Corporate social responsibility and stakeholder governance around the world

In this paper, we examine the impact of stakeholder governance on corporate social responsibility (CSR) around the world to determine whether CSR is employed as a mechanism to mitigate conflicts of interest between managers and diverse stakeholders, or used as managerial perquisites. To examine this relation properly, we not only employ a large and extensive sample of international firms, but also control for endogeneity by using dynamic panel generalized method of moments (GMM), propensity score matching, and difference-in-difference approach. Our results suggest that stakeholder governance positively influences firms’ CSR engagement with a greater magnitude than board governance after controlling for endogeneity and other confounding factors of traditional corporate governance mechanisms, firm characteristics and national factors. Stakeholders’ influence in CSR engagement is more prevalent when investor protections and board governance are relatively weak.     

Does corporate social responsibility help the survivorship of SMEs and large firms?

Using a sample of 2480 firms from 51 countries covering the period 2010–2015, we find that firms with more effective corporate governance mechanisms are more likely to be more engaged in CSR. Consistent with the stakeholder theory and the conflict resolution model, this result suggests that managers adopt effective governance mechanisms together with CSR engagement in an attempt to mitigate conflicts among stakeholders. Moreover, after controlling for endogeneity and simultaneity issues, we find that both CSR engagement and corporate governance mechanisms have a significantly negative influence on the firms' risk of financial distress measured by the Altman et al. model (1995). Our results also show that the favorable influence of CSR on the firms' capability of survivorship is more pronounced in SMEs than in large firms.     

Stakeholders and the stock price crash risk: What matters in corporate social performance?

This study provides evidence for the differential impacts of corporate social responsibility (CSR) initiatives targeting different stakeholder groups on stock price crash risk. In particular, it highlights CSR's role in mitigating risk and creating shareholder value. Our results reveal that managerial bad news hoarding and the resultant stock crashes are largely determined by the social CSR dimension, and this effect is predominantly seen in undervalued firms. Moreover, social CSR subcategories aimed at specific stakeholder groups (such as the community, employees, or customers) tend to mitigate future crashes. In contrast, firms' environmental initiatives and governance characteristics seem to have trivial effects on stock crashes. Using a quasi-natural experiment, we find that the mitigating effect of social CSR dimension on crash risk is likely to be causal.     

How do independent directors view corporate social responsibility (CSR)? Evidence from a quasi-natural experiment

We investigate how independent directors view corporate social responsibility (CSR). Exploiting the passage of the Sarbanes-Oxley (SOX) Act and the associated exchange listing requirements as an exogenous regulatory shock, we document that independent directors view CSR activities unfavorably. In particular, firms forced to raise board independence reduce CSR engagement significantly relative to those not required to increase board independence. Our results are consistent with the risk-mitigation view and the agency cost hypothesis where managers over-invest in CSR to mitigate their own exposure to nonsystematic risk. The over-investments in CSR are curbed in the presence of a stronger, more independent, board of directors. Several robustness checks confirm the results, including fixed-effects and random-effects regressions, dynamic panel data analysis, instrumental-variable analysis, propensity score matching, Lewbel's heteroscedastic identification, and Oster's method for coefficient stability. We also confirm the risk-mitigation hypothesis by showing that CSR activities reduce firm risk significantly. Our research design is much less vulnerable to endogeneity and is therefore likely to show a causal effect of board independence on CSR.     

Tradeoff between corporate investment and CSR: The moderating effect of financial slack,workforce slack,and board gender diversity

This paper investigates the existence of a tradeoff between corporate investment (i.e., tangible and intangible) and corporate social responsibility (CSR) in the presence of the moderating effects of financial slack, human resources slack, and board gender diversity. Based on an international sample of 44,129 firm-year observations between 2005 and 2019, we find that corporate investment leads to significantly lower CSR engagement in all three pillars (i.e., environmental, social, and governance). Furthermore, while financial slack positively moderates between corporate investment and CSR, human resources slack and board gender diversity negatively moderate between corporate investment and CSR. This outcome is robust in terms of endogeneity concerns, alternative sampling, alternative investment proxies, CSR regulations, and timing impacts. Hence, we find the dominance of the shareholders' perspective rather than the stakeholders' perspective. The results outline the tradeoff between corporate investment and CSR and the role of contingencies in this tradeoff relationship.     

