Corporate political activity through social responsibility.

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CORPORATE POLITICAL

ACTIVITY THROUGH SOCIAL

RESPONSIBILITY

Philanthropic

or economic

corporate

social

motivation?

University: University of Amsterdam Department: Economics and Business Master: MSc Business Administation: International Management Thesis supervisor: Dr. Ilir Haxhi Second reader: Dr. Francesca Ciulli Student: Aviv de Poel Student number: 10004577 Date: June 21, 2018

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Statement of originality

This document is written by Student Aviv de Poel who declares to take full responsibility for the contents of this document. I declare that the text and the work presented in this document are original and that no sources other than those mentioned in the text and its references have been used in creating it. The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.

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Abstract

Despite the increasing research interest on corporate social responsibility (CSR) and corporate political activity (CPA), previous studies, by either exploring their joint effect on performance or by taking a qualitative approach, have impaired our understanding of how CSR might affect CPA concerning political access. By building on the resource-based view, we argue that CSR is likely to enhance CPA because CSR provides firms with specialized resources that consequently enhance their political resources. Moreover, we decompose CSR into two types, philanthropic and economic, and argue that philanthropic CSR has a stronger effect on CPA than economic CSR since the first is more concerned with the firm external context, while the latter is more related to firm’s internal well-being. We further argue that corporate governance (CG) and industry (B2C over B2B) positively moderate the relationship between CSR and CPA, since both CG and CSR appeal to the responsibility of the firm to their immediate external environment through moral duties. Moreover, firms operating in B2C industries are more responsive to external societal demands than B2B firms. We test our predictions for a sample of 468 US firms listed in the Fortune 500. Our results show two main findings. First, CSR as a whole has a positive impact on CPA. However, when decomposing CSR into philanthropic versus economic CSR, the economic CSR has a stronger positive effect on CPA than the hypothesized philanthropic CSR. Second, we find no evidence for the moderating role of strong CG and type of industry on the relationship between CSR and CPA. We build on previous studies by finding statistical evidence for the argument that intangible resources create the actual building blocks that initiate the relationship between CSR and CPA and by discovering that CSR motivations, both philanthropic and economic, have a different effect on CPA. This study practically contributes in the sense that it depicts how non-market elements shape a firm’s environment, and therefore it could be helpful for managers to form their external stakeholder strategy.

Keywords: Non-Market Strategy, Corporate Social Responsibility (CSR), Corporate Political Activity (CPA), Corporate Governance (CG), Industry Type (B2B vs. B2C), Fortune 500.

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List of Tables and Figures

Table 1 Summary of regression models (chapter 4) ………...35

Table 1 Descriptive statistics (chapter 5) ………...37

Table 2 Correlations and multicollinearity ………....39

Table 3 Variance Inflation Factor (VIF) ………41

Table 4 Multiple regression CSR-CPA………...42

Table 5 Moderation analysis CG ………....43

Table 6 Moderation analysis industry type ………46

Figure 1 Conceptual framework of the relationship between CSR, CPA, CG and industry type ………..29

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1. Introduction

Experiencing higher global and internal market pressures, firms nowadays are faced with an increasingly diverse number of interests to maintain in order to distinguish themselves and be successful. In the current global marketplace firms are only able to both develop and sustain their competitive advantage and to generate higher performance by pursuing non-market strategies within the societal, institutional, and political context (Baron, 1995; Frynas, Mellahi & Pigman, 2006). Recently two non-market strategies, corporate social responsibility (CSR) and corporate political activity (CPA), have gained considerable attention among scholars and practitioners alike. While managers may use socially responsible behavior to raise awareness and increase their firms’ profitability (Carroll, 1991; Friedman, 1970; McWilliams, Siegel & Wright, 2006), firms are increasingly engaging in political activities in an attempt to shape government policy in their favor with an ultimate goal of boosting firm performance (Hillman, Keim & Schuler, 2004; Baysinger, 1984; Lux, Crook & Woehr, 2011; Hillman & Hitt, 1999). Due to their inherently conflicting characteristics, CSR and CPA have historically been considered as isolated fields of academic research within the non-market strategies domain (Hond, Rehbein, Bakker & Lankveld, 2014; Baron, 1995), however recently several scholars have identified synergies between CSR and CPA by uniting them as generators of higher performance (Mellahi, Frynas, Sun & Siegel, 2016; Liedong, Ghobadian, Rajwani & O’Regan, 2015; Lock & Seele, 2004). Creating synergies (Hond, Rehbein, Bakker and van Lankveld, 2014) enhances trust between firms and the polity, in the sense that governmental institutions then create strong relationships with firms, eventually leading to stronger governmental support for those firms’ business conduct (Liedong et al., 2015).

Despite the rich literature focusing on these two non-market strategies in isolation, there is a lack of understanding of how CSR might affect CPA concerning political access (Hadani & Coombes, 2015). Previous research, either paid attention to their joint effect on performance (Mellahi et al., 2016; McWilliams et al., 2002; Siegel, 2009; Lyon and Maxwell, 2008; Liedong et al., 2015; Hadani & Coombes, 2015) or conducted a qualitative research approach to capture their interrelatedness without generating any potential generalizable conclusions (Liedong et al., 2015; Hadani & Coombes, 2015). We argue that CSR is likely to enhance CPA in two ways: theoretically and practically. Theoretically, we build on the resource-based view (RBV) of Hillman, Keim and Schuler (2004) that firm-level competitive resources could help in explaining relationships between firm-level resources and CPA. Furthermore, building on the same theoretical perspective, Frynas and Stephens (2015: 494)

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state: “… the literature linking RBV to CSR has so far not provided a detailed picture of how social, environmental and political capabilities of companies are acquired, where the RBV could arguably provide the greatest insights in future”. Second, practically, firms are increasingly adopting CSR strategies with the aim of fostering relationships with policymakers to make a societal contribution. As such, by meeting societal interest firms create societal goodwill, providing them with new opportunities of gaining competitive advantage and innovation (Peterson & Pfitzer, 2009; Liedong et al., 2015). Additionally, it is thus likely that CSR affects CPA as CSR unlocks specific intangible resources and capabilities for focal firms that are likely to increase political legitimization and ultimately reduce political barriers for these firms. The question of how CSR as a crucial facet of a firm’s competitive advantage causally leads to CPA remains unexplored in the current literature on non-market strategies. To unravel this missing link, we address our first following research question:

RQ 1: To what extent does corporate social responsibility lead to corporate political activity?

Hinging on previous literature on CSR, we argue that internally-driven ‘economic-CSR’ or externally-driven ‘philanthropic-‘economic-CSR’ (Carroll, 1991; Friedman, 1970; Orlitzky, Schmidt & Rynes, 2003; Carroll, 1991) lead to CPA because they provide firms with specialized reputational resources that consequently increase their political resources (Mellahi, Frynas, Sun & Siegel, 2016; McWilliams, Van Fleet & Cory, 2002; Boddewyn & Brewer, 1994) and eventually open the doors to political access (Werner, 2015).

