Looking Inside the Black Box: The Effect of Corporate Governance on Corporate Social Responsibility

• Author: Dima Jamali,Tanusree Jain
• DOI: http://doi.org/10.1111/corg.12154
• Published date: 01 May 2016
• Date: 01 May 2016

Looking Inside the Black Box: The Effect of

Corporate Governance on Corporate Social

Responsibility

Tanusree Jain*and Dima Jamali

ABSTRACT

Manuscript Type: Review

Research Question/Issue: This study providesa systematic multi-level reviewof recent literature to evaluatethe impact of cor-

porate governance mechanisms (CG) at the institutional, f‌irm, group, and individual levels on f‌irm level corporate social re-

sponsibility (CSR) outcomes. We offer critical ref‌lections on the current state of this literature and provide concrete

suggestions to guide future research.

Research Findings/Insights: Focusing on peer-reviewed articles from 2000 to 2015, the review compiles the evidence on offer

pertaining to the most relevant CG mechanisms and their inf‌luence on CSR outcomes. At the institutional level, we focus on

formal and informalinstitutional mechanisms,and at the f‌irm level, we analyze thedifferent types of f‌irm owners.At the group

level, we segregate our analysis intoboard structures, directorsocial capital and resourcenetworks, and directors’demographic

diversity. At the individual level, our review covers CEOs’demography and socio-psychological characteristics. We map the

effect of these mechanisms on f‌irms’CSR outcomes.

Theoretical/Academic Implications: We recommend that greater scholarly attention needs to be accorded to disaggregating

variables and yet comprehending how multiple conf‌igurations of CG mechanisms interact and combine to impact f‌irms’

CSR behavior. We suggest that CG-CSR research should employ a multi-theoretical lens and apply sophisticated qualitative

and quantitativemethods to enable a deeper and f‌iner-grained analysis of the CG systems and their inf‌luence on CSR. Finally,

we call for cross-cultural research to capture the context sensitivities typical of both CG and CSR constructs.

Practitioner/Policy Implications: Our review suggests that for structural changes and reforms within f‌irms to be successfu l,

they need to be complemented by changes to the institutional makeup of the context in which f‌irms function to

encourage/induce substantive changes in corporate responsible behaviors.

Keywords: Corporate Governance, Corporate Social Responsibility, Corporate Social Performance, Corporate Environ-

mental Performance, Multilevel Review

INTRODUCTION

In a provocative claim, the f‌irst decade of the new millen-

nium has been described as the “Decade from Hell,”char-

acterized by the worst economic catastrophe since the Great

Depression (Serwer, 2009). A Rockefeller study (2010) pre-

dicted that the present decade (2010–2020) willbe the “Doom

Decade,”typif‌ied by authoritarian leaderships, domination

by elites, and social and environmental disasters. In a world

marked bygrave corporate breachesand systemic governance

failureson one hand, and gross societaland environmental ex-

cesses on the other, the interface between corporate gover-

nance (CG) and corporate social responsibility (CSR) has

acquired global resonance and is more intriguing than ever

before (Ryan, Buchholtz, & Kolb, 2010; Walls, Berrone, &

Phan, 2012). In our attempt to look inside the black box of this

vital interface,we provide a timely review ofthe fast develop-

ing yet largely fragmented literature on the effect of multi-

level CG mechanisms o n f‌irms’CSR outcomes.

Beginning with the conceptualization of CG,the traditional

economic perspective emphasizes the shareholder value ap-

proach to CG for maximizing f‌irms’f‌inancial performance

(Shleifer & Vishny, 1997). Toward achieving this objective,

the purpose of CG is to specify the rules that shape the rela-

tions among boards of directors, shareholders, and managers

to resolve assumed agency conf‌licts (Berle & Means, 1932).

However, recent literature, including the OECD revised prin-

ciples (2004), considers the traditional outlook of CG as nar-

row and shortsighted, with rising calls to include

governance consequences and spillovers for non-f‌inancial

stakeholders (Gill, 2008; Windsor, 2006). This shift has oc-

curred primarily for three reasons. First, there is some

*Address for correspondence: TanusreeJain, ESADE, Ramon Llull University, Av.de la Torre

Blanca, 59, Sant Cugat, Spain. Tel: +34 93 554 3511; E-mail: tanusree.jain@alumni.esade.edu

© 2016 JohnWiley & Sons Ltd

doi:10.1111/corg.12154

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Corporate Governance: An InternationalReview, 2016, 24(3):253–273

evidence that stakeholder engagement can enhance the value

of the f‌irm (Brown, Helland, & Smith, 2006; Ntim &

Soobaroyen, 2013b), thus intertwining f‌irms’f‌inancial and

non-f‌inancial responsibilities (Donaldson & Preston, 1995).

Second, neither corporate statutes nor corporate case laws ex-

pressly require shareholder value maximization (Stout, 2012),

thus questioning the prioritization of shareholder interests as

the default purposeof the f‌irm (Gill, 2008). Finally, rising inci-

dents of corporate frauds and scandals have expanded the

idea of CG beyond merely dealing with agency conf‌licts to-

wards adoptingan ethical, accountable, andsocially responsi-

ble agenda (Elkington, 2006). This has led to redef‌ining CG

both as a “structure of rights and responsibilities among the

parties with a stake in the f‌irm”(Aoki, 2000: 11) as well as a

conf‌iguration of organizational processes through which dif-

ferent CG mechanisms interact and affect both f‌inancial and

social outcomes (Aguilera, Desender, Bednar, & Lee, 2015;

Aguilera, Filatotchev, Gospel, & Jackson, 2008; Aguilera,

Goyer, & Kabbach-Castro, 2012). We adopt this wider per-

spective on CG in this paper.

