The (mis)fit of corporate social responsibility and corporate governance

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The (mis)fit of Corporate Social Responsibility

and Corporate Governance

Thesis MSc. Business Administration - International Management Track University of Amsterdam – Faculty of Economics and Business Name of Student: Sterre Burgers Student Number: 10581928 Date of Submission: 20th of June 2018 Supervisor: dr. Ilir Haxhi Second Reader: dr. Francesca Ciulli

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Statement of Originality

This document is written by Student Sterre Burgers 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

Due to stakeholder and societal pressure, developing non-market strategies such as corporate social responsibility (CSR) activities have become paramount for many firms. However, despite the increasing research interest in examining the aggregated effect of CSR on corporate financial performance (CFP), previous studies have yielded mixed and inconclusive results. In this study, we correct these inconsistencies by examining the separated and integrated effects of internal and external CSR on CFP. Building on stakeholder theory, we argue that CSR activities increase legitimacy, trust, access to capital, and enhance corporate reputation, thereby the ability to obtain critical resources. While we expect CSR to have a positive influence on CFP, this effect should be stronger for the internal CSR activities. Considering the contingent nature of corporate governance (CG) on this relationship, we also examine the moderating effect of two CG characteristics (i.e. board diversity and CEO payment structure). We argue that while board diversity complements CSR and thereby positively affects the CSR-CFP relationship, the CEO payment structure focused on the short-term opposes CSR and affects this relationship negatively. For a sample of 468 U.S. Fortune 500 firms, we test our hypothesised relationships by running multiple linear regressions. Our results generate three main findings. First, in line with our claim, CSR does affect CFP positively; however, contradictory to our predictions, this effect is stronger for external CSR activities. Second, board diversity positively moderates the relationship between the aggregate CSR-CFP relationship as well as the external CSR-CFP relationship. Finally, our results show a negative moderating effect of the CEO payment structure only on the internal CSR-CFP relationship, not on the aggregate CSR-CFP relationship. The contribution of this study is twofold. First, by disentangling the CSR effect on CFP this study adds to the existing literature by demonstrating that separated CSR activities differently affect the CFP; and second, by exploring its contingent nature it shows the complementary effect of CG on this relationship. Proving that the organisational effectiveness of CSR activities on CFP depends on the complementation with CG characteristics. For managers and practitioners this indicates that CSR and their profitability should not be treated as a zero-sum game. They should rather focus on the type of CSR activities that contributes most to their CFP and which complements best with their CG-characteristics.

Keywords: Corporate Social Responsibility (CSR), Corporate Financial Performance (CFP),

Corporate Governance (CG), Board Diversity, CEO Payment Structure, Stakeholder theory, Contingency Theory.

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4.4.2 Board diversity ... 30 4.5 CONTROL VARIABLES ... 30 4.5 METHOD ... 30 5. RESULTS ... 33 5.1 DESCRIPTIVE ANALYSIS ... 33 5.2 CORRELATION ... 34 5.3 MULTICOLLINEARITY ... 37 5.4 REGRESSION ... 37 6. DISCUSSION ... 44 6.1 FINDINGS ... 44 6.2 CONTRIBUTION ... 48 6.3 LIMITATIONS ... 49 6.4 FUTURE RECOMMENDATIONS ... 50 7. CONCLUSION ... 52 8. REFERENCES ... 54

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1. Introduction

“Being responsible” has become a key standard of today’s business, pressuring firms to focus not only on profit but also on acting responsibly towards the society and the planet (Fisk, 2010). Corporate social responsibility (CSR) activities have become indispensable to many corporations today (Frynas & Yamahaki, 2016) by going beyond shareholder maximisation goals even though they are of a voluntary nature. While the motives behind social investments are not always clear, there are a growing number of firms that invest in CSR activities, raising the question of their profitability (Carroll, 1999). When CSR activities enhance the corporate financial performance (CFP), this creates a win-win situation for both the firm and its environment as well as society at large.

Consequently, there is an increasing amount of academic literature investigating the influence of CSR on CFP. Despite the increased interest, results remain mixed and inconclusive. While a few studies find a positive relationship between CSR and CFP (Brammer & Millingtion, 2005; Mellahi, Frynas, Sun, & Siegel, 2016; Ruf, Muralidhar, Brown, Janney, & Paul, 2001; Wang & Choi, 2013), others find a negative relationship if not no relationship at all (Hoepner, de Aguiar, Thereza Raquel Sales, & Majithia, 2014; Jia & Zhang, 2014; Moore, 2001). Therefore, research has generated two conflicting views. Building on Friedman‘s (1962) neoclassical perspective, the supporters of the negative effect view social related corporate expenditures as a violation to the shareholder’s wealth, where all the resources spent on social initiatives are detrimental to the short-term profit maximisation (Margolis & Walsh, 2003). In contrast, building on stakeholder theory, resource-based view (RBV) and resource dependence theory (RDT), the defenders of the positive effect view argue that firms should fulfil the demands of multiple stakeholders, as opposed to solely the shareholders, since this will help the firm to obtain legitimacy, trust, an increased corporate reputation and access to critical resources (Bebbingtion, Larrinaga, & Moneva, 2008; Chan, Watson, & Woodliff, 2014; Frooman, 1999; Milne & Patten, 2002; Pfeffer & Salancik, 2003). In order to address the relationship between CSR and CFP, we will first take a global approach by exploring the overall effect of CSR and then we will look further into different aspects of CSR to assess the disintegrated effect of specific CSR dimensions. We hereby look at internal versus external CSR (Orlitzky, Schmidt, & Rynes, 2003) or economic versus ethical CSR (Carroll, 1999). While internal CSR investments focus on developing new competencies, resources and capabilities that are manifested in, for example, the structure or culture of the firm (Russo & Fouts, 1997; Wernerfelt, 1984), external CSR investments lead

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to a positive corporate reputation among external parties such as banks, customers and suppliers (Fombrun & Shanley, 1990). Therefore, to correct for these previous inconclusive results and contrary to these previous studies, we will investigate the relationship between CSR and CFP by taking an overall and disaggregated approach to CSR. Since the pressure to run business in a socially responsible way is increasing, it is more than ever essential to find out whether including CSR activities can also lead to a higher CFP, or if corporate success and social welfare should be seen as a zero-sum game. For that purpose, by dividing the CSR construct in internal versus external CSR activities, we address our first research question:

RQ1: To what extent does CSR (internal versus external) influence CFP?

