_Beyond Bottom Lines

Profitability alone will not win the day in boardrooms.

_Xin Dai

Dai is an associate professor of accounting in the Bennett S. LeBow College of Business.

The bottom line only takes a corporate executive so far.

CEOs who lead effectively in financial and social responsibility spheres are most likely to prosper, according to a study co-authored by Xin Dai, an associate professor in the Bennett S. LeBow College of Business.

Dai and her colleagues analyzed the impact of corporate performance in the environmental, social and governance measures filed with the Securities and Exchange Commission on CEO job prospects. The team found that executives will most likely exit when a firm shows declines in those metrics. Tracking departing CEOs’ subsequent employment records, the researchers found that executives who have led companies with strong social performance quickly find offers at larger firms that provide higher compensation.

The Global Sustainable Alliance estimated in 2020 that the investment industry managed $35.3 trillion of sustainable investment assets, an increase of 15% in two years, equating to 36% of all professionally managed assets worldwide.

After controlling for financial operations, Dai and colleagues Feng Gao of Rutgers University, Ling Lei Lisic of the Virginia Polytechnic Institute and State University, and Ivy Zhang of the University of California show that CEO turnover is faster when their firms decline on measures such as the environment, community impact, diversity, human rights, employees and products.

Executive turnover slows when performance improves in those areas. The team deemed declines or improvements as significant when the corporate social responsibility (CSR) performance of a firm moves from the top to the bottom, or from the bottom to the top quartile.

Their study, appearing in the Review of Accounting Studies in 2023, suggests that boards view good social performance as a positive indicator of CEO ability.