Organized labor and corporate philanthropy: Evidence from Korea

• Author: Youngwook Song,Hongmin Chun,Jennifer Brodmann,Hakjoon Song
• DOI: http://doi.org/10.1111/beer.12267
• Published date: 01 October 2020
• Date: 01 October 2020

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  wileyonlinelibrary.com/journal/beer Business Ethics: A Eur Rev. 2020;29:780–795.© 2020 John Wiley & Sons Ltd

1 | INTRODUCTION

There has been a re cent renewed intere st in the corpor ate role as-

sociated with a fi rm's philanthropi c behavior. Several rece nt studies

examine the relationship between management and corporate philan-

thropy and explore whether other factors influence the management's

decision to engage in corporate philanthropy (Bertrand, Bombardini,

Fisman, & Trebbi, 2018; Gardberg, Zyglidopoulos, Symeou, & Schepers,

2019; Hogarth, Hut chinson, & Scaife, 2018). Previous s tudies investi-

gate the determinants and pos tulate three explanations for corporate

philanthropy: a ltruism, agenc y theory, and sha reholder wealt h maxi-

mization theo ry (Choi & Wang, 2007; Gautie r & Pache, 2015; Navarro,

1988). Expanding on t his research, several rec ent studies (Bertran d et

al., 2018; Gardber g et al., 2019; Hogarth et al., 2018) investig ate cor-

porate philant hropy from the legi timacy theor y perspec tive of firms

seeking to gain or maintain social legitimacy by employing corporate

giving to improve social perceptions. However, relatively few studies

examine corporate philanthropy from the stakeholder theory perspec-

tive. Stakeholder theory insinuates that strengthening relations with

crucial stake holders (both internal and ex ternal) leads to the financ ial

success of a firm (Free man, 2010; Jones, 1995).

Prior studies e xamine the effect of union s on investment, lever-

age, dividend, c ost of equity and d ebt, earning s management, t ax

aggressivene ss, analyst s' earnings fore cast, audit fe es, disclosure

policy, and debt cont racts. Ou r study explore s the effect of o rga-

nized labor—a vital inter nal stakehold er of the firm—on cor porate

giving, which is n ot explored in prior studi es. In Korea, managers do

not view the labor u nion as a partne r to improve the firm p erfor-

mance and share pr ofits; instead, they treat un ions as cost centers.

Managers, particularly controlling shareholders in business groups,

view unions as bar riers to business o perations and, therefore, co n-

centrate on redu cing costs assoc iated with the lab or unions. The

rent-seeking behavi ors of both managem ents and labor u nions are

quite pervas ive, and the labor unions often s trike when their nego-

tiation outcome s are unsatisfa ctory relati ve to their expec tations,

which results in massive losses for firms. Unionized firms focus on

strengthening their bargaining power with unions and prevent the

rent-seeking behavi or of labor unions du ring negotiation . For in-

stance, sever al studies (Bova , 2013; Bowen, DuChar me, & Shores,

1995; Cullinan & Knobet t, 1994; DeAngelo & DeAngelo, 1991) indi-

cate that unionize d firms choose conservati ve accounting practices

for favorable bargaining positions.

Received: 16 Janua ry 2019 

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  Revised: 22 Janua ry 2020 

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  Accepted: 22 Janua ry 2020

DOI: 10 .1111/bee r.12267

ORIGINAL ARTICLE

Organized labor and corporate philanthropy: Evidence from

Korea

Hakjoon Song1 | Hongmin Chun2 | Jennifer Brodmann1 | Youngwook Song2

1Accounting, F inance, Economic s and Law

Department, California State University

Dominguez H ills, Carson, C A, USA

2School of Business, Chungbuk National

University, Cheongju, Korea

Correspondence

Hongmin Chun , Business School o f

Chungbuk National University, Chungdae-ro

1, Seowon-Gu, Cheongju, Chungbuk 28644,

Korea.

Email: hmchun@cbnu.ac.kr

Abstract

This study examin es the impact of organized labor on cor porate philanthropy, focus-

ing on Korean firms. We find a p ositive association bet ween the labor unio nization

ratio and the corpo rate philanthropy of firm s, especially for non- Chaebol-affiliate d

firms and firms t hat have positive operating c ash flow. The results fro m the robust-

ness tests, whi ch employ alternative uni on strength proxi es and two-stage le ast

squares regression analyses, support our major findings. The findings indicate that

unionized firms can u tilize corporate philanthropy to bo ost their bargaining power re-

garding wages and colle ctive bargaining power with unions by rep orting lower earn-

ings. This study co ntributes to the corporate philanthropy a nd labor union literature

by providing evidence that t he labor union is a crucia l stakeholder that m ay affect

firms' philanthropic behavior. Our findings explain corporate philanthropic decisions

in the Korean context .

    

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SONG et al.

We conjecture that u nionized firms c an use corporate p hilan-

thropy to increase their bargaining power regarding wages and col-

lective negoti ations with unions in Korea. Fu rther, managers can use

corporate phil anthropy as a tool to pr omote their priva te interests

(e.g., marketab ility in the futu re labor market) and r eputation (Masu lis

& Reza, 2015), par ticularly in the Korean contex t. Hence, we antici-

pate a positive rela tionship between organized l abor and corporate

giving.1  Further, this study ex tends the prior research (C hun & Shin,

2018), which finds a correlation between labor union strength and

corporate social responsibility (CSR) index (Korea Economic Justice

Index2 ) by focusing on how l abor union stre ngth effec ts corporate

philanthropy. U.S. and U.K. corporate philanthropy data that mea-

sure firm-year do nation expenses are limi ted. However, because the

Korean government m andates firm-leve l donation expe nse data in

the audited fin ancial statements annuall y, the available dat a, which

was used as a proxy f or corporate giving, is ad equate.

