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Dissertation for MSc IB&M

CEOs Educational Background relation on Corporate Social Performance and the moderating effects of institutional quality and business visibility

Student: Nicolás Gantivar Alfaro – S3902420 / B8036089

Supervisors: Dr. Esha Mendiratta / Dr. Iain Munro

Date: 02.12.2019

Word Count: 13,975

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2 ABSTRACT

Multinational Enterprises (MNEs) and their governing structures are responsible not only to their shareholders but to a wide variety of stakeholders due to the scale of their business activities and their impact on societal and environmental levels. This study builds on such premise and investigates the relationship between the educational background of MNEs chief executive officers – CEOs and the firm’s corporate social performance (CSP). It also examines whether this relationship is moderated by the organizational visibility of the firm and/or by the institutional quality of the country where it is headquartered. First, while prior literature has predominantly focused on demographic characteristics of the firm’s dominant coalition that are likely to influence the company’s engagement with CSR activities, the current study examines their impact on the social performance of the company. Particularly, it focuses on the CEOs education background as a construct of both level and field of education. Second, building on the

‘upper-echelons’ and the stakeholder’s theories, the study theorizes and empirically investigates the mentioned relationships through a quantitative approach using a sample comprised by the Fortune Global 500. The study reveals that there is no significant correlation between CEOs educational background and firm’s CSP. Moreover, that neither the institutional quality nor the organizational visibility have a moderating effect on said relationship. Results are discussed and suggestions are made for further research.

Key words: Multinational Enterprises (MNEs) – Corporate Social Responsibility (CSR) – Upper Echelons Theory – Stakeholders Theory – Chief Executive Officer (CEO) – Corporate Social Performance (CSP) – Institutional Quality – Organizational Visibility

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3 ACKNOWLEDGEMENTS

I would like to acknowledge everyone who played a role in the personal, professional and academic accomplishments that have led me to this moment. To god and my family for always believing in me. To Newcastle University and the University of Groningen for giving me the opportunity to broaden my knowledge and pushing me out of my comfort zone. A special thanks to both of my supervisors for their guidance and support throughout this process. Likewise, special thanks to all with whom I shared difficulties, moments of joy, experiences and memories.

Finally, to Father Francis Wehri, wherever you are, thanks for teaching me that knowledge is far more valuable when we use it to serve, help and improve other people’s lives. I will do my best to follow your teachings.

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4 TABLE OF CONTENTS

I. Introduction ……….… 5

II. Literature Review ……… 8

2.1 Hypotheses Development Moderators ………... 13

2.1.a Moderators ……… 15

2.2 Conceptual Model ……… 21

III. Data & Methodology …………...……….. 22

3.1 Sample and Data Collection ……… 22

3.2 Measurements ………... 23

3.2.a Dependent Variable ...……… 23

3.2.b Independent Variable ……… 24

3.2.c Moderating Variables ……… 26

3.2.d Controlling Variables ……… 27

IV. Results ………... 29

V. Discussion and Conclusion ………...…. 35

5.1 Limitations and further research ……….. 41

5.2 Conclusion ………... 43

VI. References ………. 45

VII. Appendices ………...……. 56

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5 I. INTRODUCTION

Multinational Enterprises (MNEs) have become key players in a global landscape where economies of scale and global value chains are now a reality more than ever. By 2017, the US enterprise ‘Walmart’, earned more money through revenues than Belgium, the sixth-largest economy in the euro zone (Belinchón & Moynihan, 2018). Thus, the success of these MNEs must be attributed to the company’s capabilities and resources, but also to their human capital, particularly to the ‘dominant coalition’ at the top of the organization who shapes the company’s fate (Hambrick & Mason, 1984). Due to their role in the global scenery, MNEs are responsible for their business activities not only at an economic level but likewise at an environmental and societal one.

Situations like the ones occurred in the ‘Rana Plaza’ in Bangladesh highlight the role that MNEs can have on social disasters related with industry production. Due to this social catastrophe, the garment industry in Bangladesh was exposed and many of its stakeholders demanded answers regarding the safety levels of the locations where multiple companies operated. Walt Disney Company, one of the ‘usual’ Global Fortune 500 companies by revenue, had operations within the country. To such circumstances, Disney addressed the situation and rethought its role in the Bangladesh garment industry. As a result, Disney proclaimed social responsibility reasons in order to retrieve their massive operation in Bangladesh, arguing the precarious situation of health and safety conditions of the garment factories (part of their supply chain) (Fox, 2013).

From the latter situation, a great number of questions may arise. Among them could be, what made Disney take this ‘particular’ decision? Why didn’t they stay and contribute to the improvement of CSR matters in the front-line in Bangladesh? Are CSR matters important enough to drop out from one of its operating countries? Likewise, there could be a number of answers that point out the growing relevance of CSR practices, or even so the economic affectation the scandal could have in terms of reputation. Nonetheless, a valuable insight from such events is that the closure of operations and further departure of the country is the result of Disney’s interpretation of the situation and their business strategy to overcome it. Moreover, that through the lens of the ‘upper-echelons’ theory, which is one of the main theoretical frameworks

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6 of the current study, such resolution can be attributable to the ‘dominant coalition’ of the organization which took the decision of which strategic course to implement.

This is helpful to illustrate the unique position that the dominant coalition of an organization has on a firms’ behaviour at many levels. In this line of argument, the current study provides practical and theoretical contributions based on empirical evidence to understand such statement.

As the stakeholders demands increase towards more social and environmental practices (United Nations, 2019), MNEs can use this study and its results when trying to determine the selection of high-level executive profiles that could be more driven to attend such matters, and therefore enhance the firm’s social performance. Likewise, it contributes theoretically to management literature by addressing a subject under-studied and unattended. Through the lens of the ‘upper- echelons’ and stakeholder’s theories, the study examines on a global scale the relationship between CEOs educational background and the firm’s corporate social performance – CSP.

Moreover, it moves through unchartered waters and studies the moderating effect of institutional quality and organizational visibility on the mentioned relationship.

The current study builds on the ‘upper-echelons’ theory of Hambrick & Mason’s (1984) ‘upper- echelons’ which states that the organizational outcomes of a firm – strategic choices and performance levels – are partially predicted by managerial background characteristics.

Additionally, it utilizes the stakeholder’s theory to understand the role of a firm’s stakeholders.

In this sense, when discussing stakeholder theory and corporate management, Ramchander et al.

