Corporate social (ir)responsibility

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Corporate social (ir)responsibility

The influence of national-level institutions, industry differences and firm

characteristics, explaining the variance in CSR and CSI among firms.

Jasper Westerveld

S2573342

MASTER THESIS

MSc Business Administration

Strategic Innovation Management

Supervisor: prof. dr. J. Surroca Co-assessor: P.J. Steinberg

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Abstract

Corporate social responsibility and irresponsibility have become an important topic in the re-search literature in the last decade. The main question that remains hard to answer is ‘what influences a firm to engage in corporate socially responsible (or irresponsible) behavior?’. De-spite the interest in this topic, it is still unclear what the answer to this question is. Especially the research in which multiple levels are introduced into the analyses remains scarce. Utilizing a longitudinal study, which is composed of 6000 firms in 151 industries in 51 countries, this study will examine the relative importance in the variance of CSR and CSI among firms. Using a variance decomposition method, it is indeed confirmed that each level in this study (firm-, industry-, and country-level) have a substantive effect on the variance in CSR and CSI among firms. Furthermore, this study also shows the magnitude of the effect that can be attributed to each factor. Not only is this analysis done for the aggregated scores of CSR and CSI but also for the separate pillars environment, social, and corporate governance as well. This is the first study using these levels, analyzing both CSR and CSI at the same time for the aggregated scores as well as the individual pillars. By employing this study, we are able to add to emerging liter-ature by showing the impact of each level on CSR and CSI and to what extend this effect differs comparing the overall score with the separate pillars.

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1. Introduction

The idea of businesses having more responsibilities than only making profit for shareholders goes back a long time. Only in the last decades, the interest in the phenomenon of corporate social responsibility (CSR) has become one of the most important topics for academics and practitioners (Carrol & Shabana, 2010). Even though CSR is a topic that is well researched in the past, this is less the case for the opposing practices Corporate Social Irresponsibility (CSI). Strike, Gao and Bansal (2006) defined CSI as “[…] the set of corporate actions that negatively

affects an identifiable social stakeholder's legitimate claims (in the long run)”. Additional to

this, Armstrong (1977) also added that CSI practices could be the case if “a vast majority of

unbiased observers would agree that this was so”. Examples of CSI practices are manifold, for

example testing cosmetics on animals, dumping toxic waste or exploiting the local population. This overemphasis on CSR compared to CSI stems from the fact that the current discussion in the literature is mainly focusing on the topic of ‘doing good’ and pays less attention to ‘avoiding bad’ or ‘doing bad’ (Campbell, 2007; Lange & Washburn, 2012). However, according to Lange and Washburn (2012) “perceptions of social irresponsibility are likely to generate stronger

observer reactions and ultimately loom much larger for the firm than perceptions of social responsibility”. Meaning that the impact of CSI on a firm is of greater importance on the value

of the firm than CSR (Doh, Howton, Howton, & Siegel, 2010; Muller & Kräussl, 2011). This is something this study is trying to fix by better aligning the two concepts.

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harmful activities could be seen as a viable social responsible option (Rexler, 2010). From a different perspective this same option could be seen as irresponsible, because if Shell would leave the company could get replaced with another company with even worse CSI practices.

However, studies up till this point were not able to explain the social performance heterogeneity across firm. Therefore, many scholars have called for a more comprehensive study that will explain this variation across firms (Campbell, 2007; Maignan & Ralston, 2002; Margolis & Walsh, 2003). This study will try to answer this call by examining whether and to what extent both nation-level institutions and the differences among industries (combined with the characteristics of the individual firms) influences both the CSR and CSI of the firms. This paper addresses the question: “To what extend does the explanatory power of national-, industry- and firm-level factors differ across the different pillars of CSR and CSI?” Consequently, this study will contribute to the knowledge available on this topic in several ways. First, it will give a better insight into the relative importance of firm- industry- and country level factors in the way they explain the variance in their CSR and CSI performance. Furthermore, this study will also take more in-depth look into the different areas of both CSR and CSI to get a better understanding of the different concepts and being able to explain the underlying differences. To the best of our knowledge, no other study has used these three levels to study both CSR and CSI at the same time. Also being able to look at the separate pillars instead of only the aggregated variable is a new contribution to this field of research.

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of industry characteristics, national institutions and at the same time controlling for company-level characteristics.

