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New Accounting Department Study Finds Socially Responsible Firms are Also Better Governed

September 16, 2015
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Firms that rate highest in corporate social responsibility (CSR) rankings are also better-governed (i.e. have boards that closely oversee management), says a new study from the School’s Department of Accounting. Specifically, the research finds that firms with higher CSR ratings are more likely to dismiss their CEOs due to poor financial performance, which reflects the effectiveness of firms’ corporate governance. By contrast, CEOs insulated from the threat of job removal, are employed at companies with low CSR ranking says the study.

“Contrary to the popular belief that CSRs' main payoffs are forward-thinking and only valuable for image-building and protection from future lawsuits, our findings show that CSR ratings are an important tool that anyone can easily look at to determine how a company’s leadership is governed,” said DJ Nanda, professor of accounting and one of the researchers. “We believe these ratings can be an important evaluation tool for potential business partners, M&A executives, customers, senior head hunters, investors and so on. Therefore, our study shows that companies making an investment in CSR are also better governed.”

Methodology

The researchers examined close to 3,000 publicly traded U.S. firms with CEO turnover from 1996-2005, eliminating the firms where the turnover was unforced, for example, due to illness or retirement. They took the resulting 1,111 firms and studied the likelihood that each CEO was dismissed because of poor performance both quarterly and annually. The findings revealed that the likelihood of CEO turnover based on performance is greater when a firm has a higher CSR rating, because owners are observing management more closely. Therefore, a correlation exists between a well-managed firm and their high CSR rating.
 
The paper, co-authored by John Barrios (PhD ’15) of the University of Chicago and Marco Fasan of the University of Venice, recently won the “Outstanding Management Accounting Paper Award” from the American Accounting Association. The authors received the award at the organization’s 2015 Annual Meeting in August.

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