Due to stakeholder and societal pressure and the increasing power of the media, especially in western societies, non-market strategies are increasingly more important (Orlitzky et al., 2003). The pressure of stakeholders (Helmig, Spraul, & Ingenhoff, 2016) and isomorphic pressure (Tempel & Walgenbach, 2007) of other firms incorporating CSR in their business model make the inclusion of CSR crucial for a business to maintain its licence to operate (Banerjee, 2008; Cohen & Winn, 2007). Based on this we expect a competitive disadvantage for firms not including CSR. Building on stakeholder theory, CSR activities will increase trust, legitimacy and enhance the corporate reputation. Based on the RBV and RDT, fulfilling stakeholder demands gives firms the opportunity to obtain critical resources. We thereby expect CSR activities to not only save cost but also increase revenue. Considering these arguments, we claim CSR to positively affect CFP, while this effect should be stronger for internal CSR activities because of its difficulty to imitate and likeliness to lead to a sustainable competitive advantage. Moreover, internal CSR activities increase organisational effectiveness by more efficient utilisation of resources (Majumdar & Marcus, 2001), leading to increased profitability and requiring less advertising investments than the external CSR activities which mainly focus on the outside. Correspondingly, Carroll (1999) uses the term economic CSR instead of internal CSR that relates to the shareholder perspective with a focus on value maximisation, based on which we expect a stronger positive effect on the CFP.

Responding to the recommendations of researchers to explore the contingent nature of the CSR-CFP relationship (Barnett & Salomon, 2012), we examine the moderating effect of two corporate governance (CG) variables. Based on contingency theory, not every type of CSR activity is profitable for every firm. The essence of this theory is that organisational effectiveness depends on the fit between characteristics of the organisation (Donaldson,

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2001). In this research, we examine whether the separated and integrated effects of CSR on CFP are affected by the complementation with CG characteristics. CG refers to the mechanisms by which stakeholders of a company exercise control over the firm (John & Senbet, 1998). Most researchers contrast two dichotomous models of CG; the stakeholder and the shareholder model (Becht & Röell, 1999; Berglof, 1994; Porta, Lopez-de-Silanes, & Shleifer, 1999; Shleifer & Vishny, 1997; Soskice & Hall, 2001). In this research, we focus on the firm-level CG practices, more specifically board characteristics.

The board of directors is important since they possess the power to influence the CSR activities. One increasingly discussed topic is board diversity and its influence on the profitability. Although the percentage of women on boards has slightly increased, their representation is still unequal compared to men. Board diversity does not only relate to gender diversity, but concerns the inclusion of all minority groups (Carter, D’Souza, Simkins, & Simpson, 2010). Researchers found that increased board diversity positively affects CSR activities (Bear, Rahman, & Post, 2010; Harjoto, Laksmana & Lee, 2015). In line with stakeholder theory, more diverse boards increase the ability to fulfil the different demands of multiple stakeholders.

Although previous research shows that board diversity influences CSR and CFP directly, the direction of this relationship remains inconclusive (Carter et al., 2010). Despite growing interest in the direct effects, research falls short concerning the complementation with CSR and its moderating effect on the separated and integrated CSR-CFP relationship. We aim to correct for these inconsistencies through our second research question:

RQ2: To what extent does board diversity affect the relationship between CSR (internal versus external) and CFP?

We expect an enhanced positive CSR-CFP relationship when complementing CG mechanisms are in place. We regard board diversity as a CG characteristic of the stakeholder-oriented model of CG. This CG model complements with the CSR activities, due to their mutual focus on fulfilling the demands of the broader perspective of stakeholders, which we expect to positively affect the CSR-CFP relationship. Moreover, external CSR activities are more related to reputational effects that increase the relationship with stakeholders, which create a network. This network orientation is especially related to the stakeholder-oriented model of CG. The external CSR activities, therefore, complement board diversity better

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compared to internal CSR activities. Consequently, we expect the moderating effect to be stronger for the external CSR activities.

The last moderating CG characteristic that we examine is the role of the CEO who has extensive decision-making power and thereby the ability to influence the CSR activities. We research the executive compensation, which is a governance mechanism that aims to align the interests of managers and owners through payment structures. Previous research found a long-term payment structure to positively influence CSR activities, whereas the influence of a short-term payment structure was negative (Deckop, Merriman, & Gupta, 2006). We examine the influence of CEO payment structure relatedness to the shareholder return, which is related to agency-theory in which the CEO (principal) avoids the principal-agent conflict by aligning its payment structure with the shareholder’s demands (agent) (Nyberg, Fulmer, Gerhart, & Carpenter, 2010). This relatedness causes a short-term focus of the CEO. Although previous research did find direct effects on either the CSR or CFP, it still falls short in researching its moderating influence. Thus, we examine the existence of a complementing effect on the CSR-CFP relationship through the following question:

RQ3: To what extent does the CEO payment structure affect the relationship between CSR (internal versus external) and CFP?

If the CEO payment structure is related to shareholder return it focuses on increasing the short-term performance, a characteristic of the shareholder-oriented CG model. This causes that important stakeholders are neglected, due to which the long-term market value will not be maximised. Based on this we claim the CEO payment structure based on the shareholder return to oppose the CSR activities, which will affect the CSR-CFP relationship negatively. This effect should be less strong for internal CSR activities compared to external CSR activities. This is because internal CSR activities relate more to the CG characteristics of the shareholder model, due to their mutual focus on organisational effectiveness and increased profitability. Thereby the CEO payment structure focused on the short-term opposes less with the internal CSR activities compared to the external CSR activities.

In order to address the research questions, we use data from 468 Fortune 500 listed firms from the U.S. The secondary data, collected between 2012-2015, will be considered against the relevant variables. We first check the data with different general statistics and test our hypotheses through multiple linear regressions. Our primary independent variable is CSR, which is measured by KLD. To answer hypothesis 1B, 2B and 3B we also create two different

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scales based on the internal and external CSR activities. With regard to board diversity, we include the percentage of women on the board and create a dummy variable for the CEO payment relatedness to shareholder return. The dependent variable, CFP, is measured through ROA, ROI, and ROE. We also include industry, firm size and board size as control variables.

This study contributes to the mixed and inconclusive results within the existing literature by first of all disentangling the CSR effect on CFP, thereby deviating from previous research that mainly researched CSR in an aggregate way. We did find the separated external CSR to differently affect the CFP compared to the internal CSR, proving that it is essential to look deeper into the CSR-CFP relationship than solely in an aggregate manner. Second, despite the inconclusive previous results, our research adds to the growing body of literature researching the aggregate CSR-CFP relationship by once again proving the aggregate CSR activities to positively affect the CFP. Lastly, we contributed by exploring the contingent nature of this relationship, adding to the existing literature that studied the CSR-CFP effect in isolation. Our findings show that the organisational effectiveness of CSR on CFP depends on the complementation with CG characteristics, thereby supporting contingency theory. Through the inclusion of two moderating board characteristics we found complementing CG characteristics to positively influence the CSR-CFP relationship, whereby opposing CG characteristics did negatively. Consequently, our research provides an overarching framework of the relationships between CSR, CG, and CFP.

