How does corporate governance influence CSR? In Part 2 of this research feature, Professor Tanusree Jain, Trinity Business School, explores how corporate governance and other mechanisms can positively shape CSR.
By CoBS Editor Megha Sureshkar. Related research: Zaman, R., Jain, T., Samara, G., & Jamali, D. (2020). Corporate Governance Meets Corporate Social Responsibility: Mapping the Interface. Business & Society, 0007650320973415.
Return to Part 1 of this feature
Internal vs. external
Since corporate governance (CG) and corporate social responsibility (CSR) consist of many different elements, it is important to understand that their relationship depends on various factors that may arise from inside and outside the boundaries of the firm. Accordingly, there are internal CG mechanisms that emerge from within the firm – board composition, ownership and managerial incentives – and external CG mechanisms that originate outside the firm – nature of the legal system, the market for corporate control, external auditing, rating organisations, stakeholder activism, and the media.
In liberal market economies (LMEs) and emerging economies, the majority of studies emphasize on internal CG mechanisms and only a few studies focus on external CG. The limited studies conducted in advanced city economies, advanced emerging economies, Arab oil-based economies, coordinated market economies, European peripheral economies and highly coordinated economies also show a similar trend in focus on internal CG. Interestingly, although still in their infancy, more recent studies in LMEs, especially those in the post global financial crisis period, have started to focus on external CG where these studies have almost doubled. However, the ratio of external to internal CG research remains low.
Similar to CG, there is a distinction between CSR mechanisms adopted by firms. Internal CSR mechanisms are aimed at internal audiences and take the form of setting up ethical codes of conduct, employee health and safety, work-life balance, trainings, protection of human rights, provision of equal opportunity, and diversity practices. External CSR mechanisms include CSR actions that target external audiences and incorporate partnerships with charity organisations, philanthropy, environmental and community focused practices, and CSR disclosures and awards.
CSR mechanisms vary across business systems based on the nature of the governance system, regulations, employment and labour conditions, among others. For instance, firms operating in coordinated market economies, highly coordinated and European peripheral economies focus on both internal (employee centric) and external(environmental) CSR mechanisms. In contrast, firms operating in LMEs, notably the US, Australia and New Zealand are more likely to single out external CSR as opposed to internal CSR.
As seen in Part 1 of this research feature, the nature of the CG-CSR relationship is categorized into two strands: CSR as a function of CG, which explores how different configurations of CG systems, structures and processes impact firms’ CSR policies and practices; and, CG as a function of CSR, which employs CSR as a tool for effective and responsible governance. Research in all the clusters is dominated by the portrayal of the former, with scant focus on how CSR influences CG.
More nuggets of discovery
The majority of the studies in LMEs focus on how board characteristics affect CSR. Board gender diversity, board CSR committee, board expertise, board independence, board networking capacity, board diversity on age and race parameters, and multiple directorships are found to be positively associated with CSR. Also, firms with an audit committee demonstrating high expertise positively influences CSR. With respect to CEO traits, the impact of CEO duality (same person holding both the CEO and board chairperson positions in a corporation), tenure, and age, on CSR depicts mixed results.
Delving into research investigating the effect of executive compensation on CSR, brings to light the positive association of CSR-related bonus on CSR activities. The effect of media coverage and legislation pressure on CSR is unclear. With respect to ownership structure, family ownership and CEO shareholding are found to be negatively related to CSR, as family owners are preoccupied with accumulating family financial wealth and consider CSR investments as additional unnecessary costs.
The few studies within LMEs that have investigated CG as a function of CSR highlight that higher CSR investments tend to reduce the total compensation for CEOs. Yet, there is also evidence that firms that tend to adopt measures to be more environmentally responsible reward their CEOs with higher remuneration. The latter suggests how public corporations are a nexus of specific investments made by varied stakeholders with a view to sharing the benefits of team production, and that CEOs who enable an increase in such benefits are remunerated well for performing this function.
Additionally, while higher corporate giving tends to positively influence investor perceptions, create favourable media coverage as well as promote dialogue with shareholder activist groups, such firms exhibit weak corporate governance particularly on board monitoring and increased insider shareholder activity.
