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The Relationship between CSR and Innovation:
The Moderating Effect of Upper Echelon Theory
Master Thesis - Final Version
Student : Daniel Agung Pratama Student Number : 11012978
Thesis Supervisor : Pushpika Vishwanathan Submission Date : 22 June 2018
MSc. In Business Administration
2 Statement of Originality
This document is written by Student Daniel Agung Pratama 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.
3 Acknowledgement
First of all, I would like to say many thanks to my thesis supervisor, Pushpika, since she has dedicated much time, effort, and thinking within this thesis process. First, she really supervised me to go beyond my previous capacity with this thesis, so that I could yield an important piece of thesis and improve myself. Also, she gave me careful guidance and significant help in collecting the data, so that I can possess the firm data that were necessary for the empirical analysis.
Furthermore, I would like also to thank my brother, girlfriend, and friends who were willing to proofread my thesis, and be honest in giving me feedback. Moreover, I would like to also thank my family who constantly gave me extraordinary support meanwhile I was working on my master thesis. They are all awesome!
4 Contents Statement of Originality ... 2 Acknowledgement…..……..………..………3 Abstract ... 5 Introduction………..………..………5 Literature Review………..………8 Knowledge-Based View………...……….……...…..8
The Two CSR Dimensions…...………..9
Hypothesis Development……..……….………..………11
CSR in Employee Relations and Innovation………...….11
CSR in Environment and Innovation……….……….….….12
Moderation Analysis…….………..……….……14
Upper Echelon Theory (UET)…………..………...….……14
CEO Age………..………..………..….……16 CEO Ideology………..…..………...……17 CEO Tenure……….……..………...…19 Method……….……….………21 Sample…….……….……..………..21 Data Sources……..……….……..………21 Measurement……….……..………..……22
Analysis and Result ... 26
Statistical Model…….……….……..………...…27
Descriptive Statistics….……….……..………28
Correlations………….……….……..………..…28
Regression Analysis…………..……….……..………....32
Summary of The Findings…………..…….………...33
Discussion……….……….………...…....34
Unexpected Findings…….……….……..………...….…34
Supported Findings…….……….……..………..………...…38
Research Contribution …….……….……..……….…....39
Limitation and Future Research…….……….…..………..….41
Conclusion……….……….……..………..…..…42
Reference……….……….……..………....…..43
List of Table Table 1: List of indicators for CSR in Employee Relations and Environment………...……..……….23
Table 2: Means, Standard Deviations, and Correlations………..……..30
Table 3: Regression Results.………….………...…31
List of Figure Figure 1: Theoretical Framework………….……….………20
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Abstract
This research aimed to study how the upper echelon theory may have an influence on the relationship between CSR and innovation. Two CSR dimensions were particularly chosen, namely CSR in employee relations and environment. Using the knowledge-based view, this study provided a strong theoretical argument for how each of the two CSR dimensions had an effect on innovation. Furthermore, as the upper echelon theory formulated that the CEO characteristics may influence the firm decision, the current paper argued that the CEO characteristics would have moderation effect on the relationship between each of the two CSR dimensions with innovation. Specifically, I selected to study CEO age, CEO ideology, and CEO tenure as the CEO characteristics. Focusing on 309 US firms that are listed in the Fortune 500 list, this study found mixed support for the hypotheses. I deeply discussed how these partially supporting results could happen. Moreover, I also discussed this research’s practical implication and theoretical contribution.
Keywords: CSR in employee relations, CSR in environment, knowledge-based view, upper echelon theory, CEO characteristics, innovation
Introduction
Nowadays, managers are under more intense pressure than ever to establish socially responsible activities (McWilliams & Siegel, 2011). In other words, managers are required to be able to allocate the firm’s resources wisely. However, every firm undoubtedly expects a return from any resources allocation activities, including from corporate social responsibility -CSR- activities (Al-Shammari, 2017). In the literature, there have been many scholars who attempted to study the relationship between CSR and its business returns (Wang, Dou, & Jia, 2016a; Gallego-Alvarez, Manuel, and García-Sánchez, 2011; Brammer & Pavelin, 2006; Branco & Rodrigues, 2006). For instance, Brammer and Pavelin (2006) found that corporate social performance affected reputation, but the effect depended on the ‘fit’ between the type of social activities and the stakeholder environment. Also, Branco and Rodrigues (2006) asserted that a firm would enhance its employees’ commitment and productivity by engaging in CSR activities.
Moreover, there have been some research studied innovation as the business return of the firm’s CSR activities (McWilliams & Siegel, 2000; Pevelin & Porter, 2008; Gallego-Alvarez
6 et al, 2011; Luo & Du, 2015). For example, Gallego-Alvarez et al (2011), who aimed to find out whether there was a bidirectional relationship between CSR and innovation, found that CSR had a positive relationship with innovation. Additionally, Luo and Du (2015) also found a positive relationship between CSR and innovation, and the effect was contingent on the firm’s R&D investment and market competitiveness. In line with these studies, the current research seeks to study the innovation as the business return of the CSR activities. Studying innovation as the benefit of the CSR activities is important because the innovation is a driver of a business growth (Rexhepi, Kurtishi, & Bexheti, 2013). Moreover, besides financial performance, innovation is also an important indicator that will measure firm’s competitiveness; thus adaptability within an industry (Cho and Pucik, 2005).
Importantly, this study will provide an explanation regarding the relationship between CSR activities and innovation that is based on the knowledge-based view (Grant, 1996; Nonaka, Toyama, and Nagata, 2000; Zheng, Zhang, Wu, & Du, 2011). Through the knowledge-based view, this paper will provide a basis of argumentation of how the CSR activities may have a positive relationship with innovation. Furthermore, this research would not treat the CSR as a unidimensional index. Instead, based on Clarkson’s (1995) stakeholder framework, this study focused on two CSR dimensions, namely CSR in employee relations and environment.
Even though the literature has shown some evidence regarding the relationship between CSR and innovation, studying the business return of the CSR activities is however complex and needs a deeper understanding (Hull & Rothenberg, 2008). With that being said, this study believes that the relationship between CSR and innovation is also complex; therefore, there are some factors that are potential to influence such relationship. In the literature, there have been several researchers that used the upper echelon theory to explain how the CEO may have individual effect on CSR (Manner, 2010; Godos-Díez, Fernández-Gago &
Martínez-7 Campillo, 2011) and innovation (Kraiczy, Hack, & Kellermanns, 2015; Cazier, 2011; Barker & Mueller, 2002; Dechow & Sloan, 1991). However, there has been little research that attempted to investigate how upper echelon theory can provide insights to the literature regarding the relationship between CSR and innovation. Meanwhile, Hambrick and Mason (1984) emphasised that a decision made by the firm was highly influenced by the CEO of the firm since the CEO was an important and influential decision maker in the firm.
Witnessing the findings of the individual effect that the CEO had on CSR and innovation, the current paper aimed to focus on these streams of research. Specifically, this research would apply the insights from the upper echelon theory which stated that the CEO cognitive and value, which can be represented by the CEO characteristics, will determine the decisions made by the firm (Hambrick & Mason, 1984; Hambrick, 2007). Such insights from the upper echelon theory would be used in explaining the complexity of the relationship between CSR and innovation. In other words, I emphasise that the CEOs play an important role in determining the intensity of the CSR-innovation relationship. Similarly, the CEO characteristics will affect the degree of the firm decision to establish innovation that is spurred by their CSR activities.