In addition, literature on Corporate Governance (CG), which refers to the firm’s structure of governing and balancing the interests between shareholders and stakeholders (Aoki, 2001; Jensen & Meckling, 1976; Aguilera & Jackson, 2010), shows that although most firms pursue a shareholders’ maximizing strategy, corporate social behavior and its implicit motivation to serve stakeholders’ interests are of increasing importance to firms’ survival (Jamali, Safieddiene & Rabath, 2008; Arora & Dharwadkar, 2011; Page, 2005; Van den Berghe & Louche, 2005). The argument behind this is that both CG and CSR are complementary in the sense that they both aim to respond effectively to the external corporate context and its related stakeholders (Chan, Watson & Woodliff, 2014; Eng & Mak, 2003). Aforementioned, in turn, will expand the firm’s intangible resources such as trust, reputation, and legitimacy (Marsiglia & Falautano, 2005). At the same time, firms that have strong CG and pursue active CSR strategies gain political access through their accumulated positive reputation and legitimacy (Scherer, Baumann-Pauly & Schneider, 2012; Zadek, 2004). Strong

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CG allows firms to cope with agency problems and to be transparent toward their shareholders and stakeholders. As such, only strong CG has a positive effect on CPA (Dahan, Hadani & Schuler, 2013; Coates, 2010; You & Du, 2012), whereas weak CG is detrimental to CPA. Hence, previous inquiry investigates the relationship between CG and CSR (Jamali et al., 2008; Van den Berghe & Louche, 2005; Kolk & Pinkse, 2010; Jo & Harjoto, 2011; Beltratti, 2005) as well as the relationship between CG and CPA (Coates 2010; You & Du, 2012; Dahan, Hadani & Schuler, 2013; Hadani, 2012). However, despite their useful insights, these studies omit the effect CG may have on the relationship between CSR and CPA. Therefore, we investigate the moderating effect of CG on the CSR-CPA relationship, aiming to answer our second research question:

RQ 2: To what extent does corporate governance moderate the relationship between CSR and CPA?

To address this question, we first argue that strong CG will enhance the hypothesized positive effect between CSR and CPA, since CG intensifies the intangible resources that amplify the CSR-CPA relationship, such as trust, legitimacy and, reputation (Page, 2005; Scherer et al., 2012). Secondly, we hypothesize that the moderating effect associated with strong CG will be stronger for philanthropic CSR than compared to economic CSR.

Furthermore, previous literature argues that both CSR and CPA are sensitive to the type of industry in which a firm operates (Waddock, Bodwell & Graves, 2002; Meznar & Nigh, 1995; Hoejmose, Brammer & Millington, 2012; Puck, Rogers & Mohr, 2013). The level of adoption of and devotion to CSR practices are dependent on the kind of industry (Hoejmose et al., 2013; Puck et al., 2013). For some industries, adopting ethical or environmental standards is more demanding and of a higher priority than for other industries (Hoejmose et al., 2013; Dechezlepetre & Sato, 2017). There exists a difference between business-to-business (B2B) industries and business-to-business-to-consumer (B2C) industries. Specifically, the higher the visibility of a cluster of certain firms operating in an industry, the more the firms are subject to higher levels of societal demands and CSR (Meznar & Nigh, 1995). Where B2B industries are less visible to the end consumer and society as a whole, B2C industries are more visible and prone to societal demands and are thus more susceptible to engage in CSR activities (Hoejmose et al., 2013). The same is for the political activity of individual firms in B2B or B2C industries. Evidence suggests that CPA is more effective when firms have greater visibility, as is the case in B2C industries, due to their reputational building effect (Hillman & Hitt, 1999; Puck et al., 2013). However, despite the insights that the current literature provides into the relationship between industry type and CSR and CPA

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individually, the literature though lacks an understanding on whether industry type might alleviate the causal relationship between CSR and CPA. Building on these previous findings, it is likely that the CSR-CPA relationship is receptive to the type of industry in which firms operate. Therefore, we further attempt to clarify this issue under the following third research question:

RQ 3: To what extent does the type of industry moderate the relationship between CSR and CPA?

We expect that the initial positive relationship between CSR and CPA is more likely to be amplified by B2C industries over B2B industries since B2C industries are more visible to the external corporate environment. Furthermore, this effect is likely to be stronger for firms that are more engaged in philanthropic CSR rather than CSR which is economical, due to the argument of societal visibility.

Our sample consists of 468 companies from the US Fortune 500 database. To double-check our variables, we gathered data from the firms’ annual reports between 2012 and 2015. We test the hypotheses statistically using regression analyses, in which Kinder Lydenburg Domini (KLD) strengths and concerns operationalize CSR. We operationalize CPA through lobbying expenditures and PAC contributions (Schuler, Rehbein & Cramer, 2002; Hadani & Schuler, 2013). We measure CG by applying the CG quality index from the ESG dataset, and industry type is divided into B2C and B2B industries (Hoejmose et al., 2012).

This study contributes to the literature in the field of non-market strategies. Such contribution is threefold. First, by incorporating a resource-based perspective to our inquiry between the non-market concepts of CSR and CPA, we build on previous studies by giving a substantive argumentation of how intangible resources (such as legitimacy) create a bridge between the CSR strategy and the political behavior of a firm. Second, complementary to prior research on both non-market concepts (Mellahi et al., 2016; Branco & Rodrigues, 2006; Lawton, McGuire & Rajwani, 2013), we decompose CSR into two distinct types, philanthropic and economic, which both have their characteristics and implications for political outcomes (Orlitzky et al., 2003). The decomposition of CSR gives us more explanation about which CSR strategies are more or less effective regarding CPA. Third, compared to our priors, we do not directly look at outcomes such as public policy or firm performance (Hillman et al., 2004) nor do we conduct a qualitative research approach (Hadani & Coombes, 2015; Lock & Seele, 2004; Hond et al., 2014), but rather address quantitatively how both firm (CG) and industry level variables moderate the relationship between CSR and CPA.

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Additionally, the practical contribution is twofold. First, our study depicts a clear picture of how external and non-market elements shape a firm’s environment. As such, the outcomes of our study could be helpful for managers to form their external stakeholder strategy. Second, our study investigates whether CPA is an unscrupulous corporate behavior or whether it seamlessly matches CSR because firms encroach themselves upon the terrain of politics to achieve and gratify broadly aspired and vital societal interests.

The remainder of this study is structured as follows: the proceeding chapter provides an overview of the relevant and contributing literature on CSR, CPA, CG and other related concepts. The third chapter unravels the theoretical framework and the formulation of the hypotheses, with chapter four giving an outline of the research design and methodology. After that, chapter five untangles the results of the statistical analyses. The sixth chapter discusses the results and limitations of the present study. Finally, the study finishes with suggestions for future research and concluding remarks.

