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AMSTERDAM BUSINESS SCHOOL

The interplay between Corporate Governance,

Corporate Social Responsibility and Corporate

Political Activity.

A study by Ioannis Zois

Student No. 11568623

Supervised by Dr. Ilir Haxhi

Second reader: Dr. Francesca Ciulli

Amsterdam Business School, January 2018

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Statement of originality

This document is written by Ioannis Zois who declares to take full responsibility for the contents of this document. I declare that the text and the work presented in this document is 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 :

Existing literature has researched the relationships between Corporate Governance (CG), Corporate Social Responsibility (CSR) and Corporate Political Activity (CPA) in pairs, however little is known about their interplay. This study aims to shed light on the effect of CG on CSR the CPA moderating effect. We argue that CG characteristics – in particular Board independence and CG score – will have impact the firm‘s CSR. We hypothesize that the bigger the firm‘s CG score the higher the positive impact on CSR, as well as that the bigger the independence of the Board the bigger the positive impact on CSR. Furthermore, we argue that CPA, and especially Lobbying and Political Action Committees (PACs), will negatively moderate the above-mentioned relationship. For a sample of 405 US Fortune 500 firms we test these relationships. Ours results show that CG variables influence CSR negatively, while Lobbying and PAC positively moderate the relationship between CG and CSR. Our findings have several theoretical contributions. First, this report is novel in adding CPA in the relationship between CG and CSR, and aims to add to the existing literature by

delving further into the relationship of CG and CSR, while at the same time providing managers with insight on how changes in CG and CPA might affect the firm‘s CSR, in order to maximize the gains of all concepts and their interactions. Finally, this report provides managers with an insight on how their firm‘s governance affects the results in CSR and how specific political tactics interact with all the parts in this relationship.

Keywords: Corporate Governance (CG), Corporate Social Responsibility (CSR),

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TABLE OF CONTENTS

1. Introduction……… 6

2. Literature Review……….. 11

2.1. Corporate Governance………. 11

2.2. Corporate Social Responsibility……… 13

2.3. CSR Disclosure……….. 15

2.4. CG – CSR………...… 17

2.5. Corporate Political Activity………... 18

2.6. Lobbying……….. 20

2.7. Political Action Committees……….... 22

3. Theoretical Framework……… 23

3.1. CG Score – CSR and 1st Hypothesis……… 23

3.2. Board Independence – CSR and 2nd Hypothesis……… 24

3.3. Lobbying – CG – CSR and 3rd Hypothesis……… 25

3.4. PACs – CG – CSR ………. 27 4. Methodology………. 29 4.1. Sample……….. 29 4.2. Data Collection………. 29 4.3. Independent Variable……… 30 4.4. Dependent Variable……… 30 4.5. Moderator Variable……… 31 4.6. Control Variable……… 31 4.7. Method……… 32

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5.1. Descriptive Statistics and Correlations………. 35

5.2. Regressions Analysis………. 38

6. Discussion………. 42

7. Practical Implications and Future Research……….. 43

8. Limitations………. 45

9. Conclusion………. 45

10. References………. 47

Acknowledgments

The author of this study would like to thank Dr. Ilir Haxhi for his guidance, feedback and patience, Dr. Francesca Ciulli for being the second reader of this study as well as fellow colleagues Antonia Tanzer, Cilia Rodriguez and, last but not least, Michiel Blomaard for their constant help and support.

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1. Introduction

The concepts of Corporate Governance (CG) and Corporate Social Responsibility (CSR) are both central to all business networks in nowadays‘ Multinational Enterprises (MNEs). Top firms increasingly openly report their CSR initiatives, while information about the CG structure of the firm can be accessed in the vast majority of company websites. Even though they have been drawing increasing attention over the past decade, however, various scholars characterize both concepts as broad and elusive, as well as ones with many definitions (Kolk & Pinkse, 2010, Kok et al, 2011). It is estimated that large U.S firms spent around $28 billion for sustainability and around $15 billion for corporate philanthropy in 2010 (Di Giuli & Kostovetsky, 2013).

In addition, both the CG and CSR concepts intertwined seem particularly relevant for multinational enterprises (MNEs), which generally face higher demands to be transparent and disclose information about such issues (Kolk & Pinkse, 2010). Furthermore, Kolk & Pinkse (2010) argue that there is a growing need for companies to be ethical on top of profitable, such that the overlap between CG and CSR is intensifying. In that line of thought,Ricart et al. (2005) present findings from a survey including Dow Jones Sustainability Index firms, which demonstrate that companies have been incorporating CSR into their CG methods. Furthermore, Spitzeck (2009) finds that UK firms have increasingly been incorporating CSR committees within the

firm‘s Boards.

Literature has identified the strong link between CG and CSR, in the sense that companies need to be both profitable and ethical, and that the dimensions to be covered for a successful operation have broadened, such that there is an intensifying trend for overlap between CG and CSR (Kolk & Pinkse, 2010). CSR has been

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identified as the product of voluntary choices stemming from the firm‘s decision makers, and more specifically the firm‘s top executives and Top Management Team (TMT) (Chin et al, 2013). Jamali et al (2008) come up with some very interesting findings, as they suggest that CG and CSR strongly overlap and form three models of relationship between the concepts. These are 1) CG as a foundation for CSR, 2) CSR as a dimension of CG and 3) both CG and CSR interacting in a continuum, which means that the two concepts intertwine, or affect one another in the operational process of every MNE.

However, Money and Schepers (2007, p. 5) note that there is little knowledge from a corporate perspective thus far as to the extent of alignment between CG and CSR. Little is also known about which aspects of CG affect and are linked with CSR and that is underlined in the statement of Chan, Watson & Woodliff (2013), that future studies could investigate which aspects of CG are most closely tied to (or associated with) CSR. What we get from the above is that, clearly, existing literature has underlined the importance of a firm‘s environmental performance for a healthy corporal governance and vice versa, but the consequences of CG decisions on a company‘s CSR have not been studied in depth. Jo & Harjoto (2012) state that there is very little empirical evidence examining the causality effect and endogeneity issues caused by CG on CSR, hence putting the issue into perspective.

In order to examine the causality effect between CG and CSR, this study will engage in examining the following research question :

RQ1 : To what extent does Corporate Governance affect a firm’s Corporate Social Responsibility?

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At the same time firms also operate politically in a traditional sense, in seeking to secure favorable political conditions for their businesses (den Hond et al, 2014). This statement puts the Corporate Political Activity (CPA) of MNEs into perspective. CPA is also a concept that has been facing expanding attention for many firms and their boards over time. Hillman & Hitt (1999) define CPA as efforts made in the corporate world in order for government policy to be shaped in ways favorable to the firm. Delmas et al (2015) mention among others that an estimated $359 million was spent by the U.S energy and natural resources sector for lobbying in 2013, and that such a move is perceived by many as a common firm strategy of the industry that aims to oppose legislation.

