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Article

You Say Tough, I Say Hope: An Effect of CEO Regulatory Focus on Corporate Social Performance under Challenging Market Conditions

by
Seunghye Lee
1 and
Rami Jung
2,*
1
Sogang Business School, Sogang University, Seoul 04107, Republic of Korea
2
College of Social Sciences, Hansung University, Seoul 02876, Republic of Korea
*
Author to whom correspondence should be addressed.
Sustainability 2023, 15(6), 5555; https://doi.org/10.3390/su15065555
Submission received: 7 December 2022 / Revised: 14 March 2023 / Accepted: 20 March 2023 / Published: 22 March 2023
(This article belongs to the Special Issue Unpacking Stakeholders’ Complex Responses to Corporate Social Responsibility and Corporate Sustainability)
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Abstract

:
This study explores the effect of CEO regulatory focus (i.e., promotion vs. prevention) on corporate social performance (CSP). Given that corporate social activities are an outcome-uncertain risky investment, we propose that CEOs with promotion focus (vs. prevention focus) would actively seek CSP, since promotion focus involves risk-taking propensity and prevention focus involves risk-avoiding behavior. We further propose that such a tendency should be more pronounced, especially when market conditions are uncertain. Using a panel sample of U.S. listed firms and conducting content analysis of CEO letters in annual reports, we found that only promotion-focused CEOs tend to promote CSP, and such a tendency is more salient in tough market conditions where firms face a lower level of munificence and a higher level of stakeholder expectation in the markets. We conclude that promotion-focused CEOs tend to seek hope even when situations are hopeless.

1. Introduction

Corporate social performance (CSP) has been in the limelight for contemporary corporations in the last few decades. A growing number of firms have recognized the business benefits of CSP, including market value and performance [1]. Given the popularity of CSP, an increasing number of scholars have identified various antecedents of CSP by adopting stakeholder theory. Such studies suggest that firms can build positive relationships with stakeholders by engaging in corporate socially responsible activities [2,3]. In other words, investing in CSP can be a useful business strategy that aligns a corporation’s interest with stakeholders [4].
However, a firm’s social investment can often be viewed as a risky strategic decision because this type of non-market investment requires a relatively long period of time to pay off and does not ensure positive financial outcomes [5]. Previous research has paid substantial attention to the long-term nature of a firm’s social investment [6]. In addition, previous studies have posited that the relationship between CSP and financial performance is uncertain given the “mixed” findings. For example, past studies have confirmed positive, negative, nonlinear, or non-existent relationships between a firm’s corporate social investment and its outcomes [7,8]. These inconsistent results indicate that social investment does not guarantee positive outcomes to the firm; therefore, it may be a risky investment in a strategic sense.
Given the outcome-uncertain nature, CSP must be subject to “strategic” choice. As such, a growing number of researchers have focused on CEO characteristics as a key driver of CSP, since CEOs are key individuals in the context of corporate strategic decision making. While previous works relied on various theoretical frameworks, including the upper-echelons perspective [9], agency theory [10], and resource dependence theory [11], relatively little is known about how a CEO’s psychological traits, particularly regulatory focus, affect CSP. The framework of regulatory focus has received huge attention from psychology scholars to date but also has potential to offer useful insight to predict how CEOs make decisions about CSP [12]. Regulatory focus is a motivation-based trait that reflects preferences for decision making [13,14]. It reflects an individual’s strategic inclination toward the achievement of goals [15]. In short, a decision maker’s strategic preference is influenced by their regulatory focus. As such, it is reasonable that regulatory focus could be a significant underlying mechanism through which CEOs make a strategic choice to achieve various goals of social actions.
Regulatory focus theory suggests that people may differ in motivating when they are trying to pursue their goals [1,16], and such a difference occurs through two distinctive self-regulatory mechanisms: a promotion and a prevention focus. A promotion focus is related to a gain and advancement, as well as the desire to take risks that maximize the positive consequences, whereas a prevention focus involves a person’s emphasis on protection and safety, as well as their desire to avoid risks that cause losses and punishment [3,4]. As such, it is plausible that the distinctive roles of the two regulatory foci have different implications on CSP investment decisions. Given that spending on corporate social activities has been viewed as an outcome-uncertain investment, we assume that promotion focus is more theoretically relevant to CSP than prevention focus.
Further, this study examines the moderating role of market conditions, since market conditions are a critical contingency that CEOs take into consideration [5,7]. We assume that regulatory focus shapes a CEO’s mindset, through which he or she sees and interprets the external market conditions. Specifically, we propose that when a market is highly munificent, promotional CEOs may capitalize on such sufficiency and luxury and seek many investment options regarding varying degrees of risk. In this case, there is no other reason for CEOs to take only outcome-uncertain investment options such as CSP.
However, when the market lacks munificence, promotional CEOs may view such difficulties as an opportunity (rather than a threat) to move their firms forward through high-risk investment options such as enhancing CSP. Lanaj et al. [17] also supported our claim, stating that promotion focus sensitizes individuals to the positive features of a situation. As such, promotional CEOs are more likely to actively engage in CSR activities when the market lacks munificence.
We also propose that the relationship between CEO promotion focus and CSP is stronger when the market is highly concentrated. In a less-concentrated market, firms are not conspicuous and are, thus, desensitized to respond to stakeholders’ expectations. On the contrary, a highly concentrated market makes firms more visible and feel pressure to meet shareholders’ expectations; therefore, firms are motivated to invest in CSP to gain legitimacy from stakeholders [8]. In such market situations, promotion-focused CEOs are more likely to engage with CSP in order to gain moral legitimacy and ultimately improve their competitive position.
We tested and found support for our hypotheses by using a panel dataset of 2751 publicly traded firms in the U.S. in a period of 2005–2011. As predicted, our results show that CEO’s promotion focus is positively related to CSP as a risky investment but prevention focus is not. Such a tendency is more salient in the conditions of lower market munificence and higher concentration. We concluded that promotional CEOs appear to be go-getters who see hope in tough situations, never remaining in comfort and ease.
This study provides meaningful contributions. First of all, this study advances the upper-echelons argument [9,18] by showing that CEO regulatory focus has a meaningful impact on a firm’s social investment. We examine a differential impact of regulatory focus, showing that promotion focus is more relevant to CSP than prevention. This study introduces important psychological characteristics (i.e., regulatory focus) to predict a CEO’s propensity for social investment. More importantly, this study provides a richer and more precise description of the relationship between CEO regulatory focus and CSP by taking into account the boundary condition of market characteristics (i.e., market munificence and concentration). This study implies that the ways in which regulatory focus affects CEO decision making cannot be fully understood without consideration of the external market factors [10,11,12,13]. This implication directly responds to the increasing scholarly calls for more critical research that focuses on underexplored “boundary conditions” where CSP is more or less favorable to stakeholders, including top managers.

