International Evidence on the Relationship between Insider and Bank Ownership and CSR Performance

• Author: Kerstin Lopatta,Reemda Jaeschke,Thomas Kaspereit,Felix Canitz
• Published date: 01 January 2017
• Date: 01 January 2017
• DOI: http://doi.org/10.1111/corg.12174

International Evidence on the Relationship

between Insider and Bank Ownership and CSR

Performance

Kerstin Lopatta, Reemda Jaeschke*, Felix Canitz and

Thomas Kaspereit

ABSTRACT

Manuscript Type: Empirical

Research Question/Issue: This study examines the relationship between blockholder and bank ownership and a f‌irm’s

corporate social responsibility (CSR) performance. We analyze a multinational panel data sample for the period 2003–2012.

Research Findings/Insights: We f‌ind that the degree of blockholder ownership is negatively related to CSR performance,

whereas the degree of bank ownership is positively related to CSR performance. The negative (positive) relationship between

blockholder (bank) ownership and CSR performance is more pronounced in f‌irms with high ownership dispersion.

Theoretical/Academic Implications: Our study contributesto existing literature by investigating the effectsof blockholder and

bank ownership on CSR performance within an international context. Prior research has predominantly examined local

markets. Additionally, we identify ownership dispersion to strengthen the relationship between investors and CSR and thus

provide furtherevidence on the factors inf‌luencing investors’CSRpreferences. Conductingan instrumental variables approach

supports our f‌indingsthat bank ownership is positively, and blockholder ownership is negatively, related to CSR performance.

Practitioner/Policy Implications: Our results may assist f‌irmsin understanding the demand for CSR by blockholders and bank

owners. An awareness of this demand may help f‌irms to optimize their CSR performance in line with their investors’

preferences. The knowledge produced in this article could assist f‌irms in adopting the optimal level of CSR performance.

Viewed from another perspective, knowing that either blockholder or bank ownership is present allows other shareholders,

for instance sustainability funds, to anticipate the long-run equilibrium level of f‌irm-specif‌ic CSR performance.

Keywords: Corporate Governance, Corporate Social Responsibility (CSR), Corporate Sustainability, Shareholders,

Blockholders, Ownership Dispersion

INTRODUCTION

The relationship between ownership structure and CSR

performance has attracted increasing attention. Though

it is an ongoing debatewhether sustainable businessbehavior

pays off in f‌inancial terms (Belghitar, Clark, & Deshmukh,

2014; Statman & Glushkov, 2009), a growing proportion of

owners more strongly engage with f‌irms on CSR issues and

exercise theirright to inf‌luence a f‌irm’s CSR strategy(Dimson,

2014). In this paper, we focus on the relationship between two

particular ownership types, namely blockholder and bank

ownership, and CSR performance.

Various ownership types have differing roles and responsi-

bilitiesin society, followdifferent investment targets,and have

access to different information channels. Thus, the absolute

and ownership type-specif‌icbenef‌its of CSR can differ with

ownership structure (Dam & Scholtens, 2012). Because some

benef‌its of CSR, for examplelower perceived risk due to lower

information asymmetries (El Ghoul, Guedhami, Kwok, &

Mishra, 2011), can differ depending on investor type, each

type may prefer a different level of CSR performance.

Consequently, Devinney, Schwalbach, and Williams (2013)

emphasize the need for more studies that distinguish among

different kinds of shareholders in order to better understand

the effects of investors’CSR preferences.We follow their argu-

ment and assess how blockholder and bank ownership relate

differently to a f‌irm’s CSR performance.

Our interest in the relationship between these two share-

holder types and CSR follows from blockholder and bank

owners’prominent role in the literature on the relationship

between corporategovernance and agency costs (Holderness,

2009; Konijn, Kräussl, & Lucas, 2011), and from the literature

on the decreasing effect of CSR on information asymmetries

(Dhaliwal, Radhakrishnan, Tsang, & Yang, 2012; El Ghoul

*Address for correspondence: Reemda Jaeschke, Department of Accounting and

Corporate Governance, Carl von Ossietzky Universityof Oldenburg, Germany. E-mail:

reemda.jaeschke@uni-oldenburg.de

© 2016 JohnWiley & Sons Ltd

doi:10.1111/corg.12174

41

Corporate Governance: An International Review, 2017, 25(1): 41–57

et al., 2011; Lopatta, Buchholz, & Kaspereit, 2015). We provide

a theoretical framework based on agency theory to explain the

relationship between blockholder and bank ownership and

CSR performance. Specif‌ically, we argue that blockholder

ownership decreases information asymmetries (Admati,

Pf‌leiderer, & Zechner, 1994; Maug, 1993; Shleifer, 1986) and

that hence the presence of blockholders lowers the overall

demand for CSR (substitution hypothesis). Banks as share-

holders, on the other hand, demand relatively more CSR

because their investment objectives and risk aversions are

presumably more similar to those of debt investors. Thus, the

theoretical framework of our paper relies both on well-

established agency literature as well as on very recent literature

that highlights the benef‌icial effects of CSR performance on

various types of investment risk, e.g., information asymmetries

(Dhaliwal et al., 2012; El Ghoul et al., 2011; Lopatta et al., 2015)

and stock price crash risk (Kim, Li, & Li, 2014).

