Skip to main content

Advertisement

SpringerLink
Log in

The Causal Effect of Corporate Governance on Corporate Social Responsibility

  • Published:
Journal of Business Ethics Aims and scope Submit manuscript

Abstract

In this article, we examine the empirical association between corporate governance (CG) and corporate social responsibility (CSR) engagement by investigating their causal effects. Employing a large and extensive US sample, we first find that while the lag of CSR does not affect CG variables, the lag of CG variables positively affects firms’ CSR engagement, after controlling for various firm characteristics. In addition, to examine the relative importance of stakeholder theory and agency theory regarding the associations among CSR, CG, and corporate financial performance (CFP), we also examine the relation between CSR and CFP. After correcting for endogeneity bias, our results show that CSR engagement positively influences CFP, supporting the conflict-resolution hypothesis based on stakeholder theory, but not the CSR overinvestment argument based on agency theory. Furthermore, firms’ CSR engagement with the community, environment, diversity, and employees plays a significantly positive role in enhancing CFP.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1

Similar content being viewed by others

Notes

  1. Baron (2010) distinguishes between corporate social performance (CSP) and CSR, where the latter involves a moral duty to undertake social activities. In contrast, CSP need not arise from moral duties. CSP pertains to social activities that satisfy two conditions. First, the activities are beyond the requirements of the law and regulation. Second, the activities involve the private provision of public goods or private redistribution. Consistent with Baron (2010), our CSR implies CSP, but CSP need not be morally motivated, because CSP could be strategically chosen to serve the firm’s interests.

  2. Another related study is Baron et al. (2011) that describe three measurable markets in which firms operate: a product market, a capital market, and a market for social responsibility, as urged by shareholders, government, NGOs, and social activists. They suggest that consumer industries evidence a positive relationship between financial performance and social performance, while industrial firms have a negative relationship. That differs from overall corporations, which exhibit no strong empirical relationship between their social activities and their financial performance. They show that in the consumer sphere, at least, companies can get a financial edge by behaving socially responsibly.

  3. According to the management literature summarized by Margolis and Walsh (2003), over 120 studies between 1971 and 2001 examine the empirical relation between CSR and CFP, and the results are largely inconclusive. They suggest that assessments of previous studies are complicated because of the studies’ various imperfections, such as measurement problems related to both CSR and CFP, omitted variable problems, a lack of necessary analyses of causality and/or endogeneity, a lack of methodological rigor, and a lack of theory. Nonetheless, these studies stress that bad social performance is detrimental to a firm’s financial performance. Although, it would be abstruse to draw a definite conclusion because of the imperfect nature of many studies, the review of the empirical CSR literature conducted by Margolis and Walsh (2003) indicates a positive relation between CSR and CFP, and Baron et al. (2011) suggest that consumer industries evidence a positive association between CFP and CSR, while industrial firms have an inverse association.

  4. Prior et al. (2008) interpret Jensen’s (2002) and Fuller and Jensen’s (2002) view as an adoption of a compromised stakeholder-agency perspective, where a firm is conceived not only as a bilateral relation between managers and shareholders, but also as a multilateral set of relations among stakeholders.

  5. CSR could increase firm value through other channels. For instance, having loyal shareholders who prefer to invest in socially responsible firms might lead a firm to have small volatility and stable share prices. Or if CSR engagement lowers the firm’s borrowing costs, CSR engagement enhances firm value.

  6. In fact, the KLD database has few firms that actually have exclusionary items. We find only 756 firm-year observations that report exclusionary items. The rest have zero exclusionary items. For the KLD strength scores, we find 4,174 firm-year observations. For the combined strength and concern scores, we have 6,479 firm-year observations. In addition, while the KLD database reflects whether a company is engaged in CSR activities and includes a list of the types of activities, it does not report how much each firm invests in CSR activities. Although, we are not aware of the existence of CSR investment data, the availability of such data could provide additional benefits.

