Corporate Governance and Performance in Socially Responsible Corporations: New Empirical Insights from a Neo‐Institutional Framework

• Author: Teerooven Soobaroyen,Collins G. Ntim
• Date: 01 September 2013
• Published date: 01 September 2013
• DOI: http://doi.org/10.1111/corg.12026

Corporate Governance and Performance

in Socially Responsible Corporations:

New Empirical Insights from a Neo-

Institutional Framework

Collins G. Ntim* and Teerooven Soobaroyen

ABSTRACT

Manuscript Type: Empirical

Research Question/Issue: This paperinvestigates the relationship between corporate governance (CG) and corporate social

responsibility (CSR) and, consequently, examines whether CG can positively moderate the association between corporate

f‌inancial performance (CFP) and CSR.

Research Findings/Insights: Using a sample of large listed corporations from 2002 to 2009, we f‌ind that, on average,

better-governed corporations tend to pursue a more socially responsible agenda through increased CSR practices. We also

f‌ind that a combination of CSR and CG practices has a stronger positive effect on CFP than CSR alone, implying that CG

positively inf‌luences the CFP-CSR relationship. Our results are robust to controlling for different types of endogeneities, as

well as alternative CFP, CG and CSR proxies.

Theoretical/Academic Implications: The papergenerally contributes to the literature on CG, CSR, and CFP. Specif‌ically, we

make two main new contributions to the extant literature by drawing on new insights from an overarching neo-institutional

framework. First, we show why and how better-governedcorporations are more likely to pursue a more socially responsible

agenda. Second, we provide evidence on why and how CG might strengthen the link between CFP and CSR.

Practitioner/Policy Implications: Our f‌indings have important implications for corporate regulators and policy-makers.

Since our evidence suggests that better-governed corporations are more likely to be more socially responsible with a

consequential positive effect on CFP, it provides corporate regulators, managers and policy-makers with a new impetus to

develop a more explicit agenda of jointly pursuing CG and CSR reforms, instead of merely considering CSR as a peripheral

component of CG or as an independent corporate activity.

Keywords: Corporate Governance, Corporate Financial Performance, Corporate Social Responsibility, Neo-

Institutional Theory

INTRODUCTION

This study focuses on the relationship between corporate

governance (CG) and corporate social responsibility

(CSR). As such, it is at the intersection of two topical and

closely-related research strands, namely: (i) the effects of CG

on corporate f‌inancial performance (CFP) (Bozec & Bozec,

2012; Gompers, Ishii, & Metrick, 2003; Henry, 2008); and

(ii) the determinants/consequences of a company’s CSR

practices (McGuire, Sundgren, & Schneeweis, 1988; Fifka,

2013). However, studies investigating the link between a

company’s CG and its CSR strategy (Haniffa & Cooke, 2005;

Michelon & Parbonetti, 2012) and/or how a company’s CG

might potentially inf‌luence the CFP-CSR nexus (Arora &

Dharwadkar, 2011; Ntim, Opong, & Danbolt, 2012a) are very

rare. This study, therefore, investigates why and how a com-

pany’s internal CG mechanisms may drive its CSR practices.

We also examine why and how the CSR and CFP association

might be intensif‌ied by CG.

The past decades have witnessed a signif‌icant interest in

the extent of CSR practices (Jo & Harjoto, 2012; Mackenzie,

2007; Orlitzky, Siegel, & Waldman, 2011; Roberts, 1992).

Whilst a large number of reasons have been offered to

explain why corporations may engage in CSR activities

*Address for correspondence: Collins Gyakari Ntim, School of Management,Univer-

sity of Southampton, Southampton SO17 1BJ, UK. Tel: 44(0) 141330 7677; Fax: 44(0)

141 330 4442; E-mail: c.g.ntim@soton.ac.uk

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© 2013 John Wiley & Sons Ltd

doi:10.1111/corg.12026

(Frye, Nelling, & Webb, 2006; Prior, Surroca, & Tribó, 2008;

Young & Marais, 2012), recent theoretical developments

suggest that the substantial growth in CSR activitiescan also

be explained by institutional context and theory (Aguilera,

Rupp, Williams, & Granapathi, 2007). In particular, neo-

institutional theory suggests that institutionalforces, such as

economic, political, and social institutions can interact to

shape, limit, and/or facilitate the diffusion and/or imposi-

tion of business practices and innovations in corporations

(DiMaggio & Powell, 1983, 1991; Scott, 1987, 2001). In

general, such institutional antecedents have been demon-

strated to be driven by two main motives: legitimation

(moral/relational) and eff‌iciency (instrumental)(Aguilera &

Cuervo-Cazurra, 2004; Aguilera et al., 2007; Zattoni &

Cuomo, 2008). However, whilst neo-institutional theory has

been successfully used to explain the diffusion and/or

imposition of a number of corporate practices, such as dif-

ferences in the adoption of international accounting and CG

standards (Aguilera & Jackson, 2003; Judge, Douglas, &

Kutan, 2008, Judge, Li, & Pinsker, 2010; Yoshikawa,

Tsui-Auch, & McGuire, 2007; Zattoni & Cuomo, 2008), little

is known about institutional antecedents and explanations

for the rapid proliferation of CSR practices among corpora-

tions. This limits current understanding of the main institu-

tional antecedents of the global diffusion of CSR practices at

the organizational level.

