Remedial Actions After Corporate Social Irresponsibility 

By | February 2, 2023

Reputational damage resulting from media, consumer, or investor outcry often follows corporate scandals. For instance, notable oil spills, from Exxon’s 1989 Exxon Valdez disaster to BP’s 2010 Deepwater Horizon disaster, have resulted in both hundreds of millions of dollars in direct regulatory penalties as well as short-term stock market losses (Länsilahti 2012), substantial longer-term losses of reputational capital (McGuire, Holtmaat, and Prakash 2020) and punitive legislation. The reputational consequences of socially irresponsible corporate actions may also escalate in the future in light of a recent increase in investors’ interest in environmental, social, and governance (ESG) issues.  

However, little is known about whether, and how, firms systematically respond to major negative ESG incidents, in the form of (i) environmental or (ii) social violations. We address that deficiency in our recent paper. To do so, we construct a novel, hand-collected dataset on 10,270 reputation repair actions taken by individual firms after 468 serious violations between 2000 and 2020 of environmental or social laws, relative to a set of matched control firms. We (i) characterize the nature of actions taken and how these relate to the type of underlying violation; (ii) assess whether the stock market reacts to these actions; and (iii) evaluate whether these actions correlate with future improvements in firms’ track records with environmental and social regulators. 

Would firms engage in significant remedial actions subsequent to a negative ESG event? It is not obvious ex ante. Prior literature documents the actions that firms may take to regain shareholder trust after a major accounting restatement (Chakravarthy, deHaan, and Rajgopal 2014). However, environmental and social violations may arise from different firm-level factors and affect different sets of stakeholders, so the findings in that study likely do not generalize to our setting. Karpoff, Lott, and Wehrly (2005) document that the stock market reaction to environmental violations appears to be driven almost entirely by the direct monetary penalties rather than from any reputational losses, suggesting that firms may not have a (shareholder-driven) need to take reputation repair actions after an environmental violation. However, that study’s sample period is one during which firms received significantly less investor pressure in response to their nonfinancial performance. Even less is known about how firms respond to violations of social (labor and consumer) laws associated with discrimination, wage theft, and worker or consumer safety. 

Our primary sample of serious environmental and social violations is drawn from the Violation Tracker (VT) dataset, compiled by the non-profit organization Good Jobs First. We supplement this with data from the Corporate and Legal dataset compiled by Audit Analytics. Because of the extensive hand-collection required in constructing our database of reputation repair actions, we limit our sample of treatment events to those resulting in fines or penalties of $10 million or higher. For these firms, as well as a set of matched control firms, we review all press releases by, and news articles about, the firm from one year before the violation to one year after the violation. We then follow a procedure similar to that in Chakravarthy et al. (2014) to identify companies’ reputation-building actions. Specifically, from each individual press release we identify reputation-building strategies related to both environmental and social initiatives (e.g., empowering women or minorities; supporting the disabled; charitable actions; environmental protection) as well as those focused on corporate governance and investors (e.g., board or management turnover, or restructuring). 

Using this approach, we first test whether the number of reputation-building actions taken by firms increases following the revelation of E&S-related violations. Our key takeaway is that after getting caught in a serious E&S-related violation, firms significantly increase their reputation-building efforts. A firm, on average, takes 13.5% more remedial actions after a violation, compared to pre-violation and with its matched control firms. 

Next, we distinguish direct from indirect reputation-building actions. We define a direct action as one that matches the type of violation, (e.g., environment-oriented actions in response to an environmental violation such as an oil spill; or actions that empower women after a gender discrimination violation). We find that both direct and indirect actions increase after a firm is accused of a serious E&S violation. Interestingly, we also find that the post-violation increase in indirect actions is stronger than the increase in direct actions. This may be driven by different stakeholders representing differential reputational concerns from the firm’s perspective. Consistent with this argument we find that, irrespective of violation type, firms are most likely to try to pacify investors, customers, and female employees to rebuild their reputations.  

Given our finding that firms are more likely to engage in social remedial actions after major violations, our next set of tests examines potential firm-level determinants of such actions. We focus on diversity at both the board and rank-and-file employee level. A growing literature exists on the role of board diversity in shaping firms’ corporate conduct, and prior work (e.g., Matsa and Miller 2011) highlights the importance of diverse leadership in ensuring the fair treatment of minorities. Building on this literature, we first examine whether firms with more diverse board membership – measured as the fraction of ethnic minorities – are more likely to engage in social reputation-rebuilding actions after a serious environmental or social issue. We find suggestive evidence that minority board members may be more concerned about restoring either the firm’s behavior or at least the perception of its behavior in the wake of serious misconduct. In a second set of tests, we exploit novel data on rank-and-file employee diversity within a subset of our sample to examine whether firms with more diverse workforces engage in more reputation-repair actions. We posit two reasons that we may observe such a relation: (i) firms found to be engaging in serious misconduct must genuinely improve so as to not scare off employees, or (ii) firms must at least give the perception of doing so. We find, consistent with (i) and (ii), more social reputation-repair actions in firms with a more diverse workforce. In our next set of tests, we examine whether our findings are more likely to reflect (i) or (ii). 

Our approach to identifying reputation-building actions is based on corporate press releases and, as such, reflects forward-looking promises. In light of recent work on “empty ESG pledges” (Kim and Yoon 2021; Raghunandan and Rajgopal 2022a, 2022b), we examine whether remedial reputation-building actions result in sustained environmental or social performance for affected firms. We find that remedial actions by treatment firms are associated with a reduction in the likelihood of future environmental or social violations in the two years subsequent to the treatment event, relative to the effects of actions taken by control firms during the same period. Interestingly, this effect differs for social compared to environmental violations: the effect is concentrated in indirect actions for social violations but direct actions for environmental violations. This is consistent with the notion that firms can only improve environmental performance through direct environmental investment, but that broader prosocial and corporate culture changes – which would be coded as “social” actions, but not “direct” with respect to the underlying violation – may be a more effective way to induce prosocial corporate behavior. Conversely, and in contrast to Chakravarthy et al. (2014), we find that the stock market does not react differently to ESG-related remedial actions for treated firms after the treatment, suggesting that any potential financial benefits to nonfinancial reputation-rebuilding efforts may be realized indirectly (and/or that the market does not directly reward firms for taking prosocial actions). Alternatively, the stock market anticipates remedial actions and prices these before such actions are actually announced. 

To summarize, our key contributions are as follows. Regardless of whether a firm is exposed to environmental or social violations, remedial actions seem to focus on customers and employees, especially women. Even after an environmental violation, firms are less likely to invest in direct environment-related remedial actions but more likely to take investor-focused actions (e.g., stock buybacks) or employee-focused actions. The types of actions that firms are more likely to take, however, do not always affect firm behavior: although firms do not take more environment-related remedial actions after environmental violations, it is primarily these actions that are more correlated with reduced future environmental violations. Conversely, indirect social actions appear to be more correlated with cutting future social violations, perhaps because they induce broader cultural changes in the firm than narrower actions targeted only at the parties directly harmed by the violation. In general, reputation repair strategies appear much more nuanced relative to what was previously known in the literature. 


Wei Cai is an Assistant Professor of Business at Columbia Business School.  

Aneesh Raghunandan is an Assistant Professor of Accounting at the London School of Economics and Political Science.  

Shivaram Rajgopal is the Kester and Byrnes Professor of Accounting and Auditing at Columbia Business School. 

Wenxin Wang is a Doctoral Student at the Harvard Business School.  


This post is adapted from their paper, “Remedial Actions After Corporate Social Irresponsibility,” available on SSRN 

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