Analyst coverage,corporate social responsibility,and firm value: Evidence from China

This paper examines how analyst coverage affects firms' engagement in corporate social responsibility (CSR). Using data on Chinese listed companies from 2010 to 2017, we find that (1) analyst coverage significantly enhances CSR engagement; (2) ownership structure, political connection, corporate governance, and media coverage moderate that association; (3) a plausible mechanism is that analyst coverage increases CSR by increasing site visits from institutional investors and improving firms' internal controls. In addition, the interaction between analyst coverage and CSR engagement has an economically sizeable incremental effect on firm value. Overall, our findings indicate that financial analysts play a critical external monitoring and informational role for organizations.     

Corporate social responsibility and earnings forecasting unbiasedness

We investigate the relationship between corporate social responsibility (CSR) and I/B/E/S analysts’ earnings per share (EPS) forecasts using a large sample of US firms for 1992–2011. Based on literature findings, we decompose the CSR effect into four factors: accounting opacity, corporate governance, stakeholder risk, and overinvestment. We find that all of them significantly affect both the absolute forecast error on EPS and its standard deviation controlling for forecast horizon; number of analysts and forecasts; and year, industry, and broker house effects. Consistently with our ex ante hypotheses, overinvestment, stakeholder risk, and accounting opacity have a positive effect, increasing both dependent variables, while corporate governance quality has a negative effect. A crucial aspect of our findings is that high CSR quality in terms of the four factors (i.e., accounting transparency, high corporate governance quality, stakeholder risk mitigation, and absence of overinvestment) contributes to making earnings forecasts unbiased as unbiasedness is generally met in the subsample of the Top CSR quality companies and markedly violated in the subsample of the Bottom CSR companies. We also document that overinvestment and stakeholder risk are sufficient to produce this effect.     

Does CSR matter in times of crisis? Evidence from the COVID-19 pandemic

The debate over how firm stakeholder engagement is tied to preserving shareholder wealth has received growing attention in recent years, especially in the wake of the COVID-19 crisis. Against this backdrop, we examine the relation between corporate social responsibility (CSR) and stock market returns during the COVID-19 pandemic-induced market crash and the post-crash recovery. Using a sample of 1750 U.S. firms and two major sources of CSR ratings, we find no evidence that CSR affected stock returns during the crash period. This result is robust to various sensitivity tests. In additional cross-sectional analysis, we find some supporting evidence, albeit weak, that the relation between CSR and stock returns during the pandemic-related crisis is more positive when CSR is congruent with a firm's institutional environment. We also find that Business Roundtable companies, which committed to protecting stakeholder interests prior to the pandemic, do not outperform during the pandemic crisis. We conclude that pre-crisis CSR is not effective at shielding shareholder wealth from the adverse effects of a crisis, suggesting a potential disconnect between firms' CSR orientation (ratings) and actual actions. Our evidence suggests that investors can distinguish between genuine CSR and firms engaging in cheap talk.     

Deviations from Expected Stakeholder Management,Firm Value,and Corporate Governance

We propose that high‐quality corporate governance may mitigate agency costs related to value‐destroying investments in stakeholder management (SM). Using an unbalanced panel of 9,051 firm‐year observations for 1,631 firms, we find that deviations from expected stakeholder management (ESM) are increasing in chief executive officer (CEO) portfolio delta. We find, however, that deviations from ESM are negatively related to proxies for effective board monitoring. We also document that the effect of governance mechanisms varies by industry (consumer or industrial orientation) and SM dimension. The results indicate that corporations with good governance pursue shareholder value maximization while constraining unnecessary investment in stakeholders.     

