Does Ownership Type Matter for Corporate Social Responsibility?

• Date: 01 May 2012
• DOI: http://doi.org/10.1111/j.1467-8683.2011.00907.x
• Author: Lammertjan Dam,Bert Scholtens
• Published date: 01 May 2012

Does Ownership Type Matter for Corporate

Social Responsibility?

Lammertjan Dam and Bert Scholtens*

ABSTRACT

Manuscript Type: Empirical

Research Question/Issue: This study examines how different types of owners relateto corporate social responsibility (CSR).

Research Findings/Insights: We use f‌irm-level data for more than 600 European f‌irms from 16 countries and 35 industries

for 2005. We f‌ind that ownership by employees, individuals, and f‌irms is associated with relatively poor corporate social

policies of the f‌irms they invest in. In contrast, the holdings by banks and institutionalinvestors as well as those by the state

appear to be neutral in this respect.

Theoretical/Academic Implications: This study develops and tests notions as to how particular types of owners could have

a specif‌ic impact on the f‌irm’s CSR. The relative value put upon CSR can differ along different types of owners. This results

from their different economic roles in society. The study providesempirical support for the relationship between ownership

type and CSR policies in Europe. As such, it provides a new focus on the content of shareholder activism, namely that

shareholder background has to be taken into account. Another innovation is that we show it is important to account for the

multidimensional nature of CSR as well.

Practitioner/Policy Implications: This study offers a new perspective for f‌irms, investors and other stakeholders about

portfolio investments and CSR. As we f‌ind that it does matter who invests, corporate engagement policies can be directed

much more effectively. In particular, the investors who act as intermediaries appear to be the most sensitive ones in this

respect. Our study suggests thatf‌irms should take the background of their shareholders into account in relation to their CSR

strategy. Furthermore, our study helps stakeholders to direct their efforts more effectively. It also provides a perspective for

executives and investment managers of multinational f‌irms to consider if and how they can create social value next to

shareholder value. We suggest that policy makers promote the transparency of ownership information as well as that of

CSR performance.

Keywords: Corporate Governance, Corporate Social Responsibility, Firm Policy, Investor Activism, Investor Type

INTRODUCTION

We investigate whether ownership type does matter for

corporate social responsibility (CSR). CSR is about the

impact of f‌irm performance on people and the environment

while taking care that prof‌its are such that the corporation

remains viable (Blowf‌ield & Murray, 2008; Heal, 2005). Lo

and Sheu (2007) argue that CSR is a value-increasing strat-

egy. Many other researchers have investigated how people

and the environment connect with prof‌its at the level of

the f‌irm (for an overview, see Margolis & Walsh, 2001, 2003;

Margolis, Elfenbein, & Walsh, 2007). The evidence is mixed,

with most studies pointing at a neutral relationship, which

suggests that accounting for people and the environment

does not signif‌icantly impact on prof‌its. Furthermore,

several studies suggest that differences in corporate gover-

nance havean impact on CSR (Aguilera, Williams, Conley, &

Rupp, 2006; Neubaum & Zahra, 2006). It is within this realm

that we posit our hypothesis that ownership type mattersfor

CSR. So far, this issue has almost exclusively been investi-

gated for institutional investors. We will investigate how

various types of shareholders relate to the CSR of the f‌irms

they invest in. This is important for the shareholders them-

selves as it ref‌lects their potential impact on people and the

environment. It is also important for f‌irms who want to

create social value next to shareholder value. Furthermore, it

can help stakeholders direct their efforts more effectively.

There are several def‌initions of CSR and there are several

ways to measure it (see Wood, 2010). Blowf‌ield and Murray

(2008) f‌ind that the def‌initions of CSR share the belief that

*Address for correspondence: Bert Scholtens,Department of Economics, Econometrics

& Finance, Facultyof Economics and Business, University of Groningen, P.O.Box 800,

9700 AV, Groningen,The Netherlands. Tel: 31-503637064; E-mail: l.j.r.scholtens@rug.nl

233

Corporate Governance: An International Review, 2012, 20(3): 233–252

© 2012 Blackwell Publishing Ltd

doi:10.1111/j.1467-8683.2011.00907.x

companies have a responsibility for the common good and

that CSR actions basically are voluntary, that is that they go

beyond what is legally required. The def‌initions emphasize

different elements. The main areas of CSR appear to be

leadership, vision and values, marketplace activities, work-

force activities, supply chain activities, stakeholder engage-

ment, community activities and environmental activities

(Blowf‌ield & Murray, 2008). At the f‌irm level, Harjoto and Jo

(2011) suggest four motives as to why f‌irms might engage

with CSR: f‌irst, management wants to build their reputation

as a good global citizen (Barnea & Rubin, 2010); second, it

can be a strategic choice by CEOs to generate support from

stakeholders in order to reduce the probability of CEO turn-

over in a future period (Cespa & Cestone, 2007); third, via

CSR the f‌irm can signal quality in the broadest sense of the

word (Fisman, Heal, & Nair, 2005; Siegel & Vitaliano, 2007);

and fourth, f‌irms use CSR to reduce conf‌licts of interest

between managers and stakeholders (Calton & Payne, 2003;

Jensen, 2001; Scherer, Palazzo, & Baumann, 2006).

