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
This version is available at http://eprints.hud.ac.uk/id/eprint/19541/
The University Repository is a digital collection of the research output of the
University, available on Open Access. Copyright and Moral Rights for the items
on this site are retained by the individual author and/or other copyright owners.
Users may access full items free of charge; copies of full text items generally
can be reproduced, displayed or performed and given to third parties in any
format or medium for personal research or study, educational or not-for-profit
purposes without prior permission or charge, provided:
• The authors, title and full bibliographic details is credited in any copy;
• A hyperlink and/or URL is included for the original metadata page; and
• The content is not changed in any way.
For more information, including our policy and submission procedure, please
contact the Repository Team at: E.mailbox@hud.ac.uk.
http://eprints.hud.ac.uk/
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