Thus, by applying the insights the upper echelon theory with the CSR-innovation relationship, this study raises a question of “to what extent is the relationship between CSR and innovation influenced by the CEO characteristics?” In general, this study expects to contribute to CSR and innovation literature in several ways. First, scholars in the current literature of CSR and innovation relationship treated CSR as a unidimensional index (e.g. Gallego-Alvarez et al, 2011; Luo & Du, 2015; Martinez-Conesa, Soto-Acosta, & Palacios-Manzano, 2017). Since by doing so will conflate the equally important individual dimensions (Johnson & Greening, 1999), the current study contributes to the literature by unpacking the CSR, focusing on the two dimensions, and showing which dimension that may have
8 relationship with innovation. Furthermore, the scholars in such literature also studied the CSR-innovation relationship using firm- (Gallego-Alvarez et al, 2011) and market-level analysis (Luo & Du, 2015). As a result, the current paper aims to study the relationship between CSR and innovation using CEO-level analysis, particularly using the insights from the upper echelon theory. In addition, this paper will also provide contribution to the practice by informing which CSR dimension that should be maximised by the firms if they wish to achieve innovation as the benefit. Also, this study will highlight the importance of filtering the background characteristics of the firm’s CEO since it can have an effect on the organisational outcome, specifically the degree of innovation that is spurred by the CSR activities.
Literature Review Knowledge-Based View
Grant (1996) asserted that knowledge resided in the employees, and firm’s primary task was to apply such knowledge into the production of goods and services. Supporting Grant (1996), Nonaka et al (2000) also believed that the firm knowledge could provide the firm with ability to keep innovating and thus would bring the firm toward sustainable competitive advantage. Furthermore, Nonaka et al (2000) posited that knowledge creation should be established through a dynamic human process that they emphasised as the knowledge-based dynamic capabilities.
In this case, Nonaka et al (2000) asserted that the firm’s reason to exist was to continuously create knowledge through the dynamic interaction of the individuals. For instance, knowledge creation is a dynamic process because it is generated from problem-solving activities in which the individuals identify the problems, yield and apply new knowledge to solve the problems, and eventually possess a new knowledge generated from
9 the problem-solving activities. Beyond that, Nonaka et al (2000) also argued that knowledge creation process could be established through the human interactions, which were not merely within the organizational boundary, but also through the interactions with the external environment. They elaborated such process by emphasising that the environment would socialise the knowledge that they have through the interaction with the firm, then the firm could look for the knowledge that were achieved from the interactions with the environment in order to further combine it with the firm’s existing knowledge, and finally internalise it within the firm. With that being said, the firm will potentially possess a sustainable competitive advantage if it is able to achieve the new knowledge from external and integrate it within the firm (Cassiman & Veugelers, 2006).
Similar to this, Zheng et al (2011) asserted the knowledge-based dynamic capabilities framework by emphasising on the firm’s ability to acquire, generate, and combine the knowledge in order to be able to sense and mitigate the uncertainty of the environment dynamism. In this case, what plays into role is the firm’s absorptive capacity since it will determine the firm’s ability to identify and acquire the useful external knowledge (Cohen & Levinthal, 1990). Therefore, the firm should pay more attention to its absorptive capacity since it is a promising dynamic capability that will enhance the firm’s innovation capabilities (Martín-de Castro, 2015).
Focusing on Two CSR Dimensions
According to Clarkson (1995), there has been a substantial development in terms of types of stakeholders which need to be taken into account when we talk about corporate social responsibility. Furthermore, Clarkson (1995) also provided a stakeholder framework from which a company could analyse the classifications of its stakeholders. Specifically, a company’s stakeholders consist of employees, shareholders, customers, suppliers, and public
10 stakeholders (e.g. environment and community). From the Clarkson’s (1995) stakeholder classification, this paper will pursue to focus on two types of stakeholders namely the employee relation and public stakeholders (e.g. environment).
First, the employee relation dimension is chosen because, among other stakeholders, the organisational employees are the most crucial stakeholders for the firm innovation. This is due to innovation will only be initiated by the talented employees, who proactively participate, coordinate, and exchange knowledge with the other employees in a long-term process (Chen, Chen, Hsu, Podolski, 2016). Furthermore, the environment dimension is chosen because an environmentally responsible behavior will encourage the individuals to improve their learning capabilities, and thus enhance their innovation capabilities (Wagner, 2007; Rennings, Ziegler, Ankele, & Hoffmann, 2006; Sharma & Vredenburg, 1998). In general, those two dimensions are chosen since I argue that they can influence the level of knowledge possessed by the firm (Zheng et al, 2011; Nonaka et al, 2000), which is very important to establish the innovation. The more elaborated formulation on such relationship will be explained in the next section of this paper.
Therefore, the CSR activities that would be discussed in this study specifically focused on those two dimensions, namely CSR in employee relations and CSR in environment. By focusing on the single dimension of CSR, this paper would not treat a firm’s CSR in a unidimensional index. This will be particularly useful because it is in line with the statement argued by Johnson and Greening (1999), which stated that making CSR as a unidimensional index will conflate the individual dimensions that are equally important. Next, as these two CSR dimensions will affect the firm’s level of knowledge, I argue that they will also have effects on the firm’s innovation.
11 Hypothesis Development
CSR in Employee Relations and Innovation
The knowledge that is important for a firm’s innovativeness resides in the employees (Grant, 1996). Therefore, the firm’s capability to innovate highly depends on the employees’ innovation capabilities. Furthermore, from the knowledge-based view, the scholars argued that the firm’s task was to integrate these knowledge that were possessed by the employees (Nonaka et al, 2000; Grant, 1996).
Essentially, conducting responsible behavior towards the employees can enhance the employees’ knowledge and capabilities to innovate in several ways. First, the firms who responsibly manage the stakeholders’ needs are able to attract highly-skilled and better job applicants (Surroca, Tribó, & Waddock, 2010; Branco & Rodrigues, 2006). Second, Branco and Rodrigues (2006) also argued that employees’ motivation to pursue the company goal and their loyalty to the company would be maintained; thus, reducing employee turnover and recruitment. Moreover, the socially responsible firms will be able to strengthen stakeholders’ trust (Harrison, Bosse, & Phillips, 2010); thus, I argue that the stakeholder trust will further establish employees’ willingness to exchange tacit knowledge and know-how.
These all are due to the firm’s effort to responsibly manage the employees’ needs, such as fair payment, health and education benefits for workers and families, and clean and safe environment (Branco & Rodrigues, 2006). These responsible behaviors will elicit the employees’ trust toward the firm; thus, the employees believe that they will also achieve the benefits from any value creation within the firm since the firm will fairly distribute the benefits across the stakeholders (Harrison et al, 2010). Also, through those responsible behaviors, the firms are empowering the employees by being paying attention to the employees’ well-being. Duru Ahanotu (1998) asserted that the empowered employees would potentially express themselves through creativity and innovation. Therefore, since being
12 socially responsible can provide the firm an access to wider business opportunities (Roszkowska-Menkes, 2017), such empowered, highly-skilled, and loyal workers can keep pursuing innovative projects, by actively exchanging knowledge with all stakeholders.
