How does the greater number of women on S&P 100 boards affects corporate social responsibility through the KLD lenses?

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How does the greater number of women on S&P 100 boards affects

corporate social responsibility through the KLD lenses?

Master Thesis

Author: Tiambi Rebecca Simms Supervisor: Dr. Lori DiVito

Second reader: Dr. Johan Lindeque

Program: MSc Business Studies: International Management Student number: 10451528

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Acknowledgements

I would like to take this time to thank my thesis supervisor Dr. Lori DiVito, for her time and guidance during this process. Dr. DiVito has been instrumental in this thesis because of her motivation, inspiration and most importantly, her honest feedback, which I truly appreciate. I would also like to thank my second reader Dr. Johan Lineque for taking the time to read my thesis.

More importantly, I want to thank my parents and brothers who have been my rock throughout my entire academic career and helped me achieve my dreams. Thank you for your love and support.

Last but certainly not least, to my closest friends that see the bigger picture, understand the struggle of a graduate student and constantly motivate me to do better and be better. Words can’t express my gratitude. Thank you.

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In today’s evolving world, corporations are confronted with pressure from the public and the government to improve their corporation’s governance policies, as well as, their corporate social responsibilities practices. The ability for a corporation to be successful or to be defeated by failure is contingent upon the decisions made by the board directors and the upper management. The board of directors is crucial in the policymaking process and the organizational direction (Erhardt, Werbel & Shrader, 2003). The composition of the board is fundamental in ensuring that the best practices in corporate governance are used (Ayuso and Aragandoña, 2007). However, the lack of board diversity has been a contentious topic in the recent years because of the alarming low percentage of women directors. Research has suggested that the higher percentage of women directors is positively associated with stronger corporate governance practices and corporate social responsibility activities (Rosener, 2003; Bernardi and Threadgill, 2010).

The goal of this study was to determine whether or not gender diverse boards played a significant role in influencing S&P 100 corporations in becoming more socially responsible. The expectation of this study is to provide empirical evidence that the higher percentage of women directors and time will improve corporations’ corporate social responsibility initiatives. The CSR data was obtained from the Kinder, Lydenberg and Domini (KLD) database. The CSR activities discussed in this paper are corporate governance, social/community, and environment.

Key words: corporate social responsibility (CSR), corporate governance (CG), female board of directors (FBOD), total number of board of directors (TBOD), Kinder, Lydenberg, Domini (KLD), gender diverse boards

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Chapter 1 Introduction

Recent financial crisis and other corporate scandals have drawn much attention to corporate governance (CG) practices and ethics (Jamali, Safieddine and Rabbath, 2008). Also, board diversity has been a contentious topic in the recent years because of the low percentage of women directors and the concerns of corporate governance practices, especially when it comes to monitoring top management activities (Gillis, 2012). The Cadbury Report (1992) defines “corporate governance as the process by which companies are directed and controlled” while Monks and Minow (2011) suggest, “corporate governance is the relationship among various participants in determining the direction and performance of corporations. The primary participants are the shareholders, the management and the board of directors.” In essence, corporate governance policies protect the rights and profits of the shareholder (principal) from managers (agents) and strive to maximize compensation or minimize efforts (Knudsen, Geisler and Ege, 2013).

Since corporations are considered to be powerful entities in which their decisions have the potential to affect the welfare of an entire nation (Stern and Barley, 1996); then the type and scope of their corporate social responsibility (CSR) practices will also, have significant implications within and outside of the marketplace (Bondy, Moon & Matten 2012). Corporations can make a positive social impact to sustain development by spearheading innovative solutions to many social challenges (Modi, 2012). Furthermore, the European Commission (2011) defines CSR as the responsibility of the organization to impact society, which extends beyond the factory gates. More importantly, this act includes board members, managers, and employees to understand the correlation between society and business.

Corporate social responsibility is based on the notion that businesses do not only have a financial agenda but are infused also with three core principals which are economical, social and environmental. These three-core principals assist with decision-making and activities that is necessary in business and within the society in which they are practiced (Bondy et al., 2012). Accordingly, CSR is the outcome of social regulation manifestation of “soft” rules of corporate governance (Moon, 2004) and pressure from

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non-governmental organizations, especially in regard to the development of business codes (Grosser and Moon, 2005). Corporate social responsibility involves the commitment from the implicit “social contract” between businesses and society and for corporations to be receptive of societal wants and needs which will induce positive effects while reducing the development of negative effects (Shahin and Zairi, 2007).

In addition, research has revealed that gender diversity on corporate boards is not only an ethical responsibility, but it has a positive effect on the firm’s performance and corporate responsibility (Gillis, 2012). As a result, gender diversity raises the question on whether or not women on corporate boards are the answer in humanizing large multinationals in becoming more socially responsible. Therefore, this thesis will examine how the greater number of women on Standard & Poor’s (S&P) 100 boards affects corporate social responsibility through the Kinder, Lydenberg, and Domini Research & Analytics (KLD) lenses.

The paper is organized as follows. Chapter two is the “ Literature Review” which covers the importance of corporate social responsibility and the relationship between CG and CSR and followed by the “Theoretical Model Development.” The theoretical model development describes the four relevant theories: stakeholder, resource dependence, agency and group effectiveness theory, which provide the foundation for this research and are ubiquitous in all subsequent finding. Chapter three outlines “The Sarbanes-Oxley Act of 2002,” and its relevance to board composition. Chapter four then examine the significance of board composition from the outsider and women directors’ perspective and how women directors’ impact CSR. Chapter five is the “ Empirical Methodology” which presents the data and methodology that was used. The empirical results are explained in chapter six “Results”. Chapter seven is an elaboration discussion of the results. And lastly, chapter eight, “ Conclusion” concludes the study.

The research question, how does the greater number of women on S&P 100 boards affects corporate social responsibility through the KLD lenses, raises certain predications about the subject of this study. Hence, the alternative hypotheses and their equivalent null

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hypotheses are as followed. First, I hypothesized that the KLD’s rating for CSR (corporate governance, social and environment) scores would improve with an increase of women on corporate boards. The null hypothesis states that there would be no improvement in CSR with an increase of women on corporate boards. Second, I hypothesized that from 2009 to 2011 the CSR scores would improve due to higher gender diversity on S&P 100 boards. The null hypothesis states that time would not have an impact on CSR scores due to an increase of gender diversity on corporate boards.