(2012) emphasize the capability that various stakeholders and individuals have to influence a firm’s behaviour and the activities the organization decides to undertake. Prior literature has built on the latter theories to examine multiple relationships.

Studies have observed for instance, the relation between the Top Management Team and firm performance (Nielsen, 2009; Nielsen & Nielsen, 2013). Likewise, literature has studied the effects of demographic characteristics of the firm’s ‘dominant coalition’ and their impact on the overall performance of the company (Zahra & Filatotchev, 2004; Nielsen, 2009, among others).

Furthermore, scholars have examined the prime position of Chief Executive Officers (CEOs) to influence the implementation of CSR practices (Waldman & Siegel, 2008; Cassells & Lewis,

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7 2011). In this line of research, prior literature has established the relation between CEOs personal values and beliefs with the likeliness to have a strong influence on social performance and organizational culture (McGuire et al., 2003; Giberson et al, 2009). Following this approach, the current study focuses on the figure of Chief Executive Officers – CEOs and not the complete TMT of a company (which includes board members) as will be observed.

Regardless the valuable theoretical contributions to management literature, previous research has left the impact of education on organizational outcomes understudied so far. This query is highly relevant because in almost every developed society, education is known to be an important mechanism to enhance social and economic progress. Manner (2010) investigated the correlation between the fields of study of CEOs and the likeliness to pursue CSR practices. However, a literature gap remains in terms of CEOs education levels. This study builds on such gap and conceives educational background through a wider scope, one that observes it as a construct of both education field and education level. When examining the educational background of an individual, not only its important the field of education but also the level of education. This provides information on different subjects and therefore is important not only for management literature but for the academy and education institutions. Universities and high-education institutions can observe in practice and through empirical evidence the impact that years of education (degree levels) might have on the social performance of multinational enterprises.

Prior literature has also been insufficient to explain, through the lens of the ‘upper-echelons’

theory, the influence that CEOs demographic characteristics may have on a firms’ CSP. Bai &

Chang (2015) study the influence that CSR has on firm performance in emerging economies, adding to the literature the mediating role of marketing competence. Moreover, a similar approach was conducted by Ioannou & Serafeim’s (2012) to determine the role of institutions (main effect) on the corporate social performance of a firm. Nevertheless, even though valuable literature has been examined, questions regarding CEOs educational background, its relationship with CSP, and the moderating roles of institutional quality and organizational visibility remains.

Hence, considering the practical and theoretical relevance of the subject, as well as the literature gap to be filled, this study focuses on the following key question: Can the relationship between

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8 the educational background of a CEO and the CSR performance levels of an MNE be moderated by its organizational visibility and the institutional quality of the country where it has its headquarters?

In accordance with the above, by addressing this question, the study will contribute at a theoretical and practical level in the understanding of the relationship between an individual’s demographic characteristic and the social outcome of a company. As it provides empirical evidence that can contribute to the strategic choices that shape the way MNEs approach and undertake CSR matters, through the ‘upper echelons’ theory perspective, this study highlights the unique position that a CEO holds to influence the social performance of the company. Since the education system can be considered a cornerstone for social progress and development (at a general level), the educational background of the chief executive officers of companies who are bigger by revenue than many individual countries, it is a subject worth examining in detail.

Thus, the study suggests that the relationship between the educational background of Chief Executive Officers (CEOs) and organizational outcomes stretches as far as to influence the social performance of firm’s undertaking CSR activities. By filling this literature gap the readers can acknowledge the extent to which education affects the social performance of a company. What is more, evidence is provided regarding the moderating roles of institutional quality and a less examined element in CSR matters which is organizational visibility (Yu et al., 2017). Therefore, in accordance with the suggested conceptual framework (Figure 1), this study develops three individual hypotheses and tests them empirically through a quantitative methodological approach using a global sample size comprised of multinational companies headquartered in over 30 different countries.

II. LITERATURE REVIEW

Bearing in mind the scope of this study, it must be noted that CSR is an attractive subject not only for the impact of business in society, but for the elements behind the corporate decision- making process of engaging in CSR activities and ultimately the influence of those decisions in the firm’s performance.

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9 Considering the increasing amount of research being done regarding CSR activities, it’s imperative to define such concept in order to have a clear theoretical framework. Blowfield &

Frynas (2005) defined CSR as an ‘umbrella term’ for various theories and practices all of which recognize the following: “(a) that companies have a responsibility for their impact on society and the natural environment, sometimes beyond legal compliance and the liability of individuals; (b) that companies have a responsibility for the behaviour of others with whom they do business (e.g. within supply chains); and (c) that business needs to manage its relationship with wider society, whether for reasons of commercial viability or to add value to society" (Lund-Thomsen

& Lindgreen, 2014).

The generality of this definition shows the importance of detailing the conceptual boundaries of CSR if intending to conduct quantitative research. Hence, in accordance with Bai & Chang’s (2015) approach, this study conceives CSR through a stakeholder’s perspective, where CSR is defined as “a firm’s voluntary consideration of stakeholder concerns both within and outside its business operations” (Homburg et al., 2013). The stakeholder theory highlights the importance and capability of stakeholders and individuals to exert influence on corporate activities and whose interests have implications for corporate management (Freeman, 1999; Ramchander et al., 2012).

Stakeholder theory distinguishes between primary (e.g. society, employees, customers) and secondary (e.g. government, NGOs) stakeholders (Freeman, 1984), depending on their direct and frequent participation levels on the firm’s operations. For example, customers and employees are considered to be the most important primary stakeholders because these two groups contribute most to a firm’s performance (Maignan et al., 2005). Thus, CSR defined in this study refers to the voluntary behaviors of a firm to meet stakeholders (e.g. society) concerns beyond purely economic interests (Turker, 2009).

In accordance to Manner (2010), stakeholder theory provides a logical way to examine issues related to corporate social performance – CSP. Prior literature has used this approach to frame issues to investigate and contribute with strategic management literature, particularly when it

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10 comes to CSP (Davis et al., 1997; McWilliams & Siegel, 2001; Waddock & Graves, 1997).

Despite the lack of a shared precise definition in the literature, CSP is generally conceived as a broad construct comprised of stakeholder management and social issues management (Clarkson, 1995; Swanson, 1995).