2. Regulatory Focus Theory

Regulatory focus is one important feature of self-regulation of human agency [14,15]. Regulatory focus theory describes important differences in how people approach pleasure and avoid pain and posits two different regulatory systems based on this hedonic principle [19]. The two modes are a promotion focus and a prevention focus. Without changing the goal itself, these two foci lead to unique preferences in goal pursuit behaviors, intentions, and decision making [12].
People with different regulatory foci have different ways of pursuing goals [10]. In general, people with a strong promotion focus try to pursue their goals associated with their ideal selves, reflecting hopes and aspirations [14]. These individuals, therefore, are motivated by accomplishments and more concerned with the absence of positive outcomes [20,21]. However, people with a strong prevention focus try to reach their goals with their ought selves, such as duties and responsibilities, and they are more concerned with the presence of negative outcomes [14,22]. Such different motivational forces underlie the process through which people set their goals and are shaped from their guiding principles. This kind of focus is especially linked to a person’s predisposition for choosing strategic means. Promotion-focused individuals have strong motivation to employ strategic means that lead to superior results. This involves behaviors where they respond immediately to opportunities for gain, and, thus, promotion-focused individuals have a penchant for risk taking [23]. However, prevention-focused individuals prefer to be vigilant when selecting strategic means to minimize vulnerability and ambiguity [14]. These individuals prefer to avoid potential losses and, thus, they are conservative and less likely to take risks and create a sense of security by adhering to rules and regulations rather than risking violation of those rules and regulations [23].
The two regulatory foci are shaped by various external factors. For instance, several studies argued that values, norms, climate, past performance, and interpersonal relations may influence how people construct their promotion and prevention foci at work [10,13]. Som and Lee [24] posit that external stimuli may affect and shape one’s tendency to be promotion focused or prevention focused. Additionally, the influence of dispositional and situation sources often results in context-dependent regulatory focus, such as work-specific regulatory focus [17]. For example, Wallace et al. [25] argued that general self-efficacy and motivation anxiety influence work-specific regulatory focus. This suggests that regulatory focus cannot be fully understood without taking into account its environmental conditions. As such, since circumstances change over time, it is logical to propose that a person’s regulatory focus will do so as well. Therefore, given the malleability of the regulatory focus, we assume that a CEO’s regulatory focus could affect CSP through interactions with the market conditions.

