Board’s financial expertise and corporate social responsibility disclosure in China

• DOI: https://doi.org/10.1108/CG-08-2020-0329
• Pages: 716-736
• Published date: 10 February 2021
• Date: 10 February 2021
• Subject Matter: Strategy,Corporate governance
• Author: Rehana Naheed,Aws AlHares,Yasir Shahab,Rukhsana Naheed

Board’sf‌inancial expertise and corporate

social responsibility disclosure in China

Rehana Naheed, Aws AlHares, Yasir Shahab and Rukhsana Naheed

Abstract

Purpose –This study aims to investigatethe impact of the board’s financial expertise (BFE)on corporate

social responsibility(CSR) disclosure in China.

Design/methodology/approach –Using a sample of Chinese listed firms from 2009-2016 (making

3272 firm-yearobservations), this study uses the generalizedmethod of moments (GMM) and paneldata

estimationtechniques.

Findings –Using the resource dependence theory, the findings of this study are twofold. First, the is

positivelyassociated with the disclosure level of CSR. Second,this positive impact is more pronounced in

firms with femaleCEO and state ownership. The findings are robust to the potentialissues of endogeneity

and sensitivityanalyses.

Practical implications –Practically,the findings hold value for the senior management of Chinese firms

to ensurethe presence of financial experts in boardsto yield both financial and non-financialoutcomes.

Social implications –This study points out how financial experts on boards influence the societal

outcomes via disclosure of CSR. Financial experts encourage participation in social and sustainable

practiceswhich creates a positive image of thefirm not only in the eyes of society but alsofor investors.

Originality/value –This study is uniqueand contributes to the extant literature byexamining the impact

of a new attribute,i.e. the BFE on the level of CSR disclosurein China.

Keywords Corporate social responsibility disclosure, Board’s f‌inancial expertise,

Resource dependence theory, China

Paper type Research paper

1. Introduction

Corporate social responsibility (CSR) has long been a strategic concern for companies

around the world, in response to the varying interest shown by investors and

consumers. In 2015, approximately 92% of the world’s largest companies produce CSR

reports and appreciates CSR as a pertinent tool to develop a long-lasting relationship

between companies and their customers (Aljarah et al., 2018). Consequently,

companies’ boards and management respond (either positively or negatively) to ensure

the implementation of CSR practices (Albuquerque et al., 2019). The current study

bridges the extant literature by examining a new attribute of a board of directors (BOD)

as an antecedent of CSR disclosure. In particular, this study examines the impact of the

board’s financial expertise (BFE) in promoting CSR disclosure by using a sample of the

Chinese listed firms. This study further examines how the relationship between the BFE

and CSR disclosure varies across:

䊏state-owned enterprises (SOEs) and non-state-owned enterprises (Non-SOEs); and

䊏male and female CEOs.

Our empirical analysis is based on theoretical insights of the resource dependence theory

(Barney, 1991;Wernerfelt,1984).

Rehana Naheed is based at

Department of Business

Administration, Lahore

Leads University, Lahore,

Pakistan. Aws AlHares is

based at Department of

Accountancy and Finance,

University of Huddersfield,

Huddersfield, UK.

Yasir Shahab is based at

School of Accounting, Xijing

University, Xian, China.

Rukhsana Naheed is based

at Department of

Economics, University of

Haripur, Haripur, Pakistan.

Received 13 August 2020

Revised 30 November 2020

9 December 2020

19 December 2020

Accepted 22 December 2020

This research was supported

by the “Funds for High-Level

Talents of Xijing University

(2019)”, Grant/Award Number:

XJ19B02.

PAGE 716 jCORPORATE GOVERNANCE jVOL. 21 NO. 4 2021, pp. 716-736, ©Emerald Publishing Limited, ISSN 1472-0701 DOI 10.1108/CG-08-2020-0329

Resource dependence theory was introduced by Wernerfelt (1984) and later developed by

Barney (1991). Theoretically, resource dependence theory argues that the competencies

and resources of firms are compatible and of high significance. It further suggests that

firms’ resources that are valuable, inimitable, rare, and non-substitutable can help firms to

sustain for a long-term period. These resources, termed as strategic resources, can help

firms in attaining sustainable competitive advantage, which ultimately can result in superior

performance over time and, eventually long-term success. Prior literature has used

resource dependence theory while examining different organizational phenomena,

including CSR (Branco and Rodrigues, 2006;Cho and Pucik, 2005;Khan et al., 2019b

among others). However, so far, limited research has been done on the relationship

between the board’s characteristics and CSR disclosureof the firms.

In particular, previous literature (while using different theoretical lenses) has studied the

relationship between board characteristics and CSR disclosure activity (Jang et al.,2019;

Khan et al.,2013;Khan et al., 2019b;Orazalin, 2019;Patro et al.,2018;Shahab et al.,

2020a). The board of directors is responsible for creating value for the firm by endorsing

and practicing CSR disclosure thatacts in shareholder’s best interest, and their governance

practices determine the disclosure of firms (Harjoto and Wang, 2020;Khan et al., 2013).

Khan et al. (2013) have further analyzed that board independence, CEO duality, and

ownership structure play a significant role in certifying organizational legality with CSR

disclosure. Besides, ownership structure (e.g. state, block, and institutional ownership), the

board size and board independence are significant contributors to the CSR disclosure

process in China and other countries (Ongsakul et al.,2020;Shahab and Ye, 2018;

Sundarasen et al., 2016). Moreover, outside directors’ tenures significantly affect the

advising and monitoring roles of BOD and have a significant impact on CSR performance

(Patro et al.,2018). Further, it is also identified that the financial expertise of the Chief

Finance Officer (CFO) is a significant contributorto the CSR disclosure activities of the firms

(Sun and Rakhman, 2013). Similarly,in a recent study, Shahab et al. (2020b) find that CEOs

with financial expertise are more inclined to focus on sustainable performance and

environmental reporting. The findings of these studies imply that financial expertise is an

important characteristic of top managers, which can yield not only financial performance

but also non-financial performance and engagement in sustainable and social activities.

Nevertheless, the existing research on the board characteristics and CSR disclosure is

limited due to the following reasons.

First, incidents like accounting scandals at Enron, HealthSouth, Tyco, and WorldCom in 19 90,

the “2007 financial crisis” and others have lowered investors’ confidence and have resulted in

a mandatory requirement to have financial experts on the bo ard. Accordingly, CalPERS in

1997, the Blue Ribbon Commission report in 1998, the Sarbanes–Oxley Act (SOX) act in 2002,

and the New York Stock Exchange report in 2004 led to new laws and rules that made it

necessary for every firm to have at least one financial expert on the board (Agrawal a nd

Chadha, 2005). So, the presence of financial experts on the board is necessary from the

perspective of both financial and non-financial outcomes (Oussii and Klibi, 2020). Previous

research has mainly focused on three board attributes, i.e. the board size, board

independence, and BFE in the corporate governance literature. CSR is affected by board size

and board independence (Chang et al., 2017;Desche

ˆnes et al., 2015;Jo and Harjoto, 2012;

Lau et al., 2016;Ntim and Soobaroyen, 2013;Shahab and Ye, 2018). However, little evidence

exists on the non-financial outcomes of the financial expertise of the BOD (Gu

¨ner et al.,2008;

Sarwar et al.,2018). This paper seeks to address this issue.

Secondly, China has diverse standing on the content of CSR disclosure. For example in

CSR reporting and its evaluation, Chinese firms focus on stakeholders, while the western

world focuses on investors and consumers (Yu et al., 2017). So, the study in the Chinese

context is different than the otherdeveloped economies context (Shahab et >al.,2018).

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