For practitioners and managers our contribution is twofold. First, we provide evidence for the claim that it pays off to be socially responsible. Our results prove that the focus on CSR and CFP should not be regarded as a trade off but that they can complement each other. This implies that managers should not solely focus on short-term profitability because focusing on their environmental and societal impact can lead to profits that endure, creating a cycle of business and society prosperity. Second, we prove that managers should not look at their CSR activities in isolation, as the successfulness of organisational practices depends on other characteristics. We found that complementing and opposing CG characteristics influence the CSR-CFP relationship, which suggests that managers should align these aspects. More specifically it shows managers that increasing board diversity in combination with CSR activities positively affects the firm’s performance. Showing that, although the majority of the boards still mainly consist of white men (Flinders, Matthews, & Eason, 2011), this reduces the potential profitability. Furthermore, in the ideal case managers create a CEO payment structure that is focused on the long-term, otherwise diminishing the positive effect of the CSR activities.

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In the next chapter, the literature review, we provide and consider an overview of the published articles on this topic. In the theoretical framework, we will consider and amalgamate these theories with our expectations to form the hypotheses in which we formulate our expected results. After that, we discuss our method more extensively and provide a description and operationalization of our variables. Thereafter we conduct our research in SPSS and report our main findings in the results section. We will then critically analyse these results to formulate a conclusion in relation to the previously published literature as well as the theoretical and managerial contribution. Finally, we will provide and consider the limitations of our study and list the recommendations based on these findings.

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2. Literature review

In this chapter, we will discuss the main theories concerning CSR, CG, CFP and their relation. First, we explain CSR and the way in which we divide this concept. Then, we discuss CSR in the light of several theoretical lenses such as stakeholder theory, resource-based view and resource dependence theory. Subsequently, we look at the CG characteristics of the board that could influence this relationship, namely board diversity and the CEO payment structure.

2.1 CSR

CSR is an emerging topic in the management field (Frynas & Yamahaki, 2016) and its definition varies across different research disciplines (Carroll, 1999); however, CSR is broadly defined as “actions that appear to further some social good, beyond the interests of the firm and that which is required by law” (McWilliams & Siegel, 2001). These actions are the outcome of managerial decisions or the ethical values of the company and judgments (Frynas & Yamahaki, 2016), but there are other company factors that influence CSR behaviour (Gupta, Briscoe, & Hambrick, 2017). These factors influence why firms differ in the degree to which they focus on profit maximisation or the balance and incorporation of the needs of non-owners such as employees, communities, and society at large (Clarkson, 1995). The external factors that trigger CSR behaviour are, for example, the product-market competition (Flammer, 2015), isomorphic and institutional pressure (Briscoe & Safford, 2008; Matten & Moon, 2008), the government (Kassinis & Vafeas, 2006) and actions of industry peers (Pacheco & Dean, 2015). Less attention has been paid to the internal determinants of CSR (Gupta et al., 2017), but the main idea is that a company’s reputation, strategy, and size determine the stakeholder pressure for the firm, which influences CSR activities (King, 2008). Furthermore, CSR activities are influenced by the preferences and values of its decision-makers, for example by the ideology of the CEO (Chin, Hambrick, & Treviño, 2013).

CSR activities are non-market strategies (Mellahi, Frynas, Sun, & Siegel, 2016), which are the actions of a firm regarding the societal context of economic competition with which they aim to improve their performance (Baron, 1995; Lux, Crook, & Woehr, 2011). Strategic CSR is the corporate non-market strategy that advances a social good to enhance the organisational performance, regardless of its motive (McWilliams & Siegel, 2001; McWilliams, Siegel, & Wright, 2006). Related to that, previous researchers found that

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effective non-market strategies, such as strategic CSR, have a positive influence on the firm’s survival, performance and their sustainable competitive advantage (Baron, 2001; Frynas, Mellahi, & Pigman, 2006; McWilliams, Van Fleet, & Cory, 2002; McWilliams & Siegel, 2011).

Although CSR is mentioned often in many papers, the concept that is also often used is corporate social performance (CSP). Many researchers use those two concepts interchangeably; however they are not completely identical (Barnett, 2007). According to the article of Barnett (2007) CSP may be described as “a snapshot of a firm’s overall social performance at a particular point in time – a summary of the firm’s aggregate social posture”. Meaning that investments in CSR activities over time turn into a certain CSP. CSP is defined as a “firm’s configuration of principles of social responsibility; processes of social responsiveness; and policies, programs, and observable outcomes as they relate to the firm’s societal relationships.” (Wood, 1991). Because of the inconsistent use of CSR and CSP, we have decided to use CSR as it is the most commonly used concept.

Previous researchers mainly researched CSR as an aggregate construct. However, researchers found different dimensions of CSR to have different effects (Inoue & Lee, 2011). Orlitzky et al. (2003) divided CSR between internal and external CSR. Internal CSR investments help to develop internal resources and capabilities integrated into their culture, structure and HR practices (Barney, 1991; Russo & Fouts, 1997; Wernerfelt, 1984). Those CSR activities mainly focus on the shareholders, which is related to the neoclassical perspective of Friedman (1962) that will be explained in the following part. From this perspective, it is not relevant whether these CSR practices are externally disclosed (Orlitzky et al., 2003), in contrast to external CSR activities for which external communication is essential. Here, the CSR activities help to build a positive corporate reputation among customers, banks, suppliers and investors (Fombrun & Shanley, 1990), which may facilitate the access to capital (Spicer, 1978). The external CSR activities focus more on fulfilling the demands of multiple stakeholders, which is related to stakeholder theory that we also explain in the following part. Similarly, Carroll (1999) divided CSR activities into an economical and ethical component. The first, economic component is what the firm does for itself (Carroll, 1979), which is related to the internal CSR activities. The economic component points out the fact that society expects businesses to make profit as well as to obey the law (Carroll, 1999). The firm must, therefore, meet its economic mission within the boundaries of the law that determine the “rules of the game.” The second, ethical component of Carroll (1999) consists of the CSR activities that a firm undertakes for others, which is related to the external CSR

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activities. Those CSR activities are driven by social norms on a voluntary base that go beyond the obedience of the responsibilities required by law.

