Tracking unethical behaviour after IPOs

By Alistair Jones

SMU Office of Research & Tech Transfer - Whether it's via donations to the community, environment-friendly policies or sufficient compensation to employees, firms are keen to demonstrate their good citizenship by filing voluntary Corporate Social Responsibility (CSR) reports.

CSR has long been part of the visible face of business and has increased during recent decades. A survey by the New York-based Governance & Accountability Institute found that 86 percent of S&P 500 index companies published sustainability or CSR reports in 2018, compared with fewer than 20 percent in 2011.

But there's another type of business behaviour that is also rising and it's something firms are unlikely to shout about: their Corporate Social Irresponsibility (CSI).

Defined as 'firm-induced incidents that appear to hurt the social good,' prominent examples would be Volkswagen's attempt to cheat on emissions tests, Uber's discrimination towards customers, or Amazon’s enforcement of sick employees to work under COVID-19 outbreaks.

Despite the similarity in terminology, CSI is a distinct construct from CSR. It does not represent the opposing end of the same spectrum.

“Even if CSI and CSR are both evaluated based on the three dimensions of environmental, social and governance, a decrease in charity donations does not indicate an increase in CSI,” says Suyun Mah, an Assistant Professor of Marketing at Singapore Management University (SMU).

“And previous research shows that the degree to which CSI worsens firm performance is greater than the degree of the positive impact of CSR.”

Going to market

Firms engaging in CSI would typically want to conceal it. But the behaviour can be revealed during the increased scrutiny and transparency after firms file for an initial public offering (IPO).

Professor Mah and her co-authors use this opportunity to study how a stock market listing changes a company’s CSI behaviour.

“Some of the behaviours categorised as environmental CSI are pollution, overuse of resources, and animal mistreatment. Social CSI includes behaviours such as human rights abuses, negative impacts on communities and social discrimination. Examples of governance CSI are discrimination in employment, employee health and safety issues, and anti-competitive practices,” says Professor Mah.

Environmental CSI does not show a significant increase after an IPO, perhaps due to the growing calls for environmental sustainability in the community and the marketplace. A 2019 Deloitte study showed that 72 percent of US firms are responding to customers’ requests to use renewable resources.

But social and governance CSI are a different matter. The research shows clearly that firms increase their social CSI and governance CSI after their IPO filing. Given the negative implications of CSI, this shift seems counter-intuitive.

“I was surprised indeed,” says Professor Mah, "especially after seeing the result where social CSI increases after an IPO.”

“I had expected a decrease because after an IPO, when information on firms becomes more transparent to stakeholders, types of CSI having broader impacts directed to external stakeholders, such as investors and consumers, would [be expected to] decrease as firms need to care about their perceptions to avoid punishment from the stock market.”

Redirecting attention

“Companies try to make themselves look better for investors before going public,” says Professor Mah.

“But after going public, my research shows that they engage in greater CSI compared to that from the pre-IPO phase. So this actually shows that they have less need to reduce their negative behaviour after an IPO.”

The findings also show that social and governance CSI are increased to greater degrees when a firm has a high level of paid media, such as its advertising and PR. Is this a case of clean-washing?

“Yes, that is exactly the case. Because investors generally tend to have less information available about IPO firms, they are likely to seek signals that can provide more information about the quality of the firm. And a firm’s advertising often acts as a signal of firm quality,” Professor Mah says.

“So, higher paid media may buffer firms from the negative impacts of CSI behaviours because the higher quality signal attenuates negative responses and the advertising redirects attention of stakeholders.”

There is a different moderating effect from a firm's level of earned media – measured in this study by the number of Twitter posts about a firm – which reflects consumer interest and levels of scrutiny and transmission of disclosed information across a wide array of individuals.

“So, when there is a high level of earned media about an IPO firm, firms will be motivated to reduce the irresponsible activities that would most likely affect these external individuals. So, IPO firms will make more efforts to engage in less environmental CSI after the IPO,” Professor Mah says.

Competitive culture

The effect of earned media attention is different for governance CSI.

“Engaging in governance CSI can satisfy investors in terms of cost reduction or increased profit. When a firm receives a high level of earned media, it will increase its governance CSI after the IPO,” Professor Mah says.

“High degree of interest about a firm may often lead to the firm’s competitive culture where excessive focus is placed on generating profits. In such circumstances, certain governance CSI activities like fraud may occur more frequently.”

Industry trends also affect firm behaviour, notably social CSI, which will increase after an IPO if everybody else is engaging in it.

“A firm’s irresponsible behaviour becomes less transparent when others in the same industry are increasing their irresponsible activities and can be overlooked by investors, employees and consumers,” Professor Mah says.

Environmental CSI declines after an IPO when the environmental CSI industry trend is low. Governance CSI does not change significantly under either a high or low industry trend.

A further study could explore the shifts of more granular types of CSI. It could also investigate how different types of pre-IPO CSI may influence the post-IPO firm performance, as well as the impact of pre-IPO CSI on IPO underpricing or IPO value.

“Because CSI and CSR are two distinct constructs, future research may examine and compare the effects of IPO on CSR and CSI, respectively. [And it] could also examine why these occur and what motivates the firms to engage in such shifts in behaviour,” Professor Mah says.

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