The article, “Big Profits, Big Harm? Exploring the Link Between Firm Financial Performance and Human Rights Misbehavior,” published in a recent issue of Business & Society, for the first time asks whether developing country firms that financially outperform their global industry peers become more likely to abuse human rights as their performance relative to peers increases. It also investigates whether (and how much) this relationship is moderated by institutional (coercive and normative) pressures.
This research was motivated to investigate these questions empirically by the increasing number of instances of involvement of large successful firms in human rights abuses. This evidence is surprising since, apart from a few exceptions, most research on organizational misbehaviour predicts that firm abusive behaviours are motivated by financial distress and underperformance, not overperformance and resource abundance. So, why are so many successful firms misbehaving? This question was asked in the context of developing countries, for two reasons. First, despite being rather neglected by research, developing country firms are increasingly achieving the status of global economic and political powerhouses. Second, since many developing country standards – and especially those related to labour and other human rights – are considered to be less strict than internationally accepted standards, it is important and urgent to investigate their human rights behaviours and their sensitivity to institutional pressures.
By combining behavioural and neo-institutional theories, our study considers that the extent to which firms abuse human rights is dependent on the achievement of multiple goals, that is, the primary goal of top financial performance and the secondary goal of international legitimacy. This study exploited novel data on business and human rights – drawing on public information available at sources such as the Business and Human Rights Resource Centre – and estimated a set of tailored econometric models, finding that:
- Firms that outperform their global peers are more, not less likely to abuse human rights as their performance increases. The authors interpreted this as being the result of managers perceiving negative stereotyping due to their country of origin, renewing their efforts to become persistent top world performers, leading to risky human rights decisions to achieve their primary financial goal.
- However, this primary goal and managers’ aspirations must be aligned to the secondary goal of being seen in an international audience as socially legitimate actors. Therefore, this study finds that the positive link between financial performance and human rights misbehaviour was attenuated or even neutralized by the firm’s (a) greater exposure to contexts with more stringent rule of law and, especially, pressure from host countries, and (b) demonstration in their CSR reports, of a stronger alignment to international human rights meta-norms.
Punchline: financially overperforming companies can do tremendous harm, but institutions can work to contain their misconduct. Both soft and hard laws are key to regularizing bad business.
Photo: courtesy of Source International