Several individual studies have analyzed different CG

mechanisms that can affect f‌irms’social performance. At the

institutional level, formal institutions such as legal and politi-

cal systems are known to shape the nature of f‌irms’stake-

holder relationships (Judge, 2008). Informal institutions, on

the other hand, particularly cultural beliefs and norms, can

impact both the form (explicit or implicit) and the extent of

CSR practices (Matten& Moon, 2008). At the f‌irm level, own-

ership structures (Cox, Brammer, & Millington, 2008); Graves

& Waddock, 1994), board structural characteristics (Capezio,

Shields, & O’Donnell, 2011), andexecutive compensation con-

tracts (Cordeiro & Sarkis, 2008) capture the effect of owner

and managerial incentives (Deckop, Merriman, & Gupta,

2006) as well as boards’monitoring and resourceprovision ca-

pabilities on the propensity to engage in pro-social activities

(de Villiers, Naiker, & van Staden, 2011). Furthermore, there

is evidence that the continuous rise of f‌inancial and social ac-

tivist pressures is pushing managers to either precipitate or

at least deliberate broader corporate issues such as CSR

(Eesley, Decelles, & Lenox, 2015; Goranova & Ryan, 2014).

At the individuallevel, managers’and directors’demography

and socio-psychological experiences (Borghesi, Houston, &

Naranjo, 2014; Chin, Hambrick, & Treviño, 2013) tend to in-

form their roles and also affect their f‌irms’CSR performance.

Interestingly, thesedifferent CG variables, functioning at mul-

tiple levels, are often interdependent (Aguilera et al., 2015)

and work in tandem, creating a complex web of relationships

that have not been systematically examined before, particu-

larly in relation to how they affect specif‌ic CSR outcomes,

whether independently or in combination (Aguilera et al.,

2012).

Given the burgeoning f‌ield of research on CG and CSR,

some excellent reviews have been publishedto date. Most re-

view studieshave tackled either CG (e.g., Aguileraet al., 2015;

Bebchuk & Weisbach, 2010; Dalton, Daily, Ellstrand, & John-

son, 1998; Sjöström, 2008; Terjesen, Sealy, & Singh, 2009) or

CSR (e.g., Aguinis & Glavas, 2012; Carroll, 1999; Peloza,

2009; Wood, 2010), yet few are focused at the CG and CSR

nexus or interface, such as Ryan (2005 and Ryan et al. (2010

who examine the inter-linkage of CG and business ethics,

Welford (2007 who reviews issues related to CG and CSR in

Asia; and Sparkesand Cowton (2004) who discuss the growth

of socially responsible investment and its relationship with

CSR.

Our endeavor is to contribute to this existing body of re-

search in three ways. First, we undertake a systematic review

of the literature (Petticrew & Roberts, 2006) that specif‌ically

examines the effect of CG mechanisms on CSR outcomes

in the last decade and a half. Second, drawing on a multi-

theoretical lens, we summarize the literature by identi-

fying the various levels at which the CG mechanisms operate

(i.e,, institutional, f‌irm, group,and individual) and assess their

effect on CSR outcomes. Whenever possible, we also identify

the potential interactions between these multi-level mecha-

nisms. Third, we offer critical ref‌lections on the current state

of this literature and suggest avenues for advancing research

in this direction, both theoretical and methodological. We

think this is a timely exercise given the rising call foradopting

a“holistic approach”to CG research that examines both the

effect of individual CG mechanisms as well as identifying

the interdependencies between multiple governance mecha-

nisms and their implications for CSR (Aguilera et al., 2008;

Walls et al., 2012).

SCOPE OF THE REVIEW

We carry out a systematic review of relevant literature

(Petticrew & Roberts, 2006) based on the content analysis of

94 peer-reviewed journal articles(81 empirical and 13 concep-

tual) published between 2000 and 2015 that explore the effect

of various CG mechanisms on f‌irm level CSR outcomes (see

Table 1). We selected these articles using Business Source

Complete and Web of Science databases and excluded book

chapters, conference papers and book reviews. Although,

our review encompassed the entire range of 94 articles, the

empirical articles were hand-coded in two stages: f‌irst, by

three graduate research assistants and second, by the f‌irst au-

thor of this paper, independently, to identify the variables as-

sociated with CG predictors of CSR at the institutional, f‌irm,

group, and individual levels of analysis and outcome vari-

ables of CSR at the f‌irm level.

MAJOR THEORETICAL LENSES

We begin by shedding light on the core concepts of corporate

governance(CG) and corporate social responsibility (CSR). As

highlighted below, both CG and CSR have evolved into core

managerial concepts, although there are differing interpreta-

tions as to what they entail, particularly when viewed from

different theoretical perspectives.

Through our content analysis, we f‌ind that there are four

main theoretical frameworks that guide empirical research at

the intersectionof CG and CSR. The most inf‌luential theoreti-

cal framing of CG is rooted in agency theory (Dalton, Hitt,

Certo, & Dalton, 2007). Research from this perspective con-

tends that principals (shareholders) and agents (managers

and other corporate insiders) havedivergent interests,risk tol-

erance, capacities, and information. Opportunistic managers,

motivated by self-interest and guile, will act at the expense

of outside investors(Jensen & Meckling, 1976),wherever there

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© 2016 JohnWiley & Sons LtdVolume 24 Number 3 May 2016