H1a: The firm’s socially responsible activities in employee relations will have a positive relationship with firm’s innovation
CSR in Environment and Innovation
Firms that commit themselves to certain environmental management systems are indicated as an environmentally-oriented firms (Wagner, 2007). In other words, this firm pays attention to all of its operational activities to ensure that each activity produces a minimum level of harm to the environment. In essence, a firm’s environmental management system will also affect the firm’s level of knowledge. For instance, a firm that commits to pursue the environmental management system will establish a continuous learning process, which will in turn positively affects a firm’s product innovation (Rennings et al, 2006).
Furthermore, according to Avadikyan, Llerena, and Ostertag (2001), one way for a firm to operationalise its environmental management system is through a formal system by adopting an established standard, such as ISO 14001. Particularly, this standard is inherent with its utilisation of both top down and bottom up approach. Also, Avadikyan et al (2001) argued that the adoption of an environmental management system could facilitate the firm toward innovation activities. Through their case studies, they showed that the environmental management system adopted by the firm would provide a coordination mechanism to which the organisational members can reflect. Moreover, due to the system’s bottom up nature, the organisational members were encouraged to be participative; thus stimulating a cohesive
13 team-based approach. Therefore, this mechanism would allow the organisation to foster its innovation (Wagner, 2007).
As environmental management system concerns about the operational activities of the organisation, it will have effect on the firm’s process and product innovations (Klassen and Whybark, 1999; Rennings et al, 2006; Halila, 2007; Wagner, 2007; Surroca et al, 2010). Klassen and Whybark (1999) found that firms that perform with pollution prevention technologies would perform better, faster, and more efficiently compared to the firms that do not. In addition, Surroca et al 2010 pointed out that the 3M company has found a substantial process innovation due to the spillover in their tanks that could exacerbate their cost of hazardous disposal and wasted raw materials. In line with these illustrations, Rennings et al (2006) found that environmental management system would have positive impact on process innovation in which the processes becoming more efficient and environmentally-oriented, and they argued that it would also have effect on product innovation in terms of eco-efficient products and services.
Rennigs et al (2006) also posited that a firm’s commitment on a certain environmental management system would stimulate the employees to learn about how to perform the best within the system. Moreover, due to the participative nature inherent in the environmental management system, I argue that the organisational members would interact in a dynamic learning process. Similar to this, Sharma and Vredenburg (1998) asserted that the environmentally proactive firms -as opposed to environmentally reactive firms- would construct stronger organisational capabilities that enable the firms to allocate the resources into the most efficient and competitive activities. For instance, one of the capabilities that could be constructed was higher-order learning capabilities. Particularly, due to exposure to the environmentally responsible in daily operation, the managers should actively explore alternative organisational routines, technologies, environments, and objectives. This will lead
14 the managers to constantly combine their current knowledge with the new knowledge obtained after the alternative exploration. In turn, this learning capabilities will bring the organisational routines into dynamic experiential base; thus stimulate organisational knowledge and capabilities that are useful for the firm’s continuous innovation.
As Nonaka et al (2000) have depicted, such interactive and dynamic learning process would enhance the knowledge possessed by the firm. Through this mechanism, Rennings et al (2006) asserted that the more the organisational members learn about the environmental management system, the more positive impact it would have on product innovation. Therefore, this study would argue that the more a firm being oriented toward environment, the more it will enhance its innovation.
H1b: The firm’s socially responsible activities in environment will have a positive relationship with firm’s innovation
Moderation Analysis Upper Echelon Theory
The upper echelon theory (Hambrick & Mason, 1984) attempts to find the answer to the question of “why do organizations act as they do?”. In other words, they are trying to find out the reason for the decisions made by the firms. Quigley and Hambrick (2015) emphasised “the CEO effect” and found that performance differences across firms could be explained by the individual CEOs. As stated earlier, according to the upper echelon theory, the CEO characteristics matter because it represents the CEO cognitive and value that will determine the decision-making process (Hambrick, 2016; Hambrick, 2007; Hambrick & Mason, 1984).
The CEO cognitive ability is defined as the intellectual capability level that will be involved in making a decision, and is manifested in the CEO’s information-processing skills
15 (Wally & Baum, 1994; Hitt & Tyler, 1991). In addition, the CEO values are defined as the representation of the CEO’s goals and motivations about which the CEOs should communicate to organise their behavior (Bilsky & Schwartz, 1994). Furthermore, the scholars in the upper echelon theory argued that both the CEO cognitive and values would affect the way they perceive the situation; thus, would affect the firm’s decision (Kraiczy et al, 2015; Manner, 2010; Hambrick, 2007). In other words, both the CEO perception about the situation and their values will be combined in providing the basis for decision making.
Due to huge complexity to measure CEO cognitive, values, and perceptions, the upper echelon theory focuses on observable CEO characteristics -such as age, ideology, and tenure- in order to measure CEO’s behavior in making decisions (Hambrick & Mason, 1984). In other words, the CEO characteristics can reflect the CEO cognitive, values and perceptions. Therefore, the upper echelon theory emphasised that the organisational outcome can be predicted by the CEO background characteristics.
To give some instances, several scholars have provided evidence regarding certain the CEO characteristics that may have influence on the firm’s level of innovation (Kraiczy et al, 2015; Cazier, 2011; Barker & Mueller, 2002; Dechow & Sloan, 1991). First, Barker and Mueller (2002) found that there were several characteristics of a CEO that would have positive effect on the firm’s investment in innovation, particularly the CEOs who are younger, and possessing bigger wealth invested in firm stock and substantial career experience. Furthermore, Kraiczy et al (2015) found that a firm with a CEO who had higher innovation orientation and risk-taking behavior shows a higher degree of innovation investment. On the other hand, scholars also showed that the CEOs may also have influence in cutting down firm’s investment in innovation because they were at the period of nearly retired (Cazier, 2011; Dechow & Sloan, 1991).
16 Extending the literature of the relationship between the upper echelon theory and innovation, this research sought to find out whether the CEO characteristics could moderate the positive relationship between CSR and innovation. Specifically, in applying the upper echelon theory, the characteristics that would be chosen in this study are CEO age, ideology, and tenure as the CEOs characteristics that may have a significant role in affecting the relationship between CSR and innovation. The more elaborated details will be presented below, and will be followed by the hypothesis.
CEO Age, Ideology, and Tenure CEO Age
Older CEOs have had longer time horizon to accumulate wealth and they might be in a point where financial and career security are becoming their main concern; thus, they are less willing to take risk and prefer a safe investment (Hambrick & Mason, 1984; Wang et al, 2016b; Barker & Mueller, 2002). Furthermore, Barker & Mueller (2002) emphasised that investment in innovation was risky, requires long-term return, and comes at the expense of current profits. As older CEOs have shorter time horizon compared to the younger ones, investment in innovation might not provide them enough benefit in terms of short-term salaries and bonuses. With this in mind, given that CSR activities can already provide the firm with a good image and reputation (Brammer & Pavelin, 2006), the older CEOs are less interested to establish innovation ideas that are spurred by their CSR activities. In turn, these CEOs will rarely lead the firm to grasp the innovation ideas from their CSR activities.