Nevertheless, even though the literature has not reached a consensus on the definition of CSP, a wide number of scholars (Waddock & Graves, 1997; Hillman & Keim, 2001; Waldman et al., 2006) follow the definition given by Wood (1991). The author defines it as a multidimensional construct which captures “a business organization’s configuration of principles of social responsibility, processes of social responsiveness, and policies, programs, and observable outcomes as they relate to the firm’s social relationships” (Wood, 1991: 693). In other words, CSP constitutes the ‘social performance outcome of a firm’s undertaking of CSR activities’

(Ioannou & Serafeim, 2012).

Overall, a great majority of research on CSR has been oriented to investigate what drives corporations to engage in this type of activities. Prior literature reveals that factors at different levels influence the CSR of a firm. At the firm level, scholars have found evidence that, considering the scale of their business activities, big companies tend to have a higher social and environmental impact (Cowen et al., 1987). Thus, the company’s size plays an important role in the CSR practices of a firm (and therefore subsequently on its CSP) because the larger they are, the more public scrutiny they face from their multiple stakeholders (Udayasankar, 2008). As MNEs tend to be the largest companies, and with relation to the very nature of multinational operations and their dimensions, they conduct business not only in one location but in several ones. Therefore, they are challenged to foster good will among the societies where they operate (Bennet, 2002).

Accordingly, firm size influences the level of financial resources (Brammer & Millington, 2006), therefore it has an influence on the firm’s capability to invest and undertake corporate practices like CSR activities, which will lead to corporate social performance. This relation between CSR activities and the firm’s financial performance has not been left unattended. Scholars like Russo

& Fouts (1997) and Almsafir (2014) established the positive impact of CSR on firm’s

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11 profitability and argued that financial performance is better off when firms are highly rated in their CSR indexes. Additionally, Hillman & Keim (2001) found that when firm’s social engagement is properly presented and fit their stakeholders’ expectations, such action leads to value creation and positive impact on its financial performance (Marwan, 2015); which in turn is related to the financial resources of the company (Brammer & Millington, 2006) and so, to its capability to invest in CSR activities and generate positive CSP.

The notion of investing in CSR activities has led to additional approaches regarding CSP;

distinguishing between engaging in CSR and CSP holds theoretical and practical relevance. The fact of solely carrying out CSR activities lacks a very important element for any firm, namely, how the impact on the company performance, in particular, on its social performance levels can be measured. Determining whether engaging in a particular activity is useful or not will help corporations understand that if not done properly, the benefit that the company could report by engaging in CSR practices disappears; in turn, such situation will quickly become a waste of valuable resources (Bai et al., 2015). Even more, at a practical level, acknowledging the distinction and yet, the high relatability of both concepts, will be helpful for the decision-making process of a company. This considering that an important part of a firm’s lifecycle implies the allocation of resources and subsequently, it’s highly influential in the attainment of significant competitive advantage.

Regarding this matter, existing findings are rather inconclusive or at least debatable (Margolis &

Walsh, 2003). There is a general perception of a positive relationship between CSR and organizational outcomes in developed economies (Waddock & Graves, 1997; Ruf et al., 2001).

However, when analysing a single emerging economy such as China, scholars have found mixed results on the positive/negative relation between CSR and firm performance (Bai & Chang, 2015; Zhou & Huang, 2012). This situation reflects the importance of observing the contextual setting that surrounds the firms’ activities; since the current study collects data from various institutional settings, it is encouraged that future research extends this investigation by focusing on a single context, if possible of a developing country different than China, to learn from the extent of the mentioned relationship.

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12 On the other side, prior literature has also investigated factors that influence CSR activities at a more individual/managerial level. This through the analysis of which elements of the Top Management Team (TMT) of MNEs contribute to the likeliness of engaging and committing to CSR activities. For instance, Zahra & Filatotchev (2004) found that firms with a higher proportion of foreign directors will more likely commit to CSR activities, especially when the directors have a level of international exposure. Likewise, by questioning why TMTs look the way they do, Nielsen (2009) found that demographic characteristics such as educational background, industry experience, international experience and national diversity have a positive effect on how TMTs look and perform. Even though her research did not address CSR matters, it highlighted the impact that individual’s demographic characteristics can have on organizational outcomes.

The latter finds close relation with previous management literature and the importance of the role of top-level executives on the firm’s behaviour. Hambrick and Mason (1984) presented their

‘upper-echelons’ theory recognizing such importance. The authors determined that the upper echelon of a company is the ‘dominant coalition’ at the top of an organization that shapes its fate and is responsible for its future. By following this definition, the dominant coalition could be understood as the TMT of a company, which includes both CEOs and board members (regardless the discussion on formal governance structures). The ‘upper-echelons’ theory states that “organizational outcomes – strategic choices and performance levels – are partially predicted by managerial background characteristics” (Hambrick & Mason, 1984). Subsequently, research on the ‘upper-echelons’ has drawn on a variety of theories and has provided evidence that the demographic characteristics of firms' top executives are indeed related to a range of important organizational outcomes (Bantel & Jackson, 1989; Wiersema & Bantel, 1992).

In accordance with the ‘upper-echelons’ theory and its fundamental premise, this research focuses on the figure of the Chief Executive Officers – CEOs and not the complete TMT of a company. This mainly because of methodological reasons since the proposed approach is based on the feasibility of obtaining relevant information on CEOs. Bearing in mind that board dynamics develop in an environment of power relations (Veltrop et al., 2015), the overall analysis of boards and its members imply a methodological challenge difficult to overcome. This

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13 due to the fact that, if it is not possible to have primary access to the boards of directors of the multiple companies, the information collected could lack thoroughness, relevance and accuracy.

Furthermore, with the theoretical framework provided and prior literature, it is clear that the CEO of a company holds a prime position to influence CSR strategy and its implementation (Waldman & Siegel, 2008; Battisti & Perry, 2011; Cassells & Lewis, 2011).

2.1 Hypothesis Development

Educational background and CSP

Hambrick & Mason (1984) and other scholars (e.g. Carpenter et al., 2004; Hambrick, 2007) call for the use of the ‘upper echelons’ approach to examine other critical areas including CSR (Manner, 2010). Therefore, the hypotheses of how CEO demographic characteristics impact on CSP are based on the ‘upper echelons’ theoretical framework. Particularly, the current study addresses this call directly by examining the relationship between CEO characteristics and CSP, grounded by the belief that CEOs educational background is positively correlated with the firm’s social performance.

