We investigate the possible effects of a prominent corproate governance development, namely, CSR contracting (i.e., incorporating ESG metrics into CEO compensation packages), on firms’ competitive actions. We draw on research on agency theory and theorize that compared with CEOs without CSR contracts, CEOs with CSR contracts perceive greater job security in their positions and thus are more motivated to engage in competitive actions by the firms they manage. However, as the complexity of CEOs’ CSR contracting increases to involve diverse stakeholder interests, CEOs likely experience heightened job demands, leading to reduced information processing capabilities and rigidity in decision making. Consequently, they become less responsive to the competitive actions of their firms’ rivals, reducing their competitive actions. To tease out the mechanism of CEO job demands associated with the complexity of CSR contracting, we assess three dimensions of CEOs’ job environments: the time horizon of the CSR contract, the financial pressure faced by CEOs, and the increased monetary incentive for CEOs. We analyzed 38,113 firm-year observations of 3,116 firms from 1999 to 2020 (2,825 firm-year observations with CSR contracts) and found support for our hypotheses. Our study enriches the understanding of possible intended and unintended consequences of CSR contracting, while also generating implications for enhancing strategic leadership for firm competitive actions.