This body of knowledge would add to the scientific community for several crucial findings. First, the results revealed that the greater number of women on the boards does increase CSR scores; and secondly, time does have an influence on the amount of women on the boards and their corresponding CSR scores. More studies are needed to demonstrate the impact of women directors on board decision-making and effectiveness (Zhang, Zhu, and Ding, 2011). Additionally, the impact of board composition on a firm’s CSR performance and/or initiatives is an under-developed area, which needs to be discussed and exposed of its hindrances.

Chapter 2 Literature Review

2.1 Corporate Social Responsibility

For businesses to operate successfully, the needs and interests of the customers must be met. Businesses can gain substantial amount of profits if their customers purchase their products. Thus, the public expects businesses to be philanthropic and pervade its profits back to them. Therefore, businesses should be aware of this dubious, delicate relationship and see the masses as one entity, instead of devoting time only to those whom they conduct business transactions with (Uddin, Hassan & Tarique, 2008). Nowadays, corporations’ resources and economic power have grown drastically, and are expected to play a prominent role in the development of the communities in which they operate their businesses (Breuer, 2006).

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Corporate social responsibility is defined as the obligation of an organization to adhere to individuals’ rights and to promote human welfare in their business operations (Manakkalathil and Rudolf, 1995). Carroll (1979) suggested that corporations have four responsibilities to achieve in order to be considered good corporate citizens: legal, economic, ethical and philanthropic. They are defined as follow:

1. Legal responsibility: to comply with the laws and regulations that allow businesses to play by the rules of the game. The social contract between business and society is partially fulfilled when the organization conducts their economic mission within the framework of the law (Carroll, 1991).

2. Economic responsibility: to be profitable for the principle and produce a good quality product at a reasonable price for the consumer. The notion of maximum profit became the pure motive for business. Also, it’s important to maintain a competitive position, be consistently profitable and uphold an above average level of operating efficiency (Carroll, 1991).

3. Ethical responsibility: to overcome the obstructions of the legal duties and by being moral, fair and respecting peoples’ rights without causing harm to others (Smith and Quelch, 1993). Additionally, ethical responsibilities accept newly evolving values and norms that have possibly higher standards than what current laws requires. But more importantly, ethical responsibility and the legal responsibility dimension are constantly at a lively interplay (Carroll, 1991). 4. Philanthropic responsibility: is concerned with doing good for society, in spite

of the impact of the bottom line with volunteering time, resources and money. The difference between ethical and philanthropic responsibilities is that society would like business to be more involved either through volunteer programs or contribution of financial or human capital, however, if a organization does not fulfill these things they are not considered unethical. Nevertheless, philanthropy actions are more voluntarily and organizations feel like they are good corporate citizens (Carroll, 1991).

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CSR helps organizations to develop into good corporate citizens. The idea of good corporate citizenship stems from Carroll (1991) that organizations are inhabitants of the society in which they operate. Carroll (1991) argues that social responsibility cannot be considered as a separate entity from the organization’s business agenda in order to fully be considered as a legitimate and necessary practice. CSR facilitates the amalgamation of social and environmental concerns that are important to the organization’s business operations, as well as, its interactions with various stakeholders. Stakeholders are considered to be a variety of both internal and external participants that are affected by the organization’s goals and/or who can affect these goals directly (Freeman, 1984). CSR has been recognized as an apparatus that contributes to organizations’ bottom-line and long-term sustainability, which helps corporations to become good corporate citizens. Long-term sustainability consists of corporations’ internal efforts to make daily operations cleaner, reinforce social structures and accountable for their share of responsibility towards their stakeholders (Bihari and Pradhan, 2011).

2.2 Three dimensions of CSR

The mutual relationship between corporations, economic systems, society and the level of obligations are the core values of CSR. Corporate social responsibility three dimensions are economic, social and environment (Uddin, Hassan & Tarique, 2008). Corporations that participate in CSR activities can benefit from the triple-bottom line (i.e. environment, societal and economic) that potentially contributes to an organizations competitive advantage. For instance, a corporation’s reputation is difficult to mimic, a rise in employee satisfaction, possible tax exemptions and interest from new investors, can all contribute to a corporation competitive advantage (Uddin et al., 2008).

The economic aspects must consider both direct and indirect impacts organizations impose on the community and the stakeholder. An organization’s economic performance affects on its stakeholder, which consists of all employees, local governments, customers and the community. Good economic performance helps fuel local industries, assists in government programs and community activities; this result is considered to be the multiplier effect. Additionally, fair taxation policies are an example of good economic practice because it

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has profound impacts on job creation and the distribution of wealth. Consequently, the surrounding community ends up benefitting (Uddin et al., 2008).

The social dimension has encompassed the meaning of social responsibility by being accountable for the social effects an organization has on its society. Those effects are implemented both directly, through the customers and the respective community, and indirectly, through the supply chains. This responsibility of implementing good social products rests at the mercy of management. Management’s duty is to ensure that their decisions will contribute to the prosperity and interest of the society and the organization. Businesses are a crucial and prominent factor, which propel prosperity, health and stability of the communities in which they operate. Also, take into consideration that the employees and customers of the organization are normally from the surrounding communities. So, the employment of locals is already a contributing social practice. Thereby, the reputation of the organization is strongly elevated, and perhaps even favored. Accordingly, organizations that employ those tactics gain a competitive edge against their counterparts, which in turn promote their image from solely as a business to an employer, producer, and a member of the local community (Uddin et al., 2008).

Lastly, the environmental dimension consists of changes corporations have made on the surrounding natural environment. For instance, one negative impact of corporations is the overuse of non-renewable natural resources. Businesses that are environmental conscience emphasize on increasing the natural resources productivity, going green with cleaner production and most importantly, changing the modes of operation to a more environmental friendly business model. Some businesses have found that improving environmental performance has also lowered their operation cost significantly (Uddin et al., 2008).