2.2 Stakeholder and shareholder perspective

On the one hand, the neo-classical economic perspective (Friedman, 1962) regards corporate expenditures on social causes as a violation of the responsibility of managers to increase shareholder wealth. In this neo-classical perspective, they aim to fulfil the demands of one stakeholder group, the shareholders, for whom the financial performance is of the greatest interest. From this perspective, undertaking CSR activities is something unfavourable. This is the economic orientation, which states that firms should only undertake CSR activities when it creates benefits for the firm and the shareholders (Waldman & Siegel, 2008). This perspective on CSR is related to agency theory that analyses the relationship between principals and agents between whom ‘agency problems’ may occur as a result of conflicting interests (Amihud & Lev, 1981; Eisenhardt, 1985; Jensen & Meckling, 1976; Spence & Zeckhauser, 1971). This problem can sometimes be prevented with governance practices. Recent agency studies found CSR as conducive to financial and non-financial performance (Bear et al., 2010; Berrone & Gomez-Mejia, 2009; Oh, Chang, & Martynov, 2011). When relating the agency theory to the perspective of Friedman (1962), CSR can be seen as an act of self-interest of managers (agents), which causes negative results for the shareholders (principals) by decreasing the shareholder wealth (Atkinson & Galaskiewicz, 1988; Wright & Ferris, 1997).

On the other hand, the stakeholder theory focuses on fulfilling the demands of multiple stakeholders such as employees, the government, and customers. This stakeholder theory (Freeman, 1984) states that managers should take multiple stakeholder groups, as opposed to only the shareholder group, into account when making management decisions (Clarkson, 1995; Donaldson & Preston, 1995; Jones, 1995; Mitchell, Agle, & Wood, 1995; Wood & Jones, 1995). Those stakeholders may place pressure on firms that influence corporate actions, depending on the power dependence on the stakeholders (Clarkson, 1995; Freeman & Reed, 1983; Jawahar & McLaughlin, 2001) or the legitimacy claim (Hill & Jones, 1992; Langtry, 1994). From this point of view, CSR is an act with which a company meets the demands of multiple stakeholders. When combining the agency theory with the stakeholder theory, the CSR behaviour of managers (agents) can be seen as a response to the social or

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environmental long-term needs of multiple stakeholders (principals), which could reduce principle-agent conflicts and thereby increase performance.

2.3 Resource-based view

Another theory related to CSR is the resource-based view (RBV) that looks at the resource heterogeneity of firms (Frynas & Yamahaki, 2016). The idea behind the RBV is that when a firm possesses valuable, rare, inimitable and non-substitutable resources this creates a sustainable competitive advantage (Barney, 1991). From this perspective, resources could be not only tangible but also intangible, such as a positive corporate reputation (Coff, 1997). Studies that relate CSR to the RBV show that CSR can be a unique resource for the firm that creates a sustainable competitive advantage; wherefore CSR investments are justified as an investment in capabilities that will differentiate the firm from its competitors, thereby increasing its performance (Frynas & Yamahaki, 2016). Such internal capabilities that firms proactively use could be green innovations (Chen, Lay, & Wen, 2006), stakeholder management and strategic proactivity (Torugsa, O’Donohue, & Hecker, 2012) or a reputation for sustainable leadership (Lourenco, Callen, Branco, & Curto, 2014). However, previous research is inconclusive whether CSR could lead to ‘abnormal returns’ or create a sustainable competitive advantage. Some researchers found that CSR-related capabilities such as a sustainable corporate reputation could lead to a (sustainable) competitive advantage (Chen et al., 2006; Lourenco et al., 2014), whereas other researchers are sceptical towards such a relationship (Frynas, 2015; McWilliams & Siegel, 2001). Those critics state that although CSR can create advantages for a firm, it is unlikely that it would lead to a sustainable competitive advantage because, in contrast to other resources, CSR activities are easy to observe and imitate.

2.4 Resource dependence theory

The resource dependence theory (RDT) combines the above-mentioned stakeholder theory and RBV. According to this theory, firms depend on their environment to obtain critical resources for their survival (Pfeffer & Salancik, 1978). In order to obtain these resources, firms must fulfil the demands of those that possess critical resources. Different stakeholders might put conflicting social demands on the firm (Oliver, 1991), which a firm cannot meet all. The RDT therefor predicts that a firm pays more attention to the demands of

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the stakeholders that provide critical resources (Frooman, 1999; Pfeffer & Salancik, 1978). This could imply that companies in different industries invest in different CSR activities, to meet the demands of stakeholders that possess critical resources within that industry. For example, within industries with a high dependence on female staff, more attention is paid to internal CSR activities such as an attention to work-life balance (Ingram & Simons, 1995). The RDT gives rise to the importance of the role of the board of directors with regard to the flow of critical resources to the firm. An example is the result that increasing board diversity increases the CSR of a firm (Hafsi & Turgut, 2013). De Villiers et al. (2011) found that the environmental performance also increases with larger boards, larger representations of active CEOs on the board and more legal experts. We discuss the role of board characteristics more extensively further in this paper.

2.5 CSR & CFP

The increasing importance of CSR in today’s business causes increasing interest in the profitability of socially responsible firms (Carroll, 1999). Financial performance can be measured in many different ways. According to Orlitzky et al. (2003) there are three ways in which CFP can be measured based on, market, accounting or perception. The first, market-based, is the price per share, which reflects the fact that the shareholder group is the primary stakeholder group, whose satisfaction is of utmost importance to the firm (Cochran & Wood, 1984). The second option is the accounting-based indicators such as the return on assets (ROA), the earnings per share (EPS) or the return on equity (ROE) (Cochran & Wood, 1984). Lastly, there are perceptual measures such as surveys that provide subjective estimates of the company’s performance (Conine & Madden, 1986; Reimann, 1975; Wartick, 1988). Previous research of the CSR-CFP yielded mixed and inconclusive results (Donaldson, 1999; Jones & Wicks, 1999; McWilliams & Siegel, 2001; Roman, Hayibor, & Agle, 1999). They provided different reasons for the lack of consistent findings such as measurement errors (Waddock & Graves, 1997) or the neglect of contingency factors (Ullmann, 1985).

First of all, a stream of research found no effect of CSR on CFP (Cochran & Wood, 1984; McWilliams & Siegel, 2000). McWilliams & Siegel (2000) found the R&D intensity to highly correlate with CSR in a way that when R&D intensity is included in the research, CSR has a neutral influence on the CFP. The possibility of a spurious relationship between CSR and CFP is also shown by research of Cochran and Wood (1984), who found that the omission of asset age results in a spurious correlation between CSR and CFP. Both researches

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show that the effect of CSR on CFP depends on other factors, thereby finding no significant effect of CSR on CFP when disregarding those variables.

Second of all, other researchers found a negative relationship between CSR and CFP (Hoepner, de Aguiar, Thereza Raquel Sales, & Majithia, 2014; Jia & Zhang, 2014; Moore, 2001). Their core argument is the fact that the expenses made on CSR unnecessarily increase the cost and thereby affect the competitive position of the firm (Barnett, 2007). This is in line with the theory of Friedman (1962) who states that, although CSR is almost practiced everywhere; it is an agency loss for personal gain and not for shareholder benefit.