The other contribution mentioned above is that in most previous studies about CSR or CSI these variables were mostly used as an aggregate variable. By doing this, it becomes even less clear how the different levels are effecting the different areas of CSR. For example, social and environmental performance are different from each other conceptually and therefore likely driven by different institutions (Fransen, 2013). Hartmann and Uhlenbruck (2015) state that the various dimensions are different in nature, so this means for managers and policymakers that these dimensions have to be approached in different ways to be governed in an effective way. To get a better understanding of the concept of CSR, this study will analyze both CSR and CSI among the different dimension, being ‘environment’, ‘corporate governance’ and ‘social’ score. These scores are taken from the Asset4 database and will be compared to the aggregated scores to identify the differences between them?

The reason this multilevel approach is chosen, is because the differences in CSR and CSI among firms can be explained both by firm-specific factors as well as by external institutional factors (Arminen & Puurmalainan, 2018). Companies that are active in the same regulatory and business environment can end up having very different CSR. This can even differ within the same industry because of differences in a firms resources, visibility, objectives or motivation (Brammer & Millington, 2008; Chiu & Sharfman, 2011; Fellnhofer, 2017). Therefore, it is important to not only look at this topic from one dimension but also take into account the effect the different actors have on a firm’s CSR and CSI in a combined situation.

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CSI and CSR in industry effect, firm-level effect, CEO-level effect and temporal effect. Our paper is introducing the national level in the measurement. Additionally we are also deconstructing the measures of both CSI and CSR to get a better understanding of those variables. Therefore, this paper is filling the gap in previous literature in creating a better understanding of both CSR and CSI and their individual pillars (environmental, social and corporate governance). While at the same time introducing new levels that have not been used for this purpose in previous research as far as we know.

The variance decomposition methodology used in this study is used to analyze how much of the variability in the dependent variable (CSI, CSR and both their pillars) can be attributed to the independent variables is this analyses (national-level effects, industry effects and firm specific effects) (Cohen, Cohen, West, & Aiken, 2003). By using this method, this study evaluates to what extend the observed variance in the levels of CSR and CSI is explained by company- industry- and firm level characteristics.

The next chapter will first outline previous literature that is important to get a better understanding of this topic. Moreover, this chapter is also used to develop the hypotheses that are used in the rest of this study. Thereafter the next chapter explains the method and data used for the analyses. Following this, the description of the results is shown. In the final chapter, these results will be used to come to a conclusion with regard to the research question formulated before, identify the limitations and set out possibilities for future research.

2. Theory and Hypotheses

Since this study looks at the effect of three different levels on CSR and CSI. The literature revision section is divided into three distinct parts. Each part will elaborate more on one of the levels and will also include the hypotheses that are the result of that specific level. The first part will try to explain variance caused by country level factors, followed by the part about industry factors, to conclude the last part with the firm-level factors.

2.1 Country level

As Fransen (2013) acknowledges, firms are across countries embedded in different institutional settings. He states: “Firms in different countries face different regulatory frameworks,

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different types of industrial association and labor–capital bargaining”. These kind of different

environments can be influential on how the different firms view the debate around CSR and CSI (Crane & Matten, 2005; Van Tulder & Van der Zwart, 2006).

To get a better understanding of these factors, this paper will try to explain them based on the institutional theory. The institutional theory is based on the assumption that firms are conforming to predominant norms in the social context in which they are embedded (Meyer & Rowan, 1977; DiMaggio & Powell, 1983; Scott, 1995). To keep a competitive position in their environment, firms need to comply with institutional pressures (Edoho, 2008; Delmas & Montes-Sancho, 2010). Several studies stress the importance of external legitimization, which results in more or better opportunities for firms to access resources that contribute to a firm’s long-term viability (Bansal & Hunter, 2003). Jackson and Apostolakou (2010) found in their study on CSR that firms make decisions with regard to CSR not purely based on internal factors but that a broader social context is taken into account. Using the institutional theory, part of this broader social context in their study is also formed by the country-level characteristics (Jackson & Apostolakou, 2010; Muthuri &Gilbert, 2011; Oliver, 1991). External actors in broader social structures such as governments, regulators, markets, society, NGO’s and other organizations that monitor firm’s activities and corporate behavior (Campbell, 2007; DiMaggio & Powell, 1983), form this social context (Hoffman, 2001). Institutional actors in the form of regulatory, normative and cognitive pressure impose this pressure for legitimization. The pressures imposed on the firms differ per country; each country has its own specific set of pressures, which forms its distinctive institutional profile (Kostova & Roth, 2002).

