Big Profits, Big Harm: Explaining Human Rights Misbehavior by Developing Country Firms

Why do financially successful firms from developing countries abuse human rights? Are big successful firms more likely to abuse than other firms? Do institutions work to prevent such abuses? Elisa Giuliani, Federica Nieri, and Andrea Vezzulli ask these questions and more in their article, “Big Profits, Big Harm? Exploring the Link Between Firm Financial Performance and Human Rights Misbehavior,” which was published in Business & Society. Read the authors’ reflection below.

Our article, “Big Profits, Big Harm? Exploring the Link Between Firm Financial Performance and Human Rights Misbehavior,” 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.

We were 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 misbehavior predicts that firm abusive behaviors are motivated by financial distress and underperformance, not overperformance and resource abundance. So, why are so many successful firms misbehaving? We were interested in this question in the context, specifically, 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 labor and other human rights – are considered to be less strict than internationally accepted standards, we believed it was important and urgent to investigate their human rights behaviors and their sensitivity to institutional pressures.

By combining behavioral and neo-institutional theories, our study considers that the extent to which firms abuse human rights depends on achieving multiple goals, that is, the primary goal of top financial performance and the secondary goal of international legitimacy. We 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 estimating a set of tailored econometric models. We found that:

• Firms that outperform their global peers are more, not less likely to abuse human rights as their performance increases. We 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, we found that the positive link between financial performance and human rights misbehavior 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.