Lastly, contradicting to the negative findings are the researches that found a positive relationship between CSR and CFP. Based on a meta-analysis of 52 studies (Orlitzky et al., 2003) the majority of the researches found a positive relationship between CSR and CFP, similarly to his more recent study where he again found a main focus on the positive relationship (Orlitzky, 2011). This positive relationship is highly focussed on the instrumental stakeholder theory (Clarkson, 1995; Cornell & Shapiro, 1987; Donaldson & Preston, 1995; Freeman, 1984; Mitchell, Agle, & Wood, 1997) that explains the positive relationship by the fact that the satisfaction of multiple stakeholders is a crucial aspect for the firms’ financial performance (Donaldson & Preston, 1995; Jones, 1995). CSR may be used to obtain legitimacy among multiple stakeholders, which causes better corporate governance ratings, increases the attractiveness from investors and increases the corporate reputation (Bebbington, Larringa, & Moneva, 2008; Chan, Watson, & Woodliff, 2014; Milne & Patten, 2002).

This positive corporate reputation among stakeholders due to the compliance of their demands positively influences the firm’s profit since it leads to a positive relationship with their surroundings. This provides a link between stakeholder theory (Freeman, 1984), the RDT (Pfeffer & Salancik, 1978), and the RBV (Barney, 1991); stakeholder theory expects a positive relationship between the firm and its surroundings on which companies depend to obtain critical resources for their survival. This is especially true for social actors that control critical resources to whom a company will pay more attention (Frooman, 1999; Pfeffer & Salancik, 2003). Those critical resources or the positive corporate reputation can create a competitive advantage for the firm. When this advantage is valuable, rare, inimitable and non-substitutable, this could lead to a sustainable competitive advantage (Barney, 1991). Those (sustainable) competitive advantages increase the CFP of a firm, which indicates that ‘it pays to go green’ (Russo & Fouts, 1997). This relationship between stakeholder theory and the

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RBV (Barney, 1991) explains why a favourable stakeholder relationship not only saves costs but also increases revenues (Russo & Fouts, 1997).

Another explanation for this positive effect is the fact that the communication towards external parties about its level of CSR may increase a positive image among customer, bankers, suppliers, and investors (Fombrun & Shanley, 1990), which facilitates the access to capital (Spicer, 1978). The basic idea behind the stakeholder perspective is that CSR improves the relationship with relevant stakeholder groups, which builds trust and thereby decreases transaction costs and certain risks (Barnett, 2007). This trustworthiness creates more trusting labour relations that could lead to a higher retention rate which decreases costs (Greening & Turban, 2000; Turban & Greening, 1997) or increases the goodwill of the current employees, which both improve the financial outcomes (Davis, 1973; McGuire, Sundgren, & Schneeweis, 1988; Waddock & Graves, 1997).

2.6 Corporate governance

As we do not study the CSR-CFP relationship in isolation but from a broader perspective, we examine the moderating effect of two CG characteristics. CG refers to the mechanisms by which stakeholders of a company exercise control over the firm (John & Senbet, 1998). Traditionally it is seen within the framework of agency theory that looks into the principal-agent conflict. Due to the separation of ownership and control (Berle & Means, 1991), certain CG mechanisms are needed to align the different interests of principals and agents (Fama, 1980; Fama & Jensen, 1983; Jensen & Meckling, 1976). Whereas for example shareholders have profit maximisation as the main interest, this might differ among other stakeholders. The aim of CG is to minimize the agency problem with the available mechanisms (Shleifer & Vishny, 1997). Across different countries, agency problems are addressed in different ways (Aguilera & Jackson, 2003). Most researches contrast two dichotomous models of CG: the stakeholder or the continental European model and the shareholder or Anglo-American model (Becht & Roëll, 1999; Berglof, 1994; Porta, Lopez-de-Silanes, & Shleifer, 1999; Shleifer & Vishny, 1997; Soskice & Hall, 2001). The first, stakeholder model is associated with among others long-term debt finance, weak markets for corporate control and network orientation. The latter, shareholder model consists of characteristics such as short-term relationships, primary focus on shareholders and active markets for corporate control.

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CG structure (Fama & Jensen, 1983; Williamson, 1983). The board of directors has different roles such as the monitoring role and the resource-providing role (Ben-Amar, Chang, & McIlkenny, 2017). The monitoring role consists of the responsibility to monitor the managers on behalf of the shareholders, which is analysed through agency theory (Fama & Jensen, 1983; Jensen & Meckling, 1976). The latter resource-providing role is to provide resources, which is related to the researches of the RDT (Hillman, Cannella, & Paetzold, 2000; Pfeffer, 1973; Pfeffer & Salancik, 2003) and stakeholder theory (Hillman & Keim, 2001; Huse, 2003; Johnson & Greening, 1999; Luoma & Goodstein, 1999). Due to their power, the board of directors is able to influence and solve the conflict of interest among decision-makers and stakeholders (Baysinger & Butler, 1985). In this research we focus on the firm-level CG practices in which we specifically examine two of the board characteristics: board diversity and CEO payment structure.

2.7 Board diversity

One often-discussed topic is the board diversity; the representation of minority groups within the board. The minority groups are for example women, Asians, African Americans and Hispanics (Carter, Simkins, & Simpson, 2003). Diverse boards create benefits for a company such as diverse knowledge, opinions and fresh ideas (Arfken, Bellar, & Helms, 2004). Arfken et al. (2004) state that in order to enhance strategic decisions, the characteristics of the board should reflect the corporation’s consumer population, whilst this is often not the case. Research shows for example that women are still underrepresented in the majority of the boards (Arfken et al., 2004). There are countries such as France and Italy that introduced quotas for female representation and other countries such as Australia and the UK introduced a comply-or-explain approach to promote increasing female participation within the boards (Ben-Amar et al., 2017). The European Commission introduced a proposal that aims for 40% female board representation by 2020 (Ben-Amar et al., 2017). However, there are two viewpoints on why firms should invest in creating more diverse boards (Carter et al., 2010). The first viewpoint acknowledges the fact that minority groups, with their networks, information and human capital, should have the opportunity to participate in a board. The second viewpoint states that firms should create more diverse boards because the incorporation of minority groups will lead to better governance and therefore increases the profitability. This creates a debate whether firms should have more diverse boards because “it is the right thing to do” or because “it increases the profitability of the firm.”