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Cambell (2007) states that institutional factors can both positively and negatively influence the CSR of firms. Campbell (2007) writes, “Corporations will be more likely to act in socially

responsible ways if there are strong and well-enforced state regulations in place to ensure such behavior.” Because of the variation in constraints and inducements with regard to CSR across

countries, the investments of firms in both CSR and CSI in different countries varies with it accordingly. Ioannou and Serafeim (2012) looked at these cross-country differences by comparing German companies with their Japanese colleagues. They found that due to differences in politics, labor, education, and financial and cultural institutions, the performance with regard to CSR was significantly different. This showed in lower levels of CSR performance in Japan because of higher levels of competition and corruption. They also found that ﬁrms headquartered in countries characterized by lower public sector corruption had higher levels of social responsibility. According to Aguilera et al. (2007), the divergent internal and external pressure firms experience to be engaged in CSR initiatives is because the firms are engaged in different national systems. They suggest that shareholders in the Anglo-American model are encouraging CSR activities more if it results in short-term benefits whereas the shareholders in the continental European model focus more on long-term results including benefits for more diverse stakeholder groups. Likewise, Jackson and Apostolakou (2010) focused on the differences in institutional environments within Europe. They found that firms in Anglo-Saxon countries with a more liberal market economy achieved higher levels of CSR compared to firms located in coordinated market economies. These results are confirming their hypothesis that voluntary CSR activities in the former NBS is a substitute for institutionalized ways of stakeholder participation. On the other hand, CSR in coordinated market economies often takes on more implicit forms (Jackson & Apostolakou, 2010). Furthermore, Maignan and Ralston (2001) are also attributing to this topic in stating that a country is either more individualist like the US or more communitarian like France and Germany. They therefore suggest that because of the impact on consumer perceptions, nation-level institutions are affecting the CSR activities of corporation within that country, in which the more communitarian countries are more involved in CSR activities compared to their more individualist counterparts, which are more concerned about their economic performance.

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H1: CSR varies systematically with differences in nation-level characteristics.

The national level is besides enabling in CSR also responsible for pressures that might lead to irresponsible behaviour. Keig, Brouthers and Marshall (2015) state in their study that firms operating in corrupt environments are more likely to act in an irresponsible way. The World Bank stated already in 1997 that “the causes of corruption are contextual, rooted in a country's

policies, bureaucratic traditions, political development and social history”. Hence, the level of

corruption differs per nation since this variance is due to differences in the cultural and political context within the country (Benson & Cullen, 1998). Other studies have found a positive relationship between the levels of corruption in the public sector and the environmental irresponsible performance within that country (Morse, 2006; Welsch, 2004).

As Vaughan (1983) states, regulatory agencies establish criteria with regard to a firms’ performance. Meeting these criteria can add pressure on the firms, which could result in cutting corners and therefore acting in ways that increases the CSI activities of a firm (Vaughan, 1983). He explains that this can for example be done by intentionally or unintentionally falsifying information provided to regulators to measure the performance of a firm. As Baucus (1994) states, CSI is more likely to occur when the cost related to conforming to regulations exceed the fines, penalties or other costs related to not complying with the regulations. In this case, the regulations can be perceived by managers as added pressure to behave irresponsible rather than the control mechanism it was intended to be. Managers can feel an increase in this pressure if the law and regulations change frequently. According to Breit and Elzinga (1986), firms that are facing changing regulations or increasing penalties, are devoting more resources and attention towards the development of strategies that are more defensive and less pioneering. This results in the decrease in resources and energy spent on other goals. They also suggest that even if the regulations stay the same, a change in legal or regulatory structures can influence this pressure by resulting in narrower interpretations or stricter enforcement of the law. Baucus (1994) states CSI represents ways to cope with the increased institutional pressure on the firm and the need to reduce uncertainty as a result of these institutional environment.

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lack of control resulting in corruption, firms may lower their ethical standards. This could be in the form of environmental negligence to violating human rights and everything in between (Tan, 2009). In the case of lowered societal standards, the felt responsibilities, and therefore its behavior may erode, resulting in more CSI (Tan, 2009). Furthermore, operating in these more corrupt environments can increase the transaction costs for a firm (Rose-Ackerman, 1975; Uhlenbruck et al., 2006). An example of this would be paying bribes. Not only is this direct corporate social irresponsible behavior, it may also lead firms to cut corners in other ways to compensate for the additional costs that have been made (Nwabuzor, 2005).