3. Hypotheses Development

3.1. CEO Regulatory Focus and CSP

We posit that a CEO’s promotion focus will be more positively related to CEO strategic investment for CSP than prevention focus. As mentioned above, there is no clear consensus about the outcomes of engaging CSP. Such mixed findings imply that investing in corporate social activities can be seen as risky investments to decision makers in the firm.
However, different regulatory foci allow CEOs to have varying levels of risk appetite. While a prevention focus would involve being vigilant to ensure safety and no losses, a promotion focus would involve being eager to achieve advancement and gains [14]. Given these differences, we assume that the CEOs with promotion focus and those with prevention focus may show different patterns of decision. In particular, CEOs with a strong promotion focus are more concerned with growth and accomplishments [26]. Based on their strong needs for growth, they are relatively more in favor of risk-taking action. However, prevention-oriented CEOs tend to prefer preservation and protection through security and safety, making them risk neutral to aversive [27].
Our claim is supported by existing works. Gamache et al. [3] investigated the impact of CEO regulatory focus on the risk-involved firm acquisitions and suggested that promotional CEOs are likely to perceive the risky decision based on what can be gained rather than what can be lost. They empirically found that CEOs with a strong promotion focus are more likely to engage in more acquisitions, whereas preventive CEOs are involved less because they have a strong risk-averse propensity. Further, Scoresby, Withers, and Ireland [22] examined different effects of CEO regulatory focus and firm risk-taking behavior such as R&D. They found that the negative relationship between CEO prevention focus and R&D increased, which means that CEO prevention focus relates to emphasis on preventing risks, while they found no meaningful relationship between CEO promotion focus and R&D increase. Taken together, it seems that promotion focus motivates CEOs to engage in CSP, whereas preventive focus does not necessarily. However, it should be noted that since promotion and prevention foci are not opposite ends of a single spectrum [28], it is not reasonable to forecast that promotional and preventive CEOs would make a decision for CSP in an opposite way. As such, we develop the base hypothesis with a comparative form as follows:
Hypothesis 1. 
A CEO’s promotion focus (vs. prevention focus) is positively related to CSP.

3.2. Boundary Conditions: A Moderating Role of Market Munificence

We further explain how CEO regulatory focus and CSP are related by considering boundary conditions. As existing works have documented, an individual’s regulatory focus does not work in a vacuum. Rather, the role of regulatory focus is affected by the circumstances that an individual faces [3,15]. From a strategic decision-making standpoint, market conditions are key circumstances to consider [29]. We suggest that, in the case of CSP, CEOs’ regulatory focus can influence their preferences for strategic choices to achieve goals, but these preferences should be more obvious when the market lacks munificence.
Market munificence describes an environment’s capability to support a firm’s sustained growth [30,31,32]. High market growth increases a firm’s access to resources, managerial opportunities, and competitive variety [30]. In non-munificent market, however, resources are constrained; therefore, firms would make more effort to analyze the environment [33,34] and make strategic decisions to overcome the difficulties. Past studies have reported market munificence as an important contingency factor. For example, Vurro, Romito, and Benassi [35] report that environmental munificence is an important boundary condition of the relationship between stakeholder orientation and firm survival. In addition, previous studies have been reported to be the effect of market munificence on CEO strategic decisions. Malhotra and Harrison [5] argue that the positive relationship between CEO cognitive complexity and firm performance is more pronounced by market munificence. According to Janani et al. [36], the effect of CEO marketing experience on CSP is amplified by market uncertainty.
We suggest that market munificence will moderate the positive relationship between CEO promotion focus and CSP. A munificent market could be an opportunity to firms, given that the market has a high capacity and resources that could support a firm to grow, and, therefore, firms are likely to reap so-called “easy money” without necessarily making extra efforts or taking risks. As such, when a market is highly munificent, promotional CEOs may capitalize on such sufficiency and luxury and seek many investment options regarding a varying degree of risk. In this circumstance, there is no solid reason for CEOs to take only outcome-uncertain investment options such as CSP. In contrast, as the market lacks munificence, normal CEOs become more risk averse and take a conservative stance for their investments. Nonetheless, promotional CEOs are willing to view this situation as an opportunity rather than a threat and, thus, try to overcome deficient market conditions by increasing risky investments such as CSP. In short, such CEOs may find “hope” in tough situations. Therefore, we expect that CEOs with a promotion focus are likely to promote CSP more when a market lacks munificence.
Hypothesis 2. 
The positive relationship between CEO promotion focus and CSP will be stronger when market munificence is low rather than high.

3.3. Boundary Conditions: A Moderating Role of Market Concentration

Market concentration is also considered to be an important external environmental condition. In a highly concentrated market, there are relatively low levels of competition because larger firms with greater market shares enjoy benefits from larger economies of scale [37]. On the other hand, firms in highly concentrated markets have greater visibility and are likely to attract more public attention and vigilance [38]. As such, markets with a high level of concentration can be considered as another sort of “tough” situation from a stakeholder management standpoint. Firms in such an environment will find it very difficult to preserve positive reputation and legitimacy from stakeholders due to a firm’s high level of visibility and stakeholders’ greater expectations for its behaviors. Prior studies suggest that it is important for firms in such markets to maintain their market power by engaging in socially responsible activities [39]. Similarly, Davis [40] (p. 73) argued that “Whoever does not use his social power responsibly will lose it”.
We propose that CEOs with a strong promotion focus in highly concentrated markets will more actively engage in social investment. Since promotion-focused CEOs are concerned with the absence of positive outcomes with gains and accomplishments [41], such CEOs place more value on gaining legitimacy in highly concentrated markets. One way to achieve legitimacy is increasing CSP. Godfrey [42] argued that firms could gain legitimacy and moral capital by engaging in socially responsible activities. Dupire and M’Zali [8] argued that firms could gain a competitive advantage in highly concentrated markets by increasing CSP because it protects a firm from external threats and improves the competitive position. As such, since promotion-focused CEOs are motivated by gains and development, such CEOs are more likely to engage in corporate social activities to attain a competitive position, even though the market is highly concentrated. In other words, we hypothesize that CEOs with a strong promotion focus will participate more actively in CSP when firms are more visible and stakeholders’ expectations are higher (i.e., a higher level of market concentration).
Hypothesis 3. 
The positive relationship between CEO promotion focus and CSP will be stronger when market concentration is high rather than low.