2.3 The interaction between Corporate Governance and CSR

Corporate social responsibility is inescapably influenced by corporate governance structures and practices. Corporate governance’s main focuses are the structure of ownership and the control over the key stakeholders (i.e. who hold the decision-making

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power in the corporation) (Kang and Moon, 2012). Better decision-making abilities are likely to triumph when there are dissimilarities in demographics (Arfken, Bellar and Helms, 2004). Research has shown that companies with a higher percentage of women on the boards tend to have stronger corporate governance practices than those with fewer or no women on the board (Rosener, 2003; Bernardi and Threadgill, 2010). This phenomenon is of particular importance due to recent corporate governance scandals.

Furthermore, CSR has the potential to play a significant role in business strategy. That role can be achieved by satisfying stakeholders’ interests and needs by being profitable and increasing the social value (Uddin et al., 2008). For instance, Stephenson (2004) found that boards with female directors tend to use other performance indicators (i.e. social responsibility and innovation) than finance to evaluate the company’s performance in comparison with their male counterparts. A 1999 study illustrated that non-financial indicators were also important for investors. Those indicators ranged from social performance of women of the community, of product safety and of the environment (Cox, Brammer and Milligton, 2004). Another example is that companies with women on their boards are likely to experience an increase in revenue and profits. Stakeholders are therefore more satisfied, which is resulted with the company acquiring a more positive corporate environment (Bernardi and Threadgill, 2010) and reducing threat regulation (Maxwell, Lyon, Hackett, 2000). Additionally, a study by Carter, Simkins and Simpson (2003), had shown that there is a direct correlation between increases in shareholder values with the diversity of board directors.

Overall, corporate social responsibility strives for corporations to safeguard society’s interest and welfare by making it clean, equitable and ensuring prosperity for future generations (Uddin et al., 2008). CSR has helped corporations fulfill their implicit and explicit contract between corporations, economic sectors and society. The implicit contract is referred to the values, norms and rules that corporations need to provide for their stakeholders. On the other hand, explicit contract is consisted of community programs and strategies that merge social and business values so that corporation can become socially responsible (Matten and Moon, 2008). However, corporate governance

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practices impact CSR differently. Corporate boards are an effective aspect of internal governance mechanism. Greater board diversity increases more initiatives, which targets sustainability and outreach programs (Hartarska, 2004).

2.4 Theoretical Model Development

2.4a Stakeholder Theory

Freeman and Velamuri (2006) stated that the main goal for CSR is to generate value for their various stakeholders and to fulfill their responsibilities towards their stakeholders. The stakeholder model is more in line with CSR initiatives than the shareholder model. The stakeholder theory provided a theoretical framework for analyzing the association between the organization and society (Clarkson, 1995). The stakeholder theory is an alternative to the shareholder’s perspective of maximizing wealth. The stakeholder theory has multiple goals that need to be achieved for its diverse constituents pertaining to the governance process; therefore, shifts from the principle to agent as in the shareholder theory toward a more collaborative approach. This shift in governance process ensures effective and efficient coordination, cooperation and negotiations for their stakeholders. Businesses that are committed in the stakeholder model must demonstrate their capabilities in achieving multiple goals and allocate value to their diverse constituents (Ayuso and Argandoña, 2007).

According to the normative perspective of the stakeholder theory, the importance of a diverse group of stakeholders can be viewed as an ethical demand. Board diversity is essential in ensuring that the various constituents’ concerns are protected, legitimized, and taken into account during the corporate decision-making process (Evan and Freeman, 1993). Luoma and Goodstein (1999) found that there are three dimensions of board composition that are significant for stakeholders and the decision-making process: oversight board committees, stakeholders as directors and a CSR committee.

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2.4b Resource Dependence Theory

There are two organization theories, resource dependence and agency theories, which provide the board theoretical foundation on how board composition influences CSR. Pfeffer and Salancik (1978) stated that the resource dependence theory regarded board members as benefactors of tangible and intangible assets, which are essential for the organization’s growth and performance. These tangible and intangible assets can potentially influence the organization’s behavior and environment. The resource dependence theory provided insights into the rationale about the board’s function, especially with regard to providing critical resources such as advice, legitimacy, skills, and counsel (Hillman & Dalziel, 2003; Bear, Rahman & Post 2010). The resources were later categorized into the directors’ human capital, which entailed capabilities, knowledge and reputation and relational capital, which included key relationships and readily available resources from their social capital (Hillman & Dalziel, 2003).

When board members are considered the embodiment of resources then the significance of board diversity becomes apparent (Ferreira, 2010). These resources have allowed the organization to fully understand and respond to the environment (Boyd, 1990) and better manage CSR issues (Bear et al., 2010). Ferreira (2010) argued that access to these resources assisted in the board’s decision-making procedures. The decision-making process is also enhanced when board members have various experiences and different perspectives and therefore are likely to approach problems differently and avoid “group thinking.” A more diverse board fosters creativity and allows unique source of information to emerge than a homogeneous board (Ferreira, 2010).

Also, the resource dependence theory explained the important advantages of board diversity and its potential in maximizing the firm’s value. Board diversity will promote fair workplace practices, which will not be limited to the promotion of minority employees, legitimizing the role of the organization, mentorship opportunities and granting access to larger resource pool of contacts, who would have otherwise been inaccessible (Ferreira, 2010). This reinforces the organization’s internal and external environment, which further increases the organization’s resources (Ferreira, 2010; Pfeffer

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and Salancik, 1978; Campbell and Minguez-Vera, 2008). Increasing the network offered new channels for collaboration with other organizations and assisted in the organization’s ability to manage third parties more effectively and efficiently (Pfeffer and Salancik, 1978; Campbell and Minguez-Vera, 2008). For instance, a director with political ties can assist in obtaining government contracts or deal with regulators (Ferreira, 2010). This builds on Pfeffer and Salancik’s (1978) argument that directors are the embodiment of their resource, which provides new channels of communication that highlights the directors’ human and social capital.

2.4c Agency Theory

Agency theory is defined as a contract between the principal and the agent to execute a task on behalf of the principal. Let’s assumes that the principal and the agent have conflicting goals, then the separation of ownership and control is imperative in avoiding opportunistic behaviors from the agent (Jensen and Meckling, 1976; Fama, 1980; Coffey and Wang, 1998). Board of directors are the monitoring mechanism that monitor the opportunism of top management and this role is fulfilled when directors employ new management, fire, recompense and monitor important decisions (Fama and Jensen, 1983).