  7. Tobin’s q is widely used as a measure of firm value in accounting, finance, and economics. See, for e.g., Chung and Jo (1996), among others. Following Chung and Jo (1996), Tobin’s q is calculated as: {[market value of common stock + book value of preferred stock + book value of long-term debt + book value of current liabilities − (book value of current assets − book value of Inventories)]/book value of total assets}. Thus, we use Tobin’s q to measure firm value. Accounting and finance literature typically uses ROA to measure firm’s operating performance. Thus, we examine this operating performance as well.

  8. Sample-selection bias and endogeneity bias refer to two distinct problems, both entailing distinct solutions. In general, sample-selection bias refers to problems in which the dependent variable is observed only for a restricted, nonrandom sample. Endogeneity arises when an independent variable included in the model is potentially a choice variable, correlated with unobservables relegated to the error term. The dependent variable, however, is observed for all observations in the data (see Millimet 2001).

  9. We also examine the association between the KLD exclusionary scores and ADJTOBINQ. Our untabulated results suggest that as anticipated, the KLD exclusionary scores from alcohol, tobacco, military, and nuclear-related revenues are inversely associated with CFP.

  10. This result is available upon request.

References

  • Aguilera, R., Rupp, D., Williams, C., & Ganapathi, J. (2007). Putting the S Back in CSR: A Multi-level theory of social change in organizations’. Academy of Management Review, 32(3), 836–863.

    Article  Google Scholar 

  • Angrist, J. (2000). Estimation of limited-dependent variable models with dummy endogenous regressors: simple strategies for empirical practice, NBER#248.

  • Barnea, A., & Rubin, A. (2010). Corporate social responsibility as a conflict between shareholders. Journal of Business Ethics, 97, 71–86.

    Article  Google Scholar 

  • Baron, D. (2010). Business and its environment (6th ed.). Upper Saddle River: Pearson Prentice Hall.

    Google Scholar 

  • Baron, D., Harjoto, M., & Jo, H. (2011). The economics and politics of corporate social performance. Business and Politics, 13(2), 1–46 (Article 1).

    Article  Google Scholar 

  • Bebchuk, L., & Cohen, A. (2005). The costs of entrenched boards. Journal of Financial Economics, 78, 409–433.

    Article  Google Scholar 

  • Bebchuk, L., Cohen, A., & Ferrell, A. (2009). What matters in corporate governance? Review of Financial Studies, 22(2), 783–827.

    Article  Google Scholar 

  • Bertrand, M., & Mullainathan, S. (2003). Enjoying the quiet life? Corporate governance and managerial preferences. Journal of Political Economy, 111, 1043–1075.

    Article  Google Scholar 

  • Beurden, P., & Gössling, T. (2008). The worth of values—a literature review on the relation between corporate social and financial performance. Journal of Business Ethics, 82, 407–424.

    Article  Google Scholar 

  • Bhimani, A., & Soonawalla, K. (2005). From conformance to performance: The corporate responsibilities continuum. Journal of Accounting and Public Policy, 24, 165–174.

    Article  Google Scholar 

  • Bowen, H. (1953). Social responsibilities of the business-man. New York: Harper.

    Google Scholar 

  • Bushman, R., Piotroski, J., & Smith, A. (2005). Insider trading restrictions and analysts’ incentives to follow firms. Journal of Finance, 60, 35–66.

    Article  Google Scholar 

  • Cadbury, A. (2000). The corporate governance agenda. Journal of Corporate Governance, Practice-Based Papers, 8, 7–15.

    Article  Google Scholar 

  • Calton, J., & Payne, S. (2003). Coping with paradox. Business and Society, 42, 7–42.

    Article  Google Scholar 

  • Campbell, H. (1996). Understanding risk and return. Journal of Political Economy, 104, 298–345.

    Article  Google Scholar 

  • Carroll, A. (1979). A three-dimensional conceptual model of corporate social performance. Academy of Management Review, 4, 497–505.