- In advanced city economies as well as in Arab-oil based economies, only one study has been found and that portrays CSR as a function of CG. In the former, directors who have concerns for the welfare of all stakeholders are found to positively affect CSR. In the Arab-oil economies, it has been seen that whereas family and government ownerships are positively related to CSR, institutional ownership (held by mutual funds, pension funds, investment banks etc.) has no significant effect. It is also suggested that western mechanisms of sound governance practices, such as the existence of an audit committee and independent directors on boards, do not impact CSR.
- In advanced emerging economies, studies predominantly focus on the effects of board structures on CSR. They highlight that board independence and board gender diversity positively affect CSR, while board size and the presence of a board CSR committee have no effect. Research also shows that CEO duality negatively impacts CSR and that CEOs with political connections are more likely to lead their companies to invest in CSR. Board ownerships negatively impact CSR, while institutional owners, especially pension funds, positively affect CSR.
Only one study was found that portrays CG as a function of CSR. And it mentions that institutional pressures coming from supranational actors, such as UN backed international CSR guidelines, have led companies to adopt sound governance structures since these are perceived to provide the necessary firm level infrastructure to catalyse CSR.
- Within CMEs, research that focuses on CSR as a function of CG stresses the important role that the board of directors plays in catalysing various CSR activities – philanthropy, social performance, internal and external CSR. Particularly, board gender diversity and board CSR committee are positively associated with CSR. However, the impact of board size on CSR is inconclusive, with some studies suggesting a positive effect and others reporting no significant effect. Interesting findings with respect to media coverage affecting the interplay between CG and CSR have also been noted. Specifically, CSR performance of firms with low public ownership is not affected by media coverage whereas firms with greater public ownership are more reactive to media coverage and significantly increase their corporate social engagement. This indicates that firms where majority of shares are held by few owners are driven by their own values in their pursuit of CSR whereas firms with several shareholders do so to accumulate reputational gains and improve corporate image.
Research on CG as a function of CSR suggests that firms, such as natural resource companies, that employ social responsibility to secure a social license to operate, tend to adopt governance structures that enables the setting up of accountability processes to catalyse their CSR practices. In this way, there is evidence of a symbiotic relationship between CSR and CG.
- In emerging economies, research on CSR as a function of CG reveals that companies with an independent audit committee that meets frequently invest more in CSR. At the same time, the effect of board characteristics and ownership structures on CSR is uncertain. Despite these inconclusive findings, research on CEO political connection and executive compensation seem to be in agreement that such attributes are positively related to CSR.
The studies that depict CG as a function of CSR show that CSR positively affects minority investors’ participation in corporate governance and can weaken their perception of the need for outside monitoring. Additionally, firms with better environmental performance reward their top executives with higher remuneration. This indicates the reputation and trust building effects of CSR on governance.
- In European peripheral economies, studies that portray CSR as a function of CG demonstrate that board size is positively related to CSR and CEO duality negatively affects CSR. Regarding the ownership structure, government and foreign ownership are negatively related to CSR. The negative association between state ownership and CSR is counter-intuitive and shows that states may separate their welfare and investment decisions in firms, the latter driven by political and strategic value. There is also evidence to show that media coverage shapes the attitude of independent directors towards CSR who, when subject to media scrutiny, become incentivised to pursue socially responsible strategies to gain prestige and accumulate reputational gains.
Studies that represent CG as a function of CSR have discovered that higher CSR firms exhibit lower managerial opportunism and enhance internal stakeholder commitment, resulting in improved corporate governance.
- Last but not the least, in highly coordinated market economies, Prof. Jain uncovers a single study that portrays CSR as a function of CG. Contextualized in Japan, this study shows that gender diversity on boards and institutional ownership are positively associated with CSR.
Having uncovered these insights, what is the direction to take for future research?
Putting two and two together
In emerging economies, the spread of global production chains has, on one hand, exacerbated social and environmental issues and on the other hand, weakened government’s regulatory capacity. The lack of enforcement from the government has opened avenues for external monitoring of CG and CSR by transnational entities such as international NGOs and other international institutions (e.g. United Nations). Such regulatory gaps have also elicited responses from corporations in the form of transnational private regulatory coalitions such as multi-stakeholder initiatives (MSIs) and business-led private governance initiatives (BLIs) to create voluntary codes of conduct for governance and sustainability.
Going against the tide
Although regulative pressures to report CSR are leading to an increase in explicit CSR communications, this can create a dilemma for companies, especially SMEs, that favour implicit CSR practices, stemming from internally driven values of owners and managers. This calls for more research on whether, to what extent, and in what form should regulatory reforms aim at mandating firms to explicitly communicate their CSR practices, especially when it goes against culturally invoked behaviors.
