The link between independent directors and firm’s performance: the moderating role of corporate social responsibility

• DOI: https://doi.org/10.1108/CG-05-2020-0176
• Published date: 18 May 2021
• Date: 18 May 2021
• Pages: 831-844
• Subject Matter: Strategy,Corporate governance
• Author: Hien Thi Tran

The link between independent directors

and f‌irm’s performance: the moderating

role of corporate social responsibility

Hien Thi Tran

Abstract

Purpose –This paper aims to examine how independent directors (IDs) affect a firm’s performance

measuredon profitability, with corporate social responsibility(CSR) interaction.

Design/methodology/approach –The study uses an international data set of 1,817 firm-year

observationsfrom 545 large companies in 20 countries across Asia,America and Europe, and the fixed-

effectsestimation method.

Findings –The direct effectof IDs alone on profitability is statisticallyinsignificant; however, thesynergic

effect of IDs andCSR on profitability becomes significantlypositive when firms disclose CSR information.

Practical implications –The profitability is partially sourced from the synergy of IDs and stakeholders

through CSR. IDs may use CSR disclosure to win stakeholders’ goodwill.This goodwill will likely be transformed

into profitability. The empirical results indicate that there should be more need for IDs’ engagement in CSR

projects as the resources ofI Dscombined with external stakeholders can be of important value to firms.

Originality/value –This paper revealsthe underlying mechanism that firm-idiosyncraticvalue is formed

using a combination of ID resourcesand stakeholders through CSR. This research extendsthe literature

of IDs’ efficiencyand effectiveness and confirms the agencytheory and resource dependence theory.

Keywords Prof‌itability, Firm performance, Corporate social responsibility,Independent directors

Paper type Research paper

1. Introduction

While board composition indicates power distribution between large and small shareholders

and executives, it is the actual conduct of the non-executive directors vis-a

`-vis the CEO that

determine board’s efficiency and influence (Roberts et al., 2005). In the current literature,

however, whether independent board members are effective and beneficial to firm owners

remains controversial (Naciti, 2019;Fan et al., 2020). Masulis and Zhang (2019) see “firms with

more preoccupied independent directors (IDs) have declining firm valuation and operating

performance and exhibit weaker profitability and accounting quality”. The distraction of IDs

could cause firms to perform at a lower level (Stein and Zhao, 2019). Another empirical study

concludes that there is no relationship between IDs and firm’s performance (Hermalin and

Weisbach, 2001). The debate on the contribution of IDs’ to corporate performance remains

inconclusive.

Likewise, the literature remains debatable regarding the dependent relationship between

corporate social responsibility (CSR) and financial performance (Kong et al., 2020;Su

¨si and

Jaakson, 2020). Although several theories including the stakeholder and legitimacy theories

support the positive relationship between CSR and profitability, there remains a lack of a

coherent theory of CSR (Wang et al.,2020, p. 1), hence inconsistent support to this relationship

in the empirical findings. Single country studies such as Ntim and Soobaroyen (2013) using a

Hien Thi Tran is based at

the Hanoi School of

Business and Management

(HSB), Vietnam National

University, Hanoi, Vietnam

and Foreign Trade

University, Hanoi, Vietnam.

Received 6 May 2020

Revised 22 July 2020

8 October 2020

13 December 2020

Accepted 8 January 2021

The author would like to thank

Professor Gerhard Kling and Dr

Hanh S.T. Pham for their helpful

comments to an earlier draft of

the paper.

DOI 10.1108/CG-05-2020-0176 VOL. 21 NO. 5 2021, pp. 831-844, ©Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 831