On the other hand, the younger CEOs seem to be associated with firm growth (Hambrick & Mason, 1984; Kinuu, Murgor, Ongeti, Letting, Nicholas, & Aosa, 2012). Kinuu et al (2012) argued that such association could happen because the younger CEOs are more risk-neutral compared to the old ones. Moreover, the younger CEOs are more interested in the
17 risky investment in innovation since their career and financial security concerns still have longer time horizon compared to the old ones (Barker & Mueller, 2002). Therefore, even though CSR activities already provide the firm with a good reputation (Brammer & Pavelin, 2006), the younger CEOs are looking forward to innovation ideas that are absorbed from their CSR activities.
With this in mind, I argue that the older CEOs will not direct the firm to absorb innovation ideas from the CSR activities, because the resource allocation toward the CSR activities is already done at the expense of their current profits. Also, the risk that is associated with innovation is too big for them, and they will rather allocate the budget to the activities that can bring them short-term salaries and bonuses. In contrast, since the younger CEOs are more able to integrate information for decision making and have higher cognitive and learning abilities –as all those capabilities will decrease in age (Burke & Light, 1981; Botwinick,1977), they will be more able to steer the firm to absorb innovation ideas from the CSR activities. Moreover, besides they have higher abilities to do so, the younger CEOs will expect innovation activities as the benefits from the firm’s resource allocation toward the CSR activities since they are risk-neutral and more interested to innovation activities.
Hypothesis 2a: CEO age will negatively moderate the relationship between CSR in employee relations and innovation.
Hypothesis 2b: CEO age will negatively moderate the relationship between CSR in environment and innovation.
CEO Ideology
Scholars asserted that the political science and political psychology literature were able to provide evidence that the CEO values were reflected in their ideology (Chin, Hambrick, &
18 Trevino, 2013). The literature has commonly classified two spectrums of CEO ideology, namely liberal and conservatism (Kashmiri & Mahajan, 2017; Gupta, Briscoe, & Hambrick, 2017; Hutton, Jiang, & Kumar, 2014; Chin et al, 2013). These contrasting ideologies are different in terms of their attitude toward risks and openness to change (Kashmiri & Mahajan, 2017; Hutton et al, 2014). Furthermore, Kashmiri and Mahajan (2017) posited that firm’s inclination toward innovation was highly influenced by the CEOs’ willingness to take the risks, and found that firms with liberal CEOs were significantly more innovative. They explained that this could be the case since these CEOs were more open to uncertainty and motivated to introduce new products.
On the other hand, the conservative CEOs tend to avoid ambiguity and be less open to new experience (Jost, Glaser, Kruglanski, & Sulloway, 2003; McAllister & Anderson, 1991), favor job security over job creativity and variety (Atieh, Brief, & Vollrath, 1987), and prefer to have familiar and simple stimuli -as oppose to novel and complex one (Glasgow, Cartier, & Wilson, 1985). With that being said, since innovation involves uncertainty, risks, and long-term investment (Kashmiri & Mahajan, 2017), the conservative CEOs tend to take safer and less innovative investment (Hutton et al, 2014). In other words, they will not steer the firm to absorb innovation ideas from the firm’s CSR activities.
Meanwhile, due to the liberal CEOs’ positive attitude towards the risky innovative investments, they will push the firm to conduct innovation activities as the business return of the firm’s resources allocation toward CSR activities. Thereby, the firms with liberal CEOs will strive to achieve innovation as the benefits from the CSR activities since the CEOs will direct them to be more willing to take risks and open to change and uncertainty, so that the firm can have a chance to have a control over the market direction.
19 Hypothesis 3a: Liberal CEOs will positively moderate the relationship between CSR in employee relations and innovation.
Hypothesis 3b: Liberal CEOs will positively moderate the relationship between CSR in environment and innovation.
CEO Tenure
CEO tenure means the time length of a person has become the CEO of the firm (Wang et al, 2016b). Matta & Beamish (2008) asserted that long-tenured CEOs paid more attention toward their legacies, and were less interested into risky investment in innovation since it could threaten their legacies. Thus, long-tenured CEOs tend to become “stale in saddle” because they are less willing to initiate change and invest in innovation (Miller, 1991). In line with this argumentation, Miles, Snow, Meyer, and Coleman (1978) posited that “defender” firms, which focused on efficiency, were led by long-tenured CEOs. So, since defense is their strategic type to stay in the market, the firms that are led by long-tenured CEOs will be less likely to lead the firm to absorb innovation from the CSR activities.
On the other hand, “prospector” firms, which were more interested in conducting innovation, were led by short-tenured CEOs (Miles et al, 1978). According to Wang et al (2016b), CEOs are more challenged to prove their competences at their early tenure. Additionally, since they possess less experience in leading the firm, it will be important for the short-tenured CEOs to conduct experiment regarding new strategic decisions (Hambrick & Fukutomi, 1991). Therefore, they are more encouraged to demonstrate their competencies often by focusing on innovation activities. In other words, the short-tenured CEOs are more challenged and will direct the firm to absorb innovation ideas from the firm CSR activities.
20 Hypothesis 4a: CEO tenure will negatively moderate the relationship between CSR in employee relations and innovation.
Hypothesis 4b: CEO tenure will negatively moderate the relationship between CSR in environment and innovation.
21 Method
Sample
This study selected any firms in the Fortune 500 list, a publishing company that annually listed 500 largest public and private U.S. companies based on the firm’s revenues. Furthermore, this study focuses on the listed companies within the time period of 2014 to 2016. This time period was chosen due to this study looked for the most recent data for the current 3 years. I believe that the 3-year time period is sufficient because it would not give too little nor too much time lapse. Moreover, since this paper also involved the CEO ideology which was measured in the CEO’s political contribution, this time period was also chosen because of the House of Representatives Elections that are held every two years. In other words, within that time period, this study took into account the 2014 and 2016 elections. Additionally, in order to take into account the lagging effect on the dependent variable, this study selected the time period of 2015 to 2017 particularly for the innovation variable.
Data Sources
Data for the firm’s R&D intensity were retrieved from COMPUSTAT database. COMPUSTAT database provides data (e.g. financial data) for companies across the world, especially companies from the U.S. Next, CSR data was extracted from the Kinder, Lydenberg, and Domini (KLD) database. KLD is a leading research firm that provides the firm’s performance in terms of the CSR activities. They combined financial statements, surveys, articles, and government reports to rate a firm’s social performance. Furthermore, the CEO age and CEO tenure data were extracted from Wharton Research Data Services (WRDS). WRDS is a research platform and tool for business intelligence for more than 50,000 corporate, academic, government, and nonprofit users at more than 450 institutions across 35 countries. In particular, the database that was chosen for the CEO age and CEO
22 tenure was Institutional Shareholder Services (ISS) in the WRDS. Lastly, the data regarding the CEO political contributions were retrieved from The Center for Responsive Politics (www.opensecrets.org). The website provided information about federal campaign contribution, lobbying data, and movements between government institutions and private sectors.
Measurement
Dependent Variable Innovation
In this study, a firm’s innovation would be measured in the firm’s R&D intensity. According to Shefer and Frenkel (2005), a firm should allocate resources into research and development to be able to innovate. Moreover, they posited that resource allocation toward R&D would spawn innovation. Furthermore, following Mousa and Chowdury (2014), this paper would derive the R&D intensity from the ratio of the firm’s R&D expenditure over total assets.