Both CSR and CPA are mainly managed by the MNE‘s top management, i.e. the board of directors. In that sense, it is very crucial to understand the concept of Corporate Governance in order to gain full insight on the way firms arrange CSR and CPA. CG can be broadly defined as the system by which companies are directed and controlled (Cadbury Committee 1992). CSR could be incorporated into a corporate governance framework in order for it to take into consideration the firm‘s dealings with cultural and environmental aspects of the society (Claessens, 2006) in the same way that CPA could be incorporated in a corporate governance framework so that it puts into perspective the firm‘s political activity. Daines & Klausner (2001), suggest that the more powerful a management team is, the more effectively they can pursue longer-term nonmarket strategies, such as political investments. Such a statement works as a stepping stone towards researching the moderating effect of CPA between CG-CSR.

Existing literature has delved into the relationship between CSR and CPA the past few years. In particular, den Hond et al (2014) state that CSR and CPA‘s

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interaction largely affects a firm‘s reputation and that they both need to be coordinated by the firm‘s top management. Hadani (2012) finds the relationship between a firm‘s CPA and the transparency between the firm‘s management and shareholders to be negative, while at the same time CPA cause information asymmetries within the firm, thus leading to the managers having ―false‖ expectations. Furthermore, it is argued that there is a significant negative relationship between firm political spending and environmental performance (Cho et al, 2006). As far as the relationship between CG and CPA is concerned, Ozer (2010) finds that CG plays a significant role in forming the firm‘s CPA strategy and reacting to their political environment.

Even though literature has, to some extent, examined the relationship between CPA and CSR, as well as CPA and CG, the moderating effect of CPA in the CG-CSR relationship has not yet been studied.

Subsequently, this study will also engage in researching the following research question:

RQ2 : Το what extent does Corporate Political Activity affect the relationship between Corporate Governance and Corporate Social Responsibility?

In short, this study is an effort to prove the positive relationship between the independence of the Board of Directors and the MNE‘s CSR, as well as between the firm‘s CG performance and the MNE‘s CSR, while we argue that the relationship between CG and CSR is negatively moderated by the firm‘s political activities, in this case Lobbying and PACs.

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The hypotheses of this study analyze secondary data on S&P 500 firms, within the period 2012-2015. We use a quantitative approach to examine the direct effect of CG on CSR as well as the moderating effect of CPA. We measure CG using two variables, board independence and CG score. Board independence is the average number of independent members of the board (percentage) as reported by the company (Hadani & Schuler, 2013) and CG score data is collected by the ESG database. We collected CSR data from the KLD database, while CPA data was extracted from opensecrets.org, focusing on lobbying expenditures and PACs. We attempt to contribute to the existing literature by establishing a causality effect between the concepts of CG and CSR. Even though these two concepts have been studied independently, we are focusing on the effect that CG score and Board Independence have on the firm‘s CSR. Furthermore, this study is novel in incorporating CPA as moderator in the CG-CSR relationship. This way, we help improve the existing understanding of how CG affects the firm‘s CSR, while at the same time we examine the interactions between CPA variables and CG variables and their effect on CSR. We suggest that by recognizing complementarities among the three concepts, a new potential framework is in sight, one that will help both scholars and managers build on this study and clarify the interactions of the concepts by industry, or on a micro level of analysis.

This study unfolds as follows; Firstly, we present the relative existing literature on the concepts of CG, CSR and CPA, as well as any established interactions between them. Secondly, we present the theoretical framework, develop this study‘s hypothesis and formulate the methodology that we follow. To continue, we present the correlations and regressions analyses, as well as the interpretation of

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their results. Finally, this study wraps up with the discussion of the results, limitations, future study suggestions and concluding remarks.

2. Literature Review

In this section we will analyze the literature background of this report by domain. We will begin by providing the definitions of Corporate Governance, Corporate Social Responsibility and Corporate Political Activity in the MNE level. To continue, we will address the concept of Corporate Social Responsibility disclosure, as well as its‘ relationship with Corporate Governance. Furthermore, aspects of each theory will be discussed in order to lead to the thesis‘ hypotheses by the end of this section.

2.1 Corporate Governance

Corporate Governance is a managerial concept that has been defined in many ways through the years. Claessens (2006) explains how the definitions fall into mainly two categories, depending on the kind of study that is under way. In that sense, for studies of firms inside one country, it can be seen as a behavioral pattern set and more specifically as ―the actual behavior of corporations, in terms of such measures as performance, efficiency, growth, financial structure, and treatment of shareholders and other stakeholders‖, while for cross-country studies, corporate governance is defined as a framework of ―rules under which firms are operating, with the rules coming from such sources as the legal system, the judicial system, financial markets, and factor (labor) markets‖ (Claessens, 2006). A more broad and simple definition would be the one that presents CG as ―the system by which companies are directed and controlled" (Cadbury Committee 1992). Based on the broader explanation of the concept of CG, Claessens (2006) argues that a successful CG framework would be

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one that allows a firm to be of contribution to the whole economy, the company‘s shareholders included. Adams & Zutshi (2004) further explain how ―…demonstrating it acts in a socially and environmentally responsible manner can provide a company with four major benefits: improved corporate image and relations with stakeholders; better recruitment and retention of employees; improved internal decision-making and cost-savings; and improved financial returns‖. Furthermore, Corporate Social Responsibility could be incorporated to a corporate governance framework in order for it to take into consideration the firm‘s dealings with cultural and environmental aspects of the society (Claessens, 2006).

Williamson (2009) identifies Corporate Governance as an institutional framework, in particular one that encompasses both the firm‘s internal structure and external environment, capital market and government included. There are two early-identified prevailing Corporate Governance systems, the first being the Continental European one, characterized by concentrated block-holder ownership, debt financing in the long term, weak shareholder rights, inflexible labor markets and inactive capital control markets. The second one is the Anglo-American system, which is identified by its‘ dispersed ownership, equity financing in the short term, active capital control markets and flexible labor markets (Aguilera & Jackson, 2010).

Looking into the link between and the possible effect of Corporate Governance on Corporate Social Responsibility, literature has identified Corporate Governance as a set of rules that controls the decision-making within the firms, while at the same time represents a mechanism which is connected to social choice and related to public interest (J.E. Parkinson, 1993). This statement essentially incorporates the company‘s social environment and its‘ stakeholders in the firm‘s decisions, which means that Corporate Social Responsibility affects the Governance

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of corporations and vice versa. At the same time, Aguilera & Jackson (2010) argue that the political activity of firms has an impact on managerial agency costs in a sense that it can either shape a competition framework or influence managerial loyalty to various stakeholders. As far as an MNE‘s political activity is concerned, Roe (2003) finds that concentrated corporate ownership is strongly related to social-democratic-oriented preferences and relationships, as left-wing parties normally protect employees from being fired and empower them against changes that work in favor of the stakeholders. A Corporate Political Activity – Corporate Governance link is, thus, established, strengthening the perception that CPA works as a moderator for the CG - CSR relationship.