To sum up, firms facing pressure from its institutional environment that are not able to conform to this pressure are possibly using CSI practices to be able to act like they are able to uphold these laws and regulations. Therefore, we hypothesize:

H2: CSI varies systematically with differences in nation-level characteristics.

2.2 Industry level

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attributed to industry-level factors. (Moura-Leite et al., 2012; O’Shaughnessy, Gedajlovic, & Reinmoeller, 2007).

Industries face strong institutional and competitive pressures in which reputation and legitimacy are important (Deephouse & Carter, 2005). A problem with reputation is that it is possible that reputation of the firm is damaged without any specific wrongdoing of the firm itself. For example, the accident in Bhopal (1984) caused by Union Carbide, affected the reputation of the whole chemical industry. Another example is the Three Mile Island incident (1979) in which the whole nuclear industry was harmed (Rees, 1997). It is also possible that a problem is attributed to the whole industry because it is hard to know whose fault it actually is. This is for example the case with pollution. As King and Lennox (2002) describe, pollution is most of the times thought of as a pure externality because it is hard to measure or acquire enough information to understand the impact of each firm on this problem. If this is the case, stakeholders may attribute the damage done to a group of firms or an entire industry and distribute the responsibility evenly among those firms (King & Lennox 2002). Because the actions of one firm can directly impact the reputation of all other firms involved in the same industry and the fact that state-level legislation might be insufficient to capture all the externalities, a lot of industry groups have taken it upon themselves to implement their own strict self-regulation programs to prevent any reputation damaging activities by their peers (King & Lennox, 2000).

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highly unionized industries. In these environments, labor unions may put a lot of pressure on companies to increase the level of CSR towards employees to develop a more ‘fair trade’ environment (Ederington & Minier, 2003). Because of this variance in stakeholder pressure, firms in a certain industry will adapt their CSR levels so that they match the stakeholder pressures and preferences unique to that industry the firm is active in. Not only will this lead to a convergence in CSR practices among firms operating in the same industry, it will also differ more from firms in other industries (Moura-Leite et al., 2011).

To sum up, companies within the same industry are likely to converge with regard to their CSR activities to be better able to comply with the stakeholder pressure specific to that industry they face. Because the levels of stakeholder pressure differ per industry, firms will differ more in their CSR activities if they do not operate in the same industry. Therefore, we suggest:

H3: CSR varies systematically with differences in industry-level characteristics.

Industry-level factors may besides the variance in CSR also predict variance in CSI. Corporate social irresponsibility is a problem that has been around for a long time. Already in 1968 Baumhart did a survey among 1800 subscribers of the Harvard Business Review and found that 82% of the respondents thought that their industries were engaging in irresponsible practices.

According to Baucus (1994), the pressure on industry-level, both refrain or create the opportunity to engage in CSI. The decision whether to act in a responsible way or not, are not made in a vacuum but in a situation, which is subject to social standards (jones). Therefore Mazzei et al. (2015) state: “as normative standards digress, organizations have greater

opportunity to engage in irresponsible corporate activities without deviating from the norm. Organizations may even feel pressure to adopt such behavior in order to remain competitive.”

In line with this statement, Baucus (1994) found that loose regulatory elements have the same outcome, which is an increase in CSI. This is because in such environments firms can act irresponsible without the risk of getting caught or punished. The same study also found that stricter regulatory elements limited the CSI of a firm.

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that offers the same product for a lower price. The focal firm is in this case driven to reduce costs to stay competitive. Previous studies have found that firms that are coping with great market pressure are likely to reduce costs by any means (Henriques & Sadorsky, 1996; Chih, Chih, & Chen, 2010), even if this means they have to use CSI practices to stay competitive (Shleifer, 2004; Campbell, 2007). Therefore, cost pressure is a frequently used reason to act in a social or environmental irresponsible way.