A higher percentage of outside and independent board members strengthen the board’s independence, provide a more balanced and efficient structure in monitoring and evaluating managers while protecting the interest of the shareholders (Bonazzi and Islam, 2007; Fama and Jensen, 1983; Coffey and Wang, 1998). Hence, board diversity with more women, minorities and independent directors are essential in securing that the boards are accountable and satisfies the needs of the shareholders. Whether inside or outside, women and minority directors are more inclined to support CSR activities. This inclination becomes possible because women and minority directors are apart of these interest groups due to their socioeconomic background (Coffey and Wang, 1998).

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2.4d Group Effectiveness Theory

The group effectiveness theory postulates that the nature of task performed is a significant intermediary amid the team composition and its effectiveness (Gist, Locke, & Taylor, 1986). Board composition implies that a particular composition has the potential to perform better because of the different skills-set that are required to achieve their goal (Nielsen and Huse, 2010). An effective board provides resources, gives advice, counsels and integrates itself in a dynamic networking system. These networks provide access to other organizations. Having an extensive network also assist in managing the organization’s challenges and balancing the board’s human capital. Research has shown that functional diversity can improve the team’s creativity through developing alternative solutions and innovation (Bantel and Jackson, 1989). Accordingly, an increase in board resource diversity has a greater potential for understanding and obtaining alternative solutions, which enable the board to work more efficiently and effectively in governance and CSR (Bear et al., 2010).

Furthermore, the aforementioned theories are significant and relevant to this research because they set the precedent of women being on board of directors and their much-needed presence, which further ensures corporations’ chances of being more socially responsible. The stakeholder and the group effectiveness theories are essential for this research because greater board diversity is a business strategy that satisfies the different stakeholders interest and needs. When those interests and needs are met, greater profits and heightened social value follow suit (Clarkson, 1995; Nielsen and Huse, 2010). The board of directors is fundamental in managing and safeguarding stakeholder acceptance (Zhang et al., 201). The agency theory builds on gender-diverse boards because board members from different backgrounds give a balanced board structure for monitoring and evaluating (Jensen and Meckling, 1976). Moreover, the resource dependence and group effectiveness theories build on how a diverse board brings different resources and how collectively the directors add a unique value to the corporation (Pfeffer and Salancik, 1978). This notion supports both hypotheses that women directors bring an added value to the organization, which it would suffer from if it would not diversify its board members. The literature provided the fundamental information to give rise to the hypotheses.

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Chapter 3 The Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act of 2002 (SOX) is a significant regulatory legislation for corporate governance. It had momentous affects on corporate board structures and composition, which resulted with more independent boards (Valenti, 2008; Zhang et al., 2011). Sarbanes-Oxley specified that the composition of influential committees must have independent members such as: corporate governance (i.e. minimum of three independent members), the chairpersons of the audit and compensation committee, and more importantly, the separation of the CEO (Valenti, 2008; Dalton and Dalton, 2010; Zhang et al., 2011). Nevertheless, the SOX guidelines do not directly address gender related issues on corporate boards; however, board composition has been impacted due to the SOX’s requirements for more independent and outsider appointees to the board (Valenti, 2008).

SOX and the stock exchange (NYSE and NASDAQ) acted as a catalyst for corporations to progressively institutionalize the increase presence and the advancement of women on boards. Since the enactment of SOX, board membership by women increased by approximately 30% and women on influential committees and leadership roles also had an upsurge of 200% (Dalton and Dalton, 2010). Overall, Post-SOX contributed to a substantial increase in independent outsider (women) directors on corporate boards in comparison to Pre-SOX (Zhang et al., 2011). The appointment of women directors fulfilled two important criteria for the corporate boards. Women directors gave alternative perspectives regarding problem solving solutions and products and markets, in addition to reducing the CEO ascendancy by being the independent intermediary in the decision-making process (Burgess and Tharenou, 2002; Valenti, 2008).

Chapter 4 Boardroom Composition

Kanter (1977) believed that shifting the gender dynamics of the board would lead to a new organizational design. Board composition is fundamental in ensuring best practices in corporate governance (Ayuso and Argandoña, 2007). The board of directors played a significant role in the decision-making process at the top level of corporate organizations. The role of the board has three core functions: assist in the attainment of mandated objects of wealth creation, mentor the executive management in their goals and control the

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process that generates wealth and wealth-creating assets (Balasubramanian, 2013). Moreover, the board of directors have additional roles that consists of performance targets, accountability to stakeholders, organizational directions, value creation and setting the ethical standards for corporate behavior (Clarke and Clegg, 2000; Huse, 2007). The board selects and appoints the CEO and makes decision of the organization’s identity in society and its position in the market (Casey, Skibnes and Pringle, 2011). The importance of the corporate governance, the board and its composition (i.e. gender diversity), is becoming increasingly significant to stakeholders (Casey et al., 2011). Board diversity goes beyond gender, which encompasses ethnicity; age, expertise and domain competencies, and all are crucial components for an effective and efficient board (Balasubramanian, 2013).

4.1 Outside Board Directors

Boeker and Goodstein (1991) reported that outside directors assist in connecting an organization with its external constituencies or stakeholders. The connection between the external stakeholders and the organization are vital in building long-term relationships that will facilitate and nurture the acquisition of resources (Aysuso and Argandoña, 2009). Outside directors add a different perspective to the board and thus broadening its ability to hear the different stakeholder claims and increase their salience.

In view of that, the stakeholder salience theory states that an organization prioritizes the claims made by different stakeholders based on three standards: the legitimacy of the claim, the alleged power of the stakeholder and the urgency of the claim (Mitchell, Agle & Wood, 1997). For instance, the directors’ history and experience enable a degree of consideration for the stakeholder’s claims pertaining to legitimacy and urgency (Saiia, 2007). More importantly, an increase in saliency leads to an increase in stakeholder approval and acceptance (Zhang et al., 2011).