In this line of argument, more narrowed research has been conducted to investigate the relation between CEOs demographic characteristics and the engagement in CSR practices. Scholars like McGuire et al. (2003) and Giberson et al. (2009) found a direct relation between the CEOs personal values and beliefs with the likeliness to have a strong social performance and influence the organizational culture of a firm. Moreover, with regards to education itself, authors agreed upon the finding that top managers who have a degree in social sciences and/or humanities are more likely to pursue CSR practices (Boone et al., 1999; Frank & Schlutz, 2000; Manner, 2010);

similarly, Rivera & de Leon (2005) determined that CEOs with bachelors’ in human/social sciences are more likely to take positive initiatives with social impact as well as to comply with environmental standards. Observing different fields of study, Davis et al. (1997) found that sociology and psychology are fields of study which lead managers to consider a more cooperative decision-making process that consider the interests of a wide variety of stakeholders, thus, influencing their CSR commitment.

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14 Even though prior literature has studied the relation between education and CSR activities, the literature regarding CEOs educational background and its relationship with the firm’s social performance – CSP is low and presents clear limitations. Romain (2014) investigated the relation between exclusive CEO characteristics and the company’s likeliness to engage in CSR practices.

His findings show that, regarding education, CEOs that have an elite education are less likely to engage in social and environmental CSR practices; his hypothesis and subsequent results regarding CEOs educational background refer to ‘elite education’, having as a benchmark the French Grande Ecole’. However, Romain (2014) (as Saidu, 2019) lacked thoroughness in defining key concepts such as CSR practices, CSP and the educational background construct, as well as their relatability. For instance, Romain (2014) argues for the engagement in CSR practices but collects data through ASSET4, which is a database mainly used to establish firm’s CSP (Ioannou & Serafeim, 2012).

Moreover, Huang (2013) argued that, amongst other variables, a firm’s CSP is associated with the educational specialization of its CEO. Nonetheless, Huang’s (2013) attempt has limitations that cannot be disregarded. The CSP construct though interesting, lacks thoroughness not only in scope and definition but in the sources selected. While Huang (2013) approaches CSP through accounting and market performance (McWilliams & Siegel, 2001; Margolis & Walsh, 2003), the current study follows Ioannou & Serafeim’s (2012) approach, and examines CSP through a construct comprised by environmental, social and governance scores. The latter with relation to the social and environmental scope of this study and its theoretical framework, rather than through a financial and market approach. Additionally, Huang’s (2013) sample focused mainly in American and European firms, leaving aside other highly relevant parts of the world, therefore a gap regarding the extent of the generalizability of the results; Asian and Latin American corporations are now key players in the business environment worldwide (OECD, 2019).

Besides, Huang (2013) leaves unnoticed the potential moderating variables that could have an impact in the relationship between CEOs demographic characteristics and CSP, which this study addresses further on.

The mentioned above highlights not only the relevance of the relationship between CEOs education and CSP, but also the fact that more theoretical development is required in order to

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15 fully understand the extent of such relationship. Additionally, as previous literature illustrates, research has somewhat arbitrarily separated field of education and level of education but has not undertaken the task to conceive educational background as a construct that comprises both elements. This means to examine the educational background through a wider lens, this is, observing the highest education degree and field of study together. The latter in order to present a broader yet detailed approach and definition of educational background, as well as to examine whether both elements have the same impact on CSP or if they influence the firm’s social performance differently.

Therefore, bearing in mind the existing literature as well as the remaining gaps and queries, the following hypotheses are expected:

H1a: A firm’s level of CSP will be positively associated with the CEOs level of education.

H1b: CEOs with an educational background in science and social sciences/humanities are more likely to have a positive effect on a firm’s CSP levels, than those with business as their field of education.

2.1.a Moderators

According to Allen (2017), a moderating variable refers to a variable that can strengthen, diminish, negate or otherwise alter the association between independent and dependent variables.

Such variable is useful to explain and understand the relationship between the independent and dependent variables.

In accordance to similar efforts done in prior literature (Carpenter & Fredrickson, 2001), this study will build upon potential moderators which are expected to moderate the relationship between the CEOs educational background and the firm’s performance, particularly its CSP levels. Hence, the mentioned moderators will be the institutional quality of the country where the firm’s headquarters are based, and the firm’s organizational visibility.

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16 The moderating effect of Institutional Quality

CSR activities are framed within social contexts and are thus influenced by the prevailing institutions in such contexts (Jackson & Apostolakou, 2010). Aguilera et al. (2007) argued that since companies are embedded in different national systems, they are likely to experience divergent degrees of internal and external pressures to engage in socially responsible initiatives. Therefore, in line of this arguments, since the sample corresponds to the CEOs of the 500 largest companies worldwide (by revenue), the study collects information from several locations and thus, various institutional settings.

Prior literature has focused on the main effect that institutions have on the engagement and commitment to CSR activities. Nonetheless, little or no research has been conducted regarding the moderating effect of institutions on the relationship between CSP and managerial demographic characteristics. For instance, building on institutional theory, Venkatraman &

Prescott (1990) suggested that organizations make strategic decisions that match the external environment, and that the effectiveness of CSR toward different stakeholders is relatable to the institutional context.

Davis & North (1971) established that a firm’s institutional environment encompasses the fundamental political, social and legal ground rules that establish the basis for production, exchange and distribution. Additionally, Martinez & Allard (2009) argued that institutions are the sum of both formal and informal norms that set the rules of the game, with the formal being the rules and regulations governing a particular society, while the informal refers to people’s values and beliefs (Nyuur et al., 2016). This study will focus on the ‘formal’ scope of institutions considering the feasibility of obtaining relevant data; values and beliefs are a subjective measurement.

Notwithstanding, this research goes beyond the well-established main effect of institutional context on the adoption of CSR practices and dives into the importance of institutional quality not as a main effect but as a moderating variable for other relations. As the ‘rules of the game’

(Martinez & Allard, 2009), institutional settings are perpendicular to all relations concerning

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17 firm’s behaviour and its’ organizational outcomes. Corporations are bounded to act in agreement with the ‘rules’ of the location(s) where they conduct their business(es) (Surroca et al., 2013).

Thus, considering its perpendicular nature, a country’s institutional context may not only be capable of explaining the relationship between a firm’s actions and its organizational outcomes, but also to impact and influence other types of relations that develop within the frame of those

‘rules of the game’. Hence, when considering with thorough detail the indirect impact and potential externalities that institutional settings have and create from country-to-country, the question of the extent of its impact and therefore, of its moderating role, arises by itself.