4. Method

4.1. Sample

To test our hypothesis, we used a sample drawn from the Governance Metrics International (GMI) Ratings database of publicly listed U.S. companies from 2005 to 2011. The final sample was restricted to those companies that earned CSP ratings from Kinder, Lydenburg, and Domini (KLD) Research and Analytics within this timeframe. We purposely select a given sample year. After a historical corporate irresponsibility crisis (i.e., subprime mortgage shock in 2007–2010), CSP has since been viewed as a corporation’s “duty for society” rather than an outcome-uncertain risky investment. Therefore, it is our best explorative condition to test the hypotheses until around 2010 as holding our key assumption that CSP is an outcome-uncertain risky investment for CEOs. Due to the availability of complete data from various data sources, the final sample consisted of 2751 firm-year observations. Multiple archival databases, including GMI Ratings, Compustat, and Proxy statements (i.e., SEC Form DEF 14A), were utilized for data collecting.

4.2. Variables and Measurement

4.2.1. Dependent Variables

We measured CSP using information from the Morgan Stanley Capital International (MSCI) database. MSCI (previously known as KLD) utilizes a binary rating system to evaluate a company’s social responsibility strengths and concerns across multiple sub-domains, such as community, diversity, employee relations, environment, human rights, product quality and safety, and corporate governance. For each sub-domain, a company earns one point as a strength score if it meets the relevant criteria and one point as a concern score if it has problems in that area. The positive and negative social performance scores of each company were obtained by summing the strength and concern scores across all sub-domains, respectively.
To calculate the net CSP of a company, the sum of its negative social performance scores was subtracted from the sum of its positive social performance scores, as recommended by prior studies (e.g., [43,44]). This approach enables capturing both the positive and negative aspects of a company’s social performance in a single measure.

4.2.2. Independent Variables

Based on prior literature, we conducted a content analysis of CEO shareholder letters to examine their regulatory focus (e.g., [3]). Content analysis is a research method that allows for a systematic and objective examination of text or other content produced by a CEO to capture their psychological characteristics [45]. In the field of management research, content analysis has been widely recognized as a useful tool [46,47]. Through the use of content analysis, scholars are able to gain valuable insights into a CEO’s underlying personality traits and decision-making process, which can help us understanding how CEOs impact organizational outcomes, such as performance and innovation. Various psychological characteristics of CEOs, including their regulatory focus, emotional expressions, cognitive complexity, and authenticity, have been measured using this method in the field of leadership research [3,11,48,49,50].
For instance, Gamache et al. [3] utilized content analysis to measure CEO regulatory focus by analyzing the language used in their annual letters to shareholders [47,51,52,53,54,55,56]. CEO letters provide a non-intrusive and consistent measure that may be compared directly across years, making them useful for longitudinal studies [3]. Researchers used Linguistic Inquiry and Word Count (LIWC) software to identify and categorize words related to promotion or prevention focus using dictionaries [57]. They then calculated a regulatory focus index for each CEO based on the proportion of words related to each focus.
Considering the commonality of research focus on CEO characteristics, we adopted the methodological procedure of Gamache et al. [3] to measure CEO regulatory focus. We measured the regulatory focus of CEOs using the same dictionaries, counting the frequency of promotion-oriented words (such as gain and growth) and prevention-oriented words (such as loss and stability). The dictionaries consisted of 27 promotion-oriented words (e.g., accomplish, achieve, aspire, etc.) and 25 prevention-oriented words (e.g., accuracy, avoid, careful, etc.). The LIWC software program calculates the precise percentage of target dictionaries based on the total number of words in each letter. Our average, the ratio of promotion-related words to total words is 1.72, indicating that for every 10,000 words in a letter, 172 words will be relevant to the CEO’s promotion focus.

4.2.3. Moderating Variables

We considered two moderating variables: market munificence and market concentration. Based on prior research (e.g., [58]), market munificence was measured as the average market growth based on the annual sales, using the antilog of regression slope coefficient. To capture the level of market concentration, we used the four-firm concentration ratio (CR4). CR4 refers to the sum of the market shares accounted for by the four largest firms in a market [59]. We calculated the ratio of sales for the top four companies to market sales at the two-digit SIC level.