Our aim is to f‌ind out whether and how ownership type is

connected with CSR. In this respect, we depart from the

fourth motive put forward by Harjoto and Jo (2011), i.e., CSR

as conf‌lict resolution, and we ask whether CSR might differ

with different types of investors. Is the presence of institu-

tional investors benef‌icial to CSR policies of the f‌irm? The

relative value placed on CSR can differ because the share-

holders have a different role and position in society and

because of their size, which can give rise to economies of

scale and scope. For example, f‌inancial institutions and

banks are intermediaries who manage risk and money on

behalf of others; f‌irms and employees predominantly have a

strategic agenda; individuals, like employees, usually are

hampered by scale and informational disadvantages; the

state has to make do with a wide range of (conf‌licting) goals.

The connection between investor type and CSR is an impor-

tant issue as the literature suggests thatthere is a demand for

CSR from multiple stakeholders (Brammer & Millington,

2008; McWilliams, Siegel, & Wright, 2006). Furthermore,

Arora and Dharwadkar (2011) suggest that behavioral traits

impact on the associationbetween corporate governance and

CSR dimensions.

To f‌ind out how different types of shareholders connect

with CSR, we investigate multinational f‌irms in 16 European

countries and 35 industries in 2005.1We analyze different

types of investors in connection with CSR for multinational

enterprises. We f‌ind that with the state, banks, and institu-

tional investors, there is no signif‌icant relationship with

CSR. However, in the case of ownership by f‌irms, individu-

als, and employees, we f‌ind that this goes together with

relatively poor CSR performance.

This research is distinct from the existing literature in

several respects. First, we investigate European multina-

tional enterprises from a large number of countries and

from different industries. Most research so far is about one

country or compares a small number of countries. Given the

internationaldifferences in ownership, it is important to take

a broader perspective. Second, apart from the institutional

investors that prevail in most studies, we also include

several non-f‌inancial investors (state,f‌irms, individuals, and

employees) in our analysis. Third, we perform a thorough

empirical investigation into the relationship between own-

ership and CSR. We look into an aggregate measure of CSR

and also investigate three constituting dimensions of CSR:

environment, ethics and stakeholders. Bird, Hall, Momente,

and Reggiani (2007) and Margolis et al. (2007) argue that

taking account of this type of heterogeneity is crucial when

studying CSR. Next, we apply the factors in a regression

analysis, accounting for industry effects and for f‌irm hetero-

geneity. We conclude that ownership does matter for CSR

indeed, but that it differs by type of owner as well as by

dimension of CSR.

The structure of this paper is as follows. We f‌irst provide

the background about ownership type in connection with

CSR and we motivate our hypotheses. Then, we introduce

our data and the methodology. Next, we present and discuss

the results. Finally, we draw conclusions on the relationship

between ownership type and CSR policies.

BACKGROUND AND HYPOTHESES

The relationship between the owner and the management of

the f‌irm is complicated as their interests are not perfectly

aligned. Agency theory (Jensen & Meckling, 1976) describes

the standard problems in the principal-agent relationship

between owners and managers. Ownership types differ for

mainly institutional reasons; regulation and tradition often

is at the basis of the existence of a particular investor

type (Brammer, Pavelin, & Porter, 2008). The scale and time

horizon can differ between ownership types too, which

affects their investment decisions. In addition, a f‌irm has to

deal with several stakeholders who may have conf‌licting

interests (Jensen & Meckling, 1976). To reduce information

and agency costs, f‌irms can take social initiatives that foster

stakeholder relations (Harjoto & Jo, 2011; Jones, 1995).At the

same time, stakeholders can invest in the f‌irm and become a

shareholder to increase the strength in the relationship and to

signal that they are committed (Belfer, 1953).

Several studies analyze whether ownership and gover-

nance do matter for f‌irm performance. Ryan and Schneider

(2002) argue that investors’ propensity for activism is related

to their portfolio, to market characteristics, and to character-

istics of the investors themselves. Gompers, Ishii, and

Metrick (2003) and Lehmann, Warning, and Weigand (2004)

f‌ind that better governance goes hand in hand with better

stock market performance. Bhagat, Black, and Blair (2004)

f‌ind mixed evidence for the relationship between investor

activism and corporate performance in the US: there is such

a relationship in the 1980s, but it seems to have vanished in

the 1990s. Cornett, Marcus, Saunders, and Tehranian (2007)

show there is a signif‌icant relationship between a f‌irm’s

operational cash f‌low returns and both the percentage of

institutional stock ownership and the number of institu-

tional shareholders. Ferreira and Matos (2008) show the

wide diversity in international institutional investment.

Sánchez-Ballesta and García-Meca (2007) perform a meta-

analysis and f‌ind that corporate governance is indeed asso-

ciated with f‌irm performance. However, recent evidence

suggests that this relationship weakens over time (Barnea &

Rubin, 2010; Statman & Glushkov, 2009).

Other studies address the issue of how CSR connects with

ownership (for a recent review, see Jamali, Saf‌ieddine, &

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