In markets that are subject to extensive rent seeking combined with an ill developed legal system, a large amount of firms are tempted to ignore the rules and are more likely to act in a social irresponsible way if this is seldom criticized or punished (Smith, Muir, Walpole, Balmford, & Leader-Williams, 2003). In such a scenario, it could be unwise for a firm to implement responsible practices if other companies in the same industry are implementing irresponsible practices. According to Hill (2011), is this because in many cases responsible behavior comes with additional costs, which will result in a competitive disadvantage that might be too big in such a corrupt market. If the competition in an industry is able to offer lower prices, or is able to secure business through bribes and the focal firm is not willing to conform to these irresponsible practices, it could possibly get pushed out the market entirely (Bryan, 2006). In situations like this, a firm may feel pressured to conform to the industry standard and adapt irresponsible behavior to stay competitive (Wu, 2014)

H4: CSI varies systematically with differences in industry-level characteristics.

2.3 Firm level

To get a better understanding of the factors influencing the variability of CSR level on a firm level, the Resource Based View (RBV) is used. Even though it was originally used to explain financial performance, is has also been used by scholars to examine the social performance of a firm (Garriga & Melé, 2004; Moura-Leite et al., 2012). Previous studies researching the influence of firm-level factors on the variability of CSR among firms were able to attribute up to 58% of this variability to firm-level factors using a factor decomposition method (Moura-Leite et al., 2012; O’Shaughnessy et al., 2007).

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(Barney, 1991). Prahalad and Hamel (1994) confirm this by saying that a firm’s success is not fully determined by external factors but more by its internal characteristics and its core resources. Examples of such resources would be reputation, knowledge, relationships with stakeholders and the culture of a firm (Barney, 1986). Building on this, Russo and Fouts (1997) found that also the social and environmental performance of firms could be the source of a competitive advantage, especially over firms in the same industry. Furthermore, Bansal (2005) proposes that the variation in CSR is partly attributable to factors related to a firm’s resources. CSR could be used as a competitive advantage because, for example, it creates new technologies or market opportunities, it could influence the financial performance of the firm and could improve the use of human resources (Bansal, 2005).

Previous studies have found all kinds of firm-level factors that are influencing the CSR of a firm. For example, Galbreath (2010) found that firms that make use of formal strategic planning are more likely to have a better social performance. Furthermore, Bansal (2003) found that firms that have specific values and missions that are aligning with social responsible ideologies are more likely to also act this way and therefore enhance their CSR. In general, firms that have a high moral standard (Aguilera et al., 2007), an including and humanistic culture (Galbreath, 2010) and a broader sense of responsibility (Bansal & Roth, 2000) are more likely to outperform their competitors with regard to CSR activities.

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back ownership of the externalities generated by the transaction of a firm (Crouch, 2006). CSR activities can also get limited by the reluctance of costumers to pay a premium for socially responsible products (Bhattacharya & Sen, 2004) or the unwillingness of shareholders to punish irresponsible companies and letting them get away with harmful practices (Rivoli, 2003). Because of this, we hypothesize:

H5: CSR varies systematically with differences in firm-level characteristics.

Social irresponsibility may also be attributed to firm-level influences. CSI is mainly caused by the contingencies, priorities and needs of a firm (Simpson & Kohers, 2002). By doing a costs-benefit analysis firms may decide to allow or even actively participate in CSI at the expense of others. This to increase their performance concerning their main stakeholders, cope with pressures presented by the environment or be more competitive over scarce resources (Post, Preston, & Sauter-Sachs et al., 2002). Mishina, Dykes, Block and Pollock (2010) even found that firms with high performance aspirations or public pressure are more willing to push the boundaries of what they find responsible, to achieve the desired outcome. In other words, CSI is the result from behavior that is aimed at gaining or keeping a competitive advantage in a specific market (Greve, Palmer, & Pozner, 2010). This problem does not only exist on a firm level but also within the firm. If organizations expect extraordinary results from its employees, they might look for alternatives to achieve these results in the form of CSI (Merton, 1968). Next to the previous situation in which the culture may accidentally lead to an increase in CSI, there also exist firms that are actively promoting these kind of practices to gain competitive advantages (Greve et al., 2010). An example of this would be that employees are using unethical practices to increase their personal wealth through embezzlement instead of increasing the benefits for the firm other stakeholders in general. (Karpoff & Lott, 1993, Lott, 1992).