Consequently, the current study seeks to extend and apply

an overarching1neo-institutional theory to explain differ-

ences in CSR practices at the organizational level – with an

emphasis on the theoretical implications of legitimation and

eff‌iciency. From a legitimation/moral perspective (Ashforth

& Gibbs, 1990; Suchman, 1995), neo-institutional theory sug-

gests that regulative institutional pressures can compel eco-

nomic units to conform to expected social behavior and

international standards. This is because conforming to such

expected social behavior can enhance legitimacy and social

acceptance. Thus, compliance with good CSR practices in

the form of increased CSR disclosures can facilitate congru-

ence of corporate goals and norms with those of the larger

society, thereby improving organizational legitimacy. Simi-

larly, the need to maintain good relationships with various

corporate stakeholders (Aguilera et al., 2007), and therefore

improving corporate legitimacy, can inf‌luence economic

actors to engage in or mimic accepted social behavior

(Mizruchi & Fein, 1999). Hence, corporate engagement in

CSR activities can strategicallyenhance organizational legiti-

macy by winning the support of powerful corporate stake-

holders, such as governments, politicians, shareholders, and

trade unions (Freeman, 1984; Freeman & Reed, 1983).

In parallel, the eff‌iciency/instrumental view of neo-

institutional theory predicts that regulative, cognitive, and

normative institutional pressures can also compel economic

entities to compete for critical resources in order to protect

shareholder interests and maximize corporate performance

(Aguilera et al., 2007; Chen & Roberts, 2010). Thus, corporate

investments in socially responsible activities can enhance

eff‌iciency by reducing economic, social, environmental, and

political costs, but also can increase access to critical

resources, such as f‌inance, business contracts, skilled man-

agement, and labor (Branco & Rodrigues, 2006; Pfeffer &

Salancik, 1978). Furthermore, greater commitment to CSR

can improve corporate eff‌iciency and maximize CFP by

minimizing agency conf‌licts through a reduction in informa-

tion asymmetry between managers and corporate stake-

holders (Jensen & Meckling, 1976; Rhodes & Soobaroyen,

2010). Therefore, in consideration of the apparent multi-

faceted nature and consequences of CSR and CG practices

(Devinney, 2009; Jensen, 2002; Parker, 2005), there is an

increasing consensus that these practices have to be exam-

ined from a theoretical perspective, which encompasses

both legitimation and eff‌iciency motives (Judge et al., 2008,

2010; Zattoni & Cuomo, 2008).

Thus, this study makes two main new contributions to the

extant literature by examining the links among CFP, CG, and

CSR. First, by relying on a generalized neo-institutional

theory, which emphasizes the legitimation and eff‌iciency

effects of CSR, we seek to investigate the extent to which a

f‌irm’s internal CG structures mayinf‌luence its CSR practices.

Specif‌ically, using an integrated CG index, as well as alterna-

tive CG mechanisms, we investigate the relationship

between CG and CSR mechanisms. Our results contribute to

the literature by showing that, on average, better-governed

corporations are also more likely to pursue a more socially

responsible agenda. In this case, our organizational-level

f‌indings complement existing studies that have employed

neo-institutional theory to primarily predict institutional

factors that drive the diffusion of business practices at the

country level (Aguilera & Cuervo-Cazurra,2004; Judge et al.,

2008, 2010; Yoshikawa et al., 2007; Zattoni & Cuomo, 2008).

Second, the considerable numbers of studies that have

examined the effect of CSR on CFP report conf‌licting evi-

dence (Becchetti & Ciciretti, 2009; Mahoney & Roberts, 2007;

McGuire et al., 1988). Whilst this has been attributed prima-

rily to potential methodological weaknesses and endogene-

ities (Jo & Harjoto, 2011; McWilliams & Siegel, 2000), recent

studies that adequately control for such problems still gen-

erally report similar mixed results (Cai, Jo, & Pan, 2012;

Scholtens, 2007, 2008). However, given that the decision to

engage in CSR activities emanates from corporate boards

and top management (Haniffa & Cooke, 2005; McWilliams,

Siegel, & Wright, 2006; Michelon & Parbonetti, 2012), we

conjecture that CG is likely to have a positive effect on the

CFP-CSR link. Our results contribute to the extant literature

by demonstrating that a combination of CSR and CG has a

stronger positive effect on CFP compared to the effect of

CSR alone.

The rest of the paper is structured as follows. The next

section discusses the theoretical framework. The following

sections discuss the related literature, outline the research

context and design, and present the empirical analyses,with

the concluding remarks containing a summary and a brief

discussion of policy implications.

A NEO-INSTITUTIONAL FRAMEWORK FOR

CSR PRACTICES

While the concept of “institution” has been def‌ined in dif-

ferent ways (DiMaggio & Powell, 1983, 1991; Scott, 1987,

2001), it generally refers to accepted socio-economic beliefs,

norms, and practices associated with different aspects of

society, such as education, law, politics, religion, and work

CORPORATE GOVERNANCE AND SOCIAL RESPONSIBILITY 469

Volume 21 Number 5 September 2013© 2013 John Wiley & Sons Ltd