The usefulness of institutional quality to explain and potentially understand the relationship between independent and dependent variables (Allen, 2017), which in this case are CEOs demographic characteristics (educational background) and organizational outcomes (CSP), gives light of its moderating effect. In accordance with Pfeffer & Salanick (1978), the strength and direction of the relationship between upper-echelons’ characteristics and social performance may be contingent upon the institutional quality of the country where it operates since the institutional environment is correlated with significant pressure from institutional, and other, stakeholders (Scott, 1987, 1995).

In this line of argument and in agreement with the stakeholder theory, stakeholders of various kinds (i.e. institutions, individuals) are capable of influencing corporate behaviour and so, the strategic choices a firm takes to carry out its business (Freeman, 1999; Ramchander et al., 2012). Through the lens of the ‘upper-echelons’ theory, these pressures have a toll on the way CEOs interpret and react towards them and come up with tangible solutions. Such solutions therefore reflect on the corporate strategy, which can be partially predicted by managerial background characteristics (Hambrick &

Mason, 1984), and whose purpose should aim to meet its stakeholders demands (Clarkson, 1995).

In this regard, scholars have argued that the effectiveness of any strategic orientation depends on market dynamics (Jaworski & Kohli, 1993; Zhou & Li, 2010; Bai & Chang, 2015). Mattson (2003) noted that market dynamics occur within the frame of institutional settings of a country or group of countries, thus, the ‘rules of the game’. Therefore, the latter suggests that the institutional context, which serves as

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18 the formal framework where market dynamics take place, will contribute to the understanding and to the strengthening or weakening of the relationship between the ‘upper-echelons’ characteristics and organizational outcomes.

This grounded in the belief that the stronger the institutional setting, the better the institutional quality;

contrasting with the opposite approach which could be understood as a context with ‘institutional voids’ (Nyuur et al., 2016) – ‘institutional settings where regulatory systems or contract- enforcing mechanisms are weak or absent’ (Amankwah-Amoah, 2014; Chakrabarty & Bass, 2013). Hence, building on the theoretical framework and aiming to fill the literary gap, this study expects that when the institutional quality of a country is weak, the more important it is the educational background of the CEOs in the achievement of positive CSP; accordingly, if the institutional quality is strong, the less important it is CEOs education on the firm CSP.

Consequently, since the ‘upper-echelon’ of a company shapes and sets the strategic path of an organization, the quality of the institutions of the country where the firm is headquartered is expected to have a moderating effect on the relationship between such dominant coalition and the company’s corporate social performance. Therefore, have the capability of moderating the relationship between the CEOs educational background and the firm’s CSP.

In that order, the following hypothesis is expected:

H2: Institutional quality negatively moderates the relationship between CEOs educational background and firm’s CSP.

The moderating effect of Organizational Visibility

The nature of conducting business implies the choice of either opting for a business-to-business (B2B) model, or for a business-to-consumer (B2C) one. This distinction, amongst other elements, highlights the exposure or ‘visibility’ that a firm has regarding its’ core business towards its’ main stakeholders. For example, the ‘visibility’ of the operations of ZARA are widely different than those of one of its numerous small suppliers; recognizing that ZARAs business model is a B2C and that models of individual suppliers are mainly B2B, the exposure levels of its [ZARA]

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19 operations towards its consumers is more direct and substantially higher than those of its individual suppliers’ due to the position of their [individual suppliers] position in ZARA’s global value chain.

Following this idea, focusing on supply chain and ‘green management’ (environmental awareness), Hoejmose et a. (2012) examined the variation of the nature of supply chain relationships across these two business models. By doing so, they brought to light a series of queries regarding the way each business model impact differently on a firm’s likeliness to engage in CSR practices.

As the nature of B2B and B2C models suggest, the first one reflects the relation between two businesses where both parties are the main stakeholders themselves. On the other side, B2C presents a relation where one of the main stakeholders of the firm are its customers, which as research suggests, have various expectations of the firm’s behaviour (Campbell et al., 2012).

However, as it will be seen further on, in terms of data collection, the obtention of valid and reliable measures regarding the firm’s business models at a global scale poses great methodological difficulties.

Scholars have established that an organization’s ability to effectively engage in CSR activities is deemed strategic as it enables the firm to gain legitimacy, build corporate image, adapt to opportunities, and maximize other benefits such as profits (Du et al., 2010; Goyal, 2006;

Kunetsov et al., 2009). Through the lens of legitimacy theory, prior literature has argued that firms voluntarily engage in sustainability initiatives in order to prevent reputational risks and to react to key stakeholders demands coming for instance from NGOs, customer pressure groups and overall media (Bansal & Clelland, 2004).

The engagement in such activities can therefore be partially motivated by the exposure of the firm’s business towards its stakeholders. Such exposure can be understood as the firms’

visibility. In general terms, visibility can be defined as ‘the extent to which phenomena can be seen or noticed’ (Bowen, 2000). Furthermore, organizational visibility is conceived as an organization’s characteristic (Neustadl, 1990) and prior literature has classified it into two groups, generic visibility and domain specific visibility (Marquis & Toffel, 2012). In terms of domain specific visibility, it relates to particular domains of the firm, say for instance labour relations or workforce security. Nonetheless, this study follows Yu et al. (2017) approach to the

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20 subject and focuses on the generic visibility, understanding it as an organizational characteristic that indicates elements such as reputation, status and prominence, which makes the firm more or less known in the whole society.

Campbell (2007) suggests that the more visible a company is, the more it is exposed to public scrutiny, which in turn reflects the amount of public attention that the firm receives from external stakeholders; bearing in mind that without the stakeholders participation, a firm cannot survive (Clarkson, 1995). In line of this argument, following the premise of the stakeholder’s theory, stakeholders’ pressures and expectations can influence and help shape a firm’s business structure and its behaviour (Freeman, 1999; Ramchander et al., 2012). Thus, through this theoretical lens, the business model of a company and particularly, its organizational visibility may have an impact on the way it behaves due to its exposure level to various stakeholders and types of pressures.

Building on Brammer & Pavelin’s (2006) approach, the moderating effect of organizational visibility could therefore be related to the presence of specific stakeholder pressures, in terms of social responsiveness. Thus, As the organizational visibility of an MNE gives way to different types of pressures in relation with its business activities, it is expected to have an influence not only on its behaviour but on its organizational outcomes as well. Moreover, given that a firms’ overall performance (including CSP), survival and success is mainly dependent on the satisfaction of its key stakeholders demands (Mitchell et al., 1997; Hillman & Keim, 2001), the visibility of the firm’s business is expected to serve as a moderating variable.

