The moderating role of board monitoring power in the relationship between environmental conditions and corporate social responsibility

• DOI: http://doi.org/10.1111/beer.12242
• Published date: 01 January 2020
• Author: Isabel‐María García‐Sánchez
• Date: 01 January 2020

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 wileyonlinelibrary.com/journal/beer Business Ethics: A Eur Rev. 2020;29:114–129.

© 2019 John Wiley & Sons Ltd

1 | INTRODUCTION

Building upon the resource dependence theory, Dess and Beard

(1984) argue that quest ions such as the busi ness environme nt

or context have a crit ical influen ce on firms' strat egic decisions.

Research has show n that dynamic an d munificent environmental

conditions—asso ciated with the deg ree of market ambigu ity, un‐

certaint y and instabil ity, and the abunda nce of industr y resources,

respective ly—can produce a l evel of freedom tha t managers may

employ to take rati onal decisions and alloc ate available resources to

profitable p rojects. Moreover, following th e agency conflict theor y,

they could decid e to invest in project s aimed at satisfyi ng managerial

interests ( Aktas, An dreou, Karas amani, & Philip, 2019; Ham brick &

Finkelstein, 1987), at th e expense of the own er/principal who has

delegated resp onsibilities to t he manager or agent a nd thereafte r

has limited abilit y to control the decision s taken (Jensen & Meckli ng,

1976).

These argume nts could be ex trapolated to t he realm of strate ‐

gic decisions con cerning corporate socia l responsibility (CSR ) (Chen,

Zeng, Lin, & Ma, 2017; Goll & R asheed, 200 4), because th e same

environmenta l conditions might be associated wit h a lower level of

concern about t he firm's competitive ness and success (Car roll, 1979;

Renouard & Ezv an, 2018). In consequence, manager s could (a) seek

to improve the firm's s ocial and enviro nmental per formance, allo ‐

cating slack re sources to CSR project s, and viewing them as growt h

opportuni ties (Goll & Rasheed, 200 4; Martínez‐del‐Río et al., 2 015;

Sharma, 20 00). Moreover, in an agency setti ng, (b) these managers,

if they are more res istant to sta keholders' dema nds, could redu ce

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DOI: 10 .1111/bee r.12242

ORIGINAL ARTICLE

The moderating role of board monitoring power in the

relationship between environmental conditions and corporate

social responsibility

Isabel‐María García‐Sánchez

IME‐Instituto Multidisciplinar de Empresa,

Departa mento de Administr ación y

Economía de la Emp resa, Universid ad de

Salamanca, Salamanca, Spain

Correspondence

Isabel‐María García‐Sánchez, IME‐Instituto

Multidisciplinar de Empresa, Departamento

de Administr ación y Economía de la

Empresa, Un iversidad de Salam anca, 37007

Salamanca, Spain.

Email: lajefa@usal.es

Funding information

Universida d de Salamanca, Gr ant/Award

Number: USAL2017‐DISAQ; Ministerio de

Ciencia e Innovación, Grant/Award Number:

ECO2013‐43838P

Abstract

Is the relationship be tween environment al munificence, dy namism, and corpor ate

social responsibili ty contingent on board m onitoring power? This is the rese arch

question examin ed in this study of an inter national sample of 956 liste d firms from

2006 to 2014. After appl ying several regressio n models for panel dat a based on

Tobit and generalized method of mo ments' (GMM) estimat ion, this paper supp orts

the assertion t hat in munificent and dynamic environment s, managers show a lower

commitment to social an d environmental issu es. Proactive pro motion of social and

environmental conce rns only occurs in firms with ef ficient internal corporate gover n‐

ance mechanisms, res ulting in a moderating effe ct of board monitoring power—board

independence and non‐duality of CEO—on the association between environmental

conditions and corpo rate social responsi bility. Theoretical ly, this moderating effe ct

triggers manager s to increase their so cially responsible p erformance in mun ificent

and dynamic environ ments because : (a) these boards reinforce th e orientation of a

firm towards the meet ing of stakeholders' expec tations; and (b) managers aim to pro‐

tect themselves f rom the greater super vision and control e xerted by the board in

order to maintain the ir decision‐making freedom in envi ronments of superior growt h,

resources, market uncertainty, and instability.

    

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GARCÍA‐SÁNCHE Z

the firm's sustainability by redirecting funds to other projects that

satisfy th eir own interests (Aror a & Dharwadkar, 2011; Majumdar &

Marcus, 2001). In t his vein—and previous evidenc e is not conclusive

about the signs of t he expected relat ionship—Young and Thyill (2014)

conducted a det ailed survey of the interrela tionships between CSR

and the busines s context.

In this paper, our aim is to sh ed light on the ef fects of enviro n‐

mental condit ions on CSR. M oreover, we suggest that i nternal cor‐

porate governance mechanisms could moderate this relationship.

Concretely, we focus on board monitoring power, represented by

board indepe ndence and the no n‐duality of th e CEO, as the main

effective m echanisms are in re lation to CSR (Ha rjoto & Jo, 2011;

Michelon & Parb onetti, 2012). T hough the evide nce is not unani‐

mous (Cuadrado‐Ballesteros, Martínez‐Ferrero, & García‐Sánchez,

2017; Lattemann, Fetscherin, Alon, Li, & Schneider, 2009), studies

have reported t hat both of these bo ard characte ristics have a pos‐

itive impact on C SR perfor mance (Chang, Oh , Park, & Jang, 2 015;

Hartojo & Jo, 2011; Jo & Har tojo, 2012; Rupley, Brown, & Marshall,

2012 Webb, 2004). Acc ordingly, we propose t hat board monitor ing

power, in addition to it s traditional role of a dvice and supervis ion and

controlling managerial discretion in decision making, could moderate

the relationsh ip between environm ental conditions and C SR by com‐

pelling the fir m to enhance its social a nd environmental pe rformance

and to satisf y stakeholders' d emands in this respe ct. With bette r CSR

performan ce, the demands of b oard director s would be satisfied in

relation to socia l and environmental prac tices, though this might re‐

sult in reduced bo ard vigilance over other mana gerial decisions.