Outside directors are essentially the representatives of the external stakeholders (Johnson and Greening, 1999). The characteristics of the outside directors are broader than the typical corporate insider such as education, health, law and not-for-profit organizations. Research has shown that outside directors are more willing to participate in philanthropic

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activities, friendly to stakeholders and are more orientated to helping employees (Ibrahim, Howard, &Angelidis, 2003). Their eagerness, to be involved with all aspects of the corporation’s dealings, gives the outside directors a unique position to assist in the organization’s resource management and its stakeholders simultaneously. To put it briefly, outside directors heighten the organization’s effectiveness with managing stakeholder claims and resources, which in turn increased the stakeholders’ acceptance and legitimacy of the firm’s operations. Legitimacy is industry based and derived from social acceptance, which is partly a reflection of their CSR performance (Zhang et al., 2011).

The boardroom, as in everywhere else, has a culture that is created through a set of unwritten laws and codes of ethics, communication styles and behaviors (Sealy, Vinnicombe & Doldor, 2009; Fagen, Menendez, & Anson, 2012). The male domination in top management determines the managerial culture and practices, which consist of masculine images and values that position women as “outsiders” (McDowell, 1997) and label women as “travellers in a male world” (Marshall, 1984) and this ubiquitous concept indirectly makes it much more difficult for women to reach senior management positions. Gender stereotypes exist in the boardrooms especially during the recruitment process because board membership depends greatly on informal networks, which are dominated by the old boys clubs (Fagen et al., 2012). Thus, gender hierarchies are deeply embedded into the organizational culture of the firm (Hutching, Lirio & Metcalfe, 2011). Sun Oil’s CEO, Robert Campbell best states it:

Often what a woman or minority person can bring to the board is some perspective a company has not had before adding some modern-day reality to the deliberation process. Those perspectives are of great value and often missing from an all-white, male gathering. They can also be inspiration to the company’s diverse workforce (Campbell, 1996).

To reiterate, “the old boys club” is embedded in the corporate board culture. Men feel a sense of entitlement to serve on corporate boards, and are blinded by impartiality, which may be of disservice of corporations, considering all the qualities latent women board directors possess.

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4.2 Women Board Directors

Ramirez (2003) stated that in order to accomplish noteworthy diversity both at the workplace and in society, it must first start with fair corporate governance practices that will sprout diverse corporate boards. Consequently, women in top management lags far behind their male counterparts. According to Adams and Ferreira (2008) gender diverse boards in fact apportion more effort and are more effective in monitoring management. Gender mix boards assist a corporation in comprehending and appealing to a vast majority of people, which allows for easy penetration into new and existing markets (Arfken et al., 2004). Since, women are responsible for procuring over 75% of all goods and services rendered (Stephenson, 2004), it would then be economically profitable to have women, who can relate to the women consumers, serve on the boards (Bernardi and Threadgill, 2010). For instance, in 2004, women spent approximately $5 trillion on personal and business products and accounted for half of all investors (Flynn and Adams, 2004)

Higgs (2003) stated that gender diversity can improve the board effectiveness by tapping into a larger talent pool of top management. On boards, there are some difference among the men and women directors, with regard to their experience and educational backgrounds. Adams and Ferreira (2009) found that women directors are mostly allotted to audit, corporate governance and nominating committees than their counterparts. In comparison to men, women gain their board experience from small organizations and are less likely to have prior CEO or COO knowledge (Singh, Terjesen & Vinnicombe, 2008). Women directors’ experience comes from a wide variety of backgrounds, which brings a different dimension to the boards (Hillman et al., 2002). Cadbury (2002) supports this ideology and states:

The responsibilities, which many women carry in voluntary organizations and public life, will have given them a different type of experience from executives; as a result, they can bring a particular kind of value added to a board… They [boards] will gain from having directors with a wider spectrum of viewpoints than in the past, in line with the wider interests, which they are now being called upon to take.

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Moreover, more women on boards stimulate more participative communication, are more democratic and encourage open conversation among board members. Women board members provide a broader perspective, which better assess the needs of diverse stakeholders (Bear et al., 2010). In addition to those qualities that women already possess, they may also provide better oversight of management practices because of the increase heterogeneity between the board, upper management and the CEO. Lastly, the number of women on boards also indicates to stakeholders that the organization believes in women and minority initiatives and thus is socially conscious (Bear et al., 2010).

Women directors through their professional experience are more aware of the various stakeholders and their claims. Women directors increase the organization’s saliency and manages the resources that are vital to key stakeholders (Zhang et al., 2011). Research has shown that the board decision process is greatly improved when there are women on the board especially, if there are three or more women on the board (Bernardi, Bosco, and Columb, 2009; Kondrad and Kramer, 2006). Furthermore, the sentiment toward gender diversity on the board trickles down to all aspects of the company. Which in fact leads to an overall advancement of women throughout the company and in society, as a whole (Bernadi, Bean, Weippert, 2005; Bernardi & Threadgill, 2010).

4.2a Background of Women Directors

Women directors, unlike their male counterparts, reach the boardroom level by other means than business, like academia and community services (Terjesen, Sealy & Sing, 2009). For instance, women are twice as likely to hold a doctoral degree than men (Hillman, Cannella & Harris, 2002). Fondas and Sassalos (2000) argue that the more women serving on the board, the more effective the board is. There is disproportionate high expectance of boards with women, and as expected they transmit higher results, which accordingly improve corporate performance and concurrently render the more independent. Hence, women directors are especially responsive to organizational practices that pertain to environmental issues and corporate social responsibilities (Nielsen and Huse 2010). A more gender diverse board improves a corporation’s claim of legitimacy from the public, media and government (Ferreira, 2010), which subsequently increases the

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corporation’s salience for stakeholders and assist in stakeholder acceptance (Zhang et al., 2011).

Additionally, women take their non-executive director roles more seriously (Izraeli, 2000). Women ask more difficult questions than their male counterparts and often decisions are not easily made (Balasubramanian, 2013). Women board members bring a different viewpoint to the debates and decisions. Furthermore, there needs to be a minimum of three women on boards to have a significant impact on board performance (Balasubramanian, 2013). For instance, research from the Leeds University Business School found that having at least one female director on the board illustrates a decrease in a company’s risk of going bust approximately by 20%. They also reported that two or three female directors decrease their risk even further. An additional example from the Conference Board of Canada found that 91% of boards with three or more women directors explicitly took responsibility for verifying audit information compared with 74% of companies with all male directors (Opportunity Now, 2012).

