Corporate Governance and Corporate Social Responsibility (CSR): The Moderating Roles of Attainment Discrepancy and Organization Slack

• DOI: http://doi.org/10.1111/j.1467-8683.2010.00843.x
• Date: 01 March 2011
• Author: Punit Arora,Ravi Dharwadkar
• Published date: 01 March 2011

Corporate Governance and Corporate Social

Responsibility (CSR): The Moderating Roles of

Attainment Discrepancy and Organization Slack

Punit Arora* and Ravi Dharwadkar

ABSTRACT

Manuscript Type: Empirical

Research Question: Is the relationship between corporate governance mechanisms and corporate social responsibility

(CSR) contingent on satisfaction with f‌irm performance?corg_843136..152

Research Findings/Insights: Our results suggest that while effective corporate governance discourages both positive

(proactive stakeholder relationship management) and negative (violation of regulations and standards) CSR, higher slack

and positive attainment discrepancy lead to higher positive and lower negative CSR, respectively. More signif‌icantly, we

f‌ind that the association between effective corporategovernance and both positive and negative CSR depends on satisfaction

with f‌irm performance as indicated by the levels of slack and attainment discrepancy. Put simply, the impact of corporate

governance on positive CSR is more pronounced under low slack/negative attainment discrepancy conditions, and that on

negative CSR is more pronounced under high slack/positive attainment discrepancy conditions.

Theoretical/Academic Implications: Our study provides robust support for the behavioral theory of the f‌irm. Previous

research has not adequately considered the role of satisfaction with f‌irm performance in studying the impact of corporate

governance on managerial decision-making. We show that the association between corporate governance and CSR dimen-

sions depends on differences in decision-making latitude originating from relative f‌irm performance compared to those of

peer f‌irms.

Practitioner/Policy Implications: First, to understand how effective corporate governance can constrain positive CSR and

more importantly reduce negative CSR. Second, to appreciate that the effectiveness of an organization’s governance

mechanisms is contingent on slack and performance and the marginal returns from improving governance mechanisms

when things are going well may be low.

Keywords: Corporate Governance, Corporate Social Responsibility (CSR), Behavioral Theory of the Firm (BTOF),

Attainment Discrepancy, Organizational Slack

INTRODUCTION

Management scholars have been interested in under-

standing the impact of corporate governance

mechanisms such as ownership and boards of directors

on corporate social responsibility (CSR) ratings (Coffey &

Fryxell, 1991; Johnson & Greening, 1999; Waddock &

Graves, 1997). Scholars examining ownership implications

argue that institutional owners, the dominant class

of owners, are myopic and concerned with quarterly

performance targets, and therefore, reduce CSR expendi-

tures, given the long-term horizons and uncertain outcomes

associated with them (Coffey & Fryxell, 1991). Other schol-

ars argue that institutional investors cannot exit the f‌irm

very easily, therefore undertake more CSR to mitigate the

risk of adverse regulatory action, higher compliance costs,

consumer retaliation, and so on (Neubaum & Zahra, 2006;

Spicer, 1978). To resolve this paradox, scholars posit that

different types of institutional owners may have different

interests in CSR. For example, Johnson and Greening (1999:

564) argue that “some categories of institutionalinvestors act

more as traders concerned predominantly with quarterly

earnings and that others act as long-term investors...more

concerned with a f‌irms social performance because it may

*Address for correspondence: Martin J. Whitman School of Management,721 Univer-

sity Avenue, Syracuse University, Syracuse, NY, 13244, USA. Tel: (315) 443-3468;

E-mail: punit@syr.edu

136

Corporate Governance: An International Review, 2011, 19(2): 136–152

© 2011 Blackwell Publishing Ltd

doi:10.1111/j.1467-8683.2010.00843.x

impact f‌inancial performance over time.” Nonetheless,

the empirical evidence continues to be mixed (Coffey &

Fryxell, 1991; Coffey & Wang, 1998; Graves & Waddock,

1994; Johnson & Greening, 1999; Kassinis & Vafeas, 2002;

Neubaum & Zahra, 2006).

Similarly, scholars examining board implications f‌ind that

the proportion of independent directors on the board has a

diametrically opposite impact on CSR depending on the

studies considered (Coffey & Wang,1998; Johnson & Green-

ing, 1999; Kassinis & Vafeas, 2002; Kesner & Johnson, 1990;

Wang & Coffey, 1992). Some scholars argue that since the

selection of a greater number of independent directors

signals the f‌irm’s intent to pay greater attention to its exter-

nal environment and legitimacy (Pfeffer & Salancik, 1978), it

should be associated with increased CSR expenditures

(Johnson & Greening, 1999). Others argue that as directors

are hired primarily to protect shareholders’ interests: “an

effective board may actually serve to screen and eliminate

philanthropic intentions” (Coffey & Wang, 1998: 1598).