4.2.4. Control Variables

We controlled a number of variables that can potentially affect a firm’s social performance based on prior research. First, industry dynamism was included since it was believed that the industrial environment may influence the CEO’s strategic decision making such as CSP [60]. Following Keats and Hitt [31], we calculated industry dynamism through two steps. In the first step, the natural logarithm of each industry’s sales for five years at the two-digit SIC level was regressed against time. The industry’s dynamism was then captured by using the antilogs of the standard error of each regression slope coefficient in the growth equations.
We also considered firm size and firm age. Due to their higher visibility and impact on society, larger firms are more likely to engage in CSP initiatives [61]. For this study, firm size was measured by the natural logarithm of total sales of the firm (e.g., [62]). Prior research indicates that firm age is either positively [63] or negatively [64] associated with CSP. We measured firm age as the natural logarithm of the number of years since the firm was founded.
According to slack resource theory, there is a relationship between CSP and a firm’s available financial resources [65,66]. Therefore, we controlled for debt-to-equity ratio and slack resources. Debt-to-equity ratio was calculated by dividing a firm’s total debt by its total equity. For slack resource, we calculated retained earnings divided by total sales, following previous studies [67,68,69,70].
In addition, we controlled a number of CEO characteristics, including age, tenure, duality, and gender. Previous research indicates that CEO age [60], tenure [71], duality [72], and gender [73] have a substantial influence on CSP decision making. There is a body of literature demonstrating that corporate governance characteristics, such as board structure, also influence CSP [74,75,76]. To control for the influence of board characteristics, board size and board independence were included in our model. Board size is the total number of active directors on the board. Board independence was measured by dividing the number of unaffiliated independent directors by the total number of board members [61]. Information regarding CEOs’ characteristics and board composition information was gathered from GMI Ratings, as well as firm proxy statements (i.e., SEC Form DEF 14A) when needed.
Since each CEO letter varied in length, the length of the letters was included as a control in the model. We also controlled CSP intention and managerial deception by conducting content analysis of CEO letters to shareholders. Both CSP intention and managerial deception are measured by using the LIWC software program. In terms of CSP intention, the previous work assumed that CEOs are likely to seek CSP when they have a genuine interest for CSP rather than just symbolic intent [77]. As such, we adapted the rationale from the previous work and measured CSP intention with a sense of authenticity of CSP by counting relevant keywords, as Boyd et al. [78] recommended. In terms of managerial deception, we measured the same set of words offered by Loughran and McDonald [79]
Finally, we also accounted for the possibility that industries may differentially influence CSP by including industry dummies (the two-digit SIC code) in the model. For the sake of simplicity, we did not report coefficients and standard errors for each industry dummy. Every control variable, with the exception of the industry dummies, was one year behind the dependent variables.

4.3. Statistical Analysis

The final sample consists of panel data from 2751 firm-year observations from 534 firms. Firm-year observations are correlated across years, violating the independence requirement of ordinary least squares (OLS) regression analysis. Thus, our models were estimated using the maximum likelihood estimation of generalized estimating equations (GEEs). GEEs take into consideration the panel’s non-independence across observations [80]. In comparison to random-effect and fixed-effect models, GEE estimation is more effective in our study. GEE estimates exclude population distribution assumptions, unlike random-effect or fixed-effect models [81]. In addition, considering the dependent variable of this study, which is formed from the sum of dichotomous assessments and has a skewed distribution, GEE is a more acceptable methodology because it does not assume the normal distribution of the dependent variable [82] (p. 650). VIF analysis was also performed to assess multicollinearity, and the findings revealed a mean VIF value of 1.14, with a range of 1.00 to 1.42; this indicated that there was no multicollinearity problem, as the VIF range was less than the conventional threshold of 10 [83].

5. Results

5.1. Descriptive Statistics

The descriptive statistics of variables, including means, standard deviations, and correlations, are shown in Table 1.

5.2. Testing Hypotheses

Table 2 reports the results of GEE regression analysis, in which CSP was used as a dependent variable to verify our hypotheses. As shown in Table 2, Model 1 is the baseline model that includes only control variables.
Hypothesis 1 predicted that promotion-focused CEOs are more likely to participate in CSP than prevention-focused CEOs. As shown in Model 2 in Table 2, the relationship between a CEO’s promotion focus and a firm’s social performance was statistically significant and positive (β = 0.34, p ≤ 0.001), whereas prevention focus was not. Therefore, the results provide support for Hypothesis 1.
Hypothesis 2 proposed that the level of market munificence moderates the influence of CEO promotion focus on CSP. The result shows that there is statistically significant interaction between market munificence and CEO promotion focus on CSP (β = −1.99, p ≤ 0.1), as shown in Model 3 in Table 2. This implies that market munificence weakens the positive effect of CEOs with a promotion focus on CSP. The interaction depicted in Figure 1 reveals that a positive relationship between CEO promotion focus and CSP only exists in less munificent markets. A simple slope test also shows that CEO promotion focus and CSP are positively related when market munificence is low (t = 1.413, p < 0.000) but not significant when it is high (t = −0.650, n.s). Thus, Hypothesis 2 was marginally supported.
Hypothesis 3 suggested that the level of market concentration moderates the positive effect of CEO promotion focus on CSP. The results in Model 4 show that market concentration strengthens the positive relationship between CEO promotion focus and CSP (β = 0.88, p ≤ 0.05). Figure 2 illustrates this interaction and shows that a CEO promotional focus enhances a firm’s social performance when the market is concentrated. A simple slope test also shows that CEO promotion focus and CSP are positively related when market concentration is high (t = 0.986, p < 0.000) but not when it is low (t = −0.075, n.s). Therefore, we find support for Hypothesis 3.