Despite thegrowing prevalence of owners’involvement in a

f‌irm’s CSR performance, the limited availability of data on

multinational CSR measures has meant that existing studies

only consider one group of investors (Prado-Lorenzo,

Gallego-Alvarez, & Garcia-Sanchez, 2009), one country

(Barnea & Rubin,2010; Johnson & Greening,1999; Oh, Chang,

& Martynov, 2011), or one particular year (Dam & Scholtens,

2012). Our studygoes beyond this previous researchby exam-

ining how blockholders and banks relate to the f‌irm’sCSR

performance in an international context. We further examine

whether the relationship between blockholder or bank owner-

ship and a f‌irm’s CSR performance is affected by the level of

ownership dispersion. Prior research has shown that owner-

ship dispersion is associated with higher agencycosts (Konijn

et al., 2011; Ragazzi, 1981), which we anticipate will magnify

the relationship between blockholders or bank ownership

and CSR performance. Using CSR performance data from

the international risk rating agency Global Engagement

Services (GES) and ownership data from OSIRIS,we examine

the relationshipbetween blockholders or bankownership and

CSR performance withina global setting. GES has established

itself as a leading provider of sustainability and corporate

governance ratings in both investment practice and academic

research (Hassel, Nilsson, & Nyquist, 2005; Lopatta et al.,

2015; Semenova & Hassel, 2008, 2015).Our sample comprises

1,621 multinational f‌irms from 24 countries during the sample

period 2003–2012. GES ratings provide reliable proxies for a

reasonable selection of CSR issues in that they assess both

environmental and social risks at the f‌irm level. They assess

af‌irm’s environmental performance by examining its invest-

ments in renewable energies, product recycling, greenhouse

gas emissions,and water use. The ratings also includea f‌irm’s

environmental preparedness by capturing relevant efforts

made by management such as environmental certif‌ication,

environmental policy and programs, implementation of an

environmental management system, screening of suppliers,

and environmental reporting. The socialdimension addresses

employee, community, and supplier performance and

includes issues such as health and safety, discrimination,

working hours and wages, forced labor, local community

involvement, and human rights, amongst others.

In accordance with our hypotheses, we f‌ind statistical

evidence that blockholder ownership is negatively related to

af‌irm’s CSR performance. This f‌indingisconsistentwiththe

notion that that blockholder ownership is an effective gover-

nance mechanism in itself (Bolton & Von Thadden, 1998;

Huddart, 1993), and that hence f‌irms with blockholders rely

less on CSR to reduce agencycosts. We further f‌ind that bank

ownership is positively related to CSR. With utility functions

more similar to debt investors, banks over-proportionally

benef‌it from CSR due to reduced information asymmetry

and investment risk. Furthermore, we f‌ind that the negative

association between blockholder ownership and a f‌irm’s

CSR performance is particularly strong in f‌irms with high

ownership dispersion.

This study contributes to existing literature on CSR and

ownership structures in two ways. First, we provide interna-

tional evidence on how blockholder and bank ownership

relate to a f‌irm’s CSR performance. Our study is the f‌irst to

use a large panel dataset of internationally listed f‌irms from

multiple countries to measure the relationship between

blockholders or bank owners and CSR performance. Earlier

studies exploringthese shareholder groups and their relation-

ship with CSR predominantly focus on local markets (e.g.,

Barnea & Rubin, 2010; Jo & Harjoto, 2011). However, given

the international differences in ownership, it is important to

take a broader perspective (Dam & Scholtens, 2012). Second,

we identify ownership dispersion as a factor that inf‌luences

the CSR–ownership relationship, which helps to derive the

reasons driving investors’CSR demands.

Our f‌indings are important to f‌irms, stakeholders, and

policymakers alike. In line with Dam and Scholtens (2012),

our results indicate that ownership structure should be taken

into account when def‌ining a f‌irm’s CSR strategy. The level

of CSR performance that maximizes shareholder utility is

lower the higher the level of blockholder ownership and

higher the level of bank ownership. If a f‌irm has not yet taken

this into account, doing so will increase shareholder value.

Furthermore, our results may be important for other types of

investors as well as stakeholders when they assess a f‌irm’s

CSR performance. The presence of blockholders and bank

owners can be used as an indicator of a f‌irm’s current or, if

the f‌irm has not yet aligned its CSR performance with

shareholders’preferences, expected CSR performance.

Thanks to this information, investors can adapttheir personal

ownership strategies accordingly. The results further point to

the need for regulatory changes and new proposals on trans-

parent reporting standards relating to ownership information

and CSR performance (Dam & Scholtens, 2012).

LITERATURE REVIEW

The literature on CSR includes numerous studies on its

determinants and its relationship with corporate f‌inancial

performance. External determinants include, amongst others,

the country of origin and legislation (Chen & Bouvain, 2009;

Dawkins & Lewis, 2003; Dhaliwal et al., 2012; Gray, Kouhy,

& Lavers, 1995). Internal determinants of CSR include size

(Gamerschlag, Möller, & Verbeeten, 2011; Haniffa & Cooke,

2002), prof‌itability (Brammer & Pavelin, 2006), and corporate

governance performance (Bear, Rahman, & Post, 2010; Jo &

Harjoto, 2012). Harjoto and Jo (2011) and Jo and Harjoto

(2011) further show that CSR is positively associated with

governance mechanisms and increases f‌irm value and

42 CORPORATE GOVERNANCE: AN INTERNATIONALREVIEW

© 2016 JohnWiley & Sons LtdVolume 25 Number 1 January 2017