Managers with high prosocial preferences that is, a concern for the welfare of others may make strategic business decisions focused more on protecting employees from severe harm than their company’s interests.
While the impact on employee behaviour of prosocial preferences the desire to care about others and avoid harming them is well-documented, little research has been conducted on the impact of prosocial behaviour on managerial behaviour. A study from Columbia University reveals that prosocial preferences can influence the strategic decisions of business leaders and owners (summarized in the research as “managers”).
Managerial prosocial preference is manifested by concern for the welfare of employees, and more specifically, in the case of management decisions, avoiding severe harm to employees. The question is: could high prosocial preferences lead managers to put concern about harm to employees above the interests of the company?
Answering this question is a challenge since managers have a responsibility to ensure the interests of the company first, and any deviance from this rule will elicit a response from shareholders. The study thus focuses on two business decisions that can less obviously be tilted toward employees: exit thresholds and risky investments.
Exit thresholds refer to the lowest performance threshold that a manager is willing to accept before deciding to shut down or divest the business. Exit thresholds might be considered a prosocial decision as well as an economic decision, according to the researchers, because of the severe harm to employees—loss of livelihood and often loss of medical insurance—that occurs when a business shuts down.
They also note the role that anticipatory guilt could play in the decision. That is, managers might lower their exit threshold because of the guilt they anticipate from the loss of jobs resulting from the exit or divestment decision.
Because risky investments might lead to an exit, decisions on corporate investment risks could also be influenced by high prosocial preferences.
To determine whether high prosocial preferences would lead managers to set low exit thresholds and avoid risky investments and whether anticipatory guilt about the potential harm influenced these decisions, the researchers conducted several field studies and experiments.
For their study, the researchers collected data from various sources and databases on career history, political orientation, and employee-friendly policies since previous research on prosocial preferences showed that CEOs were more likely to have high prosocial preferences if they were 1) promoted internally rather than brought in from the outside; 2) leaned Democratic rather than Republican; and 3) led firms that maintained employee-friendly policies. They also collected data on CEO involvement in charity, a novel measure for prosocial preference not used in previous research.
The researchers then conducted a field study based on the level of Chinese imports in different U.S. industries. Pressure from increased Chinese imports leads to firm exits. Using the measures for prosocial preferences described above and data from Compustat on firm exits, the research confirmed the link between managerial prosocial preferences and low exit thresholds—that is, firms that held out till the last minute before exiting due to Chinese import pressures. A second field study that used labor laws protecting employees after an acquisition confirmed that exit thresholds were higher when prosocial managers knew the potential severe harm to employees was mitigated.
A series of experiments that manipulated prosocial preferences and the harm to employees from exiting corroborated the conclusion that prosocial managers, driven by anticipatory guilt from the severe harm to employees, set low exit thresholds and preferred low-risk investments.
Companies today recognize the link between employee happiness and customer satisfaction, which, in turn, positively impacts firm performance. That said, when the employees’ interests conflict with the interests of the company, the latter takes precedence. An underperforming foreign subsidiary may need to be shut down, despite the severe harm to employees caused by the resulting layoffs.
For their study, the researchers intentionally chose business decisions in which differentiating employee interests and company interests were more complex, given the uncertainty of future business performance. Riskier investments may have a higher return for the company, for example, but such a return is not guaranteed. A less risky investment may be a wiser choice, even if it is motivated by concerns for employees.
Leaders must often use their judgment in navigating grey areas where the choices are not obvious, and the issues in this study are no different. Nevertheless, prosocial leaders may want to be vigilant in ensuring that their natural prosocial preferences do not unintentionally allow their decisions to be influenced by concerns for employees at the expense of the company.
Daniel Keum’s profile at Columbia Business School
Xin Lucy Liu’s profile on LinkedIn
Hanging in There for Employees: Managerial Prosocial Preferences, Firm Exit Thresholds, and Risk-Taking. SSRN Working Paper 4420492. (January 1, 2023). Available at SSRN: https://ssrn.com/abstract=4420492
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