Are better-connected CEOs more socially responsible? Evidence from the U.S. restaurant industry

Abstract

Extensive research has documented how corporate social responsibility (CSR) outcomes are determined by CEOs' intrinsic characteristics, while their social network status has been under-researched. Building on impression management theory and resource-based theory, the current study analyzes the association between CSR activities and top management's position in the social hierarchy, i.e., network centrality. The heterogeneous effects across different restaurant and CSR types are examined based on stakeholder theory. Using a panel dataset of publicly traded U.S. restaurant companies and a novel dataset of CEO network centrality, we find that firms with highly connected CEOs are involved in more socially responsible activities. In addition, the marginal effect of network centrality on CSR is stronger for fast-food than for full-service restaurants and more prominent for external than internal stakeholder subcategories. The results advance the determinant analysis of CSR and provide managerial implications for CEO selection and policy suggestions on CSR promotion.

Introduction

A growing number of firms are ramping up their investments in corporate social responsibility (CSR) activities. Given their salience in economic and social development, the tourism and hospitality industries have seen CSR become an essential component of their overall ethics quotient, with the restaurant industry being a paradigm (Lee, Singal, & Kang, 2013; Park, Song, & Lee, 2017; Kim, Lee, & Kang, 2018). Restaurants are devoted to maintaining a sustainable environment, for example, by engaging in recycling practices, reducing pollutants, adopting energy-saving equipment, and promoting healthy lifestyles (Choi & Parsa, 2007). In addition, it is also high on their agenda to give back to society through involvement in community activities, philanthropy and donations, promotion of local entrepreneurship, and fair human resource management (Jung, Kim, Kang, & Kim, 2018). Although the restaurant industry has attracted much attention from academia, it is the nexus between CSR and restaurants’ corporate financial performance (CFP) that has been extensively researched (e.g., Inoue & Lee, 2011; Lee et al., 2013; Theodoulidis, Diaz, Crotto, & Rancati, 2017). Studies on the determinants of CSR remain relatively sporadic. As noted by Kim, Lee, and Kang (2018):

The characteristics of the tourism industry require research that promotes an understanding of what affects CSR, not just of CSR as a factor that affects CFP, so that organizations can consult academic research to help them plan and execute CSR effectively (p. 204).

What drives CSR is a more fundamental question than how CSR affects firm performance. Our study aims to discover what drives CSR by investigating how the most powerful figure in a corporation—normally the chief executive officer (CEO)—provides the moral compass in CSR decisions. Extensive research has documented to what extent CSR decisions depend on a CEO's characteristics, such as demographic composition, experience, personal value perceptions, and personality (e.g., Liu & Luo, 2019; Manner, 2010; McCarthy, Oliver, & Song, 2017). However, research to date has rarely investigated CEOs' abilities derived from networks—how their social status guides the codes of ethics of the firm. Social network analysis offers a unique perspective for understanding ethics-related organizational behaviors, as they are inherently a social phenomenon that reflects structural relationships among different individuals (Brass, Butterfield, & Skaggs, 1998). This is particularly true for CSR, which is a corporate policy that involves social contract and commitment and is intertwined with the interests and welfare of multiple stakeholders (Brass et al., 1998; Lee, 2013). In this vein, the current study sets out to investigate the impact of CEO network centrality, an important reflection of executives' social status, on CSR initiatives. Network centrality refers “the interconnectedness between the individual and other members in the network” (Lee, 2013, p. 609), and reflects an individual's hierarchical place in social relations (Brass et al., 1998). Such positions are referred to as network centrality. CEOs' network positions give them an edge in strategic decision making “above and beyond their individual characteristics” (Lee, 2013, p. 607).

Building on impression management theory (Tedeschi, 1981) and resource-based theory (Barney, 1991; Wernerfelt, 1984), our study analyzes the CEO network-CSR linkage in the restaurant industry. High-centrality CEOs receive more pressure from public surveillance that urges image reinforcement; meanwhile, they have access to more valuable information, resources, and influential power. Both forces may put high-centrality CEOs in a proactive stance regarding socially responsible activities. In addition, the heterogeneous effects across restaurant/CSR types are investigated based on stakeholder theory (Freeman, 1984).

To empirically test the relationship between CEO network centrality and CSR, we extract panel data of all publicly traded U.S. restaurant companies from the MSCI ESG STATS database. A novel dataset is created to construct CEOs’ network space based on the data of all board members and senior executives of U.S. public companies with available information from BoardEx. The results confirm that CEO network centrality increases positive CSR and persuades CEOs to steer their companies to abstain from socially irresponsible actions. In addition, the marginal effect of network centrality on CSR is stronger for fast-food than full-service businesses and more prominent for external stakeholder subcategories than for internal subcategories.

Restaurants are considered as tourist attractions that enrich tourist experiences (Josiam, Mattson, & Sullivan, 2004), and thus an overlapped component between the tourism and hospitality domains (Pizam, 2009). Fick and Ritchie (1991) have also identified the restaurant industry as a travel and tourism service segment that substantially contributes to tourism development. As an integral part of the tourism sector, the restaurant industry has gained considerable attention from tourism academia and industry, which gives rise to societal expectations that put restaurants under pressure to implement CSR initiatives (Park et al., 2017; Kim, Lee, & Kang, 2018). With deepening social awareness on environmental issues, inequality, and social justice, CSR is likely to dominate the public discussion in the years to come, serving as an influential factor for both customers and investors in their respective consumption and investment decisions. The on-going pandemic also arouses public attention and corporate reflection, which may further place the restaurant industry in the spotlight.

The contributions of the current study are threefold. First, it provides an initial investigation of how CEOs' social network positions affect companies' CSR performance. Our study identifies a crucial CEO characteristic that is essential to CSR decision making yet has never been considered in the extant literature. Second, factors that shape CSR outcomes in the restaurant industry are particularly under-explored. Our empirical analysis provides new evidence that advances the understanding of CSR determinants. In particular, our study enriches the body of literature by scrutinizing the distinctions among different restaurant categories and CSR types. Lastly, our findings provide practitioners with managerial and policy implications. By revealing how better-connected CEOs implement CSR policies differently, our study offers guidance in the process of CEO selection, particularly for corporations that treasure social virtue and stakeholder value. Our findings are also useful for effective policy development regarding CSR implementation via CEOs in the restaurant industry, providing a new perspective to leverage CEOs’ CSR initiatives through social awareness campaign and regulation implementation.