Ms. Rozhin Yousefvand Mansouri, a doctoral student at McGill University in the area of Accounting will be presenting her thesis defense entitled:
CORPORATE SOCIAL PERFORMANCE INCENTIVES IN CEO COMPENSATION CONTRACTS: WHEN TO EMBRACE AND WHEN TO AVOID
Date: Tuesday, October 9, 2018
Time: 12:15 pm
Location: Room 303, Bronfman Building
All are cordially invited to attend the presentation.
Student Committee Chair: Professor Steve Fortin
This study extends the literature on the relation between executive compensation, Corporate Social Performance (CSP), and Corporate Financial Performance (CFP) by illustrating how the relation between CSP and CFP is informative in setting executive compensation. Given the role of the board of directors (BOD) in setting executive compensation, I discuss the BOD’ fiduciary duty in the contexts of corporate social responsibility by referring to American corporate law and explain how the fiduciary duty of the BOD accommodates and does not prevent Corporate Social Responsibility (CSR), even if complying with CSR goes against shareholders’ wealth maximization. Moreover, by combining contract theory literature with economics literature, I propose a theoretical framework which illustrates that contracting on CSP is effective only in situations when corporate social performance negatively affects financial performance and that contracting on CSP is inefficient when CSP is positively reflected in CFP.
Next, I examine the framework by focusing on employee health and safety aspects of CSR in extractive industries, using the Total Reportable Incident Rate (TRIR) as the measure of CSP. I find that for companies with a TRIR target in their executive compensation, the relation between TRIR and financial performance is significantly lower than for companies without a CSP target.
Furthermore, relying on the disclosures provided in companies’ annual reports on compliance with safety standards, I measure the degree to which concern about companies’ disclosure relates to the negative effect of the costs of compliance or noncompliance with safety standards, and I categorize the companies into those with a low (high) degree of concern about the negative effect of the costs of compliance on financial performance, denoted by FJ CSR companies (FNJ CSR companies) in the text. Consistent with the proposed framework, I find that a lower degree of concern about the negative effect of the costs of compliance on financial performance is associated with a lower likelihood to include a TRIR incentive in the Chief Executive Officer’s (CEO) compensation contract. Also, I find that while the changes in safety performance of FJ CSR companies that include safety performance incentives in the compensation contacts of their CEOs does not differ from that of those without such incentives, the likelihood of improving safety performance for the former group is lower than that of the latter group, which is a finding that supports the proposed theoretical framework.
In summary, this study suggests that boards of directors (BOD) are concerned about corporate social responsibilities and the negative consequences of not fulfilling those responsibilities to the extent that when the BODs perceive a simultaneous negative CSP-CFP correlation, they provide CSP incentives in CEOs’ compensation contracts.