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2. Literature Review

The following chapter provides the theoretical outset of corporate social responsibility (CSR) and corporate political activity (CPA) respectively, as well as their relationship with corporate governance (CG) and the type of industry. First, the literature on CSR and CPA are set out, addressing their implications related to resource-based perspectives for both. Later, we discuss CSR and CPA and their relationships with CG and industry type.

2.1 Corporate social responsibility

The concept of CSR has a long history and is susceptible to debate. With regards to the underlying rationales of CSR, Milton Friedman (1970) expresses a negative or egoistic view. He argues that CSR is a signal of an agency problem within a firm. From this perspective, CSR is there to squander a firm's resources in favor of internal activities that otherwise would add significant value to shareholder returns (Friedman, 1970). Furthermore, the shareholder perspective on CSR states that CSR is an executive strategic gratuity by which managers use the favorable repute for their own sake, for instance, to advance their careers or personal agendas (McWilliams, Siege & Wright, 2006). The central assumption behind the shareholder view is that firms use CSR primarily to maximize their profits. Skeptics favorable of the shareholder model even argue that CSR could be a potential for window-dressing for irresponsible behavior (Banerjee, 2008; Gond, Palazzo & Basu, 2009).

On the other hand, a stakeholder-perspective on CSR exists, where a firm's initiatives in CSR enhance stakeholder relations while focusing on social welfare (Gond et al., 2009; McBarnet & Kurkchiyan, 2007). Firms are expected to coordinate and manage the interests of various stakeholders besides their shareholders (Simmons, 2004; Jamali et al., 2008). Here, the societal impact of CSR is measured either against constructs of human rights (Preuss & Brown, 2012) or towards environmental awareness (Baron, 2001; Bansal & Roth, 2000). Thus, CSR is an aggregate of corporate actions that affect both environmental and social well-being (McWilliams et al., 2006; McWilliams & Siegel, 2001; Carroll, 1991; Freeman, 1984). Carroll (1991) offers one of the most all-encompassing explanations of CSR and its facets by arguing that CSR beset four main categories of social responsibilities: the economic, the legal, the ethical, and the philanthropic. Economic social responsibility refers to the idea that the firm has to respond continuously to the customer's needs and wants and eventually has to be profitable. This aspect overlaps with Friedman's (1970) shareholders' view on CSR, where the firm uses CSR primarily to increase the firm's performance. The

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legal responsibilities have to do with the fact that the firm has to respect and obey the legal boundaries. However, some argue that firm's processes and policies must go beyond the requirements of the law (Hond et al., 2014). Here is where the ethical and philanthropic responsibilities come into play, by which the firm, in general, avoids harm and tend to do what ought to be good for the community, environment, and society as a whole (Carroll, 1991; Branco & Rodrigues, 2006).

2.1.1 Corporate philanthropy

The concept of corporate philanthropy (CP), as part of CSR, is defined as "the non-obligatory and voluntary transfer of wealth or resources from the firm to outside entities and is an important, if not central, aspect of CSR" (Hadani & Coombes, 2015: 860; Saiia, Carroll & Buchholtz, 2003). Matten, Crane, and Chapple (2003) emphasize that the philanthropic or ethical areas of corporate social responsibility are the most important ones in studying CSR because they differentiate between voluntary corporate behavior and mere compliance to existing standards. Moreover, corporate philanthropy is a CSR strategy that firms pursue to influence societal welfare and to generate positive intangible returns from society, such as reputation, legitimacy, and trust for the focal firms (Fry, Keim & Meiners, 1982; Orlitzky & Benjamin, 2001). What is interesting is the relational impact of corporate philanthropy on firms (Godfrey, 2005). Philanthropic activities may enhance the corporate reputation and legitimacy of a firm, allowing them to get a form of insurance within their external environment (Godfrey, 2005; Hadani & Coombes, 2015). Firms achieve legitimacy by ‘pursuing socially acceptable goals in a socially acceptable manner’ (Ashforth & Gibbs, 1990: 177). The societal guarantee helps firms to cultivate their public image and consequently shelter firms from external threats by powerful stakeholders, such as the government (Hadani & Coombes, 2015). Studies prove that CP significantly impacts upon the perception of the focal firms within the societal and institutional context (Saiia et al., 2003). For instance, government or regulatory decision-makers are aware of the firms' CP actions while interacting with them (Tesler & Malone, 2008). Furthermore, studies show that if firms are signaling philanthropic behavior to the public, it increases access to critical public policy makers (Werner, 2015).

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2.1.2 Resource-based perspectives on CSR

Resources are the assets that are used by firms to carry out their internal and external activities (Branco & Rodrigues, 2006); in the words of Mathews (2002: 32): "resources are the basic elements out of which firms transform inputs into outputs or generate services". Resources can be either tangible (e.g., physical assets) or intangible (e.g., firm reputation). Additionally, resources have to be deployed, managed and assembled in an effective and coordinated manner within a firm in order to create a competitive advantage, something which relates to the firm's capabilities (Russo & Fouts, 1997: 537).

According to McWilliams and colleagues (2006: 3), businesses that engage in socially responsible actions, and who might benefit from these actions, can be framed within a resource-based perspective (RBP). The RBP mainly examines the link between the firm's internal characteristics and competitive advantage (Branco & Rodrigues, 2006: 116). The firm-specific resources must be valuable, rare, inimitable (not easily imitable by competitors), and non-substitutable (Barney, 1991). According to Barney (1991) resources are most difficult to imitate by competitors when they are path-dependent, casually ambiguous and socially complex. The first facet correlates with the fact that resources have a specific history and process that has led to the development of a firm's specialized competencies (Bowman & Ambrosini, 2003; Barney, 1991). Causal ambiguity refers to whether or not the actions that are used to create the specialized resources are not well-known. Lastly, some resources are socially complex, meaning that they are difficult to change in the short-run (Branco & Rodrigues, 2006; Barney, 1991). Typically, the resources that are most difficult to imitate are those that are intangible, such as firm reputation, and therefore these are an indispensable source of a firm's competitive advantage (Barney, 1991).

A firm can sustain two kinds of benefits related to CSR: internal or external (Branco & Rodrigues, 2006). The internal benefits correspond with the efficient application and deployment of resources that enhance the corporate culture, structure, and know-how. Moreover, specific human resource activities that a firm engages in give the firm internal benefits and thus a competitive advantage. Examples of such activities include socially responsible employment practices, education practices, and training opportunities. Furthermore, the overall firm's organizational conduct or culture may increase the firm's internal competitive advantage and eventually the firm's performance (Branco & Rodrigues, 2006). Hence, these internal intangible resources correspond with Friedman's (1970) view on

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CSR and Carroll's (1991) economic component of CSR, since these benefits primarily aim at the internal efficiency and profitability of the firm.

