Corporate social responsibility in a corporate governance framework

This paper analyse different interpretations and forms of CSR and discuss how they may arise in the context of a principal-agent structure. The authors argue that Corporate Social Responsibility (CSR) may affect the agency relationship inside a firm. They analyse how CSR and the threat of stakeholder activism influence effort of manager and shareholder, and describe how CSR may arise endogenously in this context:

• first, interpreting CSR as a straightforward implementation of the activist’s preferred project, the authors show that it may be payoff-maximising for the manager or the shareholder to implement this project either from the beginning or as a response to activist’s pressure.
• second, a socially responsible or altruistic shareholder taking into account negative externalities may adjust his effort level in order to decrease the expected externalities.
• third, a shareholder may find it optimal to commit to act as if he is socially responsible and cares about negative externalities. The authors call this as ‘corporate hypocrisy.’ For some parameter values, this reduces the shareholder’s incentive to exert effort, increases the manager’s effort and raised profits.
• fourth, the shareholder may benefit from the threat of pressure by the activist and may therefore find it optimal to engage in a ‘bear hug’ and sponsor an activist to give it the means to exert pressure.
• fifth, if there are two types of shareholders, one socially responsible and the other one socially indifferent, the socially responsible type may be able to extract greater monetary payoffs from the firm and therefore may end up owning the firm.