Superior management quality practices, in areas such as monitoring employee performance, updating operations, setting targets and establishing incentives, will impact the extent of a company’s corporate social responsible practices — notably in issues related to stakeholder concerns, such as diversity, environmental performance and employee relations.
While much research has focused on the impact of corporate social responsibility (CSR) on profitability and results, less attention has been paid on the antecedents of CSR — that is, what conditions make a company more likely to become socially responsible.
Two researchers from Queen’s University School of Business and Saint Mary’s University investigated whether a company’s organizational capital (described by previous research as ‘‘an agglomeration of technologies, business practices, process and designs, and incentive and compensation systems”) had an impact on corporate social responsibility.
To measure organizational capital, the researchers used the Management Quality Practices (MQP) scores, which rates companies on 18 key management practices. These practices are grouped into four areas: operations (introducing new or improved manufacturing techniques and processes); monitoring (tracking employee performance); targets (setting goals and establishing ways to achieve them); and incentives (rewarding successful and diligent employees).
To measure CSR, the researchers used an index that rates companies on 13 CSR-related categories that are grouped into two major categories: qualitative issue areas (e.g. community, corporate governance, diversity, employee relations, the environment, and human rights) and controversial business issues (e.g. alcohol, gambling, tobacco, firearms, and nuclear power).
With these two measurement tools in hand, the researchers analysed data for 174 medium-sized manufacturing firms, accumulating a sample total of 449 firm-year observations.
The results of the comparative analysis were unequivocal. First, the data showed that companies with superior MQPs rated significantly higher in CSR than companies with lower MQPs. This general conclusion also applied individually to each of the four areas of MQPs: companies with higher ratings in monitoring, operation, targets, and incentives rated higher in CSR.
When controlling for company characteristics such as profitability, age, size, and leveragability (ratio of long-term debt to total assets), the researchers found that only age made a difference. Apparently, young companies tend to have a higher correlation between MQP than older companies. The researchers concluded that, perhaps in a bid to enhance their competitive position, younger companies made a greater effort to pay more attention to CSR activities.
After this first set of results, the researchers drilled down into the data to examine the impact of superior MQPs on the six major dimensions of CSR representing the qualitative issue areas: community relations, diversity, environmental performance, employee relations, human rights, and product characteristics. They found a direct impact of high MQPs on CSR involvement in all areas except human rights. This result, the researchers argued, indicated that management quality practices impact CSR activities that are directly related to the firms’ primary stakeholders (employees, managers, customers, and the public).
The link between management quality practices and CSR activities related to the firm’s stakeholders is no coincidence. Companies with superior MQPs are companies who act in the best interests of all of their stakeholders, from employees and customers to the community and government.
MQPs thus impact a company’s emphasis on corporate social responsibility through two channels: quality of corporate outcomes and support of top management. Corporate outcomes are not limited to financial results but include outcomes desired by all stakeholders, including employees (e.g. profit-sharing bonuses, to give a specific example) and financial markets and regulators (who want evidence of ethical practices and relationships, for example).
Management driven by stakeholder (as opposed to shareholder) interests requires the buy-in of the company’s leaders. This buy-in leads to pro-stakeholder practices and policies (as opposed to lip service) that are socially responsible. For example, leaders’ attitudes determine the ultimate ethical conduct or pro-employee actions of the company.
In short, if managers want their companies to be more socially responsible, the first step is to look at their management practices. Quality management focused on stakeholder satisfaction leads to quality social performance.
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