In this study, we examine whether and how CEO tenure affects firms’ corporate social responsibility (CSR) performance. Using a sample of U.S. firms for the 1999–۲۰۱۳ period, we find that firms’ CSR performance is significantly higher in CEOs’ early tenure than in their later tenure. We also find that the relationship between CEO tenure and CSR performance is stronger when the board is more independent and CEOs have a longer expected employment period, supporting both the signaling interpretation of the career concern hypothesis and the career horizon hypothesis. Consistent with the trend of increasing awareness of the importance of CSR, we find that the relationship between CEO tenure and CSR performance has become more significant in recent years. Finally, we show that better CSR performance in a CEO’s early tenure is associated with a lower CEO turnover probability, suggesting that commitment to CSR during CEOs’ early tenure could enable them to mitigate career concerns.

Introduction

Due to the growth in stakeholders’ expectations in recent decades, corporate social responsibility (CSR) has become a mainstream business consideration for many firms. For example, an estimated 15 billion U.S. dollars were invested in philanthropy by large U.S. firms in 2010 (Di Giuli & Kostovetsky, 2014). Firms’ CSR performance has also received tremendous scrutiny from various parties, including the mass media, socially responsible investment funds, and rating parties such as MSCI (i.e., KLD), which can significantly affect firms’ reputation and operations. Nevertheless, firms’ CSR performance continues to vary widely, which has prompted a number of studies investigating the determinants of firms’ CSR commitment. One strand of studies has shown that a firm’s CEO has a significant effect on the CSR process; therefore, the diversity of CEOs’ characteristics and incentives provides a powerful explanation for the variations in firms’ CSR performance (e.g., Hambrick & Mason, 1984; Donaldson, 1999; McGuire, Dow, & Argheyd, 2003; Carpenter, Geletkanycz, & Sanders, 2004; Deckop, Merriman, & Gupta, 2006; Chin, Hambrick, & Treviño, 2013: Di Giuli & Kostovetsky, 2014; Tang, Qian, Chen, & Shen, 2015; McCarthy, Oliver, & Song, 2017). This study advances this line of inquiry by providing a comprehensive analysis of how CEO tenure, an important dimension of CEO characteristics, affects CSR performance. CEO tenure has significant implications for firm operations. In the early stage of a CEO’s tenure, both the board of directors and the market are uncertain about the CEO’s ability, leading to a career concern problem (Gibbons & Murphy, 1992; Holmstrom, 1982). As CEOs with better performance early in their tenure are likely to enjoy future benefits, including greater future compensation, reappointments, and greater autonomy (e.g., Fama, 1980; Hermalin & Weisbach, 1998), they have strong incentives to signal their superior ability at this stage. In addition, early-tenure CEOs have a longer horizon and thus have strong incentives to undertake long-term investment projects because they can reap the benefits of these investments at a later stage of their tenure. Consequently, CEOs have two distinct incentives in their early tenure: signaling to mitigate career concerns and investing to gain future benefits later in their tenure. While CEOs are likely to inflate earnings to signal their ability in the early stage of their tenure to alleviate career concerns (Ali & Zhang, 2015), our knowledge of whether this likelihood can be applied to CSR is limited, and the results are mixed.1 In addition, studies have not explicitly tested these two incentives for CSR as suggested by the CEO tenure literature and have not tested whether this strategy is effective. Therefore, we do not know the motives for CEOs to engage in CSR early in their tenure.