2.2 Corporate Social Responsibility

Kolk & Pinkse (2010) very clearly state that ―Corporate Social Responsibility is an elusive concept that, just like corporate governance, has been defined in many different ways.‖ In an attempt to define CSR, McWilliams et al (2006) present it as ―situations where the firm goes beyond compliance and engages in voluntary actions that appear to further some social good, beyond the interests of the firm and that which is required by law‖. Another interesting view on the subject is the one by Smith (2002) in which he defines CSR as ―the integration of business operations and values whereby the interests of all stakeholders, including customers, employees, investors, and the environment are reflected in the organization‘s policies and actions‖. Finally, one more definition of CSR was provided by Kok et al (2011) : ―CSR is the obligation of the firm to use its resources in ways to benefit society, through committed participation as a member of society, taking into account the society at large, and improving welfare of society at large independently of direct gains of the company‖.

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What can be properly deduced from the above is the plethora of different definitions of the concept (Dahlsrud, 2008), based on the different perspective of the respective scholar. An underlying understanding about CSR which is common among all these views on the subject is its‘ voluntary and discretionary nature (Banerjee, 2008). The rationale behind CSR assumes that corporations should look beyond making money, and actually pay attention to and assuage social and environmental issues. However, Trevino & Weaver (1999) identify ―practical‖ reasons, such as the profit-making behavior of firms, as constraints towards CSR.

Porter & Kramer (2011) underline the importance of aligning CSR with corporate strategy in order to create long-term value for both the firm and the community, otherwise CSR turns into short-term defense mechanisms against activists and/or NGOs, thus creating absolutely no value for society and generating no profit whatsoever for the firm itself. According to them, CSR proponents base the firms‘ CSR engagement on four arguments; the moral obligation of the firm to be a ―good citizen‖, the need to be sustainable, the fact that being a ―good citizen‖ grants them the community‘s unofficial so-called license to operate, and finally the fact that CSR works in favor of the firms in term of building and creating reputation (Porter & Kramer, 2011).

A clear example of CSR is the one of Philips developing new technology energy-saving light bulbs in order to replace traditional bulbs of incandescent light (den Hond et al, 2014), which is a move that the society perceives as non-strategic, aiming to make the world a better place.

Taking the concept of CSR one step further, Husted & De Jesus Salazar (2006) explain that CSR might undertake strategic purposes when engagement in CSR initiatives provides the company with benefits. In order for this to happen, the

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company must successfully align CSR with their business strategy. As far as the link of CSR strategies and business strategies is concerned, Porter & Kramer (2006) state that management should prioritize social issues and divide them in three categories; namely generic social issues, value chain social impacts and social dimensions of competitive context. In order to provide further insight on the matter, they argue that ―carbon emissions may be a generic social issue for a financial services firm like Bank of America, a negative value chain impact for a transportation-based company like UPS, or both a value chain impact and a competitive context issue for a car manufacturer like Toyota‖ (Porter & Kramer, 2006).

2.3 Corporate Social Responsibility Disclosure

Kolk & Pinkse (2010) state that ―one area in which Corporate Governance and Corporate Social Responsibility can be expected to become further integrated is in the MNEs‘ disclosure practices.‖ The disclosure of a firm‘s CSR (or corporate social disclosure) has been defined as ―the process of communicating the social and environmental effects of organizations‘ economic actions to particular interest groups within society and to society at large. As such, it involves extending the accountability of organizations (particularly companies), beyond the traditional role of providing a financial account to owners of capital, in particular, shareholders. Such an extension is predicated upon the assumption that companies do have wider responsibilities than simply to make money for their shareholders‖ (Gray et a1 1996, p. 3). To put it into perspective in a simpler way, another definition of CSR disclosure is that it is ―the information provided in a company‘s annual report relating to its activities, programs and application of resources deemed to affect both the public in general and particular stakeholder groups.‖ (Chan, Watson & Woodliff, 2014). CSR

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disclosure is provided on a regular basis via the firm‘s annual report (Buhr, 1998) and it is can be easily accessed by researchers (Unerman, 2000). One of the findings that Chan, Watson & Woodliff (2014) present in their research is that there is a significant positive association between CSR disclosure and quality Corporate Governance. An interesting fact on the relationship of CSR and Corporate Governance states that ‗The reason for the increase in the number of companies producing environmental reports since the early 1990s is not regulation or public pressure. The main objective is to improve corporate image with customers, state authorities, journalists and the press‖ (Adams 2002, p. 234). It can be properly inferred in that sense that firms experience benefits from engaging into voluntary community actions.

While looking further into the matter, Adams & Zutshi (2004) found that ― … demonstrating it acts in a socially and environmentally responsible manner can provide a company with four major benefits: improved corporate image

and relations with stakeholders; better recruitment and retention of employees; improved internal decision-making and cost-savings; and improved financial returns.‖, while de Villiers et al (2011), based on prior research, state that ―firms with better environmental performance are more likely to experience superior economic performance‖ Kolk & Pinkse (2010) also report on an incremental growth in the overlapping trend of CSR and Corporate Governance, especially for MNEs, which due to their operating around the world present a larger need to be transparent when it comes to such issues. This is also averred by Luo (2005) who states that ‖MNEs generally face higher demands to be transparent and disclose information about major strategic decisions (Luo, 2005a)‖.

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2.4 Corporate Governance – Corporate Social Responsibility

Existing literature has successfully established a connection between CG and CSR, as far as each concept‘s need for the other in order for the MNE to operate in a healthy and successful manner (Kolk & Pinkse, 2010). Furthermore, a firm‘s demonstration of a socially and environmentally responsible manner, provides the company with a better corporate image, as well as improves relations with stakeholders, potential recruitment of a higher level of employees as well as bigger chances of retention of existing employees, better decision making within the firm‘s management, and finally better savings and improved financial returns (Adams & Zutshi, 2004). Literature has also underlined the fact that high sustainability firms outperform low sustainability firms, making it clear that the effect of corporate sustainability on the firm‘s organizational processes and performance is also bold (Eccles, Ioannou & Serafeim, 2011).

Bhattacharya & Polman (2017) underline the fact that the majority of firms goes after their sustainability goals in the wrong way, and end up being unsustainable. Part of their framework of challenges/advice on CSR practices, refers to the top management of the firm as well as the Board. More specifically, the authors find that sustainability should be a priority for the Board of the firm in order for CSR to be integrated in the firm‘s philosophy. The CEO and top management should identify the position of the firm in comparison to where the world is headed and how the company can have a positive impact implementing sustainable business models.