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Despite the underrepresentation of women and other minority groups on the board, research found different effects of board diversity related to our topic. First of all, multiple papers found a positive relationship between (gender) board diversity and firm performance (Dezsö & Ross, 2012; Erhardt, Werbel, & Shrader, 2003; Harjoto, Laksmana, & Lee, 2015), such as increased gender diversity that positively influences a firms’ reputation (Bernardi, Bosco, Vassill, 2006; Brammer, Millington, & Pavelin, 2009). This reputation leads to an enhanced relationship with the company’s surroundings that, according to the RBV and RDT, lead to an increased CFP. According to Carter et al. (2010) two theories explain this positive relationship between board diversity and CFP. First of all, the RDT states that more diverse boards will provide more and different beneficial resources to the firm that increase the CFP (Hillman et al., 2000). Second of all, the human capital theory explains this positive relationship by the experience, education, and skills of individuals that could provide benefits to the firm (Terjesen, Sealy, & Singh, 2009) and thereby positively affect the CFP. Despite those positive results, contradicting research did not find a result of board diversity on CFP (Careter et al., 2010). Those researches mainly focus on social psychology theory, which states that board diversity decreases the cohesion and social barriers causing that the influence of minority views on group decisions become less likely (Westphal & Milton, 2000). Also, other researches found that more diverse opinions slow down the decision-making process and make it less effective (Campbell & Minguez-Vera, 2008).

Besides the relationship between board diversity on CFP, papers also found a positive relationship between (gender) board diversity and CSR (Bear et al., 2010; Harjoto et al., 2015). Bear et al. (2010) found board diversity to influence CSR, which influences the corporate reputation positively. These findings support the stakeholder theory by the fact that more diverse boards increase the ability of the firm to satisfy the needs of multiple stakeholders. Women on boards respond more to the needs of diverse stakeholders (Bear et al., 2010), which shows that gender board diversity influences the corporate response to the stakeholders’ demands (Ben-Amar et al., 2017). However, research indicates that there is a critical mass of woman on board needed to have an influence (Konrad, Kramer, & Erkut, 2008; Kramer, Konrad, Erkut, & Hooper, 2006). The reason for this is that minority groups are often less heard within a group (Nemeth, 1986). This indicates that the effectiveness of women on boards might increase when the number of female board members increases (Bear et al., 2010).

Another theory that explains the influence of board diversity on CSR is the RDT by stating the function of the board as providing critical resources to the firm such as legitimacy

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and counsel (Hillman & Dalziel, 2003). Those board resources increase the ability of the company in understanding and responding to its environment (Boyd, 1990), which increases the ability to manage CSR issues. There is also another theory that explains this relationship, which is the agency theory. The diversity of the resources within a board influences the board’s function of monitoring management. This monitoring role includes for example the strategy implementation and the rewarding of the CEO (Hillman & Dalziel, 2003). The monitor management need the right skills, expertise and knowledge (Hillman & Dalziel, 2003), with which a diverse board can help.

2.8 CEO payment structure

Another critical role within the board is the role of the CEO. As already mentioned earlier, the company’s emphasis on CSR is influenced by the preferences and values of its decision makers (Chin, Hambrick & Treviño, 2013). CEOs have extensive decision-making power and thereby the ability to influence the CSR activities (Kochan, 2002; Orlitzky & Swanson, 2002). One of the characteristics that could influence the behaviour of the CEO is their payment structure that often consists of a fixed part, which is their basic salary, and a variable part that consists of an annual bonus and a long-term incentive pay such as stock options (Deckop, Merriman & Gupta, 2006). The focus of the CEO depends on whether their payment structure is based on the long-term or short-term performance of the firm (Jensen, Murphy, & Wruck, 2004). The attention to the strength and concern areas of CSR is most likely to positively influence the long-term positive pay-outs compared to the short-term positive pay-outs (Deckop et al., 2006). Although research found that CSR causes short-term effects on the corporate reputation (Orlitzky et al., 2003), this reputation influences stock prices as opposed to the accounting performance of the firm on which the short-term CEO pay is based (McGuire, Dow, & Argheyd, 2003; Murphy, 2000). According to Deckop et al. (2006) these results imply that a CEO payment package based on the short-term performance provides little incentives for the CEO to engage in CSR. CEOs with short-term payment packages might, therefore, refrain from CSR investments due to opportunity costs; in the way that resources spent on CSR are not spent on maximising the short-term performance (Margolis & Walsh, 2003).

Contradicting, the focus on a long-term payment structure incentivises CEOs to engage in CSR (Deckop et al., 2006). The reputational effects of CSR take a couple of years to develop, wherefore the effects on performance are more likely to occur on the long-term

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(Mahapatra, 1984; Short, 2004, Spicer, 1987). Taken together, a long-term focus decreases the disincentive to invest in CSR, such as presented with the short-term focus and increases the incentive due to the long-term positive CSR-CFP relationship (Deckop et al., 2006). However, the results of the direct influence of CEO payment structure on either the CSR or CFP relationship are mixed and inconclusive. McGuire et al. (2003) for example did not find a significant difference between a long-term or short-term focus on the CSR strengths. The difference between those researches is that Deckop et al. (2006) combined CSR strengths and concerns in one measurement whereas McGuire et al. (2003) analysed them separately.

Concluding, previous literature does not yield a conclusive answer concerning the integrated and separated CSR effects on CFP. Establishing a deeper layer within this research field is difficult since most of the above-mentioned literature researched CSR in an aggregate manner. Furthermore, it is difficult to find a universal answer to the CSR-CFP relationship when studying this relationship in isolation. None of the previous mentioned research takes the moderating influence of CG characteristics into account. Unless different organisational characteristics, such as the CG characteristics, are researched, it remains difficult to create an overarching framework.

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3. Theoretical framework

Notwithstanding the different researches examining the relationship between CSR, CG, and CFP, researchers failed to create a concise picture of the overarching framework. First, results regarding the aggregate CSR-CFP relationship remain mixed and inconclusive (Frynas & Yamahaki, 2016). Although Orlitzky et al. (2003) found in their meta-analysis of 52 studies that CSR affects CFP; the direction of this relationship remains unclear. Therefore, researchers propose that future work should look more into the relationship between CSR and CFP, and the contradicting results of for example Berman et al. (1999) and Short (2004). In their previous work, Porter and Kramer (2011) highlighted the importance of creating shared value in which companies must be the ones taking the lead to bring business and society back together. This is because companies still see value creation from an out-dated approach, with a focus on the short-term financial performance, thereby missing the broader influences that determine the long-term success of the company (Porter & Kramer, 2011). Therefore companies must move beyond the trade-off and create shared-value with which they create economic value in a way that also creates value for the society. Even on the contrary, not acting socially responsible and thereby creating social harms or weaknesses often leads to increased internal costs for firms (Porter & Kramer, 2011). Society and business depend on each other in a way that business needs a prosperous community to create demand, provide critical public assets and a supportive environment; whereas a community needs business to create jobs and wealth opportunities for its citizens.