5.3. Supplementary Analysis

To verify the results, we performed additional analyses. A random-effect GLS regression model was used to assess robustness because the fixed-effects approach is inappropriate due to the relatively constant nature of some variables (e.g., CEO duality, industry effects). All of the empirical findings are confirmed, albeit with somewhat different coefficients and levels of significance. In addition, we utilized the Hausman–Taylor estimate [84] because corporate governance, firm performance, and CSP ratings may be endogenous. We can eliminate endogeneity bias by specifying endogenous subsets of variables in the Hausman–Taylor panel data regression. The findings from the Hausman–Taylor estimation are not different from what we reported here with slightly different levels of significance.

6. Discussion and Implications

The purpose of this study is to improve our understanding of how CEOs’ regulatory focus affects the social performance of their companies. We hypothesize that the degree of CEOs’ promotion focus (vs. prevention focus) has a positive effect on CSP. This study also asserts that the impact of CEOs’ promotion focus on CSP is magnified when companies operate in markets with less munificence and in a highly concentrated environment.
This study shows several meaningful findings. First, we proposed that promotion-focused CEOs are more likely to engage in CSP than prevention-focused CEOs, because CSP is perceived as a risk-taking decision. As predicted, our empirical results revealed that CEOs’ promotion focus is positively related to CSP, but prevention focus is not. This finding implies that CEOs’ promotion focus is an important driver of a firm’s social performance, while prevention focus has no effect on CEOs’ strategic decisions regarding CSP. According to regulatory focus theory [16], two distinct motivational systems, promotion focus and prevention focus, affect how individuals approach gains and losses. Typically, promotion focus refers to the motivation to achieve goals, advancement, and growth, while prevention focus refers to the motivation to avoid uncertainty and ensure safety [3,16]. Given the long-time payoff and outcome uncertainty of CSP investment, promotion focus could motivate CEOs to engage in CSP, but prevention focus may not be a relevant motivator for CSP. This result also confirms the findings of earlier research suggesting that promotion and prevention foci are not orthogonal [10,85].
Second, this study further investigates the boundary condition of the relationship between the CEOs’ promotion focus and CSP by taking market characteristics into account. Our findings indicate that promotion-focused CEOs differentially pursue CSP depending on the degree of munificence and concentration in the business environment. Specifically, CEOs with a promotional focus would increase their investment in CSP when the market has limited resources (i.e., low-munificence condition) or when there is substantial stakeholder attention due to firms’ visibility (i.e., high-concentration condition), as they are more willing to overcome such challenging conditions by implementing risk-taking strategies such as CSP. In sum, these results imply that the influence of CEO promotion focus on CSP is conditioned by environmental situations.
In light of these findings, this study provides several theoretical contributions. First, our study contributes to research on how micro-foundations, in the form of CEOs’ characteristics, affect CSP. Although a large body of literature has focused on the determinants of CSP, the effect of CEOs’ psychological traits on CSP has only recently received scholarly attention [50]. To fill this gap, we used regulatory focus, a relatively new concept in the social science literature on motivation, to predict CSP. Our findings indicate that the regulatory focus of CEOs has a significant impact on CSP. In doing so, we recommend that future studies incorporate top executives’ regulatory focus in an important antecedent in order to gain a more comprehensive understanding of a CEO’s strategic decisions related to social performance.
This study also demonstrates how the micro-foundational approach advances the current upper-echelon theory from the literature on strategy and management. Upper-echelon theory is predicated on the assumption that the psychological profiles and behavioral preferences of CEOs are reflected in their organizations’ strategic process and results [18]. Plenty of prior research in this field investigated the impact of CEO characteristics, but only observable demographic factors (i.e., age, tenure, gender, etc.) were included (e.g., [73,86,87,88]). Although these attributes are significant and observable, they only give a superficial grasp of the CEO’s role in decision making. By examining the influence of this important CEOs’ psychological features (i.e., regulatory focus) on key strategic action and social performance of a company, this study extends the scope of research on strategic leadership and management.
Second, this study provides a more precise account of the relationships between CEO regulatory focus and CSP by investigating the boundary conditions that circumscribe its relationship. Prior literature documents that the market conditions are one of the most crucial environmental factors to consider while making strategic decisions [29]. We argue that a CEO’s strategic preferences for attaining goals may be impacted by his or her regulatory focus in the case of CSP, albeit the level to which this occurs may be contingent on the market’s munificence and concentration. Specifically, we observe an interesting finding that promotional CEOs are more engaged in CSP, even when market conditions are tough. In other words, we discovered that CEOs with a strong promotion focus may view harsh market conditions as an opportunity to achieve competitive advantage. Winning in a good mood is easy but much harder in a poor mood. Our findings clearly indicate that promotional CEOs are visionary leaders who see positivity even when things are negative. In addition, these findings address recent calls for more research focusing on exploring “boundary conditions” that may influence top executives’ differential reactions to CSP.
This study also offers a number of practical implications by showing CEOs’ psychological characteristics could impact firms’ social performance. In today’s competitive business climate, it is crucial for companies to consider the needs of a wide range of stakeholders. A company’s social performance should be understood as a result of decisions made by the highest-level decision makers in the organization, such as CEOs [89]. Therefore, the organization should understand the micro-foundational mechanisms through which CEOs’ cognitions affect CSP. Our findings indicate that promotion-focused CEOs tend to be more engaged in stakeholder management than prevention-focused CEOs. Thus, by understanding the psychological tendency of CEOs, firms could take advantage of the positive aspects of CEO promotion focus to achieve greater social performance.
In addition, CEOs’ regulatory focus interacts with market conditions to influence CSP. This study demonstrates that environmental condition significantly affects CEOs’ decision making by considering market munificence and concentration. The results reveal that CEOs with a high promotion focus more actively pursue prosocial initiatives when the market provides limited resources and greater visibility to the firms. Therefore, CEOs should take into account the firm’s external environments in order to have a more complete understanding of how their strategic decisions are made.