4.2b Value of Women Directors

Gender mix boards have seen an increase in shareholder value because boards are accessing new ideas, resources and viewpoints that translate into new tactics for introducing new products and services (Carter, Simkins, and Simpson, 2003). The resource dependence perspective ties perfectly when discussing the acquisition of new resources. The board characteristic is crucial in gaining access to social and political connections from their new entrants (Ferreira, 2010). The greater amount of women on boards leads to an increase in profit margins, to an increase in return on investments, to lower stock return volatility (Adam and Ferreira, 2009), to customers fulfillment and to the overall perspective of the corporation being more positive (Erhardt et al., 2003). Additionally, corporations with diverse boards are more profitable than those of homogenous boards. For instance, corporations with the greatest percentage of women on their boards had an increase of 35% for return on equity (ROE) (Stephenson, 2004) and returned 34% more to their shareholders than their counterparts (Speedy, 2004).

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Research has further revealed that women directors have improved board conduct and boardroom culture, especially in regard to better monitoring practices (Gillis, 2012). For instance, Erhardt et al., (2003) found a positive association between an increase of women on boards with accounting procedures and returns on equity (ROE) (Ferreira, 2010). Furthermore, CEO compensation is more equity-based when there are more women serving on a board. And women board members hold CEOs more accountable when the firm’s stock price is performing poorly (Ferreira, 2010).

Women directors broaden the board’s horizon with different strategies. Research from the Conference Board of Canada found that 74% of boards with more than one woman on them improved the standards for measuring strategy (Stephenson, 2004), and 94% of boards with women on them also improved their monitoring and their implementation of strategies better than the boards without women. As a result, studies have shown that three or more women greatly improved corporative governance practices (Kramer, Konrad, Erkut, 2006). The implementation of different strategies help in identifying non-financial activities like corporate social responsibility initiatives and innovation projects which will add value to the corporation and to their stakeholders (Stephenson, 2004).

Gender-blindness also means being blind to the value of board diversity in and of itself from bringing various perspectives to the table, bringing knowledge about key constituencies, and enhancing the quality of discussion. To gain these advantages and improve governance, companies must establish a recruiting approach that acknowledges the value of diversity and deliberately seeks to build diversity into the board (Kramer et al., 2006).

The above quote further explains the value of women directors and the resources that women directors bring to the board. Board diversity changes the dynamics of the board, improves governances practices and the content that is discussed. This helps in ensuring that the perspectives of multiple stakeholders are heard (Kramer et al., 2006).

In summary, gender mixed boards affects the board’s behavior and is positively correlated with the board’s outcomes (Ferreira, 2010). This research has utilized the stakeholder, resource dependence, agency and group effectiveness theories along with the aforementioned concepts, to build on the notion that gender diverse boards add value to

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the corporation either by the access of new resources from the diversity of the board or by offering new monitoring practices to the board. The figure below summarizes how gender diversity is achieved from the embodiment of resources (i.e. characteristics) under the leadership of the individual directors (Terjesen et al., 2009). Gillis (2012) stated that women directors improved board conduct, which led to better monitoring procedures. Improved governance policies impact the corporation’s overall performance levels, especially the corporation’s reputation, finances and social clout (Terjesen et al., 2009).

Figure 1. Characteristics and Outcomes of Gender Diversity on Corporate Boards

(Terjesen et al., 2009)

Each of the aforementioned theories and concepts build a clear understanding of how greater gender diversity leads to better overall performance of the corporation which contributed to their CSR activities. CSR activities are smart a business strategy that furthers contributes to the corporation’s competitive advantage, which in turn, add value to the corporation (Wang and Coffey 1992; Smith, 2007;Uddin et al., 2008). The two hypotheses for this study are based upon these theories, concepts, and prior research:

H1: states that KLD’s rating for CSR (corporate governance, social and

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H01: states that there would be no improvement in CSR with an increase of women

on corporate boards.

H2:states from 2009 to 2011 the CSR scores would increase due to higher gender

diversity on S&P 100 boards.

H02: states that time would not have an impact on CSR scores due to an increase

of gender diversity on corporate boards.

Chapter 5 Empirical Methodology

5.1 Overview

The data was compiled for the Standard & Poor’s 100 corporations within the Risk Metrics and KLD database from the WRDS database. The S&P 100 boards are the main focus of this study since research has shown that women representation on boards are largely due to the corporation’s size, industry, and firm diversification strategy (Hillman, Shropshire and Canella, 2007). The Risk Metrics were used to obtain data on the corporation’s corporate governance structure, which included the board of directors full name, title, gender, corporate governance committee, board structure and the numbers of boards in which the directors sat on. The corporations that are in this analysis are corporations that had data in both databases for both 2009 and 2011 with either no woman on the board to multiple women on the board.

The KLD STATS database provides a multidimensional assessment of a company’s corporate social performance (Johnson and Greening, 1999). The KLD is a dataset with a yearly overview of the environmental, social, and governance performance of the largest 3100 US companies by market capitalization. Graves and Waddock (1994) stated that KLD rates companies objectively, and screenings are consistent across all companies and are not affiliated with any of the companies that are being screened. Thus, KLD is considered “the de facto (corporate social performance) research standard at the moment” (Waddock, 2003, p. 369). There are 91 companies in this sample due to the removal of nine companies because of insufficient information in either or both databases.

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The research design is based on quantitative analysis of how gender mixed boards influence corporate social responsibilities in S&P 100 corporations. This was the best-suited approach for this study because the databases provided all the essential information to measure the correlation between the independent and dependent variables. Burns and Burns (2008) considered this type of study to be a correlation research. Correlation research is conducted to measure the association between the variables; however, it does not imply causality (Burns and Burns, 2008). The research methods are adapted from Bernardi and Threadgill (2010) in examining whether or not corporations benefit from the increase presence of women directors to increase their corporate social responsibility activities.

The research results were conducted in the following matter. First, identify and categorize the independent variables and dependent variables. A descriptive analysis was completed to paint an initial picture of the data. Then a Pearson correlation was conducted to test for the associations between the independent and dependent variables and to confirm or reject the hypotheses. The stepwise multiple regressions were conducted to analyze the sequence and contribution each of the variables has on the model. The backward multiple regression analysis was conducted to further explain the variables contribution to the model. These test were conducted with all of the five KLD categories against the gender diversity categories. The dataset were split into two subgroups to analyze the two years separately. Lastly, a reliability and validity test was conducted to evaluate the measurements of the instrument.

