Corporate Governance and Performance in Socially Responsible Corporations: New Empirical Insights from a Neo‐Institutional Framework

TL;DR: In this article, the authors investigated the relationship between corporate governance and corporate social responsibility (CSR), and examined whether CG can positively moderate the association between corporate financial performance (CFP) and CSR, finding that better-governed corporations tend to pursue a more socially responsible agenda through increased CSR practices.

Abstract: Research Question/Issue: This paper investigates the relationship between corporate governance (CG) and corporate social responsibility (CSR), and consequently, examines whether CG can positively moderate the association between corporate financial performance (CFP) and CSR. Research Findings/Insights: Using a sample of large listed corporations from 2002 to 2009, we find that, on average, better-governed corporations tend to pursue a more socially responsible agenda through increased CSR practices. We also find that a combination of CSR and CG practices has a stronger positive effect on CFP than CSR alone, implying that CG positively influences the CFP-CSR relationship. Our results are robust to controlling for different types of endogeneities, as well as alternative CFP, CG and CSR proxies. Theoretical/Academic Implications: The paper generally contributes to the literature on CG, CSR and CFP. Specifically, we make two main new contributions to the extant literature by drawing on new insights from an overarching neo-institutional framework. First, we show why and how better-governed corporations are more likely to pursue a more socially responsible agenda. Second, we provide evidence on why and how CG might strengthen the link between CFP and CSR. Practical/Policy Implications: Our findings have important implications for corporate regulators and policy-makers. Since our evidence suggests that better-governed corporations are more likely to be more socially responsible with a consequential positive effect on CFP, it provides corporate regulators, managers and policy-makers with a new impetus to develop a more explicit agenda of jointly pursuing CG and CSR reforms, instead of merely considering CSR as a peripheral component of CG or as an independent corporate activity. Keywords: Corporate Governance, Corporate Social Responsibility, Corporate Financial Performance, Neo-Institutional Theory

Summary

INTRODUCTION

• This study focuses on the relationship between corporate governance (CG) and corporate social responsibility (CSR).
• In general such institutional antecedents have been demonstrated to be driven by two main motives: legitimation (moral/relational) and efficiency (Aguilera & Cuervo-Cazurra, 2004; Aguilera et al., 2007; Zattoni & Cuomo, 2008) .

A NEO-INSTITUTIONAL FRAMEWORK FOR CSR PRACTICES

• Hence, the sociological approach to institutional theory suggests that individuals, groups and corporations not only compete for economic resources ('economic efficiency'), but also seek social approval for the right to exist ('social legitimacy') (Zattoni & Cuomo, 2008) .
• In particular, the neo-institutional theory proposed by Scott (2001) places great emphasis on three levels of analysis: societal institutions; governance structures; and actors.
• These higher level institutions can shape, impede and/or spur structures and actions at lower levels.
• Arguably, there is scope to extend their understanding of the institutional antecedents and explanations for the rapid proliferation of CSR practices among corporations (Aguilera et al., 2007) .

Prior Studies on the Association between CG and CSR, and Hypotheses Development

• This suggests that good CG may impact positively on CSR practices and therefore, their first hypothesis is that: Hypothesis 1: There is a positive association between internal CG quality, as measured by a CG disclosure index and the extent of CSR practices.
• Prior evidence suggests that the effectiveness of government ownership in facilitating good CSR practices depends on the size and type of government ownership (Cressy et al., 2010; Hou & Moore, 2010; Johan & Najar, 2010) .
• Institutional owners are, therefore, influential in corporate decision-making, including decisions on investment, executive appointment and disclosure (Oh et al., 2011) .
• Empirical evidence on the effect of board diversity on CSR is generally scarce, although Haniffa and Cooke (2005) , and Barako and Brown (2008) report that boards of diverse ethnic and gender backgrounds impact positively on CSR disclosures.

The Link between CFP and CSR: The Moderating Effect of CG

• Informed by the neo-institutional perspective, the authors contend that CSR investments may be made for two main purposes: legitimation (social/moral/relational) and efficiency (Aguilera et al., 2007) .
• Third, addressing the needs of powerful stakeholders, such as customers, governments, and employees, can enhance CFP by reducing political costs (litigation, regulation, taxation, and nationalisation), labour frictions, and customer boycotts (Freeman, 1984; Donaldson & Preston, 1995) .
• Therefore, and given that the decision to engage in good CSR activities emanates from corporate boards, the authors propose that CG is likely to have an enhancing effect on the CFP-CSR nexus.
• More specifically, prior literature suggests a number of ways by which CG may heighten the link between CSR and CFP.
• This suggests that even in corrupt countries, good governance can help activists fund managers to mitigate the economic costs of corruption by enhancing efficiency in investee firms.

