An investigation into the remuneration–CSR nexus and if it can be affected by board gender diversity

• Published date: 11 January 2021
• Pages: 608-625
• Date: 11 January 2021
• DOI: https://doi.org/10.1108/CG-08-2020-0320
• Subject Matter: Strategy,Corporate governance
• Author: Sitara Karim

An investigation into the remuneration–

CSR nexus and if it can be affected by

board gender diversity

Sitara Karim

Abstract

Purpose –This study aims to investigate the relationship between remuneration packages [chief

executive officer (CEO) and director] and independent corporate social responsibility (CSR) practices

(marketplace, environment, community, workplace and money spent on CSR) of 588 Malaysian listed

firms during 2006–2017. Further,the study explored the moderating effect of board gender diversityon

the remuneration-CSRnexus.

Design/methodology/approach –The dynamic estimator; namely, the systemgeneralized method of

moments given by Arellano and Bover (1995) has been used on the data set to control dynamic

endogeneity,unobserved heterogeneityand simultaneity problems.

Findings –Findings indicate a weak relationship between remuneration and CSR where prior CEO

remuneration negativelyinfluences marketplace activities, environment-related activities and workplace

practices. However,directors’ remuneration leavesno effect on socially responsible activities.Moreover,

board gender diversity negatively moderates the CEO remuneration-CSR relationship and an

insignificantmoderating effect has been observedfor directors’ remuneration-CSR nexus.

Practical implications –This study is particularly significant for regulator y bodies of Malaysia e.g. Securities

Commission Malaysia, Bursa Malaysia, policymakers, inves tors and managers. For academia, this study

fetches support from agency theory and overinvestment hy pothesis to explain the relationships.

Originality/value –This paperis novel in providing empirical evidenceon the moderating effect of board

gender diversity on the relationship between remuneration and independent CSR activities for the first

time. Moreover, this study has sourced several theoretical and practical implications. Then, the study

uses a dynamicestimator that caters to the problemsof endogeneity, simultaneityand heterogeneity.

Keywords Agency theory, Board gender diversity, Corporate so cial responsibility, Executive remuneration,

System GMM

Paper type Research paper

1. Introduction

Although every firm needs to perform financially, firms are increasingly expected to behave

in socially responsible ways and consider the interests of stakeholders such as

communities, employees and environmental groups. This trend is caused by changing

regulations but also by emerging investor activism (Parker, 2014). Investor activism has an

effect on broader corporate outcomes and stakeholder issues, such as the firm’s

environmental impact and its involvement in corporate social responsibility (CSR). Investors

may raise both financial, as well as social issues, reflecting their concern for the triple

bottom line of economic, social and environmental issues. In response to these pressures,

an increasing number of firms seek to improvetheir socially responsible activities.

Executive remuneration and CSR has produced a litany of exciting discussions and

debates. An enduring consensus among scholars is the concept that, inherently,

Sitara Karim is based at the

School of Economics,

Finance and Banking,

College of Business,

Universiti Utara Malaysia,

Sintok, Malaysia.

Received 7 August 2020

Revised 31 October 2020

Accepted 8 December 2020

PAGE 608 jCORPORATE GOVERNANCE jVOL. 21 NO. 4 2021, pp. 608-625, ©EmeraldPublishing Limited, ISSN 1472-0701 DOI 10.1108/CG-08-2020-0320

executives, top management team members, chief executive officers (CEOs) are selfish by

nature, and thus are not innately faithful stewards to stakeholders and society. Therefore, it

behooves the stakeholders if their interests are in alignment with that of the firms’ top

management team members. From the purview of CSR, this study contributes to the quest

for finding ways to better align the interestof the firms’ executives with that of society.

Coming under particular scrutiny during these debates has been the value of remuneration

being received by CEOs and other top executives. Though few researchers have been

investigating and raising concerns about the rise in executive pay for a number of years –

the Institute for Public Policy (Anderson et al., 2008) highlights that average CEO pay was

typically 30–40 times the pay of an average worker 30years ago, now averages more than

350 times the pay of the typical worker –for most, such pay was seen as a reward so long

as companies were making and the economy was thriving. The assumption, generally built

on agency theory (Jensen and Meckling,1976) that while overall pay might be increasing, it

would rise and fall to at least some degrees with the profitability of the company. With the

economic crisis, many are now questioning the appropriateness of the levels of

remuneration and even wondering if the structure of remuneration might encourage actions

by executives that contribute to the broadereconomic problems (Miles and Miles, 2013).

Empirical studies on the influence of remuneration (CEO and director) on CSR practices are

extremely low up to now. A possible reason for this could be that traditional economic

theories and empirical research in business economics dominantly address group-, firm-

and country-specific factors and neglect individual characteristics within the board of

directors or top management team (Velte, 2019). The upper echelons theory is based on

the assumption that business actors’ behavior is bounded rationale. Cognitive

characteristics and individual values dominate the decision of top management members

with a major influence on second-tier managers and other employees (Hambrick and

Mason, 1984). In this way, it is assumed that CEOs and directors, with different cognitive

characteristics and individual values, influence the CSR activities in a different manner.

When the literature has overlapped, it has been in examining the ethics of specific

remuneration schemes or in seeing whether particular responsible acts were rewarded

(Berrone and Gomez-Mejia, 2009;Petra and Dorata, 2008). Little, if any work has focused

on the broader question of whether socially responsible firms recognize the potential

conflicts that come with higher levels of executive remuneration, and thus, on average, limit

their pay relative to what is being paid in otherfirms.

Malaysia is an interesting case to study this relationship because of several reasons. For

instance, the financial crises of 1997 and 2008 have made firms most vulnerable to

economic outbursts due to weak and inefficient compliance with corporate governance

codes. Through various amendments in the corporate governance, codes have been

initiated ranging from its very first version of the Malaysian Code on Corporate Governance

(MCCG, 2000) to the latest MCCG (2017); still, there are discrepancies in terms of

compliance of code on corporate governance. Securities Commission Malaysia, as a sole

body to guide the listed firms for ensuring effective corporate governance, has launched its

CG Monitor Report in 2019 to observe the compliance of various steps provided in the

Malaysian Code on Corporate Governance, 2017. The findings of the CG Monitor

(Corporate Governance Monitor) revealed that 685 listed companies showed a departure

from the practice of disclosing CEO remuneration on a named basis. That is to say, firms

are reluctant to reveal the exact amount of remuneration paid to the CEOs with their

respective names. Correspondingly, the substantial departurefrom MCCG (2017) creates a

state of bewilderment for potential shareholders, stakeholders, investors and for the

company itself. In this way, this study is unique in providing fresh insights by linking the

remuneration patternswith CSR activities in Malaysian listed firms.

Correspondingly, the study investigates the moderating effect of board gender diversity on

the relationship between remuneration and CSR. As argued by Baron and Kenny (1986)

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