.

State Street Corporation is another example of a firm with high corporate social performance, with 11 strengths and 0 concerns, according to MSCI ESG STATS. In their 2015 corporate responsibility report, State Street mentions their goal to reduce greenhouse gas emissions and water use by 20% per person by 2020, compared to a 2012 baseline. At the end of 2015, they had achieved 17% reduction in both categories.  56% of their global square footage of office space is certified to ISO 14001 standards.  The State Street Foundation provided $22.7 million to non-profit organizations around the world in 2015, including matching employee contributions of $4.15 million to 2,222 charitable organizations. Its’ CEO is Joseph L. Hooley, who grew up and educated in the state of Massachusetts. Massachusetts is considered as a high social capital state (it is ranked #18 out of 50). State Street is headquartered in Massachusetts, as well.

How can readers engage more with senior management on CSR concerns and how can they learn more about your work?

Based on our findings, I’d say that when you’re thinking about joining a company, investing in a company, or, if you are in a process of hiring a new CEO, don’t just look at the CEO’s experience and education. It’s also important to understand their personal values and inclinations toward CSR. Those dimensions can make a world of difference to your experience as an employee run by them, improve your portfolio performance as an investor, or make implementing your CSR initiatives a breeze as a board. Instead of trying to incentivize a person without such values, it would be much easier to hire a person with such values already built in. An easy way to proxy for that seems to be finding out where he/she grew up.

You can learn more about our study a http://web.bentley.edu/oerhemjamts/Early_life_environments_of_CEOs_and_firm_CSR_Jan_2017.pdf