Further, because a vast majority of these directors are hired

for their f‌inancial expertise (Fligstein, 1991), it may be much

easier for them to evaluate historical f‌inancial information

than to make uncertain strategic decisions such as on R&D,

internal innovation, entrepreneurship, and CSR (e.g.,

Baysinger & Hoskisson, 1990; Deutsch, 2005; Lorsch &

MacIver, 1989). In summary, as further encapsulated in

Appendix 1, the relationship between various governance

mechanisms and CSR is still far from clear.

To resolve the ambiguity surrounding these f‌indings, this

study makes three distinctive advances. First, we theorize

that one of the reasons for lack of clarity on the relationship

between corporate governance and CSR could relate to the

substitution effect (e.g., Rediker & Seth, 1995), which refers

to the interdependence among various governance mecha-

nisms. Unlike previous research that usually assesses the

implications of various corporate governance mechanisms

in isolation (Coffey & Wang, 1998; Johnson & Greening,

1999; Kesner & Johnson, 1990), we adapt the recommenda-

tions of Agrawal and Knoeber (1996) and use four gover-

nance variables in our model: independent director

representation, concentrated institutional shareholding,

managerial ownership, and strength of shareholder rights.

Managerial ownership – the f‌irst level of governance – is

expected to provide a direct incentive to managersto under-

take value-maximizing behavior (e.g., Amihud & Lev, 1981;

Davis, 1991; Denis, Denis, & Sarin, 1997; Gedajlovic &

Shapiro, 2002; Morck, Shleifer, & Vishny, 1988). Indepen-

dent directors, tasked with supervision of managerial

decision-making on behalf of shareholders, are the second

layer of governance arrangements. Concentrated institu-

tional owners – the third layer – are assumed to have both

the ability and the means to supervise managerial decision-

making, and thus are expected to act as a secondary means

of securing principals’ (owners’) tighter control over their

agents (managers). Lastly, the threat of takeover by other

f‌irms operates as the f‌inal check on the agents, which essen-

tially implies that if the f‌irms are not well managed they

would be good candidates for takeover by those who

believe they can manage them better. Our choice of these

governance mechanisms not only addresses substitution

possibilities within the internal governance mechanisms

(managerial ownership, institutional ownership concentra-

tion, outsiders on boards) but also considers the potential

effects of strong shareholder rights (or the lack thereof) for

CSR.

Second, previous research has come under increasing

criticism for combining positive and negative dimensions of

CSR (Chiu & Sharfman, 2009; Godfrey, Merrill, & Hansen,

2009; Kacperczyk, 2009; Mattingly & Berman, 2006; Strike,

Gao, & Bansal, 2006). This literature suggests that positive

CSR acts such as sustainable practices, commitment-based

employment practices, corporate philanthropy and effective

relations with local community are not on the same con-

tinuum as avoiding negative CSR acts such as violations of

regulatory guidelines on environment or equal employment

opportunities, health and safety concerns, or controversial

actions such as on human or employment rights. Whileposi-

tive CSR involves proactive stakeholder relationship man-

agement, negative CSR involves reactive compliance with

minimum standards, and hence these should not be com-

bined. In deference to these studies, we make two separate

composite ratings – positive and negative CSR – and run

separate regressions models for each of them. We believe

this helps us in signif‌icantly advancing the debate on the

nature of the relationship between governance and CSR.

Finally, previous research (e.g., Waddock & Graves, 1997)

suggests that when f‌irms perform well, they are more likely

to invest in CSR. We formally incorporate this idea by using

theoretical concepts based in the behavioral theory of the

f‌irm (Cyert & March, 1963) and examine how the concept of

attainment discrepancy – the difference between actual and

aspired performance – determines levels of CSR. Wesuggest

that when a f‌irm is perceived to be doing well, independent

directors or concentrated owners may: 1) not feel the need

for close monitoring; and 2) place greater trust in managers’

judgment, giving them greater latitude in decision-making.

Moreover, in such situations, managers are also likely to deal

with their monitors from a position of strength. Conversely,

if the f‌irm is perceived to be not doing well, managers may

not have much decision-making latitude even under rela-

tively weak governance conditions. We make similar argu-

ments about another behavioral theory of the f‌irm (BTOF)

factor, the concept of slack and how it relates to decision-

making about CSR. Thus, we theorize that under identical

governance conditions, managers could have vastly different

decision-making latitude based on the two BTOF factors,

namely, attainment discrepancy and slack.

THEORY AND HYPOTHESES

DEVELOPMENT

Corporate Governance and CSR

In order to clarify the nature of relationship between corpo-

rate governance and CSR, it is important to make a distinc-

tion between positive and negative CSR so that we can

separately examine the implications of corporate governance

for both enabling effective decision-making (e.g., proactive

sustainability practices) and preventing poor decision-

making (e.g., violation of environmental regulations). This is

important not just from an empirical perspective – previous

CORPORATE GOVERNANCE AND CSR 137

Volume 19 Number 2 March 2011© 2011 Blackwell Publishing Ltd