Modeling board governance,environmental expertise,and social engagement effects on firm environmental performance: Panel data evidence

Prior research establishes that board governance quality measures positively impact firm environmental performance. In this study, we propose an empirical model using structural equation modeling (SEM) to explore additional enhancements to board governance, namely board environmental expertise (BEE) and board social engagement (BSE) and show that they incrementally improve firm environmental performance (EN). Our proposed latent construct measure, BEE, goes beyond traditionally dichotomous measures used in the literature. BEE has a total effect on firm environmental performance that is over two thirds the size of effects arising from traditional governance quality measures (GOV). The second enhancement of our model is the focus on BSE, a novel construct to the CSR literature. In addition to possessing environmental knowledge enabling expertise, we demonstrate that a board with a deeper commitment to society will further improve firm environmental performance. Using SEM, we find that the indirect effects of GOV, BEE, and BSE on EN represent a substantial portion of the total effects on EN. Hence, ignoring these indirect effects would result in substantial understatement of the effects of improvements to governance on environmental performance.     

Corporate Social Responsibility,Corporate Performance,and Pay-Performance Sensitivity—Evidence from Shanghai Stock Exchange Social Responsibility Index

Based on annual data of listed companies on Shanghai Stock Exchange (SSE) through 2009–2013, this article examines three hypotheses: first, whether a firm’s taking corporate social responsibility (CSR) affects corporate performance; second, whether corporate governance and a firm’s age positively moderate the relationship between CSR and performance; and third, whether CSR positively moderates the magnitude/direction of linkage between a firm’s performance and top management/director compensation (pay-performance sensitivity, PPS). Three proxies for CSR engagement are constructed by a firm’s inclusion in the SSE Social Responsibility Index. Empirical evidence generally shows that firms engaging in CSR tend to obtain superior performance in terms of higher profitability. However, firm’s age and sound corporate governance have little additional benefit on the effect of a firm engaging in CSR on performance. Finally, greater CSR engagement is associated with larger PPS. Principal outcome does not shift under two-stage estimation and propensity score matching (PSM) to correct for sample self-selection of CSR engagement.     

Board structure and market performance: Does one solution fit all?

We investigate the relationship between internal corporate governance and market performance across multiple countries, utilizing a comprehensive data set comprising 77,440 firm observations from 15 European Union countries over the period 2002-2018. Specifically, we examine the impact of board characteristics, including size, independence, gender diversity, CEO duality, and classified boards, on market performance. Our findings reveal that CEO duality is generally negatively related to returns, whereas independent directors and board diversity are positively related to market performance. We observe a positive association between staggered boards and market performance as well as Tobin's Q, aligning with the EU's emphasis on stakeholder investments. Upon analyzing the data at the country level, we identify that the links between board structure and performance vary by country, and there isn't a single variable that is consistently related to market returns or Tobin's Q. These divergent findings indicate that there is no universally applicable corporate governance solution that can be recommended for companies throughout Europe.     

Cultural diversity among directors and corporate social responsibility

We examine the relationship between board diversity and a firm's corporate social responsibility (CSR) performance in a novel way. The relation between visible forms of board diversity (gender, ethnic, age diversity) and CSR may arise endogenously due to visible diversity management. In contrast, we focus on cultural diversity (based on directors' ancestry), which is less visible. We demonstrate that cultural diversity, unlike visible diversity, is not considered in director replacements, consistent with cultural diversity not being affected by firms signaling their CSR commitment by ‘looking’ diverse. We show that board cultural diversity is positively related to CSR performance. This result holds when we control for visible board diversity, directors' foreignness and diversity in nationalities, and endogeneity. We also show that CSR performance decreases when a firm increases its visible board diversity at the cost of cultural diversity.     

Impact of directors' networks on corporate social responsibility: A cross country study

We investigate the impact of directors' networks on corporate social responsibility (CSR) activities by using an unbalanced panel data of 2023 publicly listed firms from 17 countries during 2003–2018. Drawing on network theory, stakeholder theory, and institutional theory, we find that directors' networks is positively related to their decision of CSR activities. Additionally, we find a positive relation between directors' networks and CSR during financial crises. Our results still hold after a set of sensitivity tests. The findings in our study expand the academic literature related to directors' networks and CSR activities, and assist policymakers and investors in understanding the importance of directors' networks as determining factor of CSR policies.     