7. Limitations and Future Studies

Despite the theoretical and practical contributions, this study has several limitations that may inspire future studies. First, despite the fact that the measure of CEO regulatory focus we adapted has been externally validated in previous studies (e.g., [3]), this approach may have flaws. Since CEOs’ shareholder letters are carefully scripted and formal documents, the text from the letters may not accurately reflect the psychological properties of CEOs. Therefore, future research may attempt to utilize diverse textual sources or collect the self-report database from top executives in order to capture their regulatory focus with greater precision.
The second limitation of this study is that the results cannot be generalized to other industries or national contexts, as they are based on a sample of publicly traded manufacturing firms in the United States. Depending on the industry or country, the effect of CEOs’ psychological traits and environmental conditions on CSP may vary. In order to determine the generalizability of this study’s findings, future research may focus on different sectors or institutional contexts.
Lastly, this study includes only two market variables as moderators. To advance our understanding of the relationship between CEO characteristics and CSP, future research could investigate additional market- or industry-level environmental variables. Additionally, exploring the interaction between market-level environmental variables and other company attributes, such as size, age, and ownership structure, could lead to a more comprehensive understanding of the impact of market environment and company characteristics on firm social performance. These studies could provide practical implications for firms looking to improve their social performance by offering more nuanced insights into the effects of market and company characteristics on firm performance.
Despite these limitations, this study adds to the body of literature on micro-foundations of CSP by showing the interaction effects of CEO regulatory focus and environmental factors on CSP. We hope the present study encourages future researchers to further explore the influence of CEO cognitions and situational conditions on corporate social performances, thus expanding this stream of research.

Author Contributions

S.L. and R.J. significantly contributed to this paper. All authors have read and agreed to the published version of the manuscript.

Funding

This research received no external funding.

Institutional Review Board Statement

Not applicable.

Informed Consent Statement

Not applicable.

Data Availability Statement

Authors may provide data upon request.

Conflicts of Interest

The authors declare no conflict of interest.