Independent Variable
Corporate Social Responsibility - CSR in Employee Relations and Environment
As elaborated earlier, this study would focus on two dimensions, namely the firm social performance in (1) employee relations and (2) environment. The first dimension measures the degree of how well the companies manage its relationship with labor union, how they care about the employees’ involvement and health and safety, and how the firm takes care of the personal development of the employees. Additionally, the second dimension measures to what extent the firms contribute to the well being of and harm the environment through their daily operational activities. The more elaborated details about how KLD rated each dimension are shown in the table below.
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Table 1. List of Indicators for the CSR in Employee Relation and CSR in Environment
Strength Concern
Employee Relations
Union Relations (from 1991) Union Relations (from 1991)
Cash Profit Sharing (from 1991) Employee Health & Safety (from 1991) Employee Involvement (from 1991) Supply Chain (from 1998)
Employee Health and Safety (from 2003) Child Labor
Supply Chain Labor Standards (from 2002) Labor-Management Relations Compensation & Benefits
Employee Relations Professional Development Human Capital Management Controversial Sourcing (From 2013)
Strength Concern
Environment Environmental Opportunities (from 1991) Regulatory Compliance (from 1991) Waste Management (from 1991) Toxic Spills & Releases (from 1991) Packaging Materials & Waste (from 1991) Climate Change (from 1999)
Climate Change (from 1991) Impact of Products & Services (from 2010) Environmental Management Systems (from
2006)
Biodiversity & Land Use (from 2010)
Water Stress Operational Waste (from 2010)
Biodiversity & Land Use Supply Chain Management Raw Material Sourcing Water Management
Natural Resource Use (From 2013) Other Concerns (from 1991) Environmental Opportunities - Green
Buildings (From 2013)
Environmental Opportunities in Renewable Energy (From 2013)
Waste Management - Electronic Waste (From 2013)
Climate Change - Energy Efficiency (From 2013)
Climate Change - Product Carbon Footprint (From 2013)
Climate Change - Insuring Climate Change Risk (From 2013)
24 As seen from the table above, KLD rated the firm’s performance in terms of CSR activities by giving them score along their positive and negative performance in each dimension. Specifically, KLD illustrated the positive performance as strength and the negative performance as concern. Within each dimension, KLD elaborated several indicators, each of which would be rated as 1 if the firm has performed that indicator and otherwise 0. As a result, a firm will have total of strength and concern in each dimension. To come up with a CSR dimension’s net score of a firm, the total concerns were subtracted from the total strengths. For example, a firm’s concern points in the environment CSR dimension would be subtracted from the firm’s strength points in the environment CSR dimension. The same also applied to the CSR in employee relations. This method is line with several researchers that have studied CSR such as Chin et al (2013) and Choi and Wang (2009).
Moderating Variables CEO Characteristics
The CEO characteristic variables that will be involved consisting of CEO age, CEO ideology, and CEO tenure. The CEO age was measured in number of years that the CEO has lived, and the CEO tenure was measured in number of years that the CEO has positioned as the CEO of the focal firm. The youngest CEO recorded in the sample was 30 years old and the oldest one was 78 years old, with the most frequent age of range of 51-60 years old (almost 60% of the sample). Additionally, the longest duration of positioning as a CEO was for 52 years long, and the shortest tenure was half a year long. Furthermore, the variable of CEO ideology was measured in the CEO political contribution to political parties within each election period. Following Chin et al (2013), in this study, the CEO who made a political contribution to the republican party would be considered as possessing a conservative ideology, and the CEO who made a political contribution to the democrat party would be considered as owning a liberal ideology. In order to come up with a valid measurement, I calculated the CEO’s
25 liberalism index which may range from 0 to 1. The index was derived by dividing the CEO’s political contribution to democrat party over the CEO’s political contribution to both republican and democrat parties. Furthermore, to mitigate the zero value, I added up 0.1 to the numerator and 0.2 to the denominator of the formula. To get a depiction, here is an example of the formula:
CEO liberalism index = Contribution to (Republican + Democrat) + 0.2Contribution to Democrat + 0.1 = 8000 + 2000 + 0.22000 + 0.1 = 0.2 An index of below 0.5 would be considered as a conservative ideology, and an index of above 0.5 would be considered as a liberal ideology. Specifically, nearly 48% of the CEOs possessed conservative ideology and around 18% possessed a liberal ideology. This particular methodology was inspired by past scholars (Chin et al, 2013) and has been applied by others in the current literature (Kashmiri & Mahajan, 2017).
Control Variable
In this study, I controlled three firm-level variables and the type of industry in which the firm has been operating. To be more specific, the firm-level variables that were involved in this study consisting of the firm size, slack resource, and performance. These three variables were chosen because all of them may have effects on both CSR and innovation; thus, controlling those three variables would be very crucial. First, as a firm size gets larger, there will be an increase in stakeholders’ expectation that the firm conducting activities which provide a huge impact to the society (Majeed, Aziz, & Saleem, 2015; Pavelin & Porter, 2008). Also, in this case, the firm will enhance its networks with the stakeholders and knowledge and information sharing with the stakeholders (Luo & Du, 2015); thus, improving its capabilities to innovate. Therefore, firm size was included as a control variable and was measured in number of employees that was transformed into logarithm in the analysis. Second, since both
26 innovation and CSR activities do not provide an immediate return, slack resources can provide support for the firm in maintaining both investment activities (Bansal, 2005). Moreover, slack resources are very crucial input factor for firms to establish innovation (Soetanto & Jack, 2016; Mousa & Chowdury, 2014). With this in mind, I controlled the firm slack resource that was measured in a ratio of current assets over current liabilities. Next, given a firm performs better (e.g. financially), the firm will have more latitude to allocate the financial resources to other investment activities, such as CSR activities (Waddock & Graves, 1997). Thus, I included the firm financial performance as a control variable, which was measured in a firm’s return on assets. Finally, I also controlled the types of industry as many scholars in the CSR literature had considered to control the industry sector of the firm (Waddock & Graves, 1997; Hull & Rothenberg, 2008; Surroca et al, 2010). This may be caused by different industry definitely requires different resource allocation to and provides different benefits from CSR activities. In this study, I controlled three industry sectors, namely manufacturing, utilities, and retail trade. I created dummy variable in which the firms would be indicated as “1” if they came from one of those three industries, and otherwise “0”. These three types of industry were chosen as they dominated the total sample included in this study, which was in the percentage of nearly 70%. The more elaboration on this descriptive statistic would be explained in the result section below.
Analysis and Result
In general, there were initially 635 firms that were included as the sample of this study. During the data analysis, firms that changed status from public to private and vice versa were still included within the sample. In addition, firms that were acquired within the time period were also still included. Also, since this study took the average data across 3 years, firms that had a missing value in 1 year were still included in the sample. Therefore, the analysis
27 resulted a cross-sectional data across three years. This was done in order to have a more stable result since it would be prevented from any single event that may have effect on the data on one year. For the data that had missing value of 1 year, I took the average of 2-year available data for those firms. However, firms that had missing value in a variable for more than 1 year (e.g. 2 years) were excluded from the sample and would not be considered in any types of analysis. Eventually, this study completed the analysis with a total of 309 firms. In the following section, I present the statistical model that was used, a brief descriptive statistics about the final sample, the correlations between each variables, and the regression analysis.