Firms might also enjoy external benefits of CSR (Orlitzky et al., 2003). One of the most common-known external intangible assets is the reputational asset of a firm. Firms with an excellent reputation resulting from CSR may advance their relationships with external stakeholders such as customers, bankers, competitors and government servants (Branco & Rodrigues, 2006: 122; Orlitzky et al., 2003). Moreover, Galbreath (2005: 981) claims that reputational assets "can inform external actors about the trustworthiness, credibility, and quality of the firm" and form the "key drivers of the firm's success". Corporate reputation is a result of a process, wherein firms compete for social status. Additionally, the corporate reputation is a reflection of the fulfillment of stakeholders' expectations of the firm (Fombrun & Stanley, 1990), due to ethical or philanthropic behavior (Carroll, 1991). The firms are constantly signaling their characteristics to their stakeholder environment to increase their reputation eventually. Although recent scholars find that the firm's reputation resulting from philanthropic CSR initiatives is positively related to the firm's financial performance (Hond et al., 2014; Zhao and Murrell, 2016; Liedong et al., 2015), the main goal is not internally driven (Friedman, 1970) and thus not primarily to pursue a higher shareholders' return, efficiency or financial performance.

A firm achieves specific benefits from pursuing CSR by being socially integrated, building community ties, and building relationships with the firm's external environment (Fombrun et al., 2000; Weaver, Trevino & Cochran, 1999). Accordingly, the binding ties with the principal actors in the firm's external environment build up a firm's so-called reputational capital, which eventually might upgrade the firm's ability to arrange more desirable contracts or agreements with suppliers or governments. Reputational capital is dependent on the support a firm receives from external stakeholders. Support could be for example favorable regulations or government policy, or legitimacy from the overall community (Fombrun et al., 2000; Branco & Rodrigues, 2006). Ultimately, this process will reduce the cost of capital and increases a firm's competitive advantage (Fombrun et al., 2000).

In conclusion, we view CSR from a resource-based perspective as a social initiative that might constitute the firm's inimitable intangible reputational assets and eventually the firm's competitive advantage. These firms and their reputational capital that is awarded by critical stakeholders are likely to receive both support and legitimacy from these external

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stakeholders allowing them to pursue the firm's interests in favorable policy outcomes (Fombrun & Stanley, 1990; Fombrun at al., 2000).

2.2 Corporate political activity

Corporate political activity, henceforth CPA, is another non-market strategy and is defined as "the corporate attempts to shape government policy in ways favorable to the firm" (Hillman, Keim & Schuler, 2004; Baysinger, 1984). Firms pursue different political strategies, mainly to improve their performance or market share, through their attempts to shape government policies (Hillman et al., 2004). Different kind of strategies, such as lobbying, campaign contributions and political action committees (PACs) are forms of CPA (Lux, Crook & Woehr, 2011).

The most relevant antecedents of CPA found in literature are, among others, firm size (Meznar & Nigh, 1995), firm dependency on government (Stigler, 1971; Zardkoohi, 1985), firm slack (Schuler, 1996; Schuler & Rehbein, 1997), industry concentration (Schuler, Rehbein & Cramer, 2002), issue salience (Buchholz, 1992) and institutional differences (Hersch & McDougall, 2000). Public policy outcomes or firm performance outcomes are two measurable outcomes of CPA (Hillman et al., 2004). For instance, Hillman, Zardkoohi & Bierman (1999) find that firms with top managers who reside in federal office generate positive returns for shareholders. Moreover, Cooper, Gulen, and Ovtchinnikov (2010) find that firm's contributions to political campaigns result in enhanced firm performance. Chen, Parsley and Yang (2015: 20) find evidence in their study that suggests that lobbying expenditure correlates positively with financial performance.

Government policy has a significant effect on the position of the firm regarding its competitive environment and their performance (Shaffer, 1995). Moreover, both government policy and the government itself are significant causes of uncertainty for the business environment as governments have control over critical resources that are highly relevant to firms (Jacobson, Lenway & Ring, 1993; Boddewyn, 1988). Government decision-makers can shape and alter markets, for instance through government regulations, through government purchases, by imposing barriers, or by creating specific legislation (Gale & Buchholz, 1987). Thus, the power of the government might change the supply and demand in industries. Additionally, firms may make efforts to produce public policy outcomes that favor their success and survival, which in turn can generate a competitive advantage for themselves over their rivals (Hillman & Hitt, 1999: 826; Zeithaml, Keim & Baysinger, 1988; Baysinger,

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1984). Hillman and Hitt (1999) explain three types of CPA strategies in their study: the financial incentive strategy, the constituency-building strategy and, the information strategy. The former strategy relates to the fact that firms may attempt to influence public policy by providing direct financial incentives. This strategy corresponds with the political action committees (PACs), which are financial contributions aimed at altering or shaping legislation in the contributor's favor (Hillman & Hitt, 1999). The constituency-building strategy targets vital government decision-makers indirectly via constituent or democratic support. The latter, the information strategy, refers to a strategy to impact public policy by means of providing crucial government officials information about policy positions, preference for policy, or the costs and benefits of policy results (Hillman & Hitt, 1999; Aplin & Hegarty, 1980). The information strategy includes a firm's courses of action, such as lobbying by internal or external professionals. Corporate lobbying is a component of corporate political activity, which is narrowed down to direct interactions with critical government officials about regulative or legislative policies (Hillman, 2003; Slob & Weyzig, 2010). Corporate lobbying can result in some significant benefits for firms, such as a reduction in tax rates (Richter, Samphantharak & Timmons, 2009) or an improvement in financial performance (Chen et al., 2015).

2.2.1 Resource-based perspectives on CPA

A significant amount of academics argue that the firms’ resources are useful to their non-market political environment, as such, in relation to regulators or executives (Lawton, McGuire & Rajwani, 2013; Hillman et al., 2003; Bonardi, Holburn & Van den Bergh, 2006; Hillman, Withers & Collins, 2009; Salancik & Pfeffer, 1978). Firms can acquire some idiosyncratic political resources, which refers to "intelligence and cognitive maps about non-market environments, better access to decision-makers and opinion-makers, and better bargaining or non-bargaining skills" (Boddewyn & Brewer, 1994: 135-136). Frynas, Mellahi and Pigman (2006: 324) define political resources as "any firm attributes, assets, human resources, or any other resources that allow the firm to use the political process to improve its efficiency and profitability". Dahan (2005) views political resources and capabilities of a firm mainly in terms of expertise in lobbying. Political resources in itself also include reputational resources, relational resources, and financial resources (Lawton et al., 2003). All in all, the dominant view in the existing resource-based literature on CPA concludes that companies develop and use their political resources primarily for economic gain, i.e., increasing

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profitability or market share (Holburn & Zelner, 2010; Latwon et al., 2003). By developing unique political resources, firms can lock out other competitors from creating similar resources and thus create sustainable competitive advantages (Lawton et al., 2003).