Various scholars have elaborated on the interaction between CSR and corporate strategy. For example, Rangan et al (2015) stress the importance of alignment between the firm‘s social as well as environmental activities with their business purpose and values. By developing interdisciplinary CSR strategies, firms

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can achieve sustainable and profitable status. Furthermore, Porter & Kramer (2010) also find that corporate organizations should undertake social issues that intersect with their particular business, and that by doing so they can create shared value, which is the creation of economic value for the business in a way that simultaneously creates value for the society. Activists and social movement are generally identified as pressure sources for firms to engage in CSR, but firms increasingly interpret CSR as a ―source of opportunity, innovation and competitive advantage‖ (Porter & Kramer, 2006). This means that CSR is beneficial not only for the respective stakeholders and society but also for the firm itself, as it can prove to be enhancing its performance. It was not until recently that literature has identified CSR as the product of voluntary choices stemming from the firm‘s decision makers, and more specifically the firm‘s top executives and TMT (Chin et al, 2013).

2.5 Corporate Political Activity

Corporate Political Activity can be put into perspective as an ―umbrella concept that captures the firm policies, processes and practices‖ (den Hond et al, 2014) which are ―intended to influence governmental policy or process‖ (Getz, 1997). A more straightforward definition is the one that defines CPA as ―corporate attempts to shape government policy in ways favorable to the firm‖ (Hillman & Hitt, 1999). While firms can engage in CPA in various ways, they ―devote more resources to lobbying than any other form of political activity‖ (Baron, 2010), ―typically spending five times more on lobbying than on PAC contributions‖ (de Figueiredo & Richter, 2013). There is an abundance of reasons that would lead a firm to engage in political activity. For example, if a firm translates a certain governmental decision as a threat to its operation and competitiveness, getting involved in political processes can prove to be

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a defensive tactic (Getz, 2007). Furthermore, political connection can also be an opportunity for corporations to influence the output of political processes, such as regulations or legislation, in order for them to ―better reflect the internal goals of the organization‖ (Baysinger, 1984).

Den Hond et al (2013) found several complementarities between CSR and CPA. More specifically, they aver that when CSR and CPA are properly aligned underneath the umbrella of a firm‘s strategies, CSR strategies‘ viability and credibility are enhanced by CPA, since more resources are available and politicians and regulators might publicly support the firm‘s CSR activities. The other way around, as a firm‘s credibility and visibility rise by engaging in CSR, CPA activities might be enabled as new contacts are established. As a result, a wide set of diverse relationships with the community and NGOs are more easily established in comparison to CSR firms. The two concepts can be found to be aligned, non-aligned or misnon-aligned and for each case the consequences on the firm vary. Alignment of CSR and CPA amplifies positive reputation effects from CSR and CPA, and mitigates negative reputation impacts from CSR and CPA. When CSR and CPA are nonaligned, the reputation benefits from CSR and CPA are additive, as stakeholders evaluate a firm‘s CSR and CPA separately in terms of whether the firm‘s actions lead to favorable reputation consequences, frame it as misalignment. Misalignment of CPA or CSR reduces positive benefits and increases negative effects of either activity on a firm‘s reputation. (den Hond et al. 2014). At the same time, Hadani (2012) finds the relationship between a firm‘s CPA and the transparency between the firm‘s management and shareholders to be negative, while at the same time CPA cause information asymmetries within the firm, thus leading to the managers having ―false‖ expectations. Moreover, Friedman (1970) strongly suggests that a political process

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should be established in order for a firm‘s CSR initiatives to be decided and implemented and Hadani & Coomes (2015) underline that some aspects of a firm‘s non-market strategy – such as CSR - are directly impacted by the company‘s Political Activity.

One of the findings of Cho et al (2006) was that political campaign spending is higher for firms whose environmental performance is low, reaching the conclusion that firms which are perceived as ―dirty‖ engage in political activity in order to control and mitigate pressure from policy decisions. To continue, CPA is linked to corruption involvement, such as cronyism and use of the firm‘s informal connection for organizational decisions (Liedong et al, 2013).

2.6 Lobbying

Kim (2008) finds that lobbying expenditures increase a firm‘s raw and market-adjusted (but not industry-market-adjusted) equity returns in the following year. Corporations may take part in ―anti-competitive practices such as political lobbying‖ in order to get politicians to incorporate the corporation‘s interests into their new policy formulation process (Singer, 2013). Lobbying has, furthermore, been identified as a common choice for large corporations in order for them to resolve several issues and problems linked to their goals (Burgees & Tharenou, 2002), as well as a way to ensure sustained competitive advantage (Sundaram & Inkpen, 2004). Harris (2011) identifies the power of lobbying as so significant and important for a firm‘s survival that if one firm decides to stop engaging in lobbying there surely is another firm willing to take its‘ place right away. Brasher & Lowery (2006) found that corporate size is positively linked to the levels of lobbying activity, while Hrebenar (2008) stresses that

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lobbying can undertake various forms, from direct contact with policy-makers to indirect interaction by means of protest or demonstration.

Over 86% of all contributions come from firms with a lobbyist as well as a PAC, which demonstrates a strong correlation between types of CPA (Ansolabehere et al, 2002). Mathur et al (2013) identify a positive relationship between entrenched management and engagement in lobbying activities. This derives from the argument of Daines & Klausner (2001), who suggest that the more powerful a management team is, the more effectively they can pursue longer-term nonmarket strategies, such as lobbying. An important takeaway for managers is also that, when it serves managerial interests and creates shareholder value, lobbying can serve as a corporate governance mechanism to reduce agency conflict. Finally, Roe (2003) finds that concentrated corporate ownership is strongly related to social-democratic-oriented preferences and relationships, as left-wing parties normally protect employees from being fired and empower them against changes that work in favor of the stakeholders. Kim (2008) states that, all things considered, ―lobbying is more responsible for gaining political favors than are campaign contributions‖.

In sum, this set of articles represents the perception that when lobbying serves the management teams‘ interests and is also shareholder-value adding, then the managers have greater incentive to engage in lobbying. All in all, firms with greater managerial power are very much more likely to engage in lobbying tactics.

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2.7 Political Action Committee

Political Action Committees (PACs) raise corporate money from a secluded group of individuals which includes the firm‘s Top Management Team (TMT), some classified employees, the firm‘s shareholders and the spouses of these people. The organization itself is allowed to pay only for the PAC‘s operating expenses. The fore-mentioned individuals may contribute a maximum amount of $5.000 per calendar year to PACs, and each PAC is permitted to donate maximum $5.000 to each candidate per election period (primary and general elections are considered separate to each other). The firm is not allowed to reimburse the individual that makes a contribution to a PAC and no amount of money can flow back to the individual stemming from the PAC. The contribution process is determined solely by the PAC‘s leadership. This means that even though the money originates from individuals, it is considered to be a firm sponsorship (McDonnell & Werner, 2016)

Banthin & Stelzer (1986) identify Political Action Committees as the major means for business involvement in political campaign finance, setting the appearance of the first professional business PACs in the 1970‘s. Even though they appear to provide a high level of support to the incumbents, PACs will normally support any candidate that is believed to have chances of success (Jacobson, 1980). Companies are permitted to both establish and pay for expenses of PACs, but they cannot donate corporate funds to those PACs. Instead, donations from managers, employees or shareholders of the corporation must be solicited (Coates, 2010). As far as the relationship of PACs with the financial returns of the corporation is concerned, Cooper et al. (2010) find a positive correlation between PAC contributions and stock returns as well as accounting earnings in the US corporate setting.