    Google Scholar 

  • Carroll, A. (1991). The pyramid of corporate social responsibility: Toward the moral management of organizational stakeholders. Business Horizons, 34, 39–48.

    Article  Google Scholar 

  • Carroll, A. (1999). Corporate social responsibility. Business & Society, 38(3), 268.

    Article  Google Scholar 

  • Carroll, A. (2000). Ethical challenges for business in the new millennium: corporate social responsibility and models of management morality. Business Ethics Quarterly, 10(1), 33–42.

    Article  Google Scholar 

  • Carroll, A. (2008). The history of corporate social responsibility: concepts and practices. In A. Crane, A. McWilliams, D. Matten, J. Moon, & D. Siegel (Eds.), Oxford handbook of corporate social responsibility. Oxford: Oxford University Press.

    Google Scholar 

  • Cespa, G., & Cestone, G. (2007). Corporate social responsibility and managerial entrenchment. Journal of Economics and Management Strategy, 16, 741–771.

    Article  Google Scholar 

  • Cheung, Y., Tan, W., Ahn, H., & Zhang, Z. (2010). Does corporate social responsibility matter in Asian emerging markets? Journal of Business Ethics, 92, 401–413.

    Article  Google Scholar 

  • Chung, K., & Jo, H. (1996). The impact of security analysts’ monitoring and marketing functions on the market value of firms. Journal of Financial and Quantitative Analysis, 31(4), 493–512.

    Article  Google Scholar 

  • Donaldson, T., & Preston, L. (1995). The stakeholder theory of the corporation: Concepts, evidence, and implications. Academy of Management Review, 20(1), 65–91.

    Google Scholar 

  • Donham, W. (1927). The social significance of business. Harvard Business Review, 4, 406–419.

    Google Scholar 

  • Fama, E., & French, K. (1997). Industry costs of equity. Journal of Financial Economics, 43, 153–197.

    Article  Google Scholar 

  • Fisman, R., Heal, G., & Nair, V. (2005). Corporate social responsibility: Doing well by doing good? Working Paper, Wharton School, University of Pennsylvania.

  • Freeman, R. (1984). Strategic management: A stakeholder approach. Massachusetts: Pitman Publishing Inc.

    Google Scholar 

  • Freeman, R. (1994). The politics of stakeholder theory: Some future directions. Business Ethics Quarterly, 4(4), 409–421.

    Article  Google Scholar 

  • Friedman, M. (1970). Money and income: Comment on Tobin. Quarterly Journal of Economics, 84, 318–327.

    Article  Google Scholar 

  • Fuller, J., & Jensen, M. (2002). Just say no to Wall street: Courageous CEOs are putting a stop to the earnings game and we will all be better off for it. Journal of Applied Corporate Finance, 14(4), 41–46.

    Article  Google Scholar 

  • Garcia-Castro, R., Anno, M., & Canela, M. (2010). Does social performance really lead to financial performance? Accounting for endogeneity. Journal of Business Ethics, 92, 107–126.

    Article  Google Scholar 

  • Gatewood, R., & Carroll, A. (1991). Assessment of ethical performance of organization members: A conceptual framework. Academy of Management Review, 16(4), 667–690.

    Google Scholar 

  • Goel, A., & Thakor, A. (2008). Overconfidence, CEO selection, and corporate governance. Journal of Finance, 63(6), 2737–2784.

    Article  Google Scholar 

  • Gompers, P., Ishii, J., & Metrick, A. (2003). Corporate governance and equity prices. Quarterly Journal of Economics, 118, 107–155.

    Article  Google Scholar 

  • Gompers, P., Ishii, J., & Metrick, A. (2010). Extreme governance: An analysis of dual-class firms in United States. Review of Financial Studies, 23(3), 1051–1088.

    Article  Google Scholar 

  • Greene, W. (1993). Econometric analysis (5th ed.). Englewood Cliffs: Prentice-Hall.

    Google Scholar 

  • Hamilton, S., Jo, H., & Statman, M. (1993). Doing well while doing good? The investment performance of socially responsible mutual funds. Financial Analyst Journal, 49, 62–66.