Statistical Model
I first run a correlation analysis, in particular using Pearson correlation coefficient. This is useful to provide initial -but not full- support for the relationship. Before I run the regression analyses, I did several iterative collinearity tests across the independent and moderating variables. The tests showed results of VIFs that were still below 3 (the maximum or threshold); thus indicating that there was no multicollinearity between the independent and moderating variables. Also, I run normality tests in order to make sure that the variables were normally distributed. However, since all of the variables have positive skewness and kurtosis, I corrected the data by applying log transformation to the variables. This action is taken because taking a logarithm of a set of numbers will reduce positive skew and positive kurtosis. Furthermore, I also checked the homoscedasticity of the data, and it showed a random array of dots for the data scatterplot. Finally, I checked whether there was any outlier in the data, and the Cook’s Distance statistics showed no value that was more than 1. Also, since most of the Cook’s Distance statistics were far less than 1, it was unnecessary to delete any data due to outliers.
28 Next, I run regression analyses to provide the evidence for the hypotheses, and all variables were still mean-centered before the regression analysis even though the multicollinearity test was preceded. In general, the regression consisted of four models, in which the last model was used as the final evidence to support the hypotheses. Particularly, the regression analysis was run with four models, which consisting of model (1) including only the control variables, (2) adding the independent variables, (3) adding the moderating variables, and (4) adding the variables of interaction between the independent and moderating variables in order to test the moderation analysis.
Descriptive Statistics
As stated earlier, the final sample of this study consisted of 309 firms. This final sample came from diverse types of industry, such as mining, finance, services, wholesale and retail trade, utilities, construction, and manufacturing. Among these industries, there were three types of industry that populated nearly 70% of the final sample. Specifically, the top three industries were manufacturing (40.1%, N = 124), utilities -e.g. transportation, communications, electric, gas, and sanitary service- (16.8%, N = 52), and retail trade (12.9%, N = 40). In turn, these three industries would be considered as the three types of industry that I controlled in the analysis.
Correlations
Furthermore, table 2 below presents the descriptive statistics and correlation of each variable. The correlation that is presented in the table is measured in Pearson Correlation Coefficient. The correlation coefficient would give an initial -but not the full- indication to support the hypothesis. Below, I would first explain the correlation between the independent and dependent variables, next I would continue by presenting the correlation between the control
29 and dependent variables, and lastly I would discuss the correlation between the moderators and dependent variable.
The correlation between the independent and dependent variables is very crucial to provide an early support for hypothesis 1a and hypothesis 1b. In line with the hypotheses, CSR in employee relations and environment have positive and significant relationship with innovation (r = 0.32 and r = 0.217 respectively, p < 0.01). Next, not all the control variables show significant relationship with the dependent variable. For instance, both firm size and firm performance (.e.g. ROA) unexpectedly cannot show any significant relationship with the firm innovation (r = 0.041 and r = 0.055 respectively, p = ns). On the other hand, the firm’s slack resources shows significantly a positive relationship with innovation (r = 0.241 , p < 0.01). Moreover, the most populated three types of industry show mixed, but significant relationship with the firm innovation. Particularly, manufacturing industry with r = 0.301 (p < 0.01), utilities industry with r = -0.192 (p < 0.01), and retail trade industry with r = -0.113 (p < 0.05). Finally, the moderating variables also show a mixed relationship with the firm innovation. For example, the CEO age is the only moderating variable that has a significant positive relationship with the firm innovation (r = 0.266 , p < 0.01). In contrast, the CEO ideology and CEO tenure do not show any significant relationship with the firm innovation (r = 0.109 and r = -0.06 respectively, p = ns). Following this correlation results, I would continue by presenting the regression analysis.
30
Table 2. Means, Standard Deviations, and Correlations
Variables Mean SD 1 2 3 4 5 6 7 8 9 10 11 1. Innovation 0.01 0.03 2. CSR in Employee 0.97 1.25 0.320** 3. CSR in Environment 0.73 1.13 0.217** 0.305** 4. CEO Age 57.14 5.68 (0.266)** (0.141)* 0.017 5. CEO Ideology 0.17 0.29 0.109 (0.017) 0.066 (0.146)* 6. CEO Tenure 7.59 7.27 (0.06) (0.079) (0.048) (0.406)** (0.073) 7. Employee Size 1.49 0.49 0.041 0.064 0.394** 0.124* 0.048 0.138* 8. ROA 0.05 0.07 0.055 0.105 0.265** 0.051 0.019 0.069 0.348** 9. Slack Resources 1.60 0.90 0.241** 0.175** (0.027) (0.251)** 0.085 0.028 (0.080) 0,075 10. Manufacturing 0.28 0.45 0.301** 0.084 0.403** (0.049) 0.001 (0.142)* 0.024 0.161** 0.208** 11. Utilities 0.12 0.32 (0.192)** 0.097 (0.129)* 0.037 (0.065) (0.05) (0.148)** (0.092) (0.295)** (0.225)** 12. Retail Trade 0.09 0.29 (0.113)* (0.084) (0.104) (0.095) (0.023) 0.114* (0.296)** 0.204** (0.086) (0.194)** (0.141)* Note. N: 309 ** p < 0.01, * p < 0.05
31
Table 3. Regression Result for The Analysis, with R&D intensity as the dependent variable
Model 1 Model 2 Model 3 Model 4
Variables Beta SE Beta SE Beta SE Beta SE
Employee Size 0.061 0.004 0.011 0.004 0.025 0.004 (0.011) 0.004 ROA (0.004) 0.024 (0.021) 0.023 (0.017) 0.022 (0.029) 0.022 Slack Resources 0.140* 0.004 0.090 0.004 0.049 0.004 0.035 0.004 Manufacturing 0.231** 0.004 0.196** 0.004 0.218** 0.004 0.235** 0.004 Utilities (0.055) 0.005 (0.107) 0.005 (0.096) 0.005 (0.081) 0.005 Retail Trade (0.064) 0.006 (0.043) 0.005 (0.029) 0.005 0.025 0.005 CSR in Employee 0.247** 0.006 0.220** 0.006 0.205** 0.006 CSR in Environment 0.074 0.004 0.077 0.004 0.090 0.004 CEO Age (0.260)** 0.016 (0.250)** 0.016 CEO Ideology 0.039 0.000 0.000 0.000 CEO Tenure 0.074 0.002 0.046 0.002
CEO Age x CSR in Employee (0.097) 0.057
CEO Ideology x CSR in Employee (0.014) 0.002
CEO Tenure x CSR in Employee (0.157)** 0.007
CEO Age x CSR in Environment 0.050 0.037
CEO Ideology x CSR in Environment (0.033) 0.001
CEO Tenure x CSR in Environment (0.125)* 0.004
F 7.285** 9.013** 9.115** 7.697**
R square 0.109 0.172 0.225 0.270
Note. N: 309
32 Regression Analysis
Table three presents the results from the regression analysis which contained four models of regression. As stated earlier, in order to come up with evidence to support the hypotheses, I used model 4 as the benchmark of interpretation. The model 4 showed an F score of 7.697 (p < 0.001), which means that this model provides a better fit compared to the model without predictors. Also, the predictors in this model can explain 27% variance in the dependent variable (R square = 0.270).