CG and CSR Policy Reforms and the South African Research Context

• Empirical studies of organisational behaviour informed by neo-institutional theory generally require a contextual grounding to situate the specific impact of cultural, economic, political, and social factors on the selected corporate practices (i.e., CG and CSR).
• The authors general contention is that South Africa has been at the forefront of leading ('cutting-edge') CG/CSR reforms, with particular focus on addressing the governance challenges of corporations operating in developing countries (Mallin, 2006 (Mallin, , 2007)) .
• This trend persisted in the later report (King II) 3 , which further distinguished the South African CG model from other Anglo-American ones by formally adopting the 'inclusive" CG approach (Ntim et al., 2012a, b; Soobaroyen & Ntim, 2013) .
• This concentration is apparent from the existence of complex cross shareholdings and tall pyramid-shaped ownership structures by a small number of very large corporations (King Committee, 2002; Ntim & Soobaroyen, 2013) .
• Therefore, the authors seek to investigate the relationship between CG and CSR practices, and consequently, examine whether CG has any influence on the link between CFP and CSR.

Data Sources and Sample Selection

• Second, examination of eightyear data with both cross-sectional and time series properties may be useful in detecting whether the observed cross-sectional links among CFP, CG and CSR holds over time.
• As past evidence indicates that company size and industry affect CG and CSR practices (Collett & Hrasky, 2005; Campbell et al., 2003 Campbell et al., , 2006)) , the authors selected the largest 15 corporations from each of the five industries based on their market capitalisation in order to control for size and industry.
• To be certain, however, the authors further explored this potential problem by following Graham and Harvey (2001) and Beiner et al. (2006) and compare the characteristics of their final 75 sampled firms to those of the 263 out of the initial 291 with at least one year's financial data available rather than the complete eight years.
• The authors interpret this observation as indicating that the characteristics of their final 75 sample are largely similar to the underlying population and that their findings are not likely to be seriously impaired by survivorship bias.

Measures and Variables

• The authors classify their variables into six main types and sub-index) ] CSR.
• This constitutes one of the most extensive CSR data to be used to-date and the authors used the content analysis method of codifying written texts into various categories to collect all their CSR data (Hackston & Milne, 1996; Unerman, 2000) .
• The authors present the empirical analyses, including the descriptive statistics, bivariate and multivariate regression analyses, and robustness analyses in the following sections.
• Negative, but insignificantly related to the CSR index.

Multivariate Regression Analyses

• Corporations usually vary in terms of the difficulties and prospects that they face over time (Larcker & Rusticus, 2010) .
• The economic significance of this evidence is that a one-standard deviation change (i.e., increase) in the CG index can be expected to be associated with about a 3.3% (16.30 x 0.203) change (i.e., increase) in the CSR index.
• Similarly, and even in the absence of regulative institutional forces, better-governed corporations may voluntarily mimic and/or adopt good CSR practices in order to improve efficiency and CFP by obtaining access to critical resources, such as finance, contracts, and skilled labour by gaining the approval of influential stakeholders (Pfeffer & Salancik, 1978; Freeman, 1984) .
• From a legitimation view, larger boards are associated with greater diversity in terms of stakeholder representation, which can enhance corporate reputation and image.

With limited exceptions (such as the insignificant CG index-Health and safety sub-index, Board size-Ethics sub-index, Board diversity-Environment sub-index, Block ownership-Ethics sub-index, Block ownership-Health and safety sub-index, Government ownership-Ethics sub-index, and Institutional

• Ownership-Ethics sub-index links), the findings are largely consistent with their previous evidence that corporations with good governance, high government ownership, larger boards, diverse boards, and independent boards are more predisposed to be socially responsible than those with high block shareholding, and high institutional shareholding.
• The link between BEE sub-index and the CG mechanisms is generally strong, whilst the Ethics sub-index-CG nexus is relatively weak.
• Consistent with the results of prior studies (Gray et al., 1995a; Hackston & Milne, 1996; Branco & Rodrigues, 2008; Young & Marais, 2012) , CSR disclosure significantly varies across different industries and years (for brevity, the authors do not report these in Table 4 , but available on request).
• From an efficiency perspective, their evidence implies better-governed firms have greater propensity to engage in good CSR practices, which can enhance corporate efficiency, and meet instrumental and relational imperatives.