    Article  Google Scholar 

  • Harjoto, M., & Jo, H. (2011). Corporate governance and CSR nexus. Journal of Business Ethics, 100(1), 45–67.

    Article  Google Scholar 

  • Harris, M., & Raviv, A. (2008). A theory of board control and size. Review of Financial Studies, 21(4), 1797–1832.

    Article  Google Scholar 

  • Heckman, J. (1976). The common structure of statistical models of truncation, sample selection and limited dependent variables and a simple estimator for such models. Annals of Economic and Social Measurement, 5, 475–492.

    Google Scholar 

  • Heckman, J. (1979). Sample selection as a specification error. Econometrica, 47, 153–161.

    Article  Google Scholar 

  • Heckman, J., & Robb, R., Jr. (1985). Alternative methods for evaluating the impact of interventions, Chap. 4. In J. Heckman & B. Singer (Eds.), Longitudinal analysis of labor market data. New York: Cambridge University Press.

    Chapter  Google Scholar 

  • Hermalin, B., & Weisbach, M. (1998). ‘Endogenously chosen boards of directors and their monitoring of the CEO. American Economic Review, 88, 96–118.

    Google Scholar 

  • Hermalin, B., & Weisbach, M. (2003). Boards of directors as an endogenously determined institution: A survey of the economic literature. FRBNY Economic Policy Review, 9, 7–26.

    Google Scholar 

  • Hill, R. P., Ainscough, T., Shank, T., & Manullang, D. (2007). Corporate social responsibility and socially responsible investing: A global perspective. Journal of Business Ethics, 70, 165–174.

    Article  Google Scholar 

  • Hillman, A., & Keim, G. (2001). Shareholder value, stakeholder management and social issues: What’s the bottom line? Strategic Management Journal, 22, 125–139.

    Article  Google Scholar 

  • Jamali, D. (2006). Insights into triple bottom line integration from a learning organization perspective. Business Process Management Journal, 12, 809–821.

    Article  Google Scholar 

  • Jamali, D., Safieddine, A., & Rabbath, M. (2008). Corporate governance and corporate social responsibility synergies and interrelationships. Corporate Governance: An International Review, 16(5), 443–459.

    Article  Google Scholar 

  • Jensen, M. (2002). Value maximization, stakeholder theory, and the corporate objective function. Business Ethics Quarterly, 12, 235–256.

    Article  Google Scholar 

  • Jensen, M., & Meckling, W. (1976). Theory of firm: Managerial behavior, agency costs, and capital structure. Journal of Financial Economics, 3, 305–360.

    Article  Google Scholar 

  • Jo, H., & Harjoto, M. (2011). Corporate governance and firm value: The impact of corporate social responsibility. Journal of Business Ethics, 103(3), 351–383.

    Article  Google Scholar 

  • Jo, H., & Kim, Y. (2007). Disclosure frequency and earnings management. Journal of Financial Economics, 84, 561–590.

    Article  Google Scholar 

  • Jo, H., & Kim, Y. (2008). Ethics and disclosure: A study of the financial performance of firms in the seasoned equity offerings market. Journal of Business Ethics, 80, 855–878.

    Article  Google Scholar 

  • Lim, T. (2001). Rationality and analysts’ forecast bias. Journal of Finance, 56, 369–385.

    Article  Google Scholar 

  • Linck, J., Netter, J., & Yang, T. (2008). The determinants of board structure. Journal of Financial Economics, 87(2), 308–328.

    Article  Google Scholar 

  • Malmendier, U., & Tate, G. (2005). CEO overconfidence and corporate investment. Journal of Finance, 60, 2661–2700.

    Article  Google Scholar 

  • Margolis, J., & Walsh, J. P. (2003). Misery loves companies: Rethinking social initiatives by business. Administrative Science Quarterly, 48, 268–305.