As firms are pursuing buffering strategies (Hillman & Hitt, 1999), by building relationships with key political stakeholders through lobbying or PACs, firms gain influence and control over external non-market environments (e.g., governments) in both a defensive and proactive fashion (Sun, Mellahi & Wright, 2012; Hillman & Hitt, 1999). For instance, defensive strategies help firms to acquire a competitive advantage by gaining predictive capabilities (Aragón-Correa & Sharma, 2003). Proactive strategies, on the other hand, give a firm a competitive advantage by deploying firm-specific resources and capabilities to shape or modify the external non-market political or regulatory environment in favor of the focal firm (McWilliams et al., 2002).

Another resource-based theory is the resource dependence theory (RDT), which assumes that firms' survival and growth are dependent on accessing essential resources from external parties (Lawton et al., 2003). From this perspective, firms create interdependencies with external suppliers (i.e., governments) to attain or sustain a competitive advantage. From an RDT lens, the survival of the firm is dependent on the firm's ability to defend resources from uncertainty imposed by external stakeholders. Hillman, Withers and Collins (2009) oppose that argument by contending that the government is one of the most difficult environmental dependencies to control. For that reason, firms seek to cooperate with different key governmental stakeholders. In addition, RDT holds two key assumptions. Firstly, firms reduce environmental uncertainty through the alignment of incentives between focal firms and the government, corresponding with ‘bridging' (Hillman et al., 2003; Lawton et al., 2013). Secondly, the external parties (i.e., the government) create a more favorable environment that ensures the flow of critical resources to the focal firm through a variety of co-optation tactics (e.g., lobbying) (Lawton et al., 2010: 151-152). The latter relates to ‘buffering' mechanisms (Hillman et al., 2003).

2.3 CSR and CPA relationships

Conventionally, the academic non-market literature on CSR and CPA regards the two concepts as two separate and isolated fields of study (Baron, 1995; Hond et al., 2014; Beloe, Harrison & Greenfield, 2007). Where CSR is considered to be of an entirely altruistic nature and naturally beyond the political dimension, CPA is considered an egocentric strategic

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undertaking by firms (Matten & Crane, 2005). For that reason, the two conceptualizations have long been seen as opposite ends that both, in isolation, could lead to an increase in firms' profitability (Liedong et al., 2015: 410; Ungericht & Hirt, 2010).

Nonetheless, recently more and more scholars emphasize the importance of combining the two fields of research (Mellahi et al., 2016; McWilliams et al., 2002; Siegel, 2009; Lyon & Maxwell, 2008). For instance, Liedong and colleagues (2015) argue that CSR and CPA complement each other and create trust between firms and politics, which in turn influences favorable policy outcomes and firm performance. Lock and Seele (2004: 1) argue "CPA uses instrumental CSR to advance goals in public policy", which they call ‘politicized CSR.’ Hadani and Coombes (2015) find that corporate philanthropy (CSR) generates an increase in levels of trust, and legitimacy of several stakeholders, enhancing the firm's reputation and eventually firm performance. Hond and colleagues (2014) propose that using CSR and CPA aligned could have additional reputational effects on the firm. A firm may take advantage of the potential synergies of CSR and CPA if they are aligned with the similar policy outcomes (Hond et al., 2014: 808). Aligning CSR and CPA complementarities takes place between resources held by the firm, such as relationships and information (Barney, 1991). Such an alignment will eventually generate positive reputational effects. However, concerning non-alignment of CSR and CPA, stakeholders evaluate the effects on a firms’ reputation separately, evaluations which could be either positive or negative. Lastly, misalignment can have disastrous consequences for the firm's reputation (Hond et al., 2014).

Regarding resources, CSR and CPA complement each other. Firms could utilize CSR resources to enhance their corporate political activities (Hond et al., 2014; Bouwen, 2002). On the one hand, for example, CPA helps a firm to gain access to information about regulatory or legislative preferences (Peterson and Pfitzer, 2009). On the other hand, CSR strengthens CPA by enhancing the firm's external network and gaining access to specialized resources (Hond et al., 2014; Mellahi et al., 2016). Also, as the resource-based perspectives on CSR and CPA show (see paragraphs 2.2 and 2.4), CSR strengthens the human resources and improves the personal relationships with vital political stakeholders through improving reputation (Mellahi et al., 2016; McWilliams et al., 2002; Detomasi, 2007). From a stakeholder perspective firms use CSR activities – those that are related to labor standards, the community or societal contributions – to embellish their positive social reputation that in turn enhances their legitimacy among the various stakeholders surrounding the firm (Handelman & Arnold, 1999; Sen & Bhattacharya, 2001). Moreover, the increased legitimacy curtails the probability that key political stakeholders will intervene in firm

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operations (Detomasi, 2007). The government in general sets out the rules of the game and is considered to be the extension and aggregation of individual, societal interests. Reasonably, governmental power creates numerous political demands for firms (Bartlett & Ghoshal, 1989; Dunning, 1993). To somehow overcome potential liabilities with the polity, firms pursue CSR activities that increase the firm's, reputation, legitimacy, and trust, which consequently lead to narrower relationships with the polity. These relationships lower the barriers of political and legislative entry for the firm, which in turn corresponds to an increase of administrative access (Wang & Qian, 2011; Liedong et al., 2015).

2.3.1 Corporate governance and its relationships with CSR and CPA

Corporate governance (CG) is "the structure of rights and responsibilities among the parties with a stake in the firm" (Aoki, 2000: 11). It exists as a consequence of agency problems, due to the separation of owners and managers and their conflicting interests (Jensen & Meckling, 1976) between share- and stakeholders or between stakeholders. In reality, there are two main CG models: the stakeholder model and the shareholder model. Although maximizing shareholder value is still one of the primary goals for most firms, the tendency to move towards CSR activities, something which is more stakeholder-oriented, is rising (Jamali, Safieddine & Rabbath, 2008).

Three models in literature identify the overlap between CSR and CG. The first considers CSR and CG as coexisting components of one continuum (Bhimani & Soonwalla, 2005) and explains that CG and CSR are complementary in the sense that they both are on different ends of an accountability continuum. The second model views CSR as a dimension of CG (Ho, 2005) and considers that a strong CG quality has to imply that companies ensure corporate socially responsible behavior. Moreover, CG must entail internal ethical behavior for the firms and its employees as well as external ethical behavior conforming to societal standards (Ho, 2005). The last model views CG as a building block for CSR (Hancock, 2004) and states that value creation must entail the creation of stakeholder or environmental capital to have strong CG (Wright, Dunford & Snell, 2001).