Next, we can see that the model 4 provided evidence to support hypothesis 1a; in other words, CSR in employee relations has a positive relationship with innovation (β = 0.205, p < 0.001). Therefore, hypothesis 1a is accepted. On the other hand, the results could not show any significant relationship between CSR in environment and innovation (β = 0.090, p = ns). This is not in line with hypothesis 1b; thus we have to reject it.
Furthermore, there were also unexpectedly mixed supports for the moderation hypotheses. First, the results showed that CEO age did not have any moderation effect on the relationship between both CSR in employee relations (β = -0.097 p = ns) and CSR in environment (β = 0.050, p = ns) with innovation. Given these results, we have to reject both hypothesis 2a and hypothesis 2b. In line with this insignificant evidence, model 4 also could not provide support for the moderation role of CEO ideology. In particular, CEO ideology did not have any moderating effect on the relationship between both CSR in employee relations (β = -0.014 p = ns) and CSR in environment (β = -0.033, p = ns) with innovation. Therefore, we must reject hypothesis 3a and hypothesis 3b. In contrast, CEO tenure was the only CEO characteristic that was supported to have a moderating effect. Specifically, model 4 provided evidence to support that CEO tenure had negative moderating effect on the relationship between both CSR in employee relations (β = -0.157 p < 0.01) and CSR in environment (β =
33 -0.125, p < 0.05) with innovation. In other words, we can accept hypothesis 4a and hypothesis 4b.
Figure 2. Summary of the statistical findings
Note ** p < 0.01, * p < 0.05
Summary of The Findings: Major and Unexpected Results
In short, after running the analysis, I found mixed findings that could not fully support all of my hypotheses. First, I can accept hypothesis 1a; in other words, firm’s resource allocation toward both CSR in employee relation would give a positive effect on the firm’s innovation. However, it does not apply to CSR in environment since I could not find any evidence that showed CSR in environment have a positive relationship with innovation. Thus, I have to reject hypothesis 1b. Next, the results also provided mixed support for the moderating effect that the CEO characteristics have on the relationship between CSR and innovation. For instance, I cannot accept hypothesis 2a, which means that the CEO age will not negatively moderate the relationship between CSR in employee relations and innovation. Also, I have to
34 reject hypothesis 2b; thus, the CEO age does not have any moderating effect on the relationship between CSR in environment and innovation. Furthermore, the CEO ideology also turns out do not have any moderating effect in the analysis and the results enforce me to reject hypothesis 3a and hypothesis 3b. On the other hand, I can accept hypothesis 4a and hypothesis 4b; therefore the CEO tenure would negatively moderate the relationship between the both CSR dimensions (e.g. employee relations and environment) and innovation.
Discussion
By applying the insights from the upper echelon theory with the relationship between CSR and innovation, this research aims to find out whether the characteristics of the CEO may influence the relationship between CSR and innovation. As stated earlier, the CEO characteristics selected in this study were CEO age, CEO ideology, and CEO tenure. However, this study could not find full support for all hypotheses. Despite that, the theoretical contributions of this study would still be elaborated. Also, I would next discuss this paper’s limitation and recommendation related to future research. But before all of those, I would first explain the unsupported and supported hypotheses, and discuss their implications.
Unexpected Findings
Insignificant Relationship between CSR in Environment and Innovation
In the earlier part of this paper, it was argued that by being environmentally proactive, firms would achieve high-order learning capabilities (Sharma and Vredenburg, 1998). In turn, such capabilities could lead the firm into a dynamic learning process and enhance the knowledge of the firm (Nonaka et al, 2000), which would be useful for exploring innovation. Moreover,
35 scholars also posited that firm’s involvement in the environmental management system could facilitate the firm’s innovation activities (Avadikyan et al, 2001; Rennings et al, 2006).
However, the results of this study could not support those arguments. Instead, this study showed that being environmentally responsible would not necessarily lead the firm into innovation activities. This may be caused by the corporations were rarely intended to seek for innovative ideas in engaging in environmentally responsible behavior; thus, they would not realise any innovation opportunities that came from their CSR activities in environment. This is supported by the argument of Morrow and Rondinelli (2002) who pointed out several motivations of firms in establishing environmentally responsible behavior, which were because of complying with existing regulations, dealing with peer pressure as more competitors did that, and decreasing costs of excessive resources use –thus enhancing efficiency. In other words, the firms were not really motivated to seek innovation as the return from their environmentally responsible behavior, and thus did not achieve innovation from those activities.
This argument related to the motivations is supported by the assertion of Kirkland and Thompson (1999) who stated several benefits of a firm’s engagement in environmentally responsible behavior. They asserted three benefits of such behavior, which were cost reduction due to the elimination of wasteful use of resources, corporate image and identity enhancement, and avoiding the unnecessary huge costs –e.g. fines and penalties- due to disobedience to the regulations. Therefore, innovation may be rarely achieved as the benefit from a firm’s resource allocation toward the environmentally responsible behavior, especially because the firm was never really intended to benefit in terms of innovation from their resource allocation toward the CSR activities in environment. However, this study firmly will not suggest the firm who seeks innovation as the business return to stop its resource
36 allocation toward responsible activities to the environment, since they still should not harm the environment through their operational activities and comply with the existing regulation.
Insignificant Moderation Effect of CEO Age
As both CSR and innovation activities require long-term investment and uncertain return, it was expected that the younger CEOs, who were more risk neutral, would expect higher innovation activities as the business return from the resource allocation toward CSR activities. Unfortunately, this study could not also provide evidence to support the hypothesis of the moderation effect of the CEO age on the relationship between CSR –both in employee relations and environment- and innovation. In other words, it was unclear whether younger or older CEO would direct the firm into innovation activities after the firm’s engagement in CSR activities.
In the literature, there were scholars who turned out arguing that people may get more innovative as the age increased. Specifically, Ng and Feldman (2013) hypothesised that the age had a positive relationship with innovation behavior. They based their hypothesis on human capital theory (Becker, 1964) which proposed that people will definitely increase their human capital through achieving more job skills, knowledge, and experiences over their career time. Such accumulated human capital will enhance their innovative capacity. This is in contrast to the arguments formulated in the current paper that the younger CEOs were more risk-neutral (Kinuu et al, 2012) and would be easier in comprehending innovative ideas (Hambrick & Mason, 1984), thus were more interested in innovation activities.
Given the assertion of the human capital theory (Ng & Feldman, 2013; Becker, 1964) and the arguments in the current study that were based from Kinuu et al (2012) and Hambrick and Mason (1984), this study may show that age will not matter in moderating the relationship between CSR and innovation. In other words, it may imply that there is no
37 difference between young and old CEOs in terms of how they expect the firms to achieve innovation as benefits from the resource allocation toward CSR activities.
Insignificant Moderation Effect of CEO Ideology
As the CEOs with liberal ideology are more inclined to care about social justice (Jost et al, 2003), tend to engage in responsible behavior towards the stakeholders (Tetlock, 2000), and have a high willingness to take risk (Kashmiri & Mahajan, 2017), it was argued that the CEO liberal ideology would amplify the relationship between CSR and innovation. Seemingly, this study however showed that the CEO liberal ideology did not really expect innovation activities as the business return from the firm’s resource allocation toward CSR activities, neither in employee relations nor in environment. This finding is not in line with the other scholars’ finding in the CEO ideology literature, such as Kashmiri and Mahajan (2017) who could provide an evidence that firms with liberal CEOs were more innovative, and Chin et al (2013) who found that liberal CEOs would lead the firm to engage more in CSR activities compared to the conservative ones.