    Article  Google Scholar 

  • McWilliams, A., & Siegel, D. (2001). Corporate social responsibility and firm financial performance: Correlation or misspecification? Strategic Management Journal, 21, 603–609.

    Article  Google Scholar 

  • Millimet, D. (2001). What is the difference between “endogeneity” and “sample selection bias”? Working paper, Southern Methodist University.

  • Modigliani, F., & Miller, M. (1958). The cost of capital, corporate finance, and the theory of investment. American Economic Review, 48, 261–297.

    Google Scholar 

  • Moffitt, R. (1999). New developments in econometric methods for labor market analysis, Chap. 24. In O. Ashenfelter & D. Card (Eds.), The handbook of labor economics, Vol. IIIA. Amsterdam: North-Holland.

    Google Scholar 

  • Morck, R., & Yang, F. (2001). The mysterious growing value of the S&P 500 membership. Working Paper, University of Alberta.

  • Prior, D., Surroca, J., & Tribo, J. (2008). Are socially responsible managers really ethical? Exploring the relationships between earnings management and corporate social responsibility. Corporate Governance: An International Review, 16(3), 160–177.

    Article  Google Scholar 

  • Raheja, C. (2005). Determinants of board size and composition: A theory of corporate boards. Journal of Financial and Quantitative Analysis, 40, 283–306.

    Article  Google Scholar 

  • Ricart, J., Rodriguez, M., & Sanchez, P. (2005). Sustainability in the boardroom: An empirical investigation of Dow Jones Sustainability World Index leaders. Corporate Governance, 5, 24–41.

    Article  Google Scholar 

  • Scherer, A., Palazzo, G., & Baumann, D. (2006). Global rules and private actors. Towards a new role of the TNC in global governance. Business Ethics Quarterly, 16, 502–532.

    Google Scholar 

  • Shin, H., & Stulz, R. (2000). Firm value, risk, and growth opportunities. NBER Working Paper #7808.

  • Spitzeck, H. (2009). The development of governance structures for corporate responsibility. Corporate Governance, 9, 495–505.

    Article  Google Scholar 

  • Tobin, J. (1958). Estimation of relationships for limited dependent variables. Econometrica, 26, 24–36.

    Article  Google Scholar 

  • Whetten, D., Rands, G., & Godfrey, P. (2002). What are the responsibilities of business to society? In A. Pettigrew, A. Thomas & R. Whittingen (Eds.), Handbook of strategy and management (pp. 373–408). London: Sage.

    Google Scholar 

  • Wood, D. (1991). Corporate social performance revisited. Academy of Management Review, 16, 691–718.

    Google Scholar 

Download references

Acknowledgments

We appreciate many valuable comments provided by guest editors of the special issue of JBE, Michele Andreaus and Antonino Vaccaro, two anonymous referees, Luc Van Liedekerke, and other 2010 EBEN annual conference participants. Harjoto acknowledges Julian Virtue Professorship endowment for financial support. Donna Maurer provided editorial assistance.

Author information

Authors and Affiliations

  1. Department of Finance, Leavey School of Business, Santa Clara University, 500 El Camino Real, Santa Clara, CA, 95053-0388, USA

    Hoje Jo

  2. Graziadio School of Business and Management, Pepperdine University, 24255 Pacific Coast Highway, Malibu, CA, 90263, USA

    Maretno A. Harjoto

Authors
  1. Hoje Jo
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Maretno A. Harjoto
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Hoje Jo.

Appendix

Appendix

See Tables 8, 9, and 10.

Table 8 List of the strength, concern, and exclusionary items in the KLD database
Full size table
Table 9 Variable definitions and measures
Full size table
Table 10 Calculation of the CSR composite index
Full size table

Rights and permissions

Reprints and permissions

About this article

Cite this article

Jo, H., Harjoto, M.A. The Causal Effect of Corporate Governance on Corporate Social Responsibility. J Bus Ethics 106, 53–72 (2012). https://doi.org/10.1007/s10551-011-1052-1

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10551-011-1052-1

Keywords

Search

Navigation