Value in Diversity - Does Board Diversity Moderate the Effect Between
CSR and Firm Financial Performance? A Study on European Firms
Thesis MSc IFM
Student number: S2853035
Name: Daniel Holmström
Supervisor: Dr. L. Dam
Second Assessor: Dr. S. Homroy
Study Programme: MSc IFM
Date: 10.01.2020
Field Key Words: CSR, Corporate Financial Performance, Culture, Diversity of Board of
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Abstract
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1. Introduction
In recent times, firms have shifted from a more financially oriented perspective to a more
financially and socially oriented perspective. This shift from a financially oriented perspective to a more socially oriented perspective is especially impacted by pressing topics in recent times on the environment. Firms are not only pressured by shareholders to maximize returns, but they are also put under institutional and shareholder scrutiny (Homroy & Slechten, 2019). For example, the UN Global Compact is a global initiative that gives environmental pressure as it addresses several principles regarding corporate policies and corporate responsibility (Williams, 2004). Besides environmental pressures, more stress is also put on corporate governance issues as business operations become more globalized. Consequently, increased stress put on corporate governance issues resulting in societal changes that ultimately affect the board compositions in terms of diversity, the public has now put more attention to board diversity. In particular, the topic that involves gender diversity on boards and higher positions have been of great discussion. The European Commission proposed a gender quota, which implies that 40% of the board of directors needs to consist of women because research shows that the firms will perform better (Leszczyńska, 2018). This policy is one of the examples that are putting modern firms under scrutiny to act in certain ways. Ethnicity diversity on the board of directors is a less discussed topic than the number of discussions regarding females on boards (Creary et al., 2019). Also, discussions on the ethnicity diversity with reference to cross-cultural differences in terms of experience and knowledge has recently gained more attention, and a greater representation of foreign board members in European firms has become more evident (see Figure 1). Hence, in this study, I will analyse the relationship between corporate financial performance (CSR), and corporate financial performance (CFP). Furthermore, I will analyse whether the proxies for board diversity moderates the effect between CSR and CFP. As a result of hypothesising the
moderating effect of board diversity on the relationship between CSR and CFP, this study contributes to the existing literature by studying the moderating impact of board diversity.
4 focusing on the relationship between board diversity and financial performance or board
diversity and CSR. Whilst some research has been carried out on the relationship between CSR on CFP, there is very little scientific understanding of the moderating effect of board diversity on the CSR and CFP relationship. Therefore, this study focuses on providing an additional angle to the subject, namely, by studying how the board diversity such as gender, culture and ethnicity act as a moderating variable. Accordingly, I analyse whether the moderator will affect the
relationship between CSR and CFP and potentially enhance our understanding of the topic because studies are yet inconclusive whether diversity is mainly a political agenda to display the absence of discrimination (Erhardt, Werbel & Shrader, 2003), or whether it is beneficial for the firm in terms of financial performance (Miletkov, Poulsen & Wintoki, 2017), and differentiation strategies such as CSR (Wang & Bansal, 2012). Literature has shown that decision-making and increased innovation are a result of diversity (Watson, Kumar, & Michelsen, 1993). Similarly, firms that focus on a long-term and stakeholder-oriented view tend to benefit more from
conducting CSR strategies. Diversity will refer to gender, ethnicity and culture. Consequently, I expect that greater board diversity will help to explain the relationship as research has shown that by having a more diversified board, it is expected to enhance the tendency to drive an
organisations’ green and financial goals. Previous studies have found a positive relationship between board diversity and financial performance. For example, Riordan et al. (1997) advocated in their research that a company regarded by external groups might face a higher reputation. Another study found that a higher reputation will positively affect financial performance (Fombrun, 2006). Furthermore, research has shown that higher diversity might contribute to firms’ CSR reporting and actions (Harjoto, Laksmana, & Lee, 2015). The board of directors’ functions as the firms' legitimacy and reputation, as they ensure effective management and also need to take stakeholder interest into account (Michelon & Parbonetti, 2010).
Furthermore, the board is the culmination of decision-making processes, and therefore also responsible for a firms’ CSR strategy (Kassinis & Vafeas, 2002). Thus, we can expect that a heterogeneous board will have an impact.
To test my hypotheses, I use a random effects regression analysis using panel data. My
5 proxy, and second, I use interactions for percentage of women on the board and percentage of women or ethnic diversity on the board. My analysis also includes both country- and firm-specific controls in line with previous literature. The analysis consists of 1159 firms from 30 European countries over the period 2002 to 2018. I chose this specific time period as data before 2002 is very scarce, especially for CSR, and data up until 2018 to capture the highest amount of observations possible.
The regression results supported my first hypothesis that there is a positive relationship between CSR and CFP. This result supports the theory that argues that employing differentiation
strategies are beneficial for firm financial performance. The regression results for the diversity interaction effects turned out to be mixed. I find support for the hypothesis that either gender or ethnicity diversity moderates the effect positively. However, there was no support for the
hypothesis that gender diversity moderates the effect between CSR and CFP. This would suggest that ethnicity diversity has a more pronounced effect than solely having gender diversity on the board. Lastly, I found partial support for the interaction effect of the cultural dimension long-term orientation as it was significant in only one of the models.