Notwithstanding prior literature on organizational visibility and CSR activities, the existing literature lacks development on the subject concerning organizational visibility and how it may interact with the firms CSP. Prior literature has understood CSP as a construct comprised by the management of stakeholders and social issues (Wood, 1991; Clarkson, 1995; Swanson, 1995), and highlighted the relations with such conceptual frameworks. Now, the current study addresses the remaining theoretical gap regarding the role of organizational visibility in the relationship between the CSP as a construct and the managerial decision-process to sort out the mentioned issues. This allows the current study to build upon the ‘upper-echelons’ theory and expect that

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21 (+)

(-)

the strength and direction of the relationship between CEOs demographic characteristics and the firm’s social performance may be moderated by the company’s organizational visibility. This considering that since the dominant coalition of a company determines the strategic course of an organization (Hambrick & Mason, 1984), firm performance is expected to be a result of the success or failure of said strategic choices moderated by the business visibility.

Hence, in agreement with the proposed theoretical framework, the moderating effect of organizational visibility is expected when observed through its capability to strengthen or weaken the relationship between the dominant coalition’s demographic characteristics and particular organizational outcomes. Especially, it is expected that when firm’s organizational visibility is high, the less important it is the educational background of the CEOs for the CSP.

Accordingly, if the organizational visibility of the firm is low, the more relevant it becomes the educational background of CEOs for the CSP of the company.

Therefore, the following hypothesis is expected:

H3: Organizational visibility negatively moderates the relationship between CEOs educational background and firm’s CSP.

2.2 Conceptual Model – Figure 1.

Educational background of CEOs (H1) - Education Level (H1a)

- Education Field (H1b)

Moderators:

‐ Institutional Quality (H2)

‐ Organizational Visibility (H3)

CSR performance levels (CSP) of an MNE

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22 III. DATA & METHODOLOGY

The current study will follow a positivist approach bearing in mind its focus on raw data collection and its objective interpretation. As Crowther & Lancaster (2008) argued, a positivist philosophy adopts a deductive approach, therefore its only natural that the current research follows such philosophy as it utilizes relevant prior literature to theorize and construct novel hypotheses. The latter with the objective to contribute at a theoretical and practical level to management literature through the objective interpretation of the findings. Hence, as it will be observed, the study will use a quantitative methodological approach as it is the most appropriate mechanism to address the study’s research question with the least impact of potential bias from the researcher.

3.1 Sample and Data Collection

Data collection for this study involves 4 main sources. Initially, considering that the research has an international scope, the sample size focuses on the CEOs of the companies listed in the Fortune Global 500. The Fortune Global 500 is the annual ranking of the largest 500 corporations worldwide, measured by total revenue; companies are ranked by total revenues for their respective fiscal years (Fortune Media, 2019). In particular, the study collects information on the 500 worldwide corporations as of 2016 (hereinafter “Global 500”); such timeframe corresponds to the fact that, as will be observed, the dependent variable is from the calendar year 2017, thus, in order to assess the impact of the ‘upper-echelons’ demographic characteristics on the firm’s social performance, it was imperative to collect data regarding the companies and their dominant coalition of the year previous to the CSP measure, hence 2016.

Once established the sample comprised by the 500 firms, the headquarter countries of each of them were defined and further on, they were grouped by regions (Europe, North America, United Kingdom and Rest of the World). Per country, the study collected data from the Worldwide Governance Indicators (WGI) project (Kaufmann, 2018) which reports aggregate and individual governance indicators for over 200 countries since 1996 (World Bank, 2019); this in order to determine the institutional quality of each of the countries where the Global 500 are headquartered.

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23 By following the successful methodology of previous research done by Ioannou & Serafeim (2012) and using the International Securities Identification Number (ISIN) of each company, the study collected information on CSR performance from Thomson Reuters ASSET4. This database provides ‘objective, relevant and systematic environmental, social and governance (ESG) information based on 250+ key performance indicators (KPIs) and 750+ individual data points along with their original data sources’ (Thomson Reuters, 2018).

Additionally, the collection of relevant information (e.g. education, age and gender) regarding the Chief Executive Officers of each firm was collected mainly by using BoardEx. This bearing in mind that BoardEx is a business leadership database which covers more than 1.8 million public, private and non-profit global organizations and the individuals that lead them (BoardEx, 2019). Furthermore, when information was non-existent or unavailable in such database, different databases like EIKON and ORBIS were used to gather information, as well as company annual reports and/or official company websites (Gottesman & Morey, 2010).

3.2 Measurements

Bearing in mind the study’s research question, the established variables will be measured in the following way, to further be analysed using the Software for Statistics and Data Science – STATA for its relevance in data management and statistical analysis.

Dependent Variable

The dependent variable is Corporate Social Performance. Firstly, acknowledging the difficulty to find uniformity in a truly representative measure of CSP and the wide variety of measures used by researchers (e.g. the Fortune reputational and social responsibility index, or Moskowitz’

reputational scales (Bowman & Haire, 1975; Preston & O’Bannon, 1997)), this study follows the tested methodology used by Ioannou & Serafeim (2012), to measure firm’s CSR performance.

Thus, the dependent variable is measured using the Thomson Reuters ASSET4 database, particularly focusing on the time frame corresponding to the calendar year of 2017, bearing in mind the available information. Through the use of the EIKON platform, this study has collected the combined score of environmental, social and governance – ESG – metrics from Thomson

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24 Reuters ASSET4 database. The ‘environmental score’ measures a company’s impact on both living and non-living natural systems, including air, land, water and complete ecosystems. This indicator illustrates how does a firm uses management practices to avoid environmental risks and capitalize on environmental opportunities in order to generate long term shareholder value (Ioannou & Serafeim, 2012).

The ‘social score’ measures the firm’s ability to generate trust and loyalty with its stakeholders (workforce, customers, society); for instance, employee turnover, accidents, training hours, women employees, and health and safety controversies (Ioannou & Serafeim, 2012); it relates to the company’s social license to operate (Vanclay et al., 2014 & 2017). Finally, the ‘governance score’ measures a company’s systems and processes which ensure that the top management team and executives act according the firm’s interests and its shareholders; it reflects the capacity to

‘direct and control the rights and responsibilities of a company through the use of best management practices’ (Thomson Reuters, 2018).