The results ob tained from an a nalysis of 956 firms fr om 28 re‐

gions, from 20 06 to 2014, support o ur hypothesis tha t firms op‐

erating in more m unificent and dy namic context s are less likely to

promote CSR pr actices. Howeve r, board monitoring p ower, in ad‐

dition to the posit ive, direct effect on CS R performance associated

with its advis ory and supervi sory functions , has a moderating role in

managers' wishe s to engage in CSR‐related str ategies.

Our study cont ributes to the lite rature in severa l ways. First,

whereas previous studies have examined the relationship between

external conte xt and CSR (Chen et al., 2017) or bet ween the board

monitoring rol e and CSR (Jo & Harjoto, 201 2; Whiters & Fitza, 2 016),

we interrelate the se two lines of res earch, buildi ng upon resource

dependence an d agency theo ries. In additi on, we provide insig hts

into how an internal f actor—board monitoring power—could mod er‐

ate the influence of e nvironmental cond itions on CSR. Op erationally,

previous pape rs have mainly focus ed on munificen ce as the envi‐

ronmental condition considered (Martinez‐del‐Rio, Antolin‐Lopez, &

Cespedes‐Lo rente, 2015) and on individual s pecific board attri butes

such as independence (Cuadrado‐Ballesteros et al., 2017) or non‐

duality (Lat temann et al., 2009). Our a pproach considers mana gerial

decision makin g in a more complex sce nario. Second , as a meth‐

odological contribution, we analyse an international sample, thus

avoiding a researc h bias towards, for example, the Uni ted Kingdom

and the United St ates and the limit ations associated with the anal‐

ysis of specific re gions (Fifka, 2013). We also contribute by e xamin‐

ing and updating the results obtained in previous periods in which

CSR strateg ies were granted le ss prominence . In addition, th e use

of panel data allow s us to avoid the bias associated with the u se of

a single year data base (Martin ez‐del‐Rio et al., 201 5). Finally, with

respect to the s tatistic al methods empl oyed, our metho d provides

results with better statistical specifications, in which unobserva ble

heterogeneit y is controlled. Thus, the dat a analysed are more infor‐

mative and precis e and present a higher level of ef ficiency than was

observed in previous data sets (Martínez‐Ferrero, Rodríguez‐Ariza,

García‐Sánchez, & Cuadrado‐Ballesteros, 2017).

2 | CSR, ENVIRONMENTAL CONDITIONS,

AND BOARD OF DIREC TORS

2.1 | Environme ntal conditions and CSR

Firms that oper ate in a munificent a nd dynamic conte xt are rich in

critical res ources and enjoy greater growt h potential (Dess & Beard,

1984). Precisely, it is the gre ater availability of t hese resources t hat al‐

lows the manager ial team to undertake ne w projects, genera lly more

innovative and sus tainable, which may be nefit companies in ter ms of

obtaining competitive advantages (Aragon‐Correa & Sharma, 2003;

Goll & Rasheed , 2004; Rosenbusch, R auch, & Bausch, 2013).

In relation to the co ntext of munifice nce, firms ope rating in

these indust ries can be more prone to invest in C SR in comparison

with firms ope rating in indus tries with a lower l evel of critical re ‐

sources, wher e the relative cost of CSR invest ments is greater (Goll

& Rasheed, 20 04; Sharma, 2000). Howeve r, as Martínez‐del‐R ío et

al. (2015) reflec t, managers ca n be confronted wit h the decision of

whether or not to inve st in socially respons ible projects, to wh ich, as

proposed by McWi lliams and Siegel (2 001), it is necessa ry to apply

a cost‐benefit appr oach. If we focus on th e possible cost, a greater

level of munificen ce provides greate r opportun ities and resou rces

for investment s, but also a higher risk of ma nagerial discretion in t he

decision‐making process (Hambrick & Finkelstein, 1987).

Moreover, under the paradigm of agency theory, several studies

argue that the ava ilability of gre ater resources m ust make manag‐

ers more resist ant to stakeholders' demand s (Arora & Dharwadkar,

2011) that allow to invest in oth er profitabl e projects , maybe less

sustainabl e, or, to take it a step further, may recog nize opportunities

for private bene fit. It is, therefore, nece ssary to know that previous

studies have draw n attention to the argument t hat excess free cash

flow may increase a gency conflic ts, which can l ead to the manage‐

rial team making o pportunis tic decisions to o btain person al profits

resulting from u nprofitabl e projects ( Aktas et al., 2 016). In other

words, building o n agency conflic t, the manage ment's willingn ess

to compromise on so cially respons ible strategi es could be lower in

munificent environments.

Using the same theoretical frameworks in relation to dynamic

contexts, so me authors argu e that firms can deve lop socially resp on‐

sible behaviour a s a mechanism to red uce their uncer tainty, while

guaranteeing t he legitimac y and protectio n of their action s from

different stakeholders (Goll & Rasheed, 2004; Palmer & Wiseman,

1999). Thus, in highly flu ctuating envi ronments, com panies