Board diversity and corporate social responsibility: the moderating role of Shariah compliance

• Pages: 1274-1288
• DOI: https://doi.org/10.1108/CG-01-2019-0022
• Published date: 18 July 2019
• Date: 18 July 2019
• Author: Muhammad Azam,Muhammed Usman Khalid,Syeda Zinnaira Zia
• Subject Matter: Strategy

Board diversity and corporate social

responsibility: the moderating role of

Shariah compliance

Muhammad Azam, Muhammed Usman Khalid and Syeda Zinnaira Zia

Abstract

Purpose –The purpose of this study is to investigate the effectof board diversity on corporate social

responsibility(CSR) practices and the interaction effectof Shariah compliance of firms with religious and

ethicalprinciples.

Design/methodology/approach –A total of 65 firms listed on the Pakistan Stock Exchange(PSX) were

selected. The datawere collected from the companies’ financialreports from 2012 to 2018 (n= 455). The

data were analyzedusing fixed and random effects regressionmodels to test the effect of board diversity

on firms’ CSR activities, while hierarchical moderated regression analysis was used to determine the

moderatingeffects of Shariah compliance.

Findings –The study found evidencefor a moderating effect of Shariah complianceon the relationship

between board diversityand CSR activities. The findings suggest that a high level of Shariahcompliance

together with diverse educational backgrounds and presence of both genders among corporate

memberssignificantly promoted CSR activities.

Research limitations/implications –The present study includedthe demographic variables, gender,

ethnicity and education; but excludedlanguage and culture. The results suggest that the Security and

Exchange Commission of Pakistan should attach more importance to Shariah compliance by firms in

developing their CSR policies to improve social development and human well-being. Policy-makers

should encourage morewomen to become directors on company boards and to increasephilanthropic

and charitable activities. These findings possess important implications for many Islamic countries

irrespectiveof whether they are developed or developing.

Originality/value –To the best of the authors’knowledge, this study provides the first empiricalanalysis

of the relationship between CSR and board diversity from the perspective of Islamic Shariah law. The

findingswill contribute both theoretically and empiricallyto the existing body of knowledge.

Keywords Corporate social responsibility, Shariah compliance, Board diversity

Paper type Research paper

1. Introduction

Corporate social responsibility(CSR) requires firms to allocate funds for social improvement

to promote goodwill towards the company, but there is more to it than just that. Macaulay

et al. (2018) suggested a number of steps that firms could take beyond those required by

law to enhance social well-being. A firm’s CSR activities are governed by the board of

directors (BOD) of the firm and often include environmental protection (Fallahand Mojarrad,

2018), safeguarding the rights of employees (Yoon and Lee, 2016), fairness towards

consumers (Chaudary et al., 2016), as well as various external issues (Laudal, 2012)

affected by the firm’s actions. The BOD is responsible for tailoring the firm’s actions to

benefit all stakeholders. Studiesof this business theory have made it clear that to be socially

responsible, firms need to addressthe needs not only of the shareholders but all individuals

having dealings with the firm. In the modern era, apart from the usual course of daily

Muhammad Azam,

Muhammed Usman Khalid

and Syeda Zinnaira Zia are

all based at the Department

of Business Administration,

Iqra University, Karachi,

Pakistan.

Received 13 January 2019

Revised 12 May 2019

29 May 2019

Accepted 16 June 2019

PAGE 1274 jCORPORATE GOVERNANCE jVOL. 19 NO. 6 2019, pp. 1274-1288, ©Emerald Publishing Limited, ISSN 1472-0701 DOI 10.1108/CG-01-2019-0022