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3. Theoretical Framework

Even though the CG and CSR areas of research have been extensively stidied, the relationship between CG and CSR has been underspecified. Building on stakeholder theory, we argue that CG would impact positively the CSR, as CG and the firm‘s board need to recognize the opportunity to align business strategies with CSR (Kolk et al, 2010; Porter et al, 2011). Since the board and TMT orchestrate the firm‘s business strategy and align corporate functions within the operating framework, we argue that CG would positively affect CSR strategies. Different aspects of CG can have an individual effect on CSR, but this study focuses on the hypothesized positive effect that CG score and the board of directors have on CSR.

Furthermore, existing research has identified reputational effects between CPA and CSR (Hond et al, 2014) but has not examined how different CPA aspects affect CG, as well as how CG affects CPA, and their interactions. We argue that lobbying and PACs negatively moderate the fore-mentioned relationship. We base our hypotheses on the different aspects of the existing research, stating that CPA is often negatively associated with CSR reporting.

3.1 CG score – CSR

There is little research on the effect of CG score on the firm‘s CSR. Chan et al (2014) researched the relationship between the quality of CG in MNE‘s and the firm‘s CSR activity. Their findings supported the hypothesis that the firm‘s CSR is positively linked to the quality of its governance. On the same note, Gibson et al (2007) state that good governance of the firm is tightly correlated to the concept of CSR, as well as the firm‘s accountability in general. Finally, Welford (2007) states that good

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corporate governance works as foundation for CSR, in a sense that it creates value-creating relationships for all of the company‘s stakeholders.

We base our hypothesis, apart from the basis of the existing theory, on the logic that a firm with a strong, driven and success-oriented leadership will be focus on the entire value chain, create value, and prioritize sustainability for the board as well as for all the employees. Bhattacharya et al (2017) also state that the Board of directors must have sustainability expertise to a certain degree in order for the firm to engage in CSR and be sustainable.

We, thus, hypothesize:

H1: The better the performance of the firm in Corporate Governance, the bigger the positive effect on the firm’s CSR.

3.2 Board Independence – CSR

Examining the specific effect of Board independence on the firm‘s CSR, Jo & Harjoto (2011) come upon the finding that the higher the Board independence, the higher the firm‘s engagement in CSR, while they make a direct link between Board independence and CG score, suggesting that the independence of the Board is one of the measures of the firm‘s internal governance. We can properly deduce that while the two variables have an individual effect on CSR, there is a high correlation between the independence of the Board and the CG score of the company, hence leading to the conclusion that the two variables have the same effect on CSR engagement and CG score is highly affected by the firm‘s Board independence. Furthermore, de Villiers et al (2011) state that a board with high percentage of independent directors is more

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likely to assert knowledge and expertise upon monitoring the firm‘s environmental performance than a less independent Board.

More specifically, we argue that a firm with a high ratio of independent to executive directors will engage more actively in CSR, also based on the findings of Eccles et al (20110, who find that the more independent the board and the higher the corporate sustainability culture, the higher the possibility that the firm is responsible for sustainability.

Unilever is one of the international companies known worldwide for their focus on sustainability and engagement in CSR. This is partly stemming from the firm‘s CEO‘s sustainability focus, also chairman of the World Business Council for Sustainable Development, and a United Nations Sustainable Development Goals Advocate, underlined in Mr. Polman‘s 2017 article ―Sustainability lessons from the front lines‖ (Bhattacharya & Polman, 2017). Apart from the firm‘s sustainable-focused CEO, the Board of directors is comprised of 8 independent directors, out of a total 14 members, further pointing to the direction of an independent Board leading to a higher CSR engagement.

Thus, we hypothesize:

H2: The higher the independence of the Board of Directors, the bigger the positive effect on the firm’s CSR.

3.3 Lobbying – CG – CSR

Existing literature has not established a causality effect between lobbying and CSR (Slob et al, 2010). Rather than researching the relationship between the two, scholars

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have looked into the similarities between the two concepts and how these two major corporate non-market strategies can be explained by the same behavioral logic (Bernhagen et al, 2014).

However, the article by Coates (2010) finds a very strong and tight link between CPA and CG, manifested through a boldly negative relationship. More specifically, one of the author‘s key findings was that ―lobbying will be negatively correlated with corporate governance factors, even after controlling for known determinants of CPA‖ (Coates, 2010).

The negative effect of lobbying on CSR is visible in the example of European gas companies lobbying to ensure that Europe will continue using fossil fuels and natural gas. The gas firms have reportedly spent €104 million on the purpose, trying to push laws towards their benefit, on the preface that natural gas is much less harmful, hence more environmentally friendly. At the same time, analysts report that natural gas in mainly composed of methane, which is 84 times more harmful than carbon dioxide in the long run. It is safe to assume that reputational effects will be negative for the firms, while the act of lobbying on the matter is obviously negatively correlated with their social responsibility. Another clear example of lobbying posing a negative effect on CSR is that of Shell, who in 2003 lobbied against U.N efforts to define the MNE‘s human right responsibilities and boundaries. Their argument was that the standards for human rights in the company should be defined by the company itself rather than be mandated by law (Slob et al, 2010). It can be properly deduced that the firm‘s lack of willingness to engage in CSR is somewhat visible in their initiatives against human rights.

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Therefore, we hypothesize:

H3: The relationship between Corporate Governance and Corporate Social Responsibility is negatively moderated by Lobbying expenditures.

3.4 PACs – CG - CSR

Existing literature on PACs has mainly focused on their legislative and political side. However, Coates (2010) argues that the complementarities between Lobbying and PACs have been established, as well as that CG variables present highly similar relationships with Lobbying and PACs; hence leading us to hypothesize that PACs will have the same moderating effect as Lobbying in this study.

Chin et al (2013) find that there is a complementarity between CEO‘s political ideologies, PAC contributions and CSR. More specifically, they state that when CEOs act according to their ideologies, thus shifting company practices towards directions that suit their values and beliefs, this should be visible in CSR initiatives as well as in PAC contributions. However, in the case of liberal CEOs being appointed and CSR being a product of social remediation tactics, or ‗‗greenwashing,‘‘ then CSR initiatives might increase but PAC contributions might remain unchanged.