Furthermore, this study focuses on the ESG Combined Score (ESGC) which overlays the ESG score with ESG controversies in order to provide a more comprehensive evaluation on the company’s sustainability impact and conduct (Thomson Reuters, 2018). The study utilizes such measurement considering that this composite construct provides a rounded scoring of a company’s CSP based on the reported information regarding the three ESG pillars with the additional observance of ESG controversies (Appendix 1). Hence, the objective of this score is to

“discount the ESG performance score based on negative media stories by incorporating the impact of significant, material ESG controversies in the overall ESG Combined Score”

(Thomson Reuters; 2018); it’s important to notice that when companies are not involved in ESG controversies, the ESGC is equal to the ESG score.

Independent Variable

My independent variable is CEOs educational background which is associated with CEOs demographic characteristics. In accordance with what was established previously in the literature review, this variable will be measured as a construct of two elements: education level and field

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25 of study. In line of this argument, the data collection focuses on the time frame corresponding to the calendar year 2016.

As the performance levels of a company are the result of previous work and strategical decision- making processes looking towards the future, for this study, the CEOs educational backgrounds that matters is that corresponding to the previous year to the selected social performance timeframe. Therefore, as the selected timeframe for the dependent variable (CSP) is the calendar year 2017, the selected timeframe for the independent variable (CEOs educational background) is the calendar year 2016.

Thus, the information gathered regarding the CEOs educational background refer to the (i) highest education level and (ii) field of study as of the calendar year 2016. Regarding the education level, the study followed the basic structure of higher education where bachelor’s degree is the minimum degree and a PhD is the maximum degree level. Therefore, in accordance with and building upon Huang’s (2013:238) classification of education, this study examines the educational background as a variable which includes the following categories; each represented by an independent value:

1 – No Degree

2 – Bachelor’s Degree 3 – Master’s Degree 4 – PhD

Moreover, in terms of the field of education, considering the feasibility and suitability for the statistical modeling, the study focuses on the (i) Sciences (economics, accountability, finance) and social sciences/humanities, and (ii) Business. Therefore, in accordance with the above, an independent value was given to each: 0 – Sciences and Social Sciences, 1 – Business.

The study follows this approach considering the feasibility of colleting relevant data and prior literature review on related matters (Manner, 2010; Hoejmose et al., 2012).

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26 Moderating Variables

In accordance with the sample and data collection, institutional quality will be measured by a mean score of the Worldwide Governance Indicators – WGI for each of the countries that comprise the sample of the Global Fortune 500. Bearing in mind that the WGI project (Kaufmann, 2018) reports aggregate and individual governance indicators for over 200 countries (World Bank, 2019), this was the most reliable and adequate measure to use as a proxy for institutional quality. Thus, in order to obtain the overall WGI score for each country, the study took the estimate of governance (ranges from approximately -2.5 (weak) to 2.5 (strong)) for the year 2016 of each one of the indicators (Appendix 2) and calculated the mean score; the countries that were examined and from which the mean score was calculated were those where the firms of the Global Fortune 500 have its headquarters.

Regarding organizational visibility, to fully grasp and capture the concept of organizational visibility has proven not to be an easy task considering that the functional implications of visibility vary with the context (Yu et al., 2017). Scholars have used measurements like consumer name recognition, media exposure, advertising expenditure and number of customers (Bowen, 2000) but the main consensus among prior literature is focused on firm size and media exposure (Brammer & Millington, 2006; Reid & Toffel, 2009). Nonetheless, the approach of using both proxies at the same time has both positive and negative aspects if we consider the feasibility to collect data.

Theoretically, both measurements could be used to determine organizational ‘visibility’ but in practice, media exposure may not always be applicable (Yu et al., 2017). The latter due to the fact that media exposure is not always a necessary property of all firms (for instance, due to its business model), therefore the difficulty to distinguish one company from another by their media exposure. Moreover, the business media platforms and exposure channels may vary from country-to-country, regions and even continents, signifying a great challenge to assess data through uniform, reliable and valid measurements; for example, the media exposure of state- owned companies in China is in occasions non-existent, contrasting to the situation of western firms who have shared ownership with the state.

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27 Furthermore, Brammer & Millington (2006) argued that firm size may influence the level of financial resources (which includes profits – profitability) and it has been used as a proxy for firm visibility in previous research (Bowen, 2002; Yu et al., 2017). Therefore, in line of these arguments and considering that firm’s size will be a generic controlling variable, this study will build on the practical approach provided by Yu et al. (2017) and use firm’s profitability as a proxy to measure its’ organizational visibility. Bearing in mind that profitability is indeed a property that every firm has, assessing this through already known and established measurements like the annual turnover, makes a more adequate proxy to measure organizational visibility.

The latter highlighting the fact that profitable companies are more likely to be noticeable due to the scale of their activities, which reflects its impact on the community and the environment (Cowen et al., 1987; Udayasankar, 2008; Lo et al., 2009). Thus, the annual turnover of the companies that comprise the sample of this study will be obtained from the ORBIS database. This database provides data on firms’ financial and productive activities collected from balance sheets and related income statements, as well as relevant information on firm’s domestic and international ownership structure for over 300 million companies across the world (Bureau van Dijk, 2019). Likewise, for those firms with no reported information to such particular database, the data was collected through a thorough review of the firm’s 2016 annual public reports.

Controlling Variables

Following previous research, this study recognizes controlling variables at CEO, firm and industry level. Regarding the firm level, the size of a company is expected to be a controlling variable as it is the ‘usual suspect’ when it comes to controlling variables in social performance related matters (Margolis & Walsh, 2001; Graves & Waddock, 1994; Lopez et al., 2007;

Simerly, 2003; Stanwick & Stanwick 1998; Ullmann 1985; Waddock and Graves 1997). When compared in size, companies that are under ‘public scrutiny’ in terms of CSR matters are likely to be larger in size and have a higher social and environmental impact, considering the scale of their business activities (Cowen et al., 1987; Udayasankar, 2008).

Scholars have used different approaches to measure firm size. Hoejmose et al. (2012) controls for firm size by taking the number of employees, while Boulouta (2013) controlled firm size by

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28 measuring the firm’s total assets. Henceforth, by following these already tested approaches, this study utilizes the firm’s size as a controlling variable measured through the observation of the company’s total amount of employees in 2016, as well as the total reported assets of the same year.