Another problem that is related to the previous one, is when managers or the board of directors are trying to deceive the owners (Karpoff, Lee, & Martin, 2008).This happens to create a scenario where the firm benefits more from since more trust results in higher stock prices. Taking these previous studies into account, it is likely that firm level factors, like organizational culture, the competitive resources and stakeholder demands, affect the level of CSI in varying degrees unique to each firm. Therefore, we hypothesize:

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3. Methodology

3.1 Dataset

To test the hypotheses described before, this study is using data from the Asset4 database from Thomson Reuters. With the help of the data, the hypotheses were tested on a sample of firms nested within industries and countries to capture country-level, as well as industry and firm level effects on the variance in CSR level of a firm. It provides systematic information about environmental, social and governance related issues which are translated into scores. This da-taset is used by various scholars in the past (e.g., Ioannou & Serafeim, 2012; Hartmann & Uh-lenbruck, 2015). Asset4 is not only able to provide us with an overall CSR score, but also divides this into different pillars to give a more in-depth insight in the performance of the firms rated on different aspects. Furthermore, it also provides a measure for controversies. In this way, it is possible to also measure the CSI of a firm. Comparing Asset4 to, for example, the KLD Index, Asset4 draws from a more diverse range of firms since KLD is only focused on publicly traded US-based firms. To sum up, Asset4 is chosen because its legitimacy among scholars, its in-depth measurement system and because it covers a more extensive firm base than other databases.

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Country. In this study, 4 independent variables are used to test the hypotheses. The first one is ‘Country’. Each of the firms used in this dataset is assigned to a specific country. The country it is assigned to is the country in which the company has its headquarters. In Asset4 each of these companies was given an ISO country code which was used in the rest of our analyses. The original dataset included 65 countries in total. After removing the countries who did not uphold the threshold of at least 5 firms, It resulted in 51 countries that were left in this dataset with sufficient companies. The highest amount of companies were headquartered in the US (6101 data points). With only 14 data points in the Czech Republic, this is the country with the lowest amount of companies headquartered in this dataset.

Industry. Another independent variable used in the analyses is ‘Industry’. This is the industry a company is mainly active in. For this study, the Thomas Reuters Business Classification (TRBC) industry codes were used to classify the companies in the Asset4 database into a 8-digit industry code. The original dataset included 135 industries. After removing the industries with too little data points, the dataset was left with 131 industries. The largest industry in this dataset is classified as “Banks” with 1291 data points. The smallest industry in this data set is the “Phone & Handheld devices” industries with only 14 datapoints.

Firms. The dataset that is used for this study is the retrieved from the Asset4 database. Each of the firms is assigned a 6-digit Asset4 company id to be able to test the hypotheses. It is necessary to also analyze the within firm variation. The only way to test this is by addressing the dataset as a longitudinal study and incorporate data from more than one year for the same firm. There-fore, the data for the companies was retrieved for the years 2015, 2016 and 2017. Each firm that was not present in the dataset at least twice was removed to prevent any unnecessary un-explained variance. This resulted in a dataset that consists out of 5999 firms.

3.3 Dependent variable

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When the number of companies that have a “yes” is low, the score will be high. If a lot of companies have a “yes”, the score will be average. The firms are rated on 400+ ESG metrics which are then combined in 178 comparable measures. These measures are divided in 3 main categories namely Environmental, Social and Governance performance and are combined into an overall score. At the same time, there is controversy score (CSI) calculated for each firm. This score is based on 23 controversy topics. The involvement of a company in scandals or if it is penalized will affect the controversy score of that firm. If the firm is involved in a scandal in year i it is possible that this same scandal will affect the controversy score for year i+1. Each new development in such a scandal will be used to calculate this score. For example if new lawsuits will develop in the next year, the score of the next year can also be influenced. After this, the overall ESG score is combined with the controversy score to get an aggregated ESG

score for the firms. The purpose of the ESG combined score is to discount the CSR performance of the firm based on the controversies a firm is part of. If the firm was involved in any contro-versies, the ESG score and the controversies score are combined to a weighted average. If a firm was not involved in any controversies, the ESG combined score is equal to the ESG score.