5.1a Independent variables

The data was prepared in an Excel spreadsheet before being imported into IBM SPSS 20 software. The first and second independent variables are the number of female board members and total number of board of directors. This was counted manually and then extracted from the Risk Metrics database individually for each of the companies in this study. The third independent variable is percentage of women directors to board size, which was obtained between the female boards of directors (FBOD) and the total number of board of directors (TBOD). This was used to measure gender diversity. Furthermore,

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T.R. Simms the fourth independent variable is the difference between female board members from 2009 and 2011. This was obtained by subtracting the female directors 2011 from 2009. The data years were separated to include all even rows 2009 (True) and all odd rows 2011 (False).

5.1b Dependent Variables

The first dependent variable is the KLD rating. Each of the scores were first labeled and then added the scores (0-10) assigned by the KLD STATS. Then the scores were divided into their respective categories. Dependent variables 2-4 within the KLD rating scheme are corporate governance, social/community, and environment. Each of these subdivisions were counted by one and not by their original value from KLD STATS. The KLD difference is the fifth dependent variable. The KLD difference was obtained by subtracting the 2011 KLD rating scores from the 2009 KLD rating scores. This was done to demonstrate that time can influence the CSR scores. On another note, women on the corporate governance committee is the only control variable for this study. The corporate governance committee was inputted as a binary code: no (0) and yes (1). The KLD categories and corporate governance committee were manually counted, labeled, and organized and then inputted into Excel.

Table 1. Explains how the scores were achieved: Data

year Ticker KLD Category

Corporate Governance Social/ Community Environmen t

KLD$

rating$

KLD$

differ$

2009 X Diversity 3, product concern 1, community strengths 2, RD 1 1 2 1 7 2011 X Diversity 5, climate change 1, community strengths 3, bod 1 2 1 1 10 3

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Table 2. Represents the dimensions that were the most significant for this research. Their definitions can be found in the Appendix section (RiskMetrics Group, 1990-2010).

5.2 Data Analysis

The data analysis is composed of three statistical tests to test the two hypotheses: Pearson product moment correlation, stepwise multiple regressions and the backward multiple regressions. The data analysis was conducted on IBM SPSS 20.

5.2a Pearson Product Moment Correlation

The Pearson product moment correlation of the Pearson correlation coefficient (r) are used to test all hypotheses to determine whether or not the amount of women on the board of

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directors have an influence in corporations being more socially responsible and if time is a factor in improving CSR scores (Fields, 2000). Here is the Pearson’s Coefficient Correlation equation:

r = n (Σx-y) – (Σx)( Σy)

√ [n Σx²-(Σx)²][nΣy²-(Σy)²]

x1= female board of directors

x2= total number of board of directors

x3 = percentage of women directors to the total board size

x4 = difference of female board of directors from 2009 and 2011

y1=corporate governance score

y2= social/community

y3= environment score

y4= KLD rating is the combined score of Y1, Y2 and Y3

y5= KLD difference is the difference from 2009 to 2011 KLD rating

5.2b Multiple Linear Regressions

The multiple linear regression analysis is a method to find a linear combination with multiple independent variables that correlates maximally with the dependent variables. The multiple linear regression analysis is executed to test the null hypotheses. The R² is the measure of the correlation and tells that proportion of the variance in the criterion variable in the model. The R² overestimates the success of the model which leads to the adjusted R². The adjusted R² gives the most useful measure of the model because it takes into account the number of the variable and number of observations in the model. The regression models in multiple regression is an equation (Fields, 2000):

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Y1= (β0+β1Χi1 +β2Xi2 + …+ βnXn) + εi

β = the constant termàgender diversity

β1... βn= the coefficients for the independent variables

εi = is the difference between the predicted and the observed value of Y for each of the

independent variables.

X1= female board of directors

X2= total number of board of directors

X3 = percentage of female board members to total board size

X4 = difference of female board of directors from 2009 and 2011

Y1=corporate governance score

Y2= social/community

Y3= environment score

Y4= KLD rating is the combined score of Y1, Y2 and Y3

Y5= KLD difference is the difference from 2009 to 2011 KLD rating

In the stepwise multiple linear regressions, predictor variables are entered in a sequence and its values are assessed. Only variables that are important for the model will be kept and all other variables will be eliminated. This technique should ensure that the smallest possible set of variables is included in the model (Fields, 2000).

The backward multiple linear regression inputs all the independent variables into the model. However, the weakest independent variable is then removed and the regression is then re-calculated. This method is repeated until only the most significant independent variable remains in the model (Fields, 2000).

5.3 Reliability and Validity

Reliability and validity are two essential tools for evaluating the measurement of the instrument. Validity pertains to the extent to which the instrument measures what it is

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intended to measure. Reliability is then concerned with the ability of the instrument to measure consistently. An instrument cannot be considered valid unless it is reliable. But interesting enough it’s not the same the other way around because reliability does not depend on validity (Tavakol and Dennick, 2011). The Cronbach’s α reliability coefficient ranges from 0 and 1, but the closer the Cronbach’s α is to 1, the greater the likelihood that the internal consistency of the items is in the scale (Gliem and Gliem, 2003).

George and Mallery (2003, pg. 231) provided a scale to assist in analyzing the reliability of the measurement “ >.9 excellent, > .8 good, >.7 acceptable, >.6 questionable, > .5 poor and < .5 unacceptable”. An increasing α is partially due to the number of the items in the measurement, which also has diminishing returns (Gliem and Gliem, 2003). According to Saunders, Lewis & Thronhill (2009) reliability and validity of secondary data is related to the reputation of the source in which it was attained from. Since the KLD STATS is the de facto for CSR reporting and the Risk Metrics database within the WRDS database are consider reputable data providers, the data can be confirmed as reliable. The original data from the KLD STATS and Risk Metrics come from the companies public documents, company website, annual reports, CSR reports and other stakeholders data source (RiskMetrics Group, 1990-2010).