Second, previous research mainly examined the influence of CSR in an aggregated way (Frynas & Yamahaki, 2016; McWilliams & Siegel, 2001). Therefore researchers also advise future research to examine the different dimensions of CSR that could influence the CFP (Berman, Wicks, Kotha, & Jones, 1999; Johnson & Greening, 1999; Short, 2004). More in-depth research could provide a deeper understanding of separated CSR effects, providing an extra layer within the CSR-CFP research. Therefore we disentangle the CSR effect to examine whether separated CSR activities differently affect the CFP. We thereby build on previous research that already made a first step in exploring this deeper layer within the CSR-CFP relationship (Lioui & Sharma, 2012). Nevertheless, there is still room for further exploration and separations of the CSR construct.

Furthermore, the research of the above-mentioned direct CSR-CFP relationship is essential in order to find out if the integrated, as well as the separated CSR activities, can be justified as a wise decision (Barnett, 2007). Building on that, it is important to examine the

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contingent nature of this relationship in order to find out under which conditions CSR investments can be justified as a wise decision. Especially since previous research mentioned the lack of research into the contingent nature as a possible explanation for the inconclusive findings within the CSR-CFP literature (Ullmann, 1985). Not surprisingly, researchers recommended future research to explore this contingent nature (Barnett & Salomon, 2012). Previous research aimed to find a universal answer to the CSR-CFP relationship, which despite all the effort might be futile. As companies do not operate in isolation, it is also not representative to study the CSR-CFP relationship without examining the influence of other company characteristics. Responding to this research gap, we examine the moderating influence of two different CG-characteristics, thereby aiming to prove the complementing effect of CG on the CSR-CFP relationship.

This research aims to correct for the inconsistencies of previous research by re-examining the direct CSR-CFP relationship. By extending the research field through the examination of the separated as well as integrated effects of internal versus external CSR, we try to reach a deeper layer within the field of CSR. Thereby intending to not only answer the overall question whether being socially responsible pays off but also providing a broader theoretical picture, which is different from previous research that mainly investigated CSR in an aggregate way. Lastly, we look at the CSR-CFP relationship from a broader perspective, by exploring its contingent nature. Extending the research that investigated the direct effect; we examine the moderating influence of two CG characteristics on the CSR-CFP relationship, thereby providing an overall picture linking CSR, CG, and CFP in an overarching framework leading to our following hypotheses.

3.1 CSR – CFP relationship

The current environment is increasingly demanding businesses to operate in a socially responsible manner. Peer-pressure from leading-edge companies puts pressure on businesses to act responsible (Waddock, 2008). Additionally, not only the government and other NGOs are putting pressure on companies but also consumers are becoming more aware of sustainability, partly due to the rise of publications in the media. Meeting the demands of multiple stakeholders is necessary for firms in order to retain their “licence to operate” (Banerjee, 2008; Cohen & Winn, 2007). Due to their increasing power, non-marketing strategies, such as CSR, are increasingly becoming more important for firms in order to remain profitable (Orlitzky et al., 2003). Not including CSR activities could thereby lead to a

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competitive disadvantage.

Besides the disadvantage of not including CSR activities, there are also multiple advantages of incorporating CSR. First of all, related to the stakeholder theory, CSR activities increase trust, which decreases transaction costs and certain risk (Barnett, 2007). It also increases legitimacy among multiple stakeholders, attractiveness from investors and the corporate reputation (Bebbington et al., 2008; Chan et al., 2014; Milne & Patten, 2002). It is thereby important to note that currently more than half of companies’ assets are intangible rather than tangible assets, such as the corporate reputation (Galbreath, 2002; Lev & Daum, 2004; Savitz, 2013). This enhanced corporate reputation among stakeholders leads to a positive relationship with their surroundings. Consequently, firms can gain better access to critical resources for their survival. This is a critical aspect for firms as they are dependent on their resources in order to gain a (sustainable) competitive advantage (Barney, 1991). This RBV and RDT explain why a favourable stakeholder relationship not only saves costs but also increases revenue (Russo & Fouts, 1997).

Our claim builds on the stakeholder theory, RBV and RDT as well as the notion of creating shared value (Porter & Kramer, 2011). Porter introduces shared value creation in which he emphasises that not all types of profit are equal. When companies move beyond the trade-off between CSR investments and profitability, they can create economic value in a way that also creates value for the society. The investments in CSR are thereby seen as a long-term investment in profits that endure. This is because CSR investments lead to a prosperous society, on which business depends for their demand and profitability, leading to a cycle of both business and society prosperity. Not acting socially responsible could thereby create social harm and weaknesses and thereby increase costs. In combination with the fact that stakeholder theory, RBV, and RDT show that CSR activities not only save cost but also increase revenue, we argue that the disadvantages of not including CSR activities in combination with the advantages of incorporating CSR activities cause that the financial benefits will exceed the financial investments.

This research builds on the meta-analysis of Orlitzky et al. (2003) that incorporated 52 different studies of which the majority found a positive CSR-CFP relationship. Nevertheless, the results were still highly variable as well as some studies that deviated from these positive results. Yet, building on our arguments mentioned above that prove the financial benefits of incorporating CSR we claim the following:

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According to the RBV, resources can create a sustainable competitive advantage when they are valuable, rare, inimitable and non-substitutable (Barney, 1991). As mentioned above, the CSR activities create specific capabilities and access to resources that will create a sustainable competitive advantage. However, some critics are sceptical towards such a relationship (Frynas, 2015; McWilliams & Siegel, 2001). Those researches state that although CSR could create advantages for a firm, it is unlikely to lead to a sustainable competitive advantage. They argue that, in contrast to other resources, CSR activities are easy to observe and therefore easy to imitate.

We argue that this argument of imitability is more related to the external CSR activities since these activities are communicated externally and therefore easier to observe, which is more difficult for the internal resources and capabilities. Those often-intangible resources are mostly integrated in the HR practices, the structure of the company or corporate culture, which is more difficult to observe and imitate. Previous research also mentions that the social benefits of those internal CSR activities are often less visible (Tang, Hull, & Rothenberg, 2012). Therefore we claim internal CSR activities to be more likely to lead to a sustainable competitive advantage compared to external CSR activities.

Additionally, internal CSR investments focus more on increasing the organisational effectiveness by more efficient utilisation of resources (Majumdar & Marcus, 2001), which focuses on the demands of the shareholders such as value maximisation. This is in line with Caroll (1999) who called it the “economic CSR component”, which are the CSR activities that a firm undertakes to increase profit within the boundaries of the law. This focus on increasing efficiency will cause a stronger positive effect on the CFP. Furthermore, for this efficiency creation, external communication is less critical, which saves advertising expenses. Contrary to the external activities CSR activities that focus more on the reputation of the firm for which the external disclosure is essential, increasing the investments in advertising expenses.