Impact of the West
Arab-oil economies serve as an important oil hub and rank amongst the richest in the world. However, the dominance of oil centric capitalism in these countries and their associated contribution to climate emergency raise questions on how companies in this region can become environmentally responsible. Within this context, in Saudi Arabia, political and military ties between the Saudi regime and the West, particularly the U.S, have resulted in a western influence on the state’s economic and social priorities such as adopting CG standards, contributing to the UN’s Sustainable Development Goals (SDGs), reducing carbon emissions, and preserving the natural environment. As a consequence, Arab-oil economies can become a fruitful ground for investigating how political and economic relationships at the macro level influence firm level CG-CSR behaviors.
Going hand in hand
Prof. Jain argues that external CG mechanisms along with internal CG mechanisms can collectively shape firm CSR outcomes. For example, within external CG mechanisms, the emergence of new powerful actors i.e., private equity funds, media especially social media, social movements, and sovereign wealth funds have the potential to re-shape CG-CSR dynamics. Similarly, since mechanisms that focus on internal and external stakeholders are strategically different, future research should consider the differences between internal and external CSR actions, the interplay between them, and the consequent governance implications of such orientations.
A mere focus on board of directors(BODs) in relation to CSR paints an incomplete picture of the CG-CSR relationship. BODs face several barriers that may reduce their ability to process information required to effectively monitor management. In addition, as regulatory changes take effect, and the world witnesses the emergence of new institutional investors such as sovereign wealth funds and their mission-driven investments, internal CG mechanisms such as BODs can be viewed as closely interlinked and nested within the external CG dimensions that collectively determine the conditions under which CG variables interactively shape firm-specific outcomes, including CSR.
Informal but important
It is particularly useful to understand the specific characteristics of different world economies, such as the level of trust in societies and the role of the state, among others. For example, an important aspect pertains to how business groups differ across clusters. Within advanced emerging economies and highly coordinated economies, formal business networks and groups such as Chaebols within South Korea and Keiretsu in Japan are prevalent. At the same time, within emerging economies such as China, business groups function through informal relational governance such as Guanxi. Also, oftentimes researchers tend to emphasize on formal rules, rather than on informal institutions such as culture, norms, and religious and philosophical traditions. Given that Arab-oil economies, emerging economies and advanced emerging economies are characterized by a wide variance of informal institutions, these business systems present a rich opportunity to build research at the intersection of CG-CSR and informal institutional effects.
Family, a whole different playing field
Ownership structures of firms vary significantly from country to country in terms of goals, management style and stakeholder perspective. Moreover, recent research suggests that different families pursue different goals, some taking priority over others. As a result, it is essential to study the interplay between the desire for continuous family influence and control, binding social ties, and identification of the family with the business and CSR practices across business systems, while also investigating how different configurations of family, state and outsider ownership structures create differing patterns of CSR practices.
Environmental issues on the rise
Considering the recent surge of environmental issues such as bushfires in Australia, typhoons in Japan, floods in North America and severe drought conditions in South America, and business complicity in natural disasters, there are significant opportunities for CG-CSR research to include diverse environmental parameters to capture CSR issues such as release of toxic chemicals, carbon dioxide emissions, and industrial waste effluent among others.
Context is critical
As the interdependence between CG-CSR becomes more mainstream in the form of integrated reporting frameworks such as ESG and GRI, and the corresponding popularity of sustainability indices rises, it is equally important to understand how different cultural and national contexts view CG-CSR, even potentially including governance within the realms of corporate responsibility. This is both timely and relevant to progress the global agenda on effectively tackling grand challenges and wicked problems, while placing firms and the contexts within which they function at the centre of this puzzle.
In sum, an in-depth examination of the CSR-CG relationship is of critical importance to tackle the alarming increase both in frequency and severity of incidents of irresponsible behaviours and governance on the part of businesses. Through the Volkswagen emissions scandal, the Global Financial Crisis, and the deep water BP oil spill among others, the Achilles heel of business systems has been brought to the fore. Only with an exhaustive, contextualised understanding can improvements to CG-CSR activities be implemented. And with that, episodes like the BP oil spill might finally fade into history never to make a return again.
Read Part 1 of this research feature.
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