H4: The relationship between Corporate Governance and Corporate Social Responsibility is negatively moderated by PAC expenditures.

The figure below summarizes our framework. The first two hypotheses concern the effect of CG on CSR, and more specifically how the firm‘s CG score and Board Independence individually have a positive relationship with the KLD scores reporting the firm‘s CSR performance on a list of issues. Hypotheses 3 and 4 are engaged in the

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hypothesized negative effect of two Corporate Political Activity categories, namely Lobbying and PACs, on the firm‘s KLD scores.

H3/ H4 H1/H2 CPA Lobbying PAC CSR CG CG score Brd. Independence

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4. Methodology

In this section we will be discussing the methods used for the progress of this research, as well as address the independent variable, dependent variable, moderator and sample separately.

4.1 Sample

Coates (2010) avers that US public companies are more likely to engage in lobbying compared to non-public US companies. This finding provides basis for the general view from the existing CG literature that managerial agency problems are more severe for public US companies than for non-public US companies. We will be using firms from the S&P 500 2012-2015 as a sample for this report. While it is the best measure for MNEs, thus making it perfect for my model, it will present me with some limitations due to the small time period its‘ data is retrieved from.

4.2 Data Collection

This report will be using data that was collected for firms in the Fortune 500 list for the time period 2012 – 2015, which represents the biggest U.S private-held or public companies in terms of gross revenues annually. Using a sample that derives from one market only, it is easier to interpret the results and compare them to previous studies (Gande, Schenzler & Senbet, 2009), and the host country bias possibility is eliminated. As different variables are used for testing the hypotheses of this study, several datasets were used for the collection of variable data. CSR data was collected by the Kinder, Lyndenberg, and Domini database (KLD), which collects third-party assessments concerning CSR about firms all over the world. KLD is considered to be the most solid and extended benchmark for social performance data (Harrison &

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Freeman, 1999) and is believed to have a number of advantages over other methodologies (Waddock & Graves, 1997), such as companies are rated on the same list of attributes and that the ratings come from independent parties. CPA data was extracted from Opensecrets.org, and the Datastream dataset was used for the extraction of CG data.

4.3 Independent Variables

Literature has identified successful CSR as an assurance for the company‘s stakeholders that the company responsibly manages its impact on the environment and the society (Kolk & Pinkse, 2010). In order for me to adequately examine the effect of CG on CSR, we will be taking the firm‘s top management and more specifically board independence into perspective as the independent variables. As described by Hadani & Schuler (2013), board independence refers to average number of the independent members of the board as these are reported by the company (percentage). Furthermore, average Corporate Governance scores for the period 2012-2015 as reported in the ESG database will be taken into perspective in order for the results of this research on the effect of CG on CSR to be more bold and robust.

4.4 Dependent Variable

CSR will be used as the dependent variable in this report. We will be researching KLD strengths and concerns in order to examine the effect that CG has on CSR, as it has several advantages over other methods (Waddock & Graves, 1997). KLD consists of total aggregated strengths minus total concerns and scores used in this research are as follows :

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Total concerns : environment, community, corporate governance, employees, human rights, product.

Total strengths : environment, community, employees, human rights.

4.5 Moderator Variable

Hillman & Hitt (1999) developed their own typology of the concept of ―Corporate Political Activity‖, where CPA was distinguished between direct and indirect strategies. We will be using direct strategies, and more specifically information strategies such as expenditure on lobbyists to serve as moderator variable in my model and in the relationship between CG and CSR. That way, insight can be gained on the above mentioned relationship from another perspective, thus helping look at it from a different point of view, presenting us with alternative results. As Ansolabeher et al. (2008) report in their findings, over 86% of all politically related contributions come from firms with a lobbyist as well as a PAC. It is thus properly concluded that there is a robust complementarity between different types of CPA. We will, therefore, be also using Political Action Committee as a moderator variable, in order for my model to be well-rounded.

4.6 Control Variables

In order to appropriately check for variations in CSR scores caused by CG tactics, this report will be controlling for industry as well as firm size. Size and industry are reportedly important factors influencing CSR and CG tactics (McWilliams & Siegel, 2000). Firm size is an important control variable, connected to both the adoption of

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CSR initiatives as well as to CG. Hockerts et al. (2010) find that market incumbents are not usually known to innovate in undertaking sustainability initiatives, rather they react to the smaller firms‘ CSR tactics. Spar and La Mure (2003) claim that the bigger the firm, the higher its‘ susceptibility to NGO attacks which threaten the firm with significant harm and sometimes force them to commit to CSR. The number of employees will be serving as a proxy for firm size in this report. Finally, industry is taken as a control variable as industry-specific characteristics may significantly affect a firm‘s assets (both tangible and intangible). Dowell et al (2016) find that the level of environmental norms within an industry strongly affect a firm‘s CSR adoption tactics. Firms in the industrial sector are more likely to engage in CSR compared to firms in the financial sector. Industry variable is a dummy variable reporting on whether the firm operates in a regulated industry or not.

4.7 Method

After acquiring each dataset form its‘ respective source, all data were cleaned and checked for appropriateness as far as the collected scores‘ credibility and availability are concerned. My final observation thus includes 406 companies, all of which reported sufficiently for the different variables used in this report. All variables were checked through SPSS for normality via skewness and kurtosis scores, as well as for significance judged by the Kolmogorov - Smirnov & Shapiro – Wilk scale. Normal variables should ideally result in skewness and kurtosis scores close to 0 (rule of thumb), and significant variables that are normally distributed should be n.s. p>.05. Variables that are overly skewed or kurtotic must be transformed accordingly in order for the statistical analysis to have accurate results. That being said, variables for Lobbying and PAC were transformed using the method x*=log10(x), variables for

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x*=sqrt(k-x) where k is the maximum value of the variable s reported in the frequencies test in SPSS, variable for CSR KLD scores was transformed using the method x*=sqrt(x) and board size variable was left as is, due to the very limited skewness noticed to begin with. After all data was appropriately transformed, the effect of the independent variables on the dependent variable was measured using a

linear regression analysis which is expressed using the equation : Y = β0+β1*Χ1+β2*Χ2+β3*Χ3+β4*Χ1*Χ2+β5*Χ1*Χ3+β6*Χ4+β7*Χ5

The components of the equation are as follows :

Y : The dependent variable, in our case CSR KLD scores.

β0 : The intercept of the line, essentially one of the regression coefficients.

β1, β2, β3 : The direct effect of the independent variables (β1), moderator 1 (β2) and moderator 2 (β3) on the dependent variable, essentially the slope of the line and regression coefficients.

X1 : Either one of the two independent variables. X2, X3 : Moderator 1 and moderator 2 respectively. X1*X2 : Interaction terms 1 and 3.

X1*X3 : Interaction terms 2 and 4. β6*Χ4 : Control variable 1.

β7*X5 : Control variable 2.

