Impact of Financial Distress, CEO power and compensation on Environment, Social and Governance (ESG) Performance: Evidence-based on UK firms

Managers face an ethical dilemma in the allocation of scarce resources to invest in Corporate Social Responsibility (CSR) because the underlying managerial incentives behind such CSR spending can range from pure altruism to complete financial orientation.CSR is a discretionary activity undertaken by the top management of the companies. Studies such as Yim (2013) emphasises that CEOs are the main decision-maker in the company therefore, the decision on the investment of firms in CSR relies on them. Due to the importance of the managerial role in implementing CSR, this study will examine how powerful CEOs and their compensation structure influence firms’ engagement in CSR. Initially, this study will examine the association between financial distress and CSR. These contentions are tested using a sample of non-financial firms listed on the London Stock Exchange (FTSE 350) from 2006 to 2017. The data are collected from multiple secondary sources, namely, Bloomberg, FAME, Thomson Reuters Eikon, and BoardEx. The data collected is analysed using regression analysis ranging from ordinary least squares, Newey-West and dynamic GMM with the use of Stata, an analytical software. The findings of this study suggest that in situations of financial distress, firms reduce their engagement in CSR, particularly in the areas of environmental and social performance. It also finds that the firms with powerful CEOs reduce the investment in CSR, and financial distress moderates this negative association between powerful CEOs and CSR. It further finds the impact CEO compensation package by splitting it into short-term pay focus (that mainly comprises salary and bonuses) and long-term pay focus (restricted stocks, stock options and other contingent pay). The study reports that long-term pay focus has a positive and significant impact on a firm’s engagement in CSR. In contrast, short-term pay focus has a negative and significant impact. The results of this study will be significant for regulators, policymakers, investors, and other stakeholders, in understanding the underexplored determinants of CSR. This research further extends the literature on CSR, financial distress and corporate governance (CEO power and compensation structure) and makes a unique contribution.