3.4 Method

To achieve the goal of this study, which is to determine the relative importance of country- industry and firm-level factors on CSR and CSI, we have to use a variance decomposition method. Like the method of Rumelt (1991) and Short et al. (2007), this method estimates the percentage in which each of the independent variables is able to explain the variation in the dependent variable. According to Moura-Leite et al (2012), this method is suitable for studies

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like this, because it does not require a dataset that includes the whole population. In this case, it is almost impossible to cover all the firms around the world. With this method, it is possible to generalize the results (Moura-Leite et al, 2012). The only difference with previous studies is that instead of using financial performance as the dependent variable, this study is using CSR, CSI and their respective pillars as the dependent variables. The model used in this analysis, in line with Orlitzky et al. (2017) and Shaughnessy (2007), is as follows:

𝑅𝑖𝑐𝑡 = μ + 𝛼𝑖 + 𝛽𝑐 + 𝛾𝑡+ 𝜀𝑖𝑐𝑡

In this model the dependent variable Rict is the aggregated CSR (or aggregated CSI, or one of

the pillars of both CSI and CSR) for industry i in country c in year t. Furthermore, µ is in this model used as a constant that is equal to the overall mean. Beside this, αi is the deviation from

the overall mean for firms in industry i, and βc is used for the average deviation for the firm in

country c. There is also a term to account for the year effect within a firm named as

γ

t.

ε

ict is introduced in this model to account for the firm specific error.

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4. Results

The results of the variance decomposition analyses are displayed in the tables 1, 2 and 3. The values for the overall CSR score, as well as the controversy score and the combined score, are displayed in table 1. Table 2 shows the variance that is explained by each of the levels for each pillar with regard to CSR. Whereas table 2 looks at the CSR, table 3 looks at the CSI of the firm in the same way. In the reporting of the results, the first part will be used to discuss the findings regarding our hypotheses that will help to explain the main research question. The second part of this chapter will look more into the additional findings that came forward out of this analyses, both comparing CSR with CSI and looking more in-depth into the different pillars of these scores.

Table 1: Decomposed variance per level for the main scores

Hypothesis 1 proposes systematical variance in CSR at the country level, while Hypotheses 3 and 5 suggests similar systematic variance at the industry and firm levels of analysis, respec-tively. To test this, a nested variance decomposition analyses was executed to partition the var-iance into between-firms (nested within industries), between-industries (nested within coun-tries) and between-countries components. As shown in Table 1, the analyses shows the amount and relative amount of total variance in CSR that occurs among firms within an industry is 62.4 percent, among industries within a country is 12.0 percent and among countries is 18.0 percent. Since each of these effects is substantially deviating from 0, it can be concluded that differences in nation- industry and firm- characteristics each influence the variance in firms’ CSR. There-fore, Hypotheses 1, 3, and 5 are fully supported.

CSR CSI Combined Score

Level Variance % Variance % Variance %

National 61,1 18,0 14,3 4,1 36,3 12,5

Industry 40,6 12,0 19,8 5,7 33,0 11,3

Company 211,2 62,4 74,7 21,5 140,3 48,2

Residual 25,6 7,6 238,5 68,7 81,6 28,0

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Similar results are found for Hypotheses 2, 4 and 6. Hypothesis 2 proposes systematical vari-ance in CSI at the country level, while Hypotheses 4 and 6 suggests similar systematic varivari-ance at the industry and firm levels of analysis. The proportion of variance in CSI that is explained by each level is as follows: at the firm level, 21.5 percent of the variance is explained. At the industry level, this is 5.7 percent whereas on the country level this is 4.1 percent. Because the effects that are measured on the firm- industry- and country- level are all substantially deviating from 0, hypotheses 2, 4 and 6 are all supported. Therefore, it can be concluded that the variance in firms’ CSI is influenced by differences in country- industry- and firm level characteristics.

Comparing the results for both the aggregated, as well as the individual pillars of the CSI output, with the CSR output one major shift is noticeable. In the case of CSR a large amount of variance is explained by the firm level. In the case of CSI the firm-level still had the highest explanatory power of the factors included in these analyses. However, the explanatory power was smaller compared to CSR since the residual variance was substantially higher in this case, meaning that the CSI of a firm is quite heavily influenced by factors that were not implemented in these analyses. Another difference is the relative explanatory power of the measured levels. In the case of CSR, firm level had the highest explanatory power, then the country level with industry level having the lowest. Looking at CSI, this order is built up in a different way. Still company level has the highest explanatory power, but in this case is followed by the industry level with country level having the lowest explanatory power. This suggests that the industry-level is more important in the case of CSI than the country-level.