Our claim builds on the separations of Caroll (1999) and Orlitzky et al. (2003) that made a first step in examining the separated CSR effects. Our study contributes to this by examining the separated effect of internal versus external CSR on the CFP, thereby responding to previous research stating that it is still inconclusive which type of CSR activities generates a better CFP (Basu & Palazzo, 2008). Nevertheless, our claim is contradicting some of the researches mentioned in the meta-analysis of Orlitzky et al. (2003) that focused more strongly on the reputational viewpoint. Although the reputational effect of external CSR activities might be applicable, studies do not account for the possible imitation

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of those externally disclosed activities as well as the increased costs of advertising expenses. We therefore claim that the separated effect of internal CSR activities on the CFP will be stronger compared to the external CSR activities:

H1B: The positive effect of CSR activities on CFP will be stronger for the internal CSR activities than the external CSR activities

3.2 Moderating influence of board diversity

Other researchers recommended future research to explore the contingent nature of the CSR-CFP relationship (Barnett & Salomon, 2012). This is related to the contingency theory, which in general states that the organisational effectiveness depends on the fit between characteristics of the organisation (Donaldson, 2001). Previous research acknowledges that it might be naïve to think that certain poor or bad CSR behaviours will always lead to a certain CFP (Rowley & Berman, 2000). Therefore we aim to find out under which conditions CSR especially pays off by researching the contingencies of the CG practices on the CSR-CFP relationship (Rowley & Berman, 2000). Since (gender) board diversity is an often-discussed topic, it is essential to find out whether increasing board diversity could influence the CSR-CFP relationship. Several previous researches found that board diversity directly influences CSR (Bear et al., 2010; Harjoto et al., 2015) and CFP (Dezsö & Ross, 2012; Erhardt, Werbel, & Shrader, 2003; Harjoto, Laksmana, & Lee, 2015). Furthermore, previous research found stakeholders to be acknowledged due to their possession of power, legitimacy, and urgency (Mitchell, Agle, & Wood, 1997); however, the managers of the firm determine the salience of the stakeholders. Accordingly, managers are important within the stakeholder theory, thereby increasing the importance of researching their influence.

We thereby examine the complementation of CSR activities and board diversity to find out whether and how complementing CG characteristics influence the CSR-CFP relationship. As explained earlier, often two CG models are distinguished, namely the shareholder model and the stakeholder model. Since CSR is a non-market strategy that aims to satisfy the different interests of multiple stakeholders, we argue CSR activities to complement with the CG characteristics of the stakeholder model. This is because of the mutual focus on the broad range of stakeholders of both CSR activities as well as the CG characteristics of the stakeholder model, which according to our expectations will enhance the positive CSR-CFP relationship. Similarly, we claim board diversity to be a CG characteristic of the stakeholder model. We base our claim on the fact that more diverse boards will consist

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of members with more diverse values and opinions and thereby contains a broader variety of board characteristics, which increases the ability of a firm to satisfy the needs of multiple stakeholders (Bear et al., 2010; Ben-Amar et al., 2017). Due to the fact that both board diversity and CSR activities focus on the demands of the broader perspective of stakeholders, we claim that they complement each other and thereby positively affect the CSR-CFP relationship.

Our hypothesis builds on the previous research of Bear et al. (2010) that found women within boards to respond more to the needs of diverse stakeholders, showing that board (gender) diversity positively influences the corporate responses to the stakeholder’s demands (Ben-Amar et al., 2017). Although they do not link this effect to the separated and integrated CSR-CFP relationship, they did make a first step in finding the complementing effect due to their mutual focus on the stakeholder’s demands. Based on this complementation with CSR activities we argue that board diversity positively affects the CSR-CFP relationship:

H2A: The board diversity will positively moderate the CSR-CFP relationship.

The extent of complementation will also differ among different types of CSR activities. The external CSR activities focus on fulfilling the demands of important external stakeholders in order to gain legitimacy, trust, increase the access to capital, and enhance corporate reputation, thereby the ability to obtain critical resources. Carroll (1999) refers to those activities as the “ethical CSR activities” which are the activities that firms undertake for others that go beyond the obedience of the responsibilities required by law. Whereas the internal activities focus on increasing the organisational effectiveness, supported by the fact that Carroll (1999) calls these the “economic CSR activities” which are the activities that a firm undertakes for itself. The economic component points out the fact that society expects businesses to make profit as well as to obey the law (Carroll, 1999). The firm must, therefore, meet its economic mission within the boundaries of the law that determine the “rules of the game.”

We argue that the external CSR activities complement stronger with the CG characteristics of the stakeholder model, due to their mutual focus and prioritization on satisfying multiple stakeholders and efforts that go beyond the self-interest of the firm. Moreover, external CSR activities are more related to the reputational effects that increase the relationship with stakeholders, which creates a network. This network orientation is a specific characteristic of the stakeholder-oriented model of CG. Providing us with another argument why external CSR activities complement stronger with board diversity since more diverse

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boards enhance the relationship between multiple types of stakeholders, thereby also creating a network. This is in contrast with the internal CSR activities that focus on increasing the efficiency of the firm and thereby satisfying the needs of the shareholders, which complement more with the CG characteristics of the shareholder-oriented model. As more diverse boards are a CG characteristic of the stakeholder model, we claim board diversity to complement stronger with the external CSR activities compared to the internal CSR activities, thus affecting the CSR-CFP relationship to a greater extent.

This builds on and adds to the research of Orlitzky et al. (2003) and Carroll (1999) that both made a first step in the different effects of separated CSR activities. As this study does not examine the contingent nature of this relationship, we explore this further in order to provide a broader picture of the different effects of internal versus external CSR activities and the complementation with board diversity. Concluding we claim board diversity to complement stronger with the external CSR activities compared to the internal CSR activities, which will affect the CSR-CFP relationship:

H2B: This effect of H2A will be stronger for external CSR activities on CFP than the internal CSR activities.

3.3 Moderating influence of CEO payment structure

As already mentioned earlier, the company’s emphasis on CSR is influenced by the preferences and values of its decision makers (Chin, Hambrick, & Treviño, 2013). The CEO has decision-making power and thereby the ability to influence the CSR activities within a firm. If a firm wants to increase its CSR activities, it should pay attention to the alignment between the desired level of CSR and the CEO payment structure (Deckop et al., 2006). As indicated above, previous research already found different effects of the long- or short-term payment structures of CEOs. However, those results are still inconclusive (Deckop et al., 2006; McGuire et al., 2003) and fall short in researching the complementing effect.

In this research, we look at whether the CEO payment structure is related to the shareholder return. This payment structure is focused on the short-term because the CEO will focus on increasing the shareholder return by increasing the short-term profit. According to researchers this focus on the short-term performance causes that important stakeholders are neglected. Jensen (2002) provides a solution for the conflict between value maximisation and stakeholder theory, which is called the enlightened value maximisation and enlightened stakeholder theory that improves management, corporate governance, and performance. He

The (mis)fit of corporate social responsibility and corporate governance