Onna van den Broek & Adam William Chalmers

“The 2019 David P. Baron Award has been awarded to Adam William Chalmers and Onna Malou van den Broek for their article “Financial volatility and public scrutiny as institutional determinants of financial industry firms’ CSR” (Volume 21, Issue 2)”

The 2007 global financial crisis substantially changed the nature of the relationship between financial industry firms and society. A stream of corporate scandals and the collapse or nationalization of large firms, such as Lehman Brothers and ABN-AMRO, in the wake of the crisis seriously tarnished the public image of the financial services industry. The industry was largely held responsible for the crisis and found themselves scrambling to rebuild their public image and restore a modicum of trust within society at large.

This article examines the impact of the financial crisis on one aspect of these efforts: namely Corporate Social Responsibility (CSR). Many scholars predict a negative relationship between periods of crisis and CSR: in order to survive in times of crisis, firms are often incentivized to focus on the “vital” aspects of business and are therefore expected to put CSR commitments on hold. We challenge this overly “agent-centric” focus and argue that that the broader social environment within which firms operate shape and influence a firm’s decision to engage in and disclose CSR commitments.

As such, we contribute to institutional approaches to CSR by showing how firm visibility and public scrutiny shape CSR commitments. Crises have “demonstration effects” that expose the negative externalities caused by firms, such as financial sector involvement in regulatory issues, and link this to the causes of the crisis. As a result, regulators are more prone to re-regulate and social legitimacy declines. Effective CSR communication is a way to restore public trust. News media attention can also function to increase firms’ visibility and, subsequently, increase pressure to engage in and report CSR commitments. Extreme media scrutiny puts a spotlight on firms’ behaviour that increases public and regulatory attention and, as a result, forces firms to become more sensitive to social and political stakeholders.

We test this argument in the context of the European sovereign debt crisis drawing on a unique dataset of 170 firms in 15 different countries over a six-year period. Instead of using a binary variable of crisis, which is commonly used, we provide a more fine-grained measurement of financial volatility by using data derived from the European Central Bank’s Composite Indicator of Systemic Stress (CISS). Controlling for a battery of alternative explanations and comparing financial service providers to firms operating in other economic sectors, we find considerable evidence supporting our argument. Rather than abandoning CSR during times of economic hardship, financial industry firms ramp up their CSR commitments in order to manage their public image and foster public trust in light of intense public scrutiny.

The full article by Onna van den Boek and Adam William Chalmers can be read here

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