One reason that may result the insignificant result in this study might be that the difference in the way to measure the CEO ideology that used in this study compared to the ones that used by Kashmiri and Mahajan (2017) and Chin et al (2013). Specifically, this study measured the liberalism of a CEO ideology by calculating a liberalism index of the CEO, which focused on the financial commitment of the political contribution of the CEO -in terms of the amount of dollars donated. On the other hand, both Kashmiri and Mahajan (2017) and Chin et al (2013) measured the liberalism ideology of a CEO by summing up four indicators, which consisting of a CEO’s (1) behavioral commitment, (2) financial commitment, (3) persistence of commitment, and (4) scope of commitment to a political orientation. Also, this study only covered 2 election years -2014 and 2016- in incorporating
38 the CEO political contribution. In contrast, scholars in the CEO ideology literature used over 10-year time frame. For instance, Chin et al (2013) incorporated the CEO’s political contribution across 10 years and Kashmiri and Mahajan (2017) took into account over 16 years of CEO’s political contribution. Meaning, both of those studies covered much wider range of election year. In short, since this study only incorporated 2 election years and financial commitment of a CEO’s political contribution, it may lead to the risk of resulting a CEO liberalism index score that was based on incidental or token behavior (Chin et al, 2013). Thereby, this research may imply that either CEOs with liberal or conservative ideology will not matter in affecting the relationship between CSR activities and innovation.
Supported Findings
CSR in Employee Relations and Innovation
Using a theoretical argumentation of knowledge-based view, this study found that firm’s resource allocation toward CSR activities in employee relations would provide the firm with innovation activities as a benefit. This is line with the findings of Gallego-Alvarez et al (2011) and Luo and Du (2015) who found a positive relationship between CSR and innovation, even though the current study’s supported finding focused on the CSR in employee relation dimension. In practice, this may imply that the firm’s effort in being responsible toward the workers’ well-being will motivate the employees to innovate; thus, increase the firm’s level of innovativeness. Therefore, a firm must realise the importance of paying more attention toward the employees’ well-being if the firm aims to keep innovating. This is due to such responsible behavior can attract highly-skilled employees, and empower and maintain them within the organisation. Moreover, because they have been treated well by the firm, the employees may enhance their trust toward the firm; thus they will be
39 participative in exchanging knowledge with all stakeholders in order to initiate innovation ideas.
Moderation Effect of CEO Tenure on the Relationship between CSR and Innovation Finally, even though the previous two CEO characteristics were not found to have significant moderation effect, this study could provide an evidence that the last CEO characteristic -CEO tenure- had significant negative moderation effect on the relationship between the both CSR dimension, namely CSR in employee relations and environment- with the firm innovation. This is in line with the argument of Matta and Beamish (2008) who stated that the long-tenured CEOs were less interested in any investment with an uncertain return. Thus, it may imply that the short-tenured CEOs were more challenged to absorb innovative ideas from the firm CSR activities since they still would have longer duration in seating the CEO position compared to the long-tenured CEOs.
In addition, this finding may also be useful for board of directors who just hire a new CEO and are interested to pursue innovation for the firm. Specifically, the board of directors can push the new CEO to achieve innovation as the benefits from the firm’s resource allocation toward CSR activities. Especially, since the finding of this study could not prove that the CSR in environment have positive relationship with innovation because the firms were not motivated to do so, the newly hired or the short-tenured CEO should motivate and convince the organisational members that they can actually absorb innovation ideas from the resource allocation toward the environmentally responsible behavior.
Research Contribution
First and foremost, there have been several scholars who studied the CSR-innovation relationship (e.g. Gallego-Alvarez et al, 2011; Luo & Du, 2015; Martinez-Conesa et al,
40 2017), however they treated CSR as a unidimensional index. Meanwhile, Johnson & Greening (1999) emphasised that treating CSR as a unidimensional index would conflate each individual dimension that was equally important. Therefore, since the current paper unpacked the CSR dimensions and focused on two dimensions, it contributes to the literature of the relationship between CSR and innovation by showing that the relationship between CSR and innovation is complex and not all of the CSR dimensions may have positive relationship with innovation. Specifically, this research showed that CSR in employee relations had positive relationship on innovation, meanwhile CSR in environment did not.
In addition, this study seeks to extend the explanation of how the firm CSR activities may enhance their innovation, in particular using the upper echelon theory. In the current literature regarding CSR and innovation relationship, scholars have attempted to explain the complexity of the relationship between CSR and innovation using firm- and market-level analysis. For example, Gallego-Alvarez et al (2011) attempted to seek whether there was a bidirectional relationship between CSR and innovation. Furthermore, Luo and Du (2015) explained the complexity of the relationship between CSR and innovation through the moderating role of firm’s R&D investment and market competitiveness. Additionally, for the most current research, Martinez-Conesa et al (2017) extent the literature of CSR and innovation relationship by showing that the firm CSR activities had an effect on its innovation performance, and the firm innovation performance mediated the relationship between the firm CSR activities and performance. Extending this line of research, the current study improves our understanding about the relationship between CSR and innovation by providing another level of analysis in explaining such complex relationship, namely the CEO-level of analysis. Therefore, this paper could be valuable for the literature on the relationship between CSR and innovation because it showed that such relationship would be amplified as the firm was led by short-tenured CEOs.
41 Limitations and Future Research
Similar to other empirical studies, there were several limitations that may still be imposed in this research; thus providing opportunities for future research in order to improve it. First, this study came up with the results by a cross-sectional data by taking an average of three-year data. Meanwhile, a longitudinal approach may be more valuable in this line of research since it will capture how this relationship may develop over years. Second, it was mentioned that the measurement of the CEO ideology that used in this study was only using one indicator over three years, meanwhile, Chin et al (2013) and Kashmiri and Mahajan (2017) used four indicators for over and even more than 10 years. Therefore, this study could be improved by adopting what these scholars have done. Despite of using more indicators and timeframe, this measurement of CEO ideology is however still a not necessarily accurate measurement of such complex psychological construct –the ideology of a CEO. That is why Chin et al (2013) suggested that future research may use CEO’s speech and interview, survey, or social media account.
Furthermore, this study may be also limited in terms of its choice of the measurement for innovation, which is R&D intensity by taking the ratio of R&D expenses over total assets. Future research can be done by using an alternative way to measure a firm innovation, such as R&D intensity by taking a ratio of R&D expenses over total employees (Surroca et al, 2010) or new product introductions (Luo & Du, 2015). Moreover, this research may also be refined by including several measurements of innovation, and comparing each of them to the relationship with CSR activities. In addition, since this study only included two dimensions of CSR based on Clarkson’s (1995) stakeholder framework, there are several other CSR dimensions that can be used if a researcher wishes not to treat CSR as a unidimensional index, such as other public stakeholders (e.g. community relations). Finally, the inclusion of the three CEO characteristics in this study actually provides a research opportunity in the
