Is venture capital socially responsible?
Research Paper Title:
“Is venture capital socially responsible? Exploring the imprinting effect of VC funding on CSR practices”
Authors:
Ekin Alakent (California State University)
M. Sinan Goktan (California State University)
Theodore Khoury (Portland State University)
Background:
Venture capitalists (VCs) are famously focused on the bottom line and ensuring their influence on how a company is run-- i.e., their priorities for operating, but the ghosts of VCs can live on in a company long after an IPO. As shown in our study, this imprint from the VC can have dark consequences on prioritizing corporate social responsibility (CSR) in that the target companies of VCs focus less on CSRs, when compared to those that did not take VC investment.
Methodology:
Sample: public companies with an IPO between 1991 and 2015 (inclusive), where the limit to publicly traded companies was based on KLD MSCI data
Sample Size: 3349 companies and 24,357 company-year observations
Analytical Approach: Quantitative, regression
Hypothesis:
Hypothesis 1. VC-backed companies have poorer CSR records than non-VC-backed companies. (supported)
Hypothesis 2. VC-backed and non-VC-backed companies improve their CSR records as time passes from the date of the IPO; however, VC-back companies have less incremental improvement than non-VC-backed companies in their CSR records. (supported)
Hypothesis 3. Companies funded by VCs that have an investment orientation reflecting a broader stakeholder view have better CSR records than companies funded by traditional VCs that lack this investment orientation. (supported)
Results:
1. Imprinting occurs when a company depends on its major funders during its early, vulnerable stage of development; the VC, a pivotal actor in this stage, is capable of imprinting operating practices that later affect a company's engagement in CSR.
2. The extent of a VC's imprint last beyond the IPO (their exit) and eventually the boundaries of imprint decay over time and varying CSR outcomes according to imprint specificity.
3. VCs with investment orientations that focus on social and environmental benefits and VCs drawing funds from public sources yield a different imprint specificity, one that opposes the traditional VC imprint and supports better CSR engagement.
Conclusion:
When the authors consider a VC's short-term investment performance logics and a company's sustainability requirements as part of adopting a long-term perspective in stakeholder management, they uncover a critical tension among companies imprinted by the VC's intense involvement during the entrepreneurial stage of development. Through interactions with the VC firm during the earlier, entrepreneurial stages of development, a company narrows its focus to stakeholder activities that serve investor preferences. However, as a company moves through its major developmental milestones, its accountability to a broader set of stakeholders grows. This results in the decline of what might have been an early disregard for CSR practices.