Socially Responsible Corporate Customers

Today's changing global businesses and corporate environments have brought about a new wave of corporate social responsibility (CSR) activities. Corporations worldwide are increasingly integrating CSR in their business operations and are placing growing importance on ethical, safe and sustainable business practices. Also, anecdotal evidence suggests that many of these corporations are concerned about not only their own CSR standards but also those of their suppliers. Some scholars argue that the increasing popularity of CSR activities around the world is, in part, in response to the repeated failures of laws and regulations protecting stakeholders, raising the need from stakeholders to protect their own interests through pushing the company to engage in CSR. However, it is not apparent whether corporate customers, one of the most important stakeholders, are really taking actions to push suppliers to engage in socially responsible business practices, or whether their public mention of CSR is simply a sideshow.

In this study, we explore whether and by which mechanisms corporate customers influence CSR practices in global supply chains around the world. We also examine the economic implications of collaborative CSR efforts between customers and suppliers that arise from the customer effect of CSR on suppliers.

We exploit two unique international databases in our study, namely (1) a newly available FactSet Revere database that provides information on firm-level networks of customers and suppliers around the world, and (2) Thomson Reuter's ASSET4 Environmental, Social, and Corporate Governance database that contains composite CSR ratings of publicly-listed firms. Based on 34,117 unique corporate customer-supplier pairs from 50 countries worldwide for the 2003-2015 period, we find evidence of significant uni-directional spillover effects of CSR from customers to suppliers in global supply chains, and that their locations matter. Customers play a crucial role in improving CSR standards at their suppliers when the latter are from different countries, but not when they are from the same country. But customers are unable to drive CSR of suppliers in developing countries, unless catastrophic events elicit customers' responses to offer a platform of support for these suppliers, as implied by our results from quasi-natural experiments, such as workplace disasters, poor labor standards, and product responsibility scandals.

Our study identifies two channels through which customers drive CSR in suppliers. The first channel is through the bargaining powers of customers and suppliers. We argue that the bargaining power of a customer depends on its reliance of the relationship-specific investment (RSI) made by its supplier and the competition intensity of an industry. We find that customers are less inclined to affect their supplier's CSR performance when the supplier is highly innovative (i.e., when the customer depends heavily on its supplier's RSI), or when the supplier is in a highly concentrated industry. The other channel is through network connectedness. Our evidence shows that common ownership and interlocking directorates in both the customer and supplier help to propagate CSR along the supply chain.

Finally, we evaluate the economic impact of collaborative CSR efforts of customers and suppliers through their alignment of CSR standards. Previous studies show value enhancements in corporations that implement CSR initiatives, such as issues related to human rights, the community, the environment, and the treatment of employees. However, implementing these CSR initiatives can be costly and has negative financial implications (e.g., greater cost structure and agency problems) for their corporations. Our analysis, however, suggests that the increase of collaborative efforts helps improve operational efficiency and firm valuation for both the customer and supplier but enhance only the customer's future sales growth.