We conduct our stu dy using Korea-based f irm-level annual union

data consistin g of 2,024 firm obser vations from 2002 to 2008 an d

find that the lab or unionization rate has a posit ive relationship with

corporate philanthropy. This positive association is more concen-

trated in compan ies that have positi ve operating cas h flows and

non-Chaebo l-affiliated fir ms. These resul ts suggest tha t unionized

firms can use co rporate philanthropy e xpenditure to lower earn ings,

thereby stren gthening their bargainin g power for wages, as wel l as

collective bargaining with the unions. Various robustness tests sup-

port our main results.

Our study has se veral contribut ions. First , our study contri b-

utes to the corpor ate philanthropy l iterature by conce ptualizing

organized labor, which comprises the employees of firms, as a

crucially infl uential actor wh en firms make corp orate philan-

thropy decisions. Second, our study complements industrial

relations literature on union impact regarding research and de-

velopment (Hir sch, 1992), innovation (Bradley, Kim, & T ian, 2016),

profitabilit y, and shareholde r value (Lee & Mas, 2012; R uback &

Zimmerman, 1984). The study also complements the finance and

accounting liter ature on unions (Bov a, 2013; Bowen et al., 1995;

Chen, Kacperczyk, & Ortiz-Molina, 2011; Cheng, 2017; Cheng,

Mitra, & Song , 2017; Chung, Lee, Lee, & Soh n, 2016; Connolly,

Hirsch, & Hirs chey, 1986; Cullinan & Knobet t, 1994; DeAngelo &

DeAngelo, 1991; Klas a, Maxwell, & O rtiz-Molina, 20 09; Matsa,

2010) by focusing on how strategic decisions during the bargaining

stage between managers and labor unions influence philanthropic

decisions and fi rms’ financial consequen ces. Third, our study con-

tributes to agency theory literature, explaining corporate philan-

thropic decisi ons (Kim, Pae, & Yoo, 2019; Li, Wu, & Son g, 2017;

Masulis & Reza, 2015; Tan & Tang, 2016). The resul ts suggest that

the management of u nionized firms use charit able giving to report

lower earnings, which elevates their bargaining power with unions

and enhances th eir market value and repu tation. Fourth, o ur study

presents implications of the association between employee and

its internal or e xternal CSR that the recent C SR literature tries to

find (Jamali, S amara, Zollo, & Ciappei, 2019; Rodrigo, A queveque,

& Ignacio, 2019). This stud y partially answers th e relationship.

2 | LABOR UNION IN KOREA

Three peculia r aspects cha racterize the Kor ean union and indu s-

trial relation s: (a) the company-level unio n, (b) the aggressive and

militant moveme nt, and (c) the unst able union leade rship.3  Given

these unique aspects, the government's steady intervention into

labor-management relations and authoritarian control over the

labor movement ha s undeniably playe d a pivotal role in sha ping

the current conditions. Compared to the European and Japanese

unions, the Korean labor unions are intrinsically company-focused

rather than in dustry-focuse d. The Federati on of Korean Trade

Union, a pro-gover nmental body, was es tablished in 1960 whe n

the militar y regime seized power ; however, its primar y role is

not to bring ever y company into a higher na tional level of indus-

trial unions. T he umbrella union , Korean Confeder ation of Trade

Unions, was char tered in 1995. Hence, historica lly, most of the in-

dividual firm -level decentralized union s that have existed in Korea

have had a relativel y weak bargaining p ower and loose soli darity

among their union members.

In alignment wit h the Korean governme nt's plan to raise t he

country from poverty, the Chaebols, conglomerate business

groups, had be en designated to cont ribute to the rapi d develop-

ment of the Korean eco nomy with the help of favora ble assistance

from the Korean gover nment. During the indu strialization proces s

of the Korean econo my, laborers usually te nd to be subjected t o

unfair treatme nt in wages, welfare, wo rking conditions, a nd human

rights. However, the management (e.g., controlling shareholders in

Chaebols) does n ot have to pay attention to t he industrial r ela-

tions with labo r unions; instead, they focu s on the maintenance of

ownership. The management, with an antagonistic attitude toward

unions, has designed and operated union-management organiza-

tional units , staffed with competent f ull-time managers, to handle

union issues st rategically. It is comm on to suppress the i dea of

forming unions b efore it star ts (e.g., Samsung g roup). The issue

of business innova tion and organiz ational strate gy is left out of

the discussion for collaboration and cooperation with the labor

unions. Typical labo r negotiations in Korea take th e form of collec-

tive bargaining, including a wage increase, improvement to work-

ing conditions , and enhancement of other frin ge benefit packages

(Chung et al., 2016). Lab or unions would of ten strike when th eir

negotiation results are unsatisfactory relative to their expecta-

tions. Hence, Korean labor unions are rather radical regarding cor-

porate management.4  Mili tant labor union s in Korea have a track

record of stagin g protest rallies, which somet imes turn viole nt as

some protesters brandish metal pipes. These unexpected strikes

lead to tremendous firm losses.5 

As a counterpar t to the management of a firm, fu ll-time elected

labor offici als serve for two to thr ee years. After th eir terms, they re-

turn to the rank-and-fil e positions in their compan ies or, often, leave

the company with sizable compensations. Given the position and

future of each nego tiating partner, the rent-seeking behavior on both

sides (managemen t and labor officials) is q uite pervasive, as labor u nion

officials usu ally behave oppor tunistica lly with self-interest . Song