Controlling owner type, state capitalism, and corporate social responsibility in Africa

• Published date: 01 November 2022
• Author: Jimi Kim,Hoje Jo
• Date: 01 November 2022
• DOI: http://doi.org/10.1111/corg.12404

SPECIAL ISSUE ARTICLE

Controlling owner type, state capitalism, and corporate social

responsibility in Africa

Jimi Kim

1

| Hoje Jo

2

1

UNSW Business School, University of New

South Wales, Sydney, New South Wales,

Australia

2

Leavey School of Business, Santa Clara

University, Santa Clara, California, USA

Correspondence

Jimi Kim, University of New South Wales,

Sydney, NSW 2052, Australia.

Email: jimi.kim@unsw.edu.au

Abstract

Research Question/Issue: We theorize tensions between the dual purposes of

financial gains and social impact and examine how varieties of controlling owner type

and state capitalism influence corporate social responsibility (CSR) practices in weak

institutional settings. Specifically, we investigate the impact of the state as a majority

investor (via state-owned enterprises) and as a strategic investor (via government-

owned vehicles such as sovereign wealth funds) on CSR.

Research Findings/Insights: Using 512 firm-year observations from 2007 to 2015,

we find that similar to a widely held corporation, state-owned enterprises are

negatively associated with social and environmental practices. Yet, when the state

serves as a strategic supporter and investor (i.e., sovereign wealth funds), a firm tends

to exhibit greater CSR practices. Our findings are robust to random-effect models

and the two-stage least squares instrumental variable approach.

Theoretical/Academic Implications: We examine the influence of controlling

shareholders on CSR with a focus on state capitalism in Africa, highlighting the role

of controlling owners that may fill institutional voids especially when sovereign

wealth funds are the largest shareholders. By focusing on Africa, this study broadens

the understanding of CSR and controlling ownership by eliminating assumptions and

preconditions stemming from developed-country contexts.

Practitioner/Policy Implications: This study offers insights to policy makers

interested in promoting social and environmental practices. As such, we disentangle

the mechanisms behind social and environmental engagements by government, state

investor (i.e., sovereign wealth funds), and widely held corporate investors,

contributing to the understanding of underresearched domains and guiding not only

managers but also policy makers. Our results encourage policy makers to pay

attention to specific characteristics of state capitalism.

KEYWORDS

corporate governance, Africa, controlling ownership, corporate social responsibility (CSR),

institutional theory

1|INTRODUCTION

“Over and above generating financial returns for clients,

through its impact-investing programme, the PIC (Public

Investment Corporation) seeks to generate social returns

by investing in projects that ensure inclusive growth.

The PIC supports the United Nations' Sustainable

Development Goals and considers environmental, social

Received: 30 August 2020 Revised: 26 August 2021 Accepted: 2 September 2021

DOI: 10.1111/corg.12404

Corp Govern Int Rev. 2022;30:765–782. wileyonlinelibrary.com/journal/corg © 2021 John Wiley & Sons Ltd 765

and governance issues in all its investments.”—PIC is a

sovereign wealth fund wholly owned by the

government of the Republic of South Africa,

represented by the Minister of Finance

1

The literature on corporate social responsibility (CSR) has suggested

that CSR engagements are often associated with owner identity

(Aguilera et al., 2006; Graves & Waddock, 1994; Johnson &

Greening, 1999; Neubaum & Zahra, 2006). Owners have motivations

and abilities to monitor and enforce their interests, with implications

for corporate governance and firm value (Aguilera et al., 2015;

Goranova et al., 2010; Kavadis & Castaner, 2014; Thomsen &

Pedersen, 2000; Zattoni & Minichilli, 2009), and these motivation and

abilities are not uniform across institutions (Hall & Soskice, 2001;

Kavadis & Castañer, 2019; Zattoni & Judge, 2012). Among others, his-

torically, governments manage wholly owned state-owned enterprises

(SOEs) and, more recently and gradually, support private firms as stra-

tegic investors with ownership vehicles such as sovereign wealth

funds (SWFs; Musacchio & Lazzarini, 2014; Musacchio et al., 2015).

Previous studies mainly analyze the overall impact of ownership

(e.g., the influence of total shareholdings from institutional investors)

on CSR activities. The literature has suggested that ownership from

employees, individuals, and corporate ownership is associated with

relatively lower CSR engagement (Dam & Scholtens, 2012), whereas

pension fund ownership (Johnson & Greening, 1999) and institutional

and foreign investors (Oh et al., 2011) are found to have a positive

effect on CSR. Overall, studies have paid little attention to the largest

controlling shareholder, which has a greater influence on corporate

affairs. This difference is remarkable because controlling shareholders

may expropriate minority shareholders to pursue their private inter-

ests (Shleifer & Vishny, 1986) and actively exert influence on major

firm decisions, unlike passive minority investors.