Jamali and colleagues (2008) also identify overlap between CSR and CG as they consider that firms have a responsibility towards their network of interrelated stakeholders, something which is crucial for firms to retain and increase the trust and reputation of their primary stakeholders (Page, 2005). Wood (1991) argues that managerial discretion is a synonym for viewing managers as moral actors who are compelled to act in a socially

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responsible manner. Furthermore, Aguilera, Rupp, Williams, and Ganapathi (2007) state that if firms use effective CG mechanisms alongside CSR activities, then CSR engagement is positively related to effective CG mechanisms. According to stakeholder theory, managers pursue CSR to fulfill their ethical, societal, and moral duties towards their stakeholders and shareholders (Jo & Harjoto, 2012), or as Beltratti (2005: 384) argues: "an effective corporate governance system would prevent illegal actions against stakeholders. An effective socially responsible corporate code would prevent actions which are legal but inappropriate because of their consequences on some of their shareholders".

CSR and CG rely on intangible assets such as integrity, reputation, trust, and transparency (Van den Berghe & Louche, 2005). Both strong CG practices and CSR activities use philanthropic measures to gain trust, legitimacy, and reputation from their external environment to generate and maintain a competitive position in the market (Marsiglia & Falautano, 2005). Chan and colleagues (2014) find that corporate governance quality positively associates with CSR activities. Moreover, Kolk and Pinkse (2010) argue that to be both ethical and profitable, firms' CSR and CG must overlap. They explain that the boards set out operational strategies within a particular social agreement and at the same time ensure the inflows and outflows of critical resources from the external corporate environment. Lastly, the literature shows that firms with strong CG have a stronger positive association with socially responsible actions than firms with weak CG (Chan et al., 2014; Eng & Mak, 2003; Haniffa & Cooke, 2005). In the words of Ntim (2013: 32): "evidence suggests that better-governed corporations are more likely to be more socially responsible". Both CSR and CG complement each other in their interactions within a globalizing business environment (Beltratti, 2005; Van den Berghe & Louche, 2005). In short, both good CSR and strong CG relate to each other in the sense that they both are responsible for their external stakeholder environment, besides their evident and inherent goal to achieve profitable returns.

With regards to CG and CPA, firms that intertwine with socially committed activities are more engaged in communicating with influential stakeholders to enhance their socio-political legitimacy (Scherer, Baumann-Pauly & Schneider, 2012). This tendency is due to the increase of activist shareholders who demand more socially aware corporate governance (Davis & Thompson, 1994). Furthermore, the increasing social demand and power that comes with having a more extensive range of stakeholders lead to the need for corporate management to react in line with social demands (Zadek, 2004). Scherer and colleagues (2012) argue that a decisive feature of balancing a strong CG structure within a firm, as in that both shareholders' and stakeholders' demands are met in a balanced fashion, involves

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increasing the interaction with non-owning political stakeholders. By engaging in politics, firms acquire strong CG and thus ensure their survival by influencing policies in favor of both their share- and stakeholders (Hertz, 2001). However, some authors negatively formulate the agency problem as related to CPA. Coates (2010) argues that CPA outside of the eyes of the shareholders may be disastrous for firm survival. He claims that weak corporate governance systems allow executives to underinvest, overinvest or misdirect investment in their political activities, as a result of self-interest (Coates, 2010; You & Du, 2012; Hadani, 2012). Hadani (2012) argues that CPA might increase information asymmetry and thereby reduce transparency between share- and stakeholders. However, firms might counter this negative tendency by pursuing strong CG in two ways. First, firms can actively impose stricter ethical standards. Second, firms could incorporate tighter corporate governance policies (Dahan & Hadani, 2013). Both are forms of enhancing the quality of CG.

2.3.2 Industry and its relationships with CSR and CPA

Firms' stakeholders demand a certain level of transparency, accountability and environmental standards (Waddock, Bodwell & Graves, 2002). As such, that implies that firms have to harmonize their socially or environmentally-driven performance with their stakeholders' expectations (Gupta, 1995). Visibility of particular firms, in specific industries, drive "the level of social pressure to which a firm will be subjected", additionally "actors in the general environment are likely to take a greater interest in organizations of which they are aware" (Meznar & Nigh, 1995: 980).

Besides, Bowen (2000) argues that firms with greater visibility are subject to higher levels of environmentally responsible pressure and are likely to adapt to that pressure. Firms are visible when important constituents (e.g., customers) can see them. Firms that are more visible to constituents are more vulnerable to receiving attention and are thus more amenable to societal or institutional pressures (Oliver, 1991; Goodstein, 1994). Moreover, firms that are more visible retain or maintain their social legitimacy by responding accordingly to external demands of stakeholders (Miles, 1986). In that sense, the more visible firms are, the more likely they are to work towards achieving satisfactory responses to societal, environmental, or political issues resulting from the firm's exposure to a variety of external pressures (Goodstein, 1991; Bowen, 2000; Oliver, 1991).

Reasonably, firms from more visible industries are keener to pursue CSR. Hoejmose, Brammer & Millington (2012) find in their study that there are significant differences

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between business-to-business (B2B) and business-to-consumer (B2C) industries regarding their implementation of environmental policies. Their evidence suggests that B2B firms are less prone to environmental policy-making than B2C firms, due to the degree of separation between them and the end consumers. Where B2B industries have a lack of proximity to the end consumer, B2C firms are in much closer contact with them (Hoejmose et al., 2012). Furthermore, González Benito and González Benito (2006) find similar evidence by arguing that B2C firms have more pressure to engage in CSR practices than those that are B2B, due to the increased visibility of B2C firms. Firms in B2C industries are more susceptible to media scrutiny, and external pressures and are therefore keener to pursue CSR activities (González Benito & González Benito, 2006; Bowen, 2000).

Puck, Rogers, and Mohr (2013) corroborate the abovementioned argumentation by stating that B2B industries are less visible to end consumers and to society as a whole. They add that B2C industries are more visible to end consumers and other stakeholders within society, including the government. Puck et al. (2013) find that the effectiveness of CPA depends on whether firms sell to other businesses (B2B) or to end consumers (B2C). They find that information (lobbying) and financial incentive strategies (PACs) are useful when the targets of such information and financial incentives can be identified and are in line with the firms' objectives towards the targeting constituents. By pursuing these CPA strategies, more visible firms (i.e., B2C firms) create relational ties with important policymakers that can, in turn, reduce the firms' exposure to risk in the societal context.

In other words, B2C firms have increased visibility, reducing the scrutiny from individual stakeholders (Puck et al., 2013; van Tulder & van der Zwart, 2005) and thereby enhancing their external reputation (Hillman & Hitt, 1999), in turn strengthening their CPA. Increasing the firm's reputation for the public eye is in that sense in line with the commercial objectives of the firm, like selling their services and products to the end consumer, thus enhancing the firm's reputational capital to a broader range of stakeholders (Salancik, 1978) as compared to less visible firms.