Insert Table 6 about here

• Second, several studies suggest that the effect of some CG mechanisms, such as Block ownership, Board size, and Institutional ownership on CFP is non-linear (McConnell & Servaes, 1990; Chen et al., 2008) .
• Block ownership, Board size, and Institutional ownership have been found to be nonmonotonically related to CFP by Morck et al. (1988 ), Andre (2008 ), and Coles et al. (2008) , respectively.
• Thus, failing to control for advertising and R&D expenditure could result in misspecified equation with the coefficient on the CSR index being biased upwards.
• Applied to equation (2), the test rejects the null hypothesis of no endogeneity, and hence, the authors conclude that the 2SLS methodology may be appropriate and that their fixed-effects results may be misleading.
• Thus, the main implication is that whereas CG on its own can have a significant positive effect on CFP, CSR alone has a positive, but weak effect on CFP, which can be strengthened by interacting it with CG.

SUMMARY AND CONCLUSIONS

• Motivations and consequences of corporate social responsibility (CSR) and corporate governance (CG) practices separately, studies examining how and why a firm's internal CG might influence its CSR strategies are rare.
• The empirical findings are based on a sample of large South African listed corporations from 2002 to 2009.
• These findings are largely consistent with the predictions of their generalised neo-institutional framework, which emphasises the efficiency and legitimation effects of CSR practices.
• This sheds new crucial insights on and extends their understanding of the mixed findings of past studies that have examined direct associations between CFP and CSR.
• The authors study, therefore, fills this gap within the existing literature by showing that CG-related actors (e.g., boards and independent directors) and ownership structures (e.g., ownership by institutions and governments) may well pressure the firm to engage in CSR practices for both legitimation (relational/moral) and efficiency reasons.

Figures

Table 4 Effects of Corporate Governance on Corporate Social Responsibility Disclosures Based on Disclosure Indices

Table 5 Regression Analyses of the Effects of Corporate Social Responsibility Disclosures on Corporate Financial Performance

Table 6 Effects of Corporate Governance on Corporate Social Responsibility Disclosures Based on Word Counts

Table 2 Summary Descriptive Statistics of all Variables for all 600 Firm Years

Table 7 Sensitivity Analyses of the Relationships among Corporate Financial Performance, Governance and Social Responsibility

Table 3 Pearson’s and Spearman’s Correlation Matrices of the Variables for all 600 Firm Years

Full text

University of Huddersfield Repository
Ntim, Collins G. and Soobaroyen, Teerooven
Corporate Governance and Performance in Socially Responsible Corporations: New Empirical
Insights from a Neo-Institutional Framework
Original Citation
Ntim, Collins G. and Soobaroyen, Teerooven (2013) Corporate Governance and Performance in
Socially Responsible Corporations: New Empirical Insights from a Neo-Institutional Framework.
Corporate Governance: An International Review, 21 (5). pp. 468-494. ISSN 09648410
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Corporate Governance and Performance in Socially Responsible Corporations: New Empirical
Insights from a Neo-Institutional Framework
Collins G. Ntim

and Teerooven Soobaroyen
Centre for Research in Accounting, Accountability and Governance
Faculty of Business and Law, School of Management
University of Southampton
Southampton, UK

Corresponding author. Address for correspondence: Centre for Research in Accounting, Accountability and
Governance, Building 2, School of Management, University of Southampton, University Road, Highfield,
Southampton, SO17 1BJ, UK. Tel: +44 (0) 238 059 8612. Fax: +44 (0) 238 059 3844. E-mail: c.g.ntim@soton.ac.uk.

Corporate Governance and Performance in Socially Responsible Corporations: New Empirical
Insights from a Neo-Institutional Framework
Abstract
Manuscript Type: Empirical
Research Question/Issue: This paper investigates the relationship between corporate governance (CG)
and corporate social responsibility (CSR), and consequently, examines whether CG can positively
moderate the association between corporate financial performance (CFP) and CSR.
Research Findings/Insights: Using a sample of large listed corporations from 2002 to 2009, we find that,
on average, better-governed corporations tend to pursue a more socially responsible agenda through
increased CSR practices. We also find that a combination of CSR and CG practices has a stronger positive
effect on CFP than CSR alone, implying that CG positively influences the CFP-CSR relationship. Our
results are robust to controlling for different types of endogeneities, as well as alternative CFP, CG and
CSR proxies.
Theoretical/Academic Implications: The paper generally contributes to the literature on CG, CSR and
CFP. Specifically, we make two main new contributions to the extant literature by drawing on new
insights from an overarching neo-institutional framework. First, we show why and how better-governed
corporations are more likely to pursue a more socially responsible agenda. Second, we provide evidence
on why and how CG might strengthen the link between CFP and CSR.
Practical/Policy Implications: Our findings have important implications for corporate regulators and
policy-makers. Since our evidence suggests that better-governed corporations are more likely to be more
socially responsible with a consequential positive effect on CFP, it provides corporate regulators,
managers and policy-makers with a new impetus to develop a more explicit agenda of jointly pursuing CG
and CSR reforms, instead of merely considering CSR as a peripheral component of CG or as an
independent corporate activity.
Keywords: Corporate Governance, Corporate Social Responsibility, Corporate Financial
Performance, Neo-Institutional Theory

