This brief is part of the Insights @ Center for Emerging Markets, a publication focused on cutting-edge ideas and advice for global leaders about emerging markets.

By Alvaro Cuervo-Cazurra (Northeastern University) and Cheng Li (University of Manitoba)

Li and Cuervo-Cazurra identified instances of ESG corporate misconduct in the network of suppliers and subsidiaries of 1,262 multinationals between 2008 and 2018. Their goal was to compare the CSR track record of these corporations, before and after the incidents, with those of companies that did not suffer major ESG breaches. Such a comparison helped ascertain whether these events motivated the affected multinationals to improve their CSR performance. 

Illegal and unethical actions by subsidiaries and suppliers can cause damage on two levels. Directly, such behaviors can harm local communities' environment, public health, and trust in institutions. They can also lead to tangible corporate losses through reduced business and fines. Indirectly, a corporation's overall reputation and standing suffer, often resulting in broader damage to its business operations and pushing the parent firm to enforce better practices worldwide, not just in the affected region. Once multinationals become aware of the misconduct, they often not only seek to mitigate the immediate issue, but also work proactively to prevent future violations within their entire global supply and subsidiary networks. This is particularly true in highly public cases in which multinationals are forced to respond to external pressures from stakeholders, such as regulators, business partners, investors, and the general public. 

One case that illustrates how addressing misbehavior at a subsidiary level can result in positive change throughout the organization was American aluminum producer Alcoa. In 2014, its Australian subsidiary was discovered to have engaged in bribery and overcharging through a middleman dealing with a state-owned Bahraini aluminum smelter. After paying a large fine and suffering reputational damage when the misconduct came to light, Alcoa took action by reforming practices and creating a company-wide integrity hotline that encouraged general disclosure of CSR lapses. These improvements eventually helped earn Alcoa recognition as one of the world's most sustainable companies in the S&P Dow Jones Sustainability Indices for ESG performance. 

Managerial Implications / Policy Implications

The research identifies how regulations that require transparent public CSR reporting and robust enforcement of social and environmental standards in the home country not only press multinationals to improve their overall CSR performance but also become more responsive to misbehavior among their foreign suppliers and subsidiaries. Home country CSR regulations thus not only foster responsible business behavior at home, but also make multinationals improve their sustainability abroad, particularly when they face reputational harm from the misbehavior of their suppliers and subsidiaires.  

The study provides other valuable insights for managers of multinationals. As companies expand their operations globally, they rely on partners in multiple countries to produce goods and services efficiently and profitably. However, managers must be aware of the potential risks of relationships in far-flung operations. When faced with major misbehavior among their suppliers or subsidiaries, it is not only necessary to implement solutions in the specific supplier or subsidiary to ensure that the problem does not occur again. They also need to revamp their coordination and monitoring practices and improve their CSR in the overall network to compensate for harm done to their reputation and avoid the emergence of misbehavior in other parts of the network.  

Original Works

Li, C., & Cuervo-Cazurra, A. (2023). How subsidiary and supplier misbehavior lead to corporate social responsibility performance improvements in multinationals. Journal of International Business Studies, 1-22. 


If you are interested in learning more about this work, contact Professor Alvaro Cuervo-Cazurra at