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3. Theoretical Framework

To explain our theoretical validation of the subsequently formulated hypotheses, we provide justification of our field of research based on several previous shortcomings. First of all, until now existing literature falls short in explaining the relationship between CSR and CPA directly, mainly because authors view the two concepts in isolation. However, whenever authors use the two concepts simultaneously, most studies focus on their mutual relationships and contingencies as related to firm financial performance (Epstein & Schnietz, 2002; Waddock & Graves, 2000, 1997; Surroca, Tribo & Waddock, 2010, Zingales, 2000). Some authors do consider the relationship between CSR and CPA more elaborately. For instance, Liedong and colleagues (2015) extend previous literature by examining how CSR and CPA complement each other, how they can create trust between business and political stakeholders and eventually influence policy decision-making. Other scholars (Hadani & Coombes, 2015; Lock & Seele, 2004; Hond et al., 2014) find similar explanations. Besides their shortcomings regarding the focus on performance and policy outcomes, they mostly use a qualitative research approach generating propositions without empirically testing them. Thus, to increase the external validity of our proposed causal relationship in our study, we use a quantitative approach, which provides a statistical method that allows for generalization. Furthermore, by focusing solely on CSR as an aggregated concept, we could misinterpret its real implications for firm political activity and future managerial suggestions. Therefore, we dismantle CSR into two typologies, economic and philanthropic CSR, which could add value to our findings. With this study, we precede the abovementioned shortcomings by investigating three specific things. First, we view CSR activities as prior and instrumental to CPA, in the sense that CSR is a means to achieve political access through its implied intangible resources that eventually cover and satisfy environmental, societal, and communal interests. Resource-based perspectives can shed light on a positive causal relationship between CSR and CPA (Caulkin & Collins, 2003; Hillman & Hitt, 1999) since firm’s CSR activities might increase intangible assets such as trust, legitimacy, and reputational capital, which in turn provide political access.

Second, we examine the effect of CG (Van den Bergh & Louche, 2005; Chan & Watson, 2013) on the CSR-CPA relationship. Since strong CG has parallel positive implications as compared to CSR, which increases the previously mentioned gained intangible assets (Page, 2005; Scherer et al., 2012), we expect strong CG to amplify the main causal effect of CSR on CPA.

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Third, we predict that industry type (Hoejmose et al., 2012; Meznar & Nigh, 1995) might have an effect on the CSR-CPA relationship since some industries are more sensitive to the adoption of CSR activities than others (Hoejmose et al., 2013; Dechezlepetre & Sato, 2017). Previous research acknowledges significant evidence that both CG and industry are both sensitive to both CSR and CPA; however, it does not capture how they might integrate into a comprehensive conceptual framework.

3.1 CSR influence on CPA

Recently, scholars have begun to investigate the link between CSR and CPA as related to firm performance (Hond et al., 2014; Baron, 1995). For instance, several recent scholars argue that CSR and CPA could synergistically create a positive effect on the firm’s reputation and eventually firm public policy or performance outcome (Lock & Seele, 2004; Hadani & Coombes, 2015; Liedong et al., 2015). Resource-based perspectives provide reasonable arguments to substantiate the relationship between CSR and CPA (Caulkin & Collins, 2003; Hillman & Hitt, 1999; Peterson & Pftizer, 2009). CSR activities create specialized reputational resources for firms that increase the firms’ ability to gain intangible resources, like legitimacy, visibility, and trust (Mellahi et al., 2016; McWilliams, 2002). This tendency increases the firm’s political resources, such as relationships with politicians or other governmental stakeholders, and consequently reduces the barriers to political access and to the political playing field (Boddewyn & Brewer, 1994; Frynas, Mellahi & Pigman, 2006). Such access ultimately materializes eventually in forms such as lobbying and political action committees (PACs). Alternatively, as Caulkin and Collins (2003: 27) state: “Public advocacy of environmental and social policy, in line with company CSR commitments, will be seen as the desired evidence that the company is serious about developing the business case to pursue a responsible course”. Hence, CSR is likely to enhance CPA as firms are increasingly incorporating CSR strategies with the aim of fostering relationships with key governmental stakeholders in order to make a societal contribution (Hadani & Coombes, 2015).

Consequently, we argue that CSR affects CPA because CSR yields specific intangible resources for firms that might increase their reputational capital and subsequently enhance the firm’s governmental legitimization. Additionally, policymakers use a firm’s socio-political reputation as a standard when they consider granting political access for the focal firm since a good reputation adds a significant advantage and differentiates that firm from other competitors (Werner, 2015). Accordingly, this course of resource extraction by the focal firm

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is inherently likely to reduce barriers of political entry and increases political and relational capital and thus might increase the firm’s political activity.

Schuler and Rehbein (2005) give an illustrative example of the previously mentioned flow of critical resources that constitutes the positive relationship between CSR and CPA. They exemplify a regional bank in San Francisco that engages in a strategy to support public health initiatives, especially the fight against AIDS, which is essential to the San Francisco community. The bank makes donations to medical organizations that do medical research on this disease as well as sponsoring a large AIDS awareness event in San Francisco. Moreover, the bank invites members of the US Congress, state representatives and other politicians to attend as guests or speakers. Due to this awareness program initiated by the bank, the politicians and the bank create a secure network of relationships which in turn helps the bank to overcome public issues containing liabilities that could agitate the banking industry and the bank itself.

In short, the bank’s social responsibility positively influences its political resources, which increases the firm’s CPA because the firm creates some political leverage that the firm can use to protect its interests within the political playing field. For the mentioned logical reasons as outlined in literature, the following hypothesis arises:

Hypothesis 1a: The CSR activities of firms have a positive effect on their corporate political activity.

The previous hypothesis can be somehow nuanced, in the sense that CSR has different typologies, each with inherently different motives. Following the line of literature, there are two forms of CSR to consider. The first type of CSR is internally and shareholder-oriented CSR, as based on Friedman’s (1970) view on CSR and Carroll’s (1991) economic typology of CSR. This type of CSR and its implied activities are intended to directly improve the firm’s efficiency (Orlitzky et al., 2003) concerning innovation, productivity, and profitability. Specifically, this type of CSR includes activities that strengthen the organizational innovation, culture or intra-firm loyalty (Surroca et al., 2010; Hond et al., 2014) and it mostly affects the psychological or physiological well-being of the firm’s employees (Werther & Chandler, 2010; El Akremi, Gond, Swaen, De Roeck & Igalens, 2015). Since this type is more focused on the internal organizational efficiency of a given firm, it is likely to be less concerned about the firm’s external environment and thus less amenable to societal demands. Carroll’s (1991) study names this “economic CSR”.