Chapter 6 Results

This section will report the significant findings that supports the alternative hypotheses and reject the null hypotheses for this research:

H1: states that KLD’s rating for CSR (corporate governance, social and

environment) would improve due to an increase of women on corporate boards. H01: states that there would be no improvement in CSR with an increase of women

on corporate boards.

H2:states from 2009 to 2011 the CSR scores would increase due to higher gender

diversity on S&P 100 boards.

H02: states that time would not have an impact on CSR scores due to an increase of

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6.1 Descriptive Statistics

The descriptive analyses are divided into two categories, one for categorical/discrete variables and the other is for continuous variables. Continuous data measures the central tendency and the variability. For categorical/discrete data (i.e. nominal) report the frequency for each value (Fields, 2000). The continuous data was KLD rating, KLD difference, and percentage of women to men on the boards and the difference of women board from 2009 to 2011. The histograms revealed that KLD rating (M=12.68, SD= 6.62) is normally distributed. In addition, the percentage of women directors (M=17.60, SD= 7.72) and the difference of women directors (M=. 31, SD= .839) histogram showed that it is positively skewed. This indicates that the percentage of women on the board and amount of women on the board from 2009 to 2011 is significant to a company’s CSR score. However, the KLD difference (M=3.04, SD=4.68) was negatively skewed according to the histogram.

Figure 2. Skewness: Percentage of women directors (positive) and KLD difference (negative)

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Furthermore, categorical variables are female board members, total number of board members, corporate governance, social/community, and environment. The valid percent will be used because it accounts for all the entered cases and there is no missing data (Burns and Burns, 2008). The frequency table illustrated that 86 of the 91 firms have at least two (47.3%) women on the board. However, there are five firms that contained no women on their boards (2.7%), and only one firm that had five women on its board of directors (.5%). Moreover, the frequency table for total number of board members illustrated that 43 companies had 12 (23.6%) board members. The CSR scores showed that 44 companies were involved in two (24.2%) corporate governance practices. Additionally, 32 companies participated in three (17.6%) social/community activities, and lastly, the environment table illustrated that 96 companies did at least one (52.7%) environmental initiative. This analysis paints a picture of how companies participated in CSR activities.

Table 3. Frequency table

Categorical Variables Valid Frequency Percent Valid Percent Cumulative Percent

Female BOD 0 5 2.7 2.7 2.7 2 86 47.3 47.3 73.1 5 1 0.5 0.5 100 Total BOD 12 43 23.6 23.6 67 Corporate Governance 2 44 24.2 24.2 47.8 Social/Community 3 17.6 17.6 17.6 39.6 Environment 1 96 52.7 52.7 75.8

The average scores were calculated to provide a visual picture of how the CSR scores changed over the course of two years. The 2009 scores are as followed: corporate governance (2.36), social/community (4.26), environment (0.72) and KLD rating (11.15). And the 2011 scores are as followed: corporate governance (2.93), social/community

(4.71), environment (1.3) and KLD rating (14.19). The bar graph

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Figure 3. Average CSR scores for 2009 and 2011

6.2 Pearson Correlation Coefficient

The Pearson correlation coefficient was divided into two separate groups based on the data year with 91 companies in each group. A Pearson’s r data analysis for 2009 revealed that there is significant correlation at the level 0.01 between female board of directors (M=1.93, SD= .879) and corporate governance (M=2.36, SD= 1.50, r =. 395, p=. 000), and female board of directors and KLD rating (M=11.15, SD= 6.91, r =. 349, p =. 001). The r revealed a moderate correlation. Additionally, female board of directors and social (M=4.26, SD =2.60) were significant at 0.05 levels with (r=. 220, p=. 036), which is considered a weak correlation. However, there was not a significant correlation with environment and female board of directors. KLD difference is not produced for the year 2009. The data illustrated that there are significant relationship between the amount of women on the board and their CSR scores.

The Pearson’s r data analysis for 2011 disclosed that there are significant correlations amongst female board of directors (M=2.22, SD= .99) and the respective CSR scores. The correlation is significant at 0.01 for corporate governance (M= 2.96, SD= 1.25, r =. 396, p=. 000) and KLD rating (M=14.28, SD= 6.07, r= .448, p=. 000) which both have increased from 2009. Social (M=4.71, SD=2.60) was again significant at the 0.05 level

0 2 4 6 8 10 12 14 16 2009 2011

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with (r =. 217, p=. 039). There was no significant finding for environment and KLD difference. Based on these findings the first hypothesis is supported that the amount of women on the board has a direct link to the companies CSR score. The correlation between KLD rating and female board members from 2009 to 2011 showed the greatest growth with the difference of 0.091, which caused the effect size to move closer to a large correlation at .50. Which further supports the second hypothesis that the overall CSR scores increased over time with an increase of women on the boards.

Additionally the Pearson’s r correlation coefficient was conducted to analyze the relationship between the total numbers of board of directors against the aforementioned variables. The Pearson’s r for 2009 revealed that the total number of board of directors (M= 11.74, SD= 2.54, n=91) and CSR scores did not have a significant correlation with corporate governance (M=2.36, SD=1.50, r =. 103, p=. 329), social (M=4.26, SD=2.6 r=. 104, p=. 327), environment (M=. 73, SD=. 71, r = .094, p=. 375) and KLD rating (M= 11.15, SD=6.91, r=. 163, p=. 123) respectively. This can imply that the amount of men board members outnumbered women directors and hence, weakened the influence of the women vote on corporate social responsibility initiatives. But most importantly this supports H1 that the greater amount of women on the board is crucial for CSR activities.

However, the Pearson’s r disclosed a different outcome in 2011 regarding the CSR scores and total number of board of directors (M=11.73, SD=1.86, n=91). The Pearson’s r data analysis showed a significant correlation at the 0.01 levels for corporate governance (M=2.93, SD=1.24, r =. 274, p=. 009). Moreover, there was a significant correlation at 0.05 levels for KLD rating (M=14.20, SD=5.99, r =. 238, p=. 023). The effect size is considered small for these correlations. Consequently, there was no significant relationship between total number of board of directors to the social and environment dimensions. Based on these finding H1 is supported that there needs a significant

percentage of women on board compared to men board members to have an influence on the companies CSR scores. Additionally, the findings also supports H2 that over time there

How does the greater number of women on S&P 100 boards affects corporate social responsibility through the KLD lenses?