Likewise, in accordance with previous literature (Ioannou & Serafeim, 2012), this study controls for industry effects through the collection of data regarding each firm’s industry sector. This considering the relevance of industry on firm performance (Mauri & Michaels, 1998; Hawawini et al., 2003) and the objective of reducing potential biases on the results. Industry sectors are highly relevant since some industries are more heavily regulated than others (e.g. mining and pharmaceuticals). Therefore, the study uses the ORBIS database to determine the individual industry sector of each of the companies’ that comprise the sample. Furthermore, it utilizes the Software for Statistics and Data Science – STATA to categorize them (28 industry sectors were categorized overall) and include them into the model as a dummy control variable.

On the other side, when observing the CEO level, previous research has highlighted the relevance of controlling for age and gender. Forte (2004) argued that older individuals exhibit higher moral reasoning. Meanwhile, Klineberg et al. (1998) found that increased concern for CSR issues its associated with younger individuals. As observed, even though the subject presents mixed findings, the relevance of using age as a control variable remains. This given that age can influence the likeliness of CEOs to engage in CSR activities and consequently on the social performance as a result of such practices.

Additionally, gender has been studied to such extent that there are clear arguments to determine that firms with a higher level of female board members have a higher level of charitable behaviour (Wang & Coffey, 1992; Williams, 2003). Likewise, scholars found that an increase in gender diversity helps the decision-making process within a firm (Daily & Dalton, 2003), and that a higher number of female directors has a positive impact on the firms environmental CSR commitment (Post et al., 2011). Even though prior literature has focused on the board of directors and not exclusively on CEOs, this position can be found within the broader concept of

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29 board of directors, therefore maintaining and even highlighting the importance of controlling for such element.

Thus, this study utilizes age and gender as controlling variables at CEO level. For using age as a controlling variable, the study utilizes the data collected in terms of the years of age of each CEO as of 2016. Additionally, to control for gender as a binary variable in the regression model, the study provided an independent value for each gender: 0 – male, 1 – female.

IV. RESULTS

Following previous literature on similar research, the study uses regression analyses to examine and interpret the data collected. Multiple linear regressions are carried out bearing in mind that the dependent variable (CSP) of this study is a continuous one, and that the independent variable is measured through two proxies (Chatterjee & Simonoff, 2012). Moreover, Hoejmose et al.

(2012) and Bai & Chang (2015) highlighted the relevance of using this type of analysis when the conceptual model includes more than one independent variable. In particular, Bai & Chang (2015) used this approach for their independent variable, which was Corporate Social Responsibility, but examined it through three different measures (CSR towards society, employees and customers). Thus, in line with previous literature and considering that this study presents an independent variable (educational background) measured through two elements: (i) education level and (ii) education field, the prior approach fits adequately to examine the cross- sectional data collected in this study and analyze the established hypotheses.

In the first place, Table 1 reports summary descriptive statistics for the variables used in the empirical analysis. It highlights both the mean and standard deviation of each of the variables this study utilizes; both dependent and independent variables are included, as well as the moderating and controlling variables. Additionally, Table 1 reports the correlations between the selected variables, indicating that there is no evidence to support for multicollinearity among them since the values are well below the suggested threshold that would indicate multicollinearity > 0.7 (Booth et al., 1994; Dormann et al., 2012).

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30 As it can be observed, Table 1 initially reflects the number of observations taken into account for the regression analyses. With N=312, it must be noted that when compared to the total sample size of Global Fortune 500, there is missing data. This situation can be attributable to the impossibility of collecting relevant information for each and all of the selected variables, as it will be explained in the limitations. Nonetheless, the number of observations remains significant to address the subject this study examines.

Furthermore, the measurements previously established for the variables to conduct the empirical review can be observed in Table 1. For instance, regarding the CEOs gender, Table 1 illustrates the measuring mechanism in practice, ranging from 0 to 1. As 0 refers to male and 1 to females, Table 1 indicates the mean for gender as 0.0288, showing that the sample is highly comprised by male CEOs; the latter supported by a standard deviation of .1676, which implies a rather small spread in the data regarding such variable. In this line of argument, Table 1 reflects that the data collected for CEOs education level, is comprised on a big portion by bachelor’s and master’s degrees, as the mean value is equal to 2.9775. Likewise, from the data collected from the overall sample regarding CEOs field of education, Table 1 shows a mean score of .24, which indicates that the observations had more data for the fields of science and social sciences, than regarding business as the field of education.

The study utilizes the mentioned regression analyses to find the relation between variables and the effects that exist amongst them. Hence, after conducting the regression analyses to test the

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31 hypotheses of the study regarding the relationship between CEOs educational background, firm’s corporate social performance – CSP and the proposed moderating variables, the results are presented in Table 2.

Table 2 presents the results of the regression analyses with four models. Firstly, the regression was carried out with the control variables in order to add them to the model and reduce the probability of obtaining biased results – Model 1. Furthermore, Model 2 adds the main effects to the model as well as the moderators. It includes the independent variable of educational background measured through CEOs (i) education level and (ii) field of education. Likewise, as stated, it includes the moderating variables which correspond to institutional quality, measured through the Worldwide Governance Indicators, and organizational visibility, measured through profitability, hence the firm’s turnover. Model 3 adds the interaction terms between the CEOs education level and both moderating variables. Additionally, Model 4 includes the regression of the interaction terms between CEOs field of education and both moderating variables.

In the first place, to present the regression results found in Table 2, its important to begin recalling what Naghshpour (2016) stated about the ‘R-squared’ value when conducting regression analyses. The author argues that the R-squared value indicate the percentage of the variance in the dependent variable that the independent variables explain collectively (Naghshpour, 2016). Thus, bearing this in mind, Model 1, Table 2 shows that the controlling variables account for 4.2% of the variance in corporate social performance. Moreover, the addition of independent variables plus the moderators in Model 2 variates the R-square by .01, reflecting an explanatory 5.2% of the variance in the CSP.

The addition of the interaction terms between CEOs education level and both institutional quality and organizational visibility in Model 3, increases the R-squared by .015 (R2 = 0.067).

Ultimately, the addition of interaction terms between CEOs education field and both moderating variables in Model 4 shows a decrease in the R-squared value (R2 = 0.057). This shows a reduction of .01, indicating that the variables included in Model 4 account for 5.7% of the variance of CSP; contrasting the 6.7% of Model 3. Illustrating that in general, the models do not

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