1
INTRODUCTION
This study focuses on the relationship between corporate governance (CG) and corporate social
responsibility (CSR). As such, it is at the intersection of two topical and closely-related research strands,
namely: (i) the effects of CG on corporate financial performance (CFP) (Gompers, Ishii, & Metrick, 2003;
Henry, 2008; Bozec & Bozec, 2012); and (ii) the determinants/consequences of a company’s CSR
practices (McGuire, Sundgren, & Schneeweis, 1988; Fifka, 2013). However, studies investigating the link
between a company’s CG and its CSR strategy (Haniffa & Cooke, 2005; Michelon & Parbonetti, 2012)
and/or how a company’s CG might potentially influence the CFP-CSR nexus (Arora & Dharwadkar, 2011;
Ntim, Opong, & Danbolt, 2012a) are very rare. This study, therefore, investigates why and how a
company’s internal CG mechanisms may drive its CSR practices. We also examine why and how the
CSR and CFP association might be intensified by CG.
The past decades have witnessed a significant interest in the extent of CSR practices (Mackenzie,
2007; Jo & Harjoto, 2012). Whilst a large number of reasons have been offered to explain why
corporations may engage in CSR activities (Prior, Surroca, & Tribo, 2008; Young & Marais, 2012),
recent theoretical developments suggest that the substantial growth in CSR activities can also be
explained by institutional context and theory (Aguilera et al., 2007). In particular, neo-institutional theory
suggests that institutional forces, such as economic, political and social institutions can interact to shape,
limit and/or facilitate the diffusion and/or imposition of business practices and innovations in corporations
(DiMaggio & Powell, 1983, 1991; Scott, 1987, 2001). In general such institutional antecedents have been
demonstrated to be driven by two main motives: legitimation (moral/relational) and efficiency
(instrumental) (Aguilera & Cuervo-Cazurra, 2004; Aguilera et al., 2007; Zattoni & Cuomo, 2008).
However, whilst neo-institutional theory has been successfully used in explaining the diffusion and/or
imposition of a number of corporate practices, such as differences in the adoption of international
accounting and CG standards (Aguilera & Jackson, 2003; Yoshikawa et al., 2007; Zattoni & Cuomo,
2008; Judge et al., 2008, 2010), little is known about institutional antecedents and explanations for the

2
rapid proliferation of CSR practices among corporations. This limits current understanding of the main
institutional antecedents of the global diffusion of CSR practices at the organisational level.
Consequently, the current study seeks to extend and apply an overarching
1
neo-institutional
theory to explain differences in CSR practices at the organisational level - with an emphasis on the
theoretical implications of legitimation and efficiency. From a legitimation/moral perspective (Ashforth &
Gibbs, 1990; Suchman, 1995), neo-institutional theory suggests that regulative institutional pressures can
compel economic units to conform to expected social behaviour and international standards. This is
because conforming to such expected social behaviour can enhance legitimacy and social acceptance.
Thus, compliance with good CSR practices in the form of increased CSR disclosures can facilitate
congruence of corporate goals and norms with those of the larger society, and thereby improving
organisational legitimacy. Similarly, the need to maintain good relationships with various corporate
stakeholders (Aguilera et al., 2007), and therefore improving corporate legitimacy can influence
economic actors to engage in or mimic accepted social behaviour (Mizruchi & Fein, 1999). Hence,
corporate engagement in CSR activities can strategically enhance organisational legitimacy by winning
the support of powerful corporate stakeholders, such as governments, politicians, shareholders and trade
unions (Freeman & Reed, 1983; Freeman, 1984).
In parallel, the efficiency/instrumental view of neo-institutional theory predicts that regulative,
cognitive and normative institutional pressures can also compel economic entities to compete for critical
resources in order to protect shareholder interests and maximise corporate performance (Aguilera et al.,
2007; Chen & Roberts, 2010). Thus, corporate investments in socially responsible activities can enhance
efficiency by reducing economic, social, environmental and political costs, but also can increase access to
critical resources, such as finance, business contracts, skilled management, and labour (Pfeffer & Salancik,
1978; Branco & Rodrigues, 2006). Furthermore, greater commitment to CSR can improve corporate
efficiency and maximise CFP by minimising agency conflicts through a reduction in information
asymmetry between managers and corporate stakeholders (Jensen & Meckling, 1976; Rhodes &
Soobaroyen, 2010). Therefore, in consideration of the apparent multi-faceted nature and consequences of