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The alternative type of CSR corresponds with a stakeholder-oriented, externally-driven CSR. This theory regards corporate philanthropy (CP), as part of CSR (Hadani & Coombes, 2015), as an important central welfare maximizing aspect of CSR, and it thus corresponds with Carroll’s (1991) ethical or “philanthropic” form of CSR. Contrary to the economic type of CSR, philanthropic CSR actively influences societal welfare and is susceptible to satisfy external stakeholders (Orlitzky et al., 2003). The satisfaction of external stakeholders subsequently creates intangible assets for the focal firm that provide the firm assurance of critical resources within its external environment (Godfrey, 2005; Hadani & Coombes, 2015). Additionally, Fombrun and colleagues (2000) explain that the firm’s created reputational capital is likely to upgrade the firm’s ability to achieve more desirable contracts with external stakeholders, such as the government. Ultimately, desirable regulation or government policy is more likely to be achieved through philanthropic firm behavior (Branco & Rodrigues, 2006) rather than through internally-driven economic CSR (Verdeyen, Put, Van Buggenhout, 2004; Shen & Jiuha Zhu, 2011).

Therefore, we claim that philanthropic CSR is likely to have a stronger positive effect on CPA than economic CSR does. From a firm’s perspective, the distinction between philanthropic and economic CSR is easy to translate into respectively ‘others-centered’ and ‘self-centered’ (Hameed, Riaz, Arain & Farooq, 2016). Following theory, it is reasonable to argue that CSR through philanthropic means will generate more goodwill and legitimacy from governmental stakeholders than an economic-based and self-centered CSR strategy.

Building upon the example of the San Francisco bank, as provided by Schuler and Rehbein (2005), it would be expected that the bank would create a better reputation and more relational capital with external governmental stakeholders. It could do so by pursuing public health initiatives for the community (philanthropic CSR), as it does in the example, instead of conquering intra-firm social inefficiencies (economic CSR). Accordingly, their political leverage is likely to be of higher value if the firm engages in philanthropic CSR rather than economic CSR as philanthropic CSR is likely to better enhance the firm’s reputational capital and legitimacy by society and critical public stakeholders (Godfrey, 2005; Branco & Rodrigues, 2006). Therefore, it is likely that philanthropic CSR has a stronger positive effect on CPA than economic CSR does on CPA.

Logically deduced, this study claims that firms that pursue philanthropic CSR activities are likely to gain more reputational capital and thus are likely to be more politically active than firms that act more from a more economically-driven socially responsible manner. That brings forth the following hypothesis:

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Hypothesis 1b: Philanthropic CSR has a stronger positive effect on CPA than economic CSR has.

3.2 CG moderating CSR-CPA

Corporate governance is sensitive to both CSR (Jamali et al., 2008; Page, 2005; Marsiglia & Falautano, 2005; Chan et al., 2014) and CPA (Scherer et al., 2012; Davis and Thompson, 1994; Zadek, 2004; Van den Berghe & Louche, 2015). Theory proves that both CSR and CG are complementary and overlap in the sense that they both appeal to the responsibility of firms to their external environment and rely on ethical and moral duties towards society (Page, 2005; Jamali et al., 2008; Beltratti, 2005). In that sense, managers are moral actors who ought to be satisfying their shareholders and stakeholders demands effectively and appropriately (Aguilera et al., 2007; Page, 2005; Chan et al., 2014; Eng & Mak, 2003). This tendency generates intangible resources like trust, reputation, and legitimacy (Marsiglia & Falautano, 2006) that strengthen the firms’ position in the market and non-market place. Better-governed firms tend to be more socially responsible (Ntim, 2013), whereas weak CG increases information asymmetry and reduces transparency, trust, and legitimacy by its external environment (Hadani & Coombes, 2015; Coates, 2010). Furthermore, the literature suggests that firms with stronger CG are positively related to an increase in interaction with political stakeholders (Hertz, 2001; Zadek, 2004).

Based on theoretical reasoning, it is probable to argue that strong CG quality strengthens the positive relationship between CSR and CPA (H1a) as CG strengthens the intangible resources on which the CSR-CPA relationship is grounded; namely on trust, reputation, and legitimacy (Chen et al., 2004; Zadek, 2004). Effective CG relies on the moral duties of the corporate management, as well as the CSR activities the firm pursues. Furthermore, meeting investors’ and stakeholders’ demand effectively increases political legitimacy (Scherer et al., 2012), which in turn is likely to increase CPA. More and more firms incorporate CSR into their corporate governance structure (Ricart, Rodriguez & Sanchez, 2005), in some cases even forming ‘corporate responsibility-committees’ within the boards of directors (Spitzeck, 2009). For example, a French cement firm called Lafarge publicly committed itself to reducing its CO2 emissions per ton of cement production. The company included several external stakeholders (e.g., government officials) into their CG system in order to enhance the transparency of their operations (Scherer et al., 2013; Filatotchev & Nakaijama, 2014). This example clearly illustrates the positive interconnection between effective or strong CG, CSR, and CPA. Hence, strong CG is likely to amplify the

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positive relationship between CSR and CPA. Based on the theoretical argumentation and the additional exemplifications, we derive the following hypothesis:

Hypothesis 2a: Strong CG positively moderates the relationship between CSR and CPA.

Marsiglia and Falautano (2005) claim that CG practices and CSR activities use philanthropic measures to gain trust, legitimacy, and reputation by the external environment. They use the term ‘accountability’, meaning “the ability to take responsibility for new concerns”, to clarify the relationship between CSR and CG (Marsiglia & Falautano, 2005: 487). Regarding accountability, CSR relates to ‘taking account of’, whereas CG relates to ‘being held accountable for’. In other words, CSR is an additional means of good corporate strategy, whereas strong CG is an institutionalized and imperative way of dealing decently with its external environment. Furthermore, there are two contrasting ways of thinking about the relationship between CSR and effective CG. First, based on agency theory, CSR engagement is a principal-agent relationship (Jensen & Meckling, 1976) between managers and shareholders. Additionally, corporate managers have an interest in overinvesting in CSR with the goal to obtain private benefits and reputation building as good citizens (Jo & Harjoto, 2011; Carroll, 1991). The second line of thinking postulates that the use of CSR initiatives is likely to reduce potential conflicts between top management and the variety of firms’ stakeholders, hence mitigates any potential agency conflicts (Jo & Harjoto, 2011). Here, internal control systems (e.g., managerial incentives) are not sufficiently effective mechanisms to ensure self-monitoring and transparency for self-behavior (Jensen, 1993). Based on the latter argument, external monitoring systems through various governance mechanisms are more effective than internal mechanisms to reduce potential stakeholder conflicts. Harjoto & Jo (2011) find in their study significant evidence in favor of the second line of thinking, indicating that CSR and effective CG are mutually enforcing each other positively.

It is plausible to state that the philanthropic CSR strategy is likely to reduce potential conflict between firms and external stakeholders as it incorporates external control mechanisms, while the economic CSR component is more in line with agency way of thinking. Here, using CSR strategy has a perception of an egoistic corporate reputation-building affair. Following the abovementioned line of argumentation, we contend that it is likely that strong CG, concerning quality, has a stronger effect on the relationship between philanthropic CSR and CPA than it has on the relationship between economic CSR and CPA.

Corporate political activity through social responsibility.