ε : The error term, which represents the difference between X1 and the actual X1 Field, 2009).

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The regression analysis was done using a stepwise method. First the control and dependent variables are entered in SPSS, followed by the independent variables and finally the interaction between the independent and moderator variables. Regression models are presented in Table 1.

Table 1. Regression models summary

MODEL Ctrl.Variable Ctrl.Variable DV IV1 IV2 Mod1 Mod2

Industry Firm Size CSR CG.score B.indep Lobbying PAC

Model 1 X X X Model 2 X X X X X X Model 3 Model 4 Model 5 Model 6 Model 7 X X X X X X X X X X X X X X X X X X X X X X

5. ANALYSIS AND RESULTS

This part of the report is engaged in presenting the statistical analysis of the data. An overview of the descriptive analysis is presented first, followed by the correlation analysis and a multicollinearity test. Finally, an overview of the regression analysis as described in the previous chapter. These results will be used as basis for conclusions concerning the hypotheses drawn in this study.

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5.1 Descriptive statistical analysis and Correlations.

Tables 2 shows the descriptive statistics of the dependent, independent, moderator and control variables. Beginning with the control variables, size of the firms as represented by the number of the employees are evenly distributed with a mean of 1,45 and standard deviation of 0,49. Firms used in this study are also nearly evenly distributed between regulated and non-regulated industries, with a slight inclination towards non-regulated ones as the mean is 0,34 with a standard deviation of 0,473. To continue, KLD scores representing CSR performance have a mean of 0,356 indicating that average strengths minus concerns as reported for the firms are positive, and CSR initiatives were overall undertaken by the firms. Lobbying and PAC, the two moderating variables, both have a mean above the median (5.92 mean for Lobbying and 5,98 mean for PAC), indicating high political activity in average for the dataset of firms studied for the report. Last but not least, the independent variables CG score and Board Independence both report not-so-high scores, with means of 3,98 and 3,21 respectively. We can properly deduce that Corporate Governance performance is not very robust and Boards are not highly independent.

A Pearson correlation coefficient was computed to assess the relationships between the variables in the models used in this report. According to Field (2009), the fact that no correlation is close to or exceeds 0,80 is a first hint that there is no multicollinearity effect between any of the variables. In order to properly check for multicollinearity in the regression models used in the analysis, the independent, moderating and control variables were subjected to a Variance Inflation Factor (VIF) test. Tolerance and VIF scores are presented in Table X. According to Field (2009),

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VIF scores between 1 and 10 show no multicollinearity between the variables, also demonstrated by the Tolerance scores which indicate lower multicollinearity as they approach the value of 1. Moving on to the correlations analysis, a negative correlation between Industry and the number of Employees will be disregarded as it concerns mutually exclusive variables that are controls. The dependent variable is notably significantly positively correlated directly with both moderators, Lobbying and PAC, and significantly negatively correlated with both of the independent variables, CG performance and Board independence which as a first sign comes to contrast with the hypotheses drawn in this report, but regressions are to be examined in order for the hypotheses to be properly evaluated. According to these correlations, the higher the CG performance of the firm and the bigger the Board independence, the bigger the negative effect on the firm‘s CSR. Accordingly, the bigger the Lobbying and PAC activity of the organization, the bigger the positive impact on its‘ CSR performance. Finally, the correlations between both moderators and both independent variables are all significantly negative.

Table 2. Descriptive Statistics

N Min. Max. Mean Std.Dev.

Employees 406 0,08796 3,3424 1,45087 0,49387 Industry 406 0 1 0,34 0,473 CSR score 351 0 0,94 0,3564 0,20026 Lobbying 322 3,4 7,35 5,9214 0,73742 PAC 280 2,88 6,49 5,9822 0,64621 CG score 405 0,12 9,6 3,9822 1,80129 Brd. Indep. 405 0,53 8,23 3,2116 1,37389

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Table 3. Correlations Summary Mean Std.Dev. 1 2 3 4 5 6 7 1.Employees 1,45087 0,49387 2.Industry 0,34 0,473 -0,046 3.CSR score 0,3564 0,20026 0,176** -0,145** 4.Lobbying 5,9214 0,73742 0,266** -0,160** 0,319** 5.PAC 5,9822 0,64621 0,336** -0,079 0,228** 0,696** 6.CG score 3,9822 1,80129 -0,214** 0,114* -0,409** -0,238** -0,228** 7.Brd.Indep. 3,2116 1,37389 -0,022 0,014 -0,184** -0,191** -0,169** 0,345**

**. Correlation is significant at the 0.01 level (2-tailed). *. Correlation is significant at the 0.05 level (2-tailed).

Table 4. Multicollinearity test.

Tolerance VIF Industry 0,959 1,042 Employees 0,881 1,136 CG score 0,892 1,121 Brd.Indep. 0,890 1,123 Lobbying 0,487 2,053 PAC 0,468 2,138

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5.2 Regression Analysis

Table 5 presents the results of the linear regression analysis including the independent, moderator and control variables, as well as the dependent variable which is CSR. In order for the moderating effect of CPA to be properly calculated, the independent and moderator variables were standardizing into the so called ―Z scores‖, to be later on calculated into interaction terms, essentially the product of an independent variable Z score and a moderator variable Z score. Field (2009) described the Beta values as the depiction of the direction of, as well as the influence that a variable has on the dependent variable. At the same time, the significance values assess the reliability of the results and subsequently the acceptance or rejection of a hypothesis. The results of the regression are deemed significant for p-values below 0.1. As far as each model is concerned individually, their significant is examined based on the R², adjusted R² and Change in F scores. R² signifies the effect of the predictors in the variability of the outcome and the Change in F indicates whether that measure is significant (Field, 2009). This means that an R2 value close to 1 would mean that the majority of the variance in the dependent variable is explained by the regression under analysis (Sekaran & Bougie, 2009). Furthermore, the value of R² ultimately determines whether the models of the regression fit the data under analysis. R² scores are adjusted to the number of predictors used in the model. When adjusted R² is higher than R², it means that a variable is improving the model more than normally expected (Field, 2009). Linear regression is performed using a stepwise approach. The control variables are added first as predictors, followed by the dependent variable and finally the independent variables, moderators and their interaction terms.

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The first hypothesis (H1) predicts that the higher the performance of the firm in Corporate Governance (measured by CG score) the higher the firm‘s CSR performance (measured by total KLD strengths minus total KLD concerns). In order to assess H1, Model 2 as shown in Table 1 has to be examined. The model is significant (b= -0,380, p< 0.01) and indicates a negative direct effect of CG on CSR. As the model‘s coefficients are significant and robust (similar R values and large change in F), H1 is thus rejected. Under the umbrella of CG, the second hypothesis of this report (H2) similarly to H1 predicts that the higher the firm‘s Board of Director independence is, the higher its‘ CSR will be. Model 5 as presented in the regression table is examined in order to assess the credibility of H2. This model is also significant (b= -0,175, p< 0.01) and depicts once again a negative relationship between this CG variable (Board independence) and CSR. H2 is thus also rejected.