In addition, little attention has been paid to the traits of different

forms of state capital in weak institutional settings: SOEs with direct

majority state capital versus firms with the state as a strategic investor

via government-owned vehicles such as SWFs. As institutional theory

indicates, organizational behaviors depend on institutional features

(North, 1990), and in less developed institutional settings institutional

void often exists (Khanna & Palepu, 2000). Given that state capital

could fill the institutional void, the relation between controlling own-

ership and CSR may be different in less developed countries, which

suffer from economic and political uncertainties, institutional voids,

and resource constraints (Adeleye et al., 2019; Campbell, 2007; Jamali

et al., 2008; Matten & Moon, 2008). Prior studies based on emerging

market context confirm that institutions do indeed affect social

engagement levels: The absence of positive peer pressure and social

norms affects firm CSR in China (Yin & Zhang, 2012), and board char-

acteristics such as ownership, duality, or independence influence firm

CSR disclosure in Gulf countries (Garas & ElMassah, 2018).

In this study, we explore the controlling owner's behavior in deal-

ing with tensions between the dual purposes of economic and social

growth in a weak institutional context where the need for economic,

social, and environmental growth is more salient. Specifically, we

examine the role of state capital as the largest controlling

shareholder—state (i.e., government), SWFs, and widely held

corporations—on social and environmental engagements. We then

develop a theory around why differences may exist among (a) SOEs

with majority state control, (b) firms with the state as a strategic inves-

tor via state-owned vehicles such as SWFs, and (c) widely held corpo-

rations, including both domestic and foreign ownership as the largest

controlling shareholders. The literature on the role of state in CSR has

yet to evaluate the differing impact of government in weak institu-

tions. Based on the theory of varieties of institutional systems

(Carney & Witt, 2014; Fainshmidt et al., 2018; Whitley, 2003), we

examine whether SOEs in a weak institution are effective in fostering

CSR practices in Africa. To the extent that the institutional environ-

ments of Africa governments would share certain commonalities with

developmental states, the government can intervene in a way that

aligns organizational decisions with public interests. Yet, to the extent

that the African government shares the characteristics of a predatory

state (Carney & Witt, 2014), characteristics of weak institutions such

as chronic inefficiency, managerial agency problems, and corruption

may result in lower CSR. When state serves as strategic investors

such as SWF, we argue that it is effective in promoting CSR as a

nonpecuniary utility maximizer. Finally, we posit that widely held cor-

porations as controlling shareholders reduce CSR mainly because of

social and cultural backgrounds, and double void economies (Ofori-

dankwa & Julian, 2011). Using combined data from the Thomson

Reuters ASSET4, Thomson ONE, and Worldscope databases, we find

supporting evidence. The levels of social and environmental practices

are explained as a function of the largest controlling owner type, using

a sample of 512 firm-year observations from South Africa, Egypt,

Morocco, and Nigeria for 2007–2015.

This study contributes to the literature on nonmarket strategy,

corporate governance, and international business in three ways. First,

by focusing on weak institutional settings, this study broadens our

understanding of CSR and controlling ownership by eliminating

assumptions and preconditions stemming from developed-country

contexts. In doing so, it responds to the call for moving corporate gov-

ernance discipline forward in an African context (Adeleye et al., 2019;

George et al., 2016; Kolk & Rivera-Santos, 2016). Second, this study

investigates ownership typologies and CSR in the emerging context,

and develops and theorizes controlling shareholders' impact on CSR.

In particular, it disentangles the mechanisms behind social and envi-

ronmental engagements by government, public investors, and private

entities, contributing to our understanding of under-researched

domains and guiding not only managers but also policy makers.

Finally, to the best of our knowledge, this is the first study to quanti-

tatively examine the influence of controlling shareholders on CSR with

a focus on African public and private sectors. Methodologically, it

addresses endogeneity by adopting the two-stage least squares

instrumental variable (2SLS-IV) approach. By so doing, we respond to

the call for more broad and quantitative studies targeting Africa, given

that those countries usually do not have extensive, multiyear observa-

tions, which in turn limits our understanding (George et al., 2016;

Julian & Ofori-Dankwa, 2013).

766 KIM AND JO