Before Kenneth Lay became notorious for an accounting scandal, he was better known in Enron’s hometown, Houston, for something else: Philanthropy.
When Lay assumed his position at Enron, he started donating vast amounts of money to universities and other charities. That behavior might seem at odds with someone who was at the helm of one of the biggest financial crimes in U.S. history.
But in reality, a CEO's attempt to appear like a good person can often set the stage for bad behavior at their companies, according to a new study by researchers at the University of California at Riverside and The London School of Economics.
“Firms that have shown they have high levels of corporate responsibility are actually more likely to engage in irresponsible actions,” said Elaine Wong, an assistant professor of management at UCR and one of the study’s authors. “This relationship is even stronger among firms that are led by a CEO that maintains a moral image.”
When CEOs and companies engage in do-gooder activities, like donate to charity or adopt-environmentally friendly business practices, they obtain what Wong describes as "moral credit." Once they feel they’ve fulfilled their obligation, they focus less on being socially responsible, which puts them at risk of becoming irresponsible.
Wong was careful to note that when a company or a CEO takes steps to make themselves appear like good corporate citizens, it’s not necessarily because they’re trying to cover up malicious behavior.
Instead, what her study shows is that “corporate social responsibility” -- a popular way for companies to atone for scandals -- sets the stage for irresponsibility by increasing the likelihood CEOs and companies will become more lax.
“They’re not being as vigilant as they were before,” she said.
Wong and her colleague, Margaret Ormiston, an assistant professor of organizational behavior at the London Business School, studied books and newspaper clippings about 49 Fortune 500 companies to come up with their findings.
One of the more prominent examples they found was BP. In 2008, the company’s then-CEO Tony Hayward made BP’s safety record one of his top priorities, the study notes. Fast forward two years and BP safety managers missed key warnings, resulting in the disastrous explosion of the Deepwater Horizon.
“CEOs need to be aware of this tendency so that the companies don’t slip into this type of pattern,” Wong said. “Our corporate boards really need to be more vigilant and not just allow the CEOs to rest on their prior performance.”