Moving on to the moderation effect in the hypothesized model, Hypotheses 3 and 4 predict a negative moderation by both Lobbying and PAC respectively in the CG – CSR relationship. Models 3 and 6 provide us with information on the moderation of the CG – CSR relationship by the firm‘s Lobbying activity. Looking into Model 3, we notice that Lobbying has a significant, positive direct effect on CSR (b=0,226, p<0.01) and its‘ interaction with CG performance of the firm also has a positive effect on CSR (b=0,059). In Model 6, Lobbying again has a positive direct effect on CSR (b=0,283) and its‘ interaction with the second CG variable, Board independence, is again positively affecting CSR (b=0,185), while the model is overall significant (p<0.01). Hypothesis 3 is, in effect, rejected. Finally, Hypothesis 4 is assessed based on the results provided by Models 4 and 7. As with Lobbying, PAC has both a positive direct effect on CSR in both models (b=0,154 and b=0,200 for Model 4 and Model 7 respectively) and a positive moderating effect when interacting

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with CG variables (b=0,175 for interaction with CG score and b=0,193 for interaction with Board independence). Model 7 is the least significant of all the Models included in the analysis, but results are still clear as far as the support of Hypothesis 4 is concerned. Hypothesis 4 is, finally, also rejected.

Examining the R² between Models 2 and 7, we can see that in none of the Models is Adjusted R² value higher than R² value, which means that in none of the variables were actually enhancing the performance of their respective model. Model 2 has an R² value of 0,186, CG score thus explaining 18,6% of the variance in CSR and Model 5 has an R² value of 0,081, which means that Board Independence explains 8,1% of the variance in CSR. This means that CG score has a more robust direct effect on the firm‘s CSR compared to Board independence. On a similar note, the interaction between CG score and Lobbying as o moderator has a significant say in the variance of CSR of almost 22% (R²=0,213) , while the moderation by the interaction of Board independence and PAC has an R² value of 0,108, thus explaining almost 11% of the variance in CSR, the lowest value compared to all four interaction models. Therefore, we can conclude that CG score is the independent variable with the most significant effect on CSR and Lobbying the moderator variable with the most significant effect on CSR, with their interaction also being the bigger reason for variance in the dependent variable, as their beta and R² values are the most significant and highest ones. Finally, an interesting finding is that firm size positively interacts with the firm‘s CSR as a control variable, meaning that the bigger the firm the bigger its‘ CSR, but controlled industry has a negative effect on an MNE‘s CSR, contrary to logical belief. This will be further analyzed in the ―Discussion‖ part of this report.

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Table 5. Regression analysis

***. Regression is significant at the 0.001 level (2-tailed). **. Regression is significant at the 0.01 level (2-tailed). *. Regression is significant at the 0.05 level (2-tailed). +. Regression is significant at the 0.1 level (2-tailed) Dep.Variable CSR Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 beta beta beta beta beta beta beta

Ctrl.Variables Firm Size Reg.Industry 0,168*** -0,136** 0,104 -0,085 0,069 -0,049 0,084+ -0,082+ 0,160 -0,136 0,098 -0,074+ 0,105+ -0,085+ Ιndep.Variable CG Score Brd.Independence -0,380 -0,307 -0,303 -0,175*** -0,057 -0,066 Interaction 0,059 0,175 0,185+ 0,193 Mod.Variable Lobbying PAC 0,226 0,154 0,283 0,200 Constant 0,274 0,471 0,341 0,343 0,362 0,345 0,343 R^2 0,049 0,186 0,213 0,197 0,081 0,159 0,108 Adjusted R^2 Change in F 0,044 9,208 0,179 26,280 0,199 14,779 0,180 11,452 0,073 10,104 0,143 10,285 0,088 5,616

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6. Discussion

This study examined the relationship between Corporate Governance and Corporate Social Responsibility, as well as how Corporate Political Activity moderates this relationship. Contrary to what was hypothesized, the results of this study demonstrate a negative relationship between CG and CSR, as well as a positive moderation of this relationship by CPA. The following will engage in looking into the meaning of the results of this report.

The analysis examining Hypotheses 1 and 2 came up with results underlining a negative relationship between the Corporate Governance variables and the firm‘s CSR. According to Suchman (1995), there are individuals in a variety of organizational levels within a corporation who are able to propose or even endorse initiatives, while at the same time, top governance executives usually tend to accept the prevailing organizational values and beliefs in their firm regardless of their own beliefs, in order to appear as more legitimate. This means that it is very likely that CSR initiatives undertaken by a firm are often reflecting not only TMT ideologies, but also ideologies of the whole body of the company (Gupta et al, 2016). Furthermore, confident and powerful CEOs tend to overinvest (Malmendier & Tate, 2005), and based on this overinvestment theory, Jo & Harjoto (2012) expect firms whose CEOs have great discretion and overinvest to have a negative causality effect of CG on CSR. Discretion, as defined by Hambrick and Abrahamson (1995) is the ―latitude of action‖, essentially the opposite of constraint (Hambrick & Finkelstein, 1987).

Breuer et al (2006) come across the finding that the more powerful the CEO, the higher the CSR initiatives he chooses to pursue for private benefits or increased reputation, when they are loosely monitored by the board (low board independence), because they often do not bear the responsibility for failed initiatives. We can

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properly deduce that CSR strategies can be benefitted by low board independence when the power of the CEO is high, as CSR overinvestment is reduced by big internal and external CG controlling mechanisms (Jo & Harjoto, 2012). At the same time, a high CEO discretion would result in lower CG score for the firm, thus providing a reason for the results of the analysis for Hypotheses 1 and 2.

Continuing with Hypotheses 3 and 4, this research came up with the result that CPA variables such as Lobbying and PACs do not moderate negatively the relationship between CG and CSR. Political processes can help the firm develop resources that could prove useful for their CSR initiatives, for example political contacts, information, government affairs operations and the possibility to build political guilds (Peterson et al, 2009). In order for firms to be able to capitalize on these potentials, they have to recognize the possibility and align their CSR and CPA practices (Hond et al, 2014).

Chin et al (2013) find a strong complementarity between CEOs‘ political beliefs and CSR, amplified by the CEOs‘ power. Their findings suggest that firms with democratic and liberal CEOs advance in CSR initiatives, which might explain Hypotheses 3 & 4 being rejected, if CEOs are powerful enough and have liberal ideologies (Chin et al, 2013).

7. Theoretical Implications, Practical Contribution and Future Research

The results of this study present us with some novel findings, which can contribute to both researchers as well as managers. This section of the study provides practitioners and managers with advice on practical implications and suggestions for the direction of future research on the subject.

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