Chair-CEO generation gap and bank risk-taking

Poor bank governance has disastrous consequences for economies as the 2007–2009 financial crisis has shown. In the aftermath, board diversity is identified as an effective mechanism to enhance bank governance. Diversity, creating cognitive conflict between board members, is expected to enhance board's independence of thought to better perform monitoring and advising functions. Age is a key demographic measure and age dissimilarity between the chair and the CEO in non-financial firms leads to better economic outcomes (Goergen, Limbach, & Scholz, 2015). In this paper, we examine whether chair-CEO age dissimilarity can mitigate banks' excessive risk-taking behaviour. Using a unique sample of 100 listed banks in Europe between 2005 and 2014, we find that age difference between the chair and the CEO reduces bank risk-taking. A chair-CEO generational gap –defined as a minimum of 20 years' age difference– has a larger impact in reducing risk-taking.     

Board governance and corporate performance

We examine the link between the monitoring capacity of the board and corporate performance of UK listed firms. We also investigate how firms use the flexibility offered by the voluntary governance regime to make governance choices. We find a strong positive association between the board governance index we construct and firm operating performance. Our results imply that adherence to the board‐related recommendations of the UK Corporate Governance Code strengthens the board's monitoring capacity, potentially helping mitigate agency problems, but that investors do not value it correspondingly. Moreover, in contrast to prior UK findings suggesting efficient adoption of Code recommendations, we find that firms at times use the Code flexibility opportunistically, aiming to decrease the monitoring capacity of the board, which is followed by subsequent underperformance. This finding questions the effectiveness of the voluntary approach to governance regulation followed in the UK and in many countries around the world.     

Corporate social responsibility and stakeholder value maximization: Evidence from mergers

Using a large sample of mergers in the US, we examine whether corporate social responsibility (CSR) creates value for acquiring firms' shareholders. We find that compared with low CSR acquirers, high CSR acquirers realize higher merger announcement returns, higher announcement returns on the value-weighted portfolio of the acquirer and the target, and larger increases in post-merger long-term operating performance. They also realize positive long-term stock returns, suggesting that the market does not fully value the benefits of CSR immediately. In addition, we find that mergers by high CSR acquirers take less time to complete and are less likely to fail than mergers by low CSR acquirers. These results suggest that acquirers' social performance is an important determinant of merger performance and the probability of its completion, and they support the stakeholder value maximization view of stakeholder theory.     

Multi-dimensional corporate social responsibilities and stock price crash risk: Evidence from China

Worldwide, there has been an ongoing debate about whether corporate social responsibility (CSR) can lead to better financial market performance, or whether corporations can do well by doing good. Working with a sample of all listed companies in China from 2010 to 2017, this study examines the impacts of three dimensions of CSR on stock price crash risk. We find that CSR, especially firms' responsibility to the environment and stakeholders, significantly reduces stock price crash risk, while social contributions such as charitable donations have no significant effect on stock crash risk. Attracting long-term institutional investors is the primary mechanism through which CSR can curb crash risk. Mitigating earnings management is also a channel through which overall CSR and stakeholder responsibility contribute to a lower stock crash risk. Finally, we find that stakeholder responsibility and environmental responsibility can help improve stock market performance.     

Ranking Corporate Governance of Australia's Top Companies: A Decade On

The Horwath/University of Newcastle (UoN) Corporate Governance Reports commenced in 2002 and were among the first to assess Australia's largest companies on their corporate governance structures and policies. Initiated prior to the release of the 2003 Australian Securities Exchange Corporate Governance Council's Principles of Good Corporate Governance and Best Practice Recommendations, and at a time of increased focus on corporate governance failures, the reports attracted much attention from both the media and stakeholder groups. This paper reports the findings of applying the Horwath/UoN methodology to the relevant corporate governance disclosures of the 2012 annual reports of Australia's top 200 companies. Comparison to the original analysis of 2002 annual report disclosures shows a significant improvement across all areas of corporate governance by Australia's top companies. However, there remain some areas of concern, particularly in respect to board diversity, risk management and insider share trading policies.