How Firms Should React to Social Misconduct: Compensation Strategies and Performance Implications

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The research project seeks to provide insights into how firms can develop corporate social responsibility (CSR) actions that compensate society after the occurrence of social misconduct and thus rehabilitate the firm`s societal standing and social legitimacy. The following objectives of the research project help to elaborate on this question. First, the project will identify socially desirable strategies that firms can use to compensate society for social misconduct. Second, the project will test empirically whether these strategies help to safeguard firm value. Third, the project will identify and empirically test contextual factors that alter the impact of compensation strategies. The project is highly relevant for CSR research because prior studies have concentrated on symbolic communication-related actions but have not specified how firms should use long-term substantive CSR actions for rehabilitation after social misconduct without harming firm value. Results of the project are also practically important because nearly all firms that pursue social responsibility initiatives regularly face social misconduct. Understandably, firms often respond to social misconduct with CSR actions to repair legitimacy. However, this attempt may create a dilemma for firms, because CSR actions in response to social misconduct are inherently problem-driven and often lead to stakeholder suspicion, jeopardizing firm value. Consequently, the key challenge for firms is to engage in CSR actions that effectively repair the firm`s social legitimacy and do not exacerbate the deleterious effects of social misconduct. Findings of the research project will help firms to meet this challenge and enable them to better contribute to society.