22/1/18: For-Profit CSR: Bounds of Effectiveness?

Quite an interesting paper concerning the potential limitations to the structured CSR (Corporate Social Responsibility) programs impact.

From the abstract (emphasis mine):

“Prosocial incentives and Corporate Social Responsibility (CSR) initiatives are seen by many firms as an effective way to motivate workers. … We argue that the benefits crucially depend on the perceived intention of the firm. Workers use prosocial incentives as a signal about the firm's type and if used instrumentally in order to profit the firm, they can backfire. We show in an experiment in collaboration with an Italian firm, that monetary and prosocial incentives work very differently. While monetary incentives used instrumentally increase effort, instrumental charitable incentives backfire compared to non-instrumental incentives. This is especially true for non-prosocially-motivated workers who do not care about the prosocial cause but use prosocial incentives only as a signal about the firm. The results contribute to the understanding of the limits of prosocial incentives by focusing on their signaling value to the agent about the principal's type.”

Which raises some questions:

Often, these days, we think of CSR-to-improve-bottom-line ideas for structuring CSR and broader Social Impact programs. In the light of this research, should we continue focusing on the bottom line-linked CSR? Traditional corporate view of CSR has been that ’we spend resources to do good’. This perception of CSR within corporations quite often results in CSR function becoming secondary to other profit-centric functions. As a response to this, academics and consultants working in the field of Social Impact have advocated for years that companies and organisations need to define CSR as an organic profit-related function. The latest research suggests that this can be counter-productive to other objectives of the CSR programs.

If we do continue to focus on CSR as profit-related function in our teaching and research, what are the limitations to its effectiveness? The paper findings are based on a very restricted data set, derived from a single firm. We do not know the key factors driving the limitations uncovered in the study and we do not know how these factors translate into other geographical, cultural, social and macroeconomic contexts.

Are mixed/hybrid enterprises (socially-mandated for profit enterprises) have to rely on a biased selection of employees to mitigate for this effect? In other words, are mixed/hybrid enterprises, that explicitly rely on conflating the notions of Social Impact and profitability, subject to lower productivity risks when employing ’non-prosocially-motivated’ workers? If so, are systemic biasing filters used in selecting best-fit employees for such enterprises to avoid such workers? Can these filters be identified and tested against other biases (or worse, potential discriminatory hiring practices)?

As educators, we might think about structuring these questions into our classroom discussions. As researchers, we can see this study as opening up the gates for further research. The questions the study prompts are big, important and poorly researched.

Full paper: NBER Working Paper No. w24109 http://www.nber.org/papers/w24109
Ungated version: https://ssrn.com/abstract=3092527

22/4/17: Two Regimes of Whistle-Blower Protection

“Corporate fraud is a major challenge in both developing and advanced economies, and employee whistle-blowers play an important role in uncovering it.” A truism that is, despite being quite obvious, has been a subject of too little research to-date. One recent study by the Association of Certified Fraud Examiners (2014), found that the average loss to organisations experiencing fraud that occurs due to financial statement fraud, asset misappropriation, and corruption is estimated losses from impact of corporate fraud globally at around $3.7 trillion. Such estimates are, of course, only remotely accurate. The Global Fraud Report" (2016) showed that 75% of surveyed senior executives stated that their company was a fraud victim in the previous year and in 81% of those cases, at least one company insider was involved, with a large share of such perpetrators (36%) coming from the ranks of company senior or middle management.

Beyond aggregate losses, whistleblowers are significantly important to detection of fraud cases. A 2010 study showed that whistleblowers have been responsible for some 17 percent of fraud discoveries over the period of 1996-2004 for fraud occurrences amongst the large U.S. corporations. And, according to the Association of Certified Fraud Examiners (2014), “employees were the source in 49% of tips leading to the detection of fraud”.


In line with this and other evidence on the impact of fraud-induced economic and social costs, whistleblower protection has been promoted and advanced across a range of countries and institutional frameworks in recent years. An even more glaring gap in our empirical knowledge arises when we attempt to analyse the extent to which such protection has been effective in creating the right legal and operational conditions for whistleblowers to be able to provide our societies with improved information disclosure and corporate governance and regulatory enforcement.

Somewhat filling the latter research gap, a recent working paper, titled “Whistle-Blower Protection: Theory and Experimental Evidence” by Lydia Mechtenberg, Gerd Muehlheusser, and Andreas Roider (CESIFO WORKING PAPER NO. 6394, March 2017) performed “a theory-guided lab experiment in which we analyze the impact of introducing whistle-blower protection. In particular, we compare different legal regimes (“belief-based" versus “fact-based") with respect to their effects on employers' misbehavior, employees' truthful and fraudulent reports, prosecutors' investigations, and employers' retaliation.”

In basic terms, there are two key approaches to structuring whistleblowers protection: belief-based regime (with “less stringent requirements for granting protection to whistle-blowers”) and fact-based regime (with greater hurdles of proof required from whistleblowers in order to avail of the legal protection). The authors’ “results suggest that the latter lead to better outcomes in terms of reporting behavior and deterrence.” The reason is that “when protection is relatively easy to (obtain as under belief-based regimes), fraudulent claims [by whistleblowers] indeed become a prevalent issue. This reduces the informativeness of reports to which prosecutors respond with a lower propensity to investigate. As a consequence, the introduction of such whistle-blower protection schemes might not lead to the intended reduction of misbehavior. In contrast, these effects are mitigated under a fact-based regime where the requirements for protection are more stringent.”

In a sense, the model and the argument behind it is pretty straight forward and intuitive. However, the conclusions are far reaching, given that recent U.S. and UK direction in advancing whistleblowers protection has been in favour of belief-based systems, while european ‘continental’ tradition has been to support fact-based thresholds. As authors do note, we need more rigorous empirical analysis of the effectiveness of two regimes in delivering meaningful discoveries of fraud, while accounting for false cases of disclosures; analysis that captures financial, economic, institutional and social benefits of the former, and costs of the latter.