How far the ownership structure is relevant for CSR performance? An empirical investigation

• DOI: https://doi.org/10.1108/CG-10-2020-0461
• Published date: 17 August 2021
• Date: 17 August 2021
• Pages: 128-147
• Subject Matter: Strategy,Corporate governance
• Author: Ritu Pareek,Tarak Nath Sahu

How far the ownership structure is

relevant for CSR performance? An

empirical investigation

Ritu Pareek and Tarak Nath Sahu

Abstract

Purpose –Taking hints from the lacunas in the field of ownership structure and corporate social

responsibility (CSR) performance of the firms in India, especially when the moderatingeffect of certain

corporate governance mechanism comes into play, this study aims to attempt to fulfill the gap by

exploring the ownership structure of the firm (i.e. foreign ownership, institutional ownership and

government ownership)and the CSR performance of the firm, when moderated by boardindependence

of the firm. In an additional analysis, the study explores the non-linear effect of foreign ownership

structureon the CSR performance in the Indiancontext.

Design/methodology/approach –The study incorporates a strongly balanced panel data set of 280

non-financialNational Stock Exchange 500 listed firms for the study period of 2013–2019.The study uses

both static and Arellano–Bond dynamic panel model under generalized method of moments (GMMs)

frameworkto establish the relationship between the studiedvariables.

Findings –The study acknowledgesa positive impact of the foreign investorsin the CSR performance of

Indian firms with a higher proportion of independent directors on the board. The study further finds a

contrarian roleof government ownership in Indian contextamong the sampled firms. The study also in its

extendedanalysis finds a non-linear inverted U-shaped relationshipbetween foreign ownership (FO) and

the CSR performance, which shows that FO positively impacts the CSR performance until a threshold

level of 34% afterwhich the curve starts declining.

Practical implications –One of the major implications this study provides for the corporate

policymakers is that the firms with a string penchantfor philanthropic activities such as CSR should be

concerned with attracting more foreign investors in their shareholding. Also, a higher proportion of

independentdirectors on the board boost theengagement of the firm in CSR works.

Originality/value –The moderating effect of board independence in the ownership structure–CSR

relationshipattempted by this study is a rare attempt in a developingeconomy, such as India, and offers

a fresh dimensionto the study. Also, the non-linearityrelationship between FO and the CSR performance

and the threshold level providing the twofold effect of the variables is an innovative research attempt,

especiallyin regard to a developing country like India.

Keywords Non-linearity, Ownership structure, Corporate social responsibility performance,

Dynamic panel data analysis, Generalized method of moments

Paper type Research paper

1. Introduction

In the recent trends, the topic of corporate social responsibility (CSR) has gained

tremendous impetus among researchers and academicians all over the globe (Javaid Lone

et al., 2016;Jouber, 2021). The business models have shifted from profit-making

management theories to the complementarymodel of helping and uplifting the well-being of

the individual, society andthe environment linked with it (Sharma and Mahendru, 2017). The

idea has been argued that there exists a moral obligation of the firms to engage in

addressing social problem beyondtheir economic and legal responsibilities. CSR in India is

Ritu Pareek and Tarak Nath

Sahu are both based at the

Department of Commerce,

Vidyasagar University,

Midnapore, India.

Received 16 October 2020

Revised 9 March 2021

5 June 2021

Accepted 26 July 2021

PAGE 128 jCORPORATE GOVERNANCE jVOL. 22 NO. 1 2022, pp. 128-147, ©Emerald Publishing Limited, ISSN 1472-0701 DOI 10.1108/CG-10-2020-0461

considered an indispensable element in social upliftment and development

(Balasubramanian et al., 2005), which encourages the firms to undertake certain

standardized CSR practices dictated by the legal framework they operate in (Matten and

Moon, 2008). The notion of institutional theory also dictates that firms gain legitimacy,

reputation and brand value in the society by undertakingsocial and environmental activities

and practices that are favorable for the society (Sharma and Talwar, 2005). The course of

CSR engagement has moved from philanthropic activities (Talan and Sharma, 2019)to

regulated and legalized widespread norms among all the major corporations because of its

major advantages such as better returns (Hart and Ahuja, 1996) and improved financial

performance (Talan and Sharma, 2020), along with competitive advantage (Dienes et al.,

2016) over its rival firms.

It is well established in the literature that corporate governance practices and owne rship

characteristics affect the way firms operate. Thus, any major decisions such as CSR or social

investment are made within the context of organizations’ governance mech anisms and

leadership responsibilities (Filatotchev et al., 2013). Ownership structure, therefore, is a major

governance mechanism that influences corporate strategic decision s and, more specifically,

the extent to which a firm can undertake and appreciate various socially responsible pursu its

(Muttakin and Subramaniam, 2015). Firm ownership structures are the outcomes of thei r

unique institutional arrangements that determine the different objective s, modes of operation

and desired use of available resources in the firm (Panicker, 2017). For instan ce, Indian

Government-owned firms view CSR as a part of the firm’s moral obligation to advocate national

well-being (Subramaniam et al.,2017). The CSR engagement helps the government-owned

firms to gain legitimacy when facing dynamically altering int erests and expectations of a broad

group of stakeholders such as shareholders, government, society and non-governmental

organizations (Sangle, 2010). These public sector firm’s manag ements are duty bound to use

the resources for CSR activities to safeguard social stability (Li and Zhang, 2010).

Similarly, the foreign-owned firm tends to attract greater scrutiny and pressures from

domestic and international bodies because of its higher visibility all over the globe. Thus,

the foreign affiliates use CSR expenditures as a mechanism for enhancing their reputation

through “good-faith” and gain“social legitimacy” in the host country (Campbell et al.,2012).

Moreover, majority of the listed foreign-owned firms in India belongs to North America and

Europe, which are known to be involved in higher levels of CSR engagement, making it

likely for their affiliates in India to adopt similar practices (Zhang and Luo, 2013;Attig et al.,

2016). Therefore, it can be expected that following the mandatory CSR legislation of

Companies Act 2013, the foreign-owned firms engage in a higher CSR expenditure in

comparison to domestic firms.

Another ownership structureis the institutional participation that has rapidly grown in the last

two decades in Indian firms. Also, institutional owners are progressively participating in the

strategic decision-making process of firms (David et al., 2001) and are voting their

preferences for various firm strategies (Gillan and Starks, 2003).The increase in institutional

ownership (INST) enhances the effective and efficient utilization of assets of the company

(Nurleni and Bandang, 2018). Thus,INST acts as a driving force for the company to perform

CSR disclosure. The preference of institutional investors for CSR activities emerges out of

the positive stock-market value that these investments provide to the shareholders (Oh

et al.,2011

).

In the contemporary business environment, there is a controversial growing concern on the

crucial role of ownership structure on CSR disclosure. However, most of the contemporary

prior studies investigating the impact of ownership structure on the CSR disclosure have

restricted to analyze the direct relationship between the two without considering the

corporate governance–CSR nexus. Hence, it is worthwhile to study the moderating effect of

board independence (BI), a major corporate governance mechanism, to extract new

insights into the relationship between ownership structure and CSR away from the narrow

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