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Table 3 is taking a more in-depth look at the variance decomposition per level for the different pillars of CSI. The main difference with table 2 is that for CSI in most cases the residual vari-ance has the highest explanatory power. Looking at the other levels, the company level still has the highest explanatory power. Another difference compared to CSR is the fact that for each of the pillars the explanatory power of the industry level (between 5,7% and 16,7%) is in this case higher than the explanatory power of the country level (between 0,7% and 4,1%). The only pillar that is not in line with the other results is “Environmental Controversy”, in this case the residual variance is only 12,2 %. However, the relative explanatory power of the other levels is in line with the other pillars, company level the highest, than industry level and lastly the coun-try level.

CSI Governance Cont. Social Cont. Environmental Cont. Level Variance % Variance % Variance % Variance %

National 14,3 4,1 0,2 2,3 0,2 3,0 0,1 0,7

Industry 19,8 5,7 0,6 7,6 1,0 12,6 3,0 16,7

Company 74,7 21,5 1,5 18,0 2,1 26,1 12,6 70,4

Residual 238,5 68,7 6,0 72,0 4,6 58,3 2,2 12,2

Sum 347,3 100 8,4 100 7,9 100 17,9 100

Table 3: Decomposed variance per level for the CSI pillars

CSR Corporate Governance Social Environmental Level Variance % Variance % Variance % Variance % National 61,1 18,0 415,3 44,8 289,5 27,8 261,7 25,6 Industry 40,6 12,0 59,3 6,4 155,4 14,9 185,7 18,2 Company 211,2 62,4 394,1 42,5 540,2 51,8 513,3 50,2

Residual 25,6 7,6 58,9 6,3 57,0 5,5 61,2 6,0

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5. Discussion and conclusion

5.1 Findings

This study explored the variance for both CSR and CSI explained by looking at the levels of firm, industry and country. The results, as described in the previous chapter, indeed indicate that the firm- industry- and company level affect the way in which firms are engaging in both CSR and CSI. Furthermore, the results also give a better insight in the relative importance re-garding the amount of variance explained. Comparing the aggregated scores of CSR and CSI, it shows that CSI has a higher level of residual variance. This means that a larger part of the variance in CSI is not explained by the factors used in this analysis. Two possible reasons may attribute to this fact. The first one is about the types of CSI. According to Lin-Hi (2013), there are two sorts of CSI being intentional and unintentional CSI. The first one is about acting irre-sponsible on purpose, for example dumping waste, tax evasion or bribery mostly motivated to increase profits. The latter is when a firm is not actively engaged in CSI but when it is more an unanticipated side product, for example an earthquake resulting in toxic waste leaking or unan-ticipated side-effects of a new drug (Lin-Hi, 2013). Therefore, future research might look into differences between these two kinds of CSI and see how this relates to the social performance of the firm. The second explanation is about possibly missing an important level in this study. Looking at previous literature, a possible level to analyze in future research might be the CEO-level. Other studies that have found that the CEO has impact on the level of CSI is for example Oh, Chang and Jung (2018) stating that CEO tenure will decrease CSI off firm. Another paper stating the importance is Tang, Qian, Chen and Shen (2015) stating that CEO hubris will lessen CSR and will increase CSI of a firm.

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with previous research, where Cumming, Dai and Johan (2013) and Kumar and Zattoni (2016) already stated that country level institutions have important implication for the corporate gov-ernance of a firm and its performance in this field. Armitage et al. (2017) found that this was both the case for firms active in developed as well as developing countries. In both situations, changes in the cultural, political or legal institutions will have a substantive impact on the cor-porate governance of the firm’s active in this country (Armitage et al., 2017). Looking at CSI and the pillar that was not in line was ‘Environmental controversies’. In this score not only the residual variance was substantively smaller than in the other scores, also the explanatory power of the firm level factors was relatively much higher than in the other scores. This implicates that a firm is better able to refrain from environmental irresponsible behavior on its own terms while being less affected by the industry and country it is operating in, in comparison to the other pillars of CSI.

5.2 Theoretical implications

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attention on this aspects to for example, increase the return on the effort put into new regula-tions.

Extending the literature on this topic is done by this study in several ways. Not only is it giving a better insight into the differences between CSI and CSR with regard to how important each level it is. It is also showing that the different pillars are influenced in different way and need to be approached in different ways to be more effective. Using this knowledge, it can be useful for both firms as well as NGO’s and institutions to be better able to approach the difficulties and challenges surrounding corporate social performance of firms.

5.3 Limitations and future research

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