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Figure 1. Effects of CEO promotion focus on CSP at different levels of market munificence.
Figure 1. Effects of CEO promotion focus on CSP at different levels of market munificence.
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Figure 2. Effects of CEO promotion focus on CSP at different levels of market concentration.
Figure 2. Effects of CEO promotion focus on CSP at different levels of market concentration.
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Table
Table 1. Descriptive statistics: means, standard deviations, and correlations.
Table 1. Descriptive statistics: means, standard deviations, and correlations.
MeanS.D.12345678910111213141516171819
1. CSP 0.673.98
2. Industry dynamism1.020.020.04 *
3. Firm Size2.861.350.19 *−0.20 *
4. Firm age 73.9546.940.13 *0.05 *0.07 *
5. Financial crisis0.600.490.21 *0.32 *−0.010.05 *
6. Debt to equity ratio0.6515.24−0.000.000.00−0.00−0.00
7. Slack resources0.281.150.04 *0.010.010.11 *−0.02−0.00
8. CEO age54.919.220.05 *0.07 *0.04 *0.05 *0.14 *−0.020.03
9. CEO tenure7.105.95−0.04 *0.04 *−0.06 *−0.11 *0.01−0.00−0.000.24 *
10. CEO duality0.950.230.000.06 *0.05 *0.11 *0.14 *0.00−0.07 *0.11 *0.07 *
11. CEO gender0.020.140.10 *−0.020.04 *0.08 *0.030.00−0.00−0.04 *−0.05−0.01
12. CEO prevention focus0.210.230.01−0.10 *0.06 *0.06 *0.09 *−0.030.000.04 *−0.030.02−0.03
13. Board size2.340.200.22 *0.04 *0.31 *0.25 *0.04 *0.010.05 *0.04 *−0.15 *−0.000.030.07 *
14. Board independence 0.860.260.04−0.010.04 *0.030.020.000.010.02−0.05 *0.03−0.010.02−0.11 *
15. Length of CEO letter7.380.550.11 *0.000.11 *0.15 *−0.020.010.04 *−0.01−0.03−0.020.06 *0.11 *0.19 *0.03
16. CSP intention31.9411.240.05 *0.020.020.000.08 *−0.01−0.00−0.000.07 *0.01−0.01−0.07 *−0.03−0.02−0.03
17. Managerial deception0.010.02−0.010.01−0.010.000.01−0.010.06 *0.020.03−0.02−0.010.11 *0.01−0.010.030.02
18. Market munificence1.040.06−0.10 *−0.50 *0.07 *0.00−0.38 *0.000.01−0.07 *−0.01−0.04 *−0.03−0.04 *0.04 *−0.00−0.04 *−0.05 *0.00
19. Market concentration0.390.18−0.11 *0.13 *0.23 *−0.13 *0.030.00−0.010.010.06 *−0.01−0.03−0.12 *−0.11 *−0.03−0.16 *0.10 *−0.04 *−0.10 *
20. CEO promotion focus1.720.700.01−0.13 *0.04 *0.10 *−0.11 *−0.01−0.03−0.01−0.07 *0.04 *0.03−0.14 *−0.02−0.01−0.12 *0.11 *−0.08 *0.010.02
* Notes: a. Correlations greater than ǀ0.05ǀ are significant at p ≤ 0.05 and those greater than ǀ0.07ǀ are significant at p ≤ 0.01; b. Two-tailed coefficient test (N = 2744).
Table
Table 2. GEE regression analysis on CSP.
Table 2. GEE regression analysis on CSP.
Model 1Model 2Model 3Model 4
βS.E.βS.E.βS.E.βS.E.
Constant−16.20 ***(4.20)−7.05(5.35)−10.14 †(5.68)−6.25(5.37)
Control variables
Industry dynamism14.50 ***(3.87)8.71 *(4.40)8.74 *(4.40)8.58 *(4.40)
Firm Size0.49 ***(3.87)0.55 ***(0.10)0.55 ***(0.10)0.55 ***(0.10)
Firm age0.49 **(0.10)0.01 **(0.00)0.01 *(0.00)0.01 **(0.00)
Financial crisis1.47 ***(0.11)1.49 ***(0.11)1.47 ***(0.11)1.49 ***(0.11)
Debt to equity ratio0.00(0.00)0.00(0.00)0.00(0.00)0.00(0.00)
Slack resources0.16 *(0.08)0.15 *(0.08)0.16 *(0.08)0.15 *(0.08)
CEO age0.00(0.01)0.00(0.01)0.00(0.01)0.00(0.01)
CEO tenure0.01(0.01)0.01(0.01)0.01(0.01)0.01(0.01)
CEO duality−0.15(0.26)−0.20(0.25)−0.21(0.25)−0.23(0.25)
CEO gender1.09 †(0.58)1.01 †(0.58)0.98 †(0.58)1.01 †(0.58)
Board size0.63(0.45)0.67(0.44)0.67(0.44)0.69(0.44)
Board independence0.16(0.21)0.18(0.21)0.17(0.21)0.18(0.21)
Length of CEO letter−0.31 **(0.12)−0.30 **(0.12)−0.28 *(0.12)−0.31 *(0.12)
CSP intention0.01 †(0.01)0.01(0.01)0.01(0.01)0.01(0.01)
Managerial deception−0.75(1.92)−0.37(1.91)−0.47(1.91)−0.35(1.91)
Industry dummies(included)
Testing variables
CEO prevention focus −0.20(0.28)−0.17(0.28)−0.20(0.28)
CEO promotion focus 0.34 ***(0.09)2.42 †(1.28)−0.02(0.20)
Market munificence (MM) −3.11 **(1.12)−0.27(2.08)−3.12 **(1.12)
Market concentration (MC) −1.81(0.85)−1.85 *(0.85)−3.45 **(1.20)
CEO promotion focus * MM −1.99 †(1.23)
CEO promotion focus * MC 0.88 *(0.46)
Wald Chi-Square (d.f.)465.16(26) ***501.97(30) ***504.62(31) ***506.04(31) ***
Number of observations2744274427442744
Notes: † ≤ 0.10, * p ≤ 0.05, ** p ≤ 0.01, *** p ≤ 0.001, two-tailed coefficient test; regression coefficients are unstandardized with standard errors in parentheses.
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Lee, S.; Jung, R. You Say Tough, I Say Hope: An Effect of CEO Regulatory Focus on Corporate Social Performance under Challenging Market Conditions. Sustainability 2023, 15, 5555. https://doi.org/10.3390/su15065555

AMA Style

Lee S, Jung R. You Say Tough, I Say Hope: An Effect of CEO Regulatory Focus on Corporate Social Performance under Challenging Market Conditions. Sustainability. 2023; 15(6):5555. https://doi.org/10.3390/su15065555

Chicago/Turabian Style

Lee, Seunghye, and Rami Jung. 2023. "You Say Tough, I Say Hope: An Effect of CEO Regulatory Focus on Corporate Social Performance under Challenging Market Conditions" Sustainability 15, no. 6: 5555. https://doi.org/10.3390/su15065555

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