The structure of the thesis is the following. First, I will examine the literature regarding corporate social responsibility and develop arguments for what the implications are for implementing such a strategy. Second, I will develop the theory regarding board diversity, by starting off by basing it on the upper echelon theory. This will be followed by an overview of the theory on gender diversity, ethnicity diversity and cultural diversity. Following my theory, I define each hypothesis following each literature section. Third, I will discuss the methodology and data. Finally, I will elaborate on the analyses and discuss the results.
2. Literature and hypotheses
In this section, I will go into detail regarding the existing academic literature on the subject CSR. To begin with, I will provide an overview of literature and concepts covering the independent variable CSR followed by defining the dependent variable firm financial performance.
6 research on the subject that will function as the groundwork, ultimately leading to my
hypotheses.
Corporate Social Responsibility
In 1970, Friedman stated that the social responsibility of business is to increase its profits. On the other hand, this statement might not fully hold for modern firms. For example, Kolstad (2007) argues that the statement by Friedman (1970) is implausible. However, empirical evidence has shown polarizing results regarding CSR and firm profit maximization.
CSR is a rather broad concept and entails a variety of dimensions. Carroll (1979) was one of the very early people to bring up CSR and is yet until this day very influential among CSR scholars. Carroll identified four different dimensions, namely: discretionary responsibilities, ethical responsibilities, legal responsibilities, and economic responsibilities. More recently, Dahlsrud (2008) identified and analyzed 37 different definitions and concluded that there is no single universal definition for CSR. In like manner, the dimensions contribute to the same concepts, but Dahlsrud (2008) further developed Carrol’s (1979) dimensions. Dahlsrud (2008) developed five CSR dimensions after the analysis of the 37 definitions. The dimensions are environmental, social, economic, stakeholder, and voluntariness dimension. Table 1 below further presents the dimensions of Dahlsrud (2008).
Table 1, Dahlsrud five dimensions of CSR and Definitions (2008)
The 5 dimensions Coded to the dimension if referred to
Example phrases
1. The environmental dimension
The natural environment “A cleaner environment” “Environmental concerns in business operations”
2. The social dimension The relationship between business and society
“Contribute to a better society”
7 3. The economic dimension Socio-economic or financial
aspects also covering CSR in terms of a business operation
“Contribute to economic development”
“Preserving the profitability” 4. The stakeholder
dimension
Stakeholders or stakeholder groups
“Interaction with their stakeholders”
“How organizations interact with their employees, suppliers, customers and communities”
5. The voluntariness dimension
Actions not prescribed by law “Based on ethical values” “Beyond legal obligations”
McWilliams & Siegel (2001) argue that there are two significant sources of CSR demand, namely (1) consumers, and (2) other stakeholders. The authors constructed a widely used definition of CSR “actions that appear to further some social good, beyond the interests of the firm and that which is required by law.” This can be interpreted as the duty a business has to meet the expectations of a wide range of stakeholders and to maximize the positive impact on the surrounding society. Furthermore, every business is distinct from one another. Thus,
8 in CSR, for example, opportunity costs, can be measured by measuring CSR activities and
activities that were not performed due to the costs that were allocated to the CSR activities (Sprinkle & Maines, 2010). It is also of importance for firms to understand that engaging in these activities will, in the long run, be beneficial, but companies that focus on short term goals might be performing better by investing less in social responsibility (Brammer & Millington, 2008). Some literature also argues that there are differences in forced CSR policies and voluntary action taken by the companies. Whereas voluntary CSR can help to avoid negative financial impacts, forced social performance can arguably conceive negative profits and long-term social benefits (Miles, Munilla & Covin, 2002, 2004). Thus, acting in a more proactive than reactive manner will help to absorb the previously mentioned benefits.
9 As we can determine from the section above, scholars are still debating for and against different CSR instruments. The arguments mainly base on the idea of how to ideally optimize a firm’s resource use. Financially oriented stakeholders are mainly focused on returns. However, the other large part of stakeholders prefer a company that is benefiting society. Also, the approach toward adopting socially responsible practices should be more proactive than reactive to be beneficial.
This hypothesis follows the prediction that engaging in a CSR strategy is financially beneficial for the company. Engaging in such a strategy helps companies to differentiate themselves (McWilliams & Siegel, 2001) strategically and build a unique competitive advantage (Porter, 2017). Therefore, this research seeks to test the hypothesis:
H1: CSR leads to higher financial performance Upper Echelon Theory
Before delving into the literature on board diversity, I will start by examining the theory that essentially explains the influential power board characteristics from a theoretical standpoint. The theory states that “individual top managers heavily influence the organizational outcomes by the choices they make, which are influenced by the managers’ characteristics” (Hiebl, 2014). By not only studying environmental and firm-level factors but by including the influence of top
managers, we can get a more comprehensive picture of the management and accounting systems (Hiebl, 2014). Hence, it will increase the explanatory power. In academic research regarding upper echelons, plenty of variables are often included. More recently, demographic
characteristics such as race, gender and culture were also included in the observable variables (Bachrach, 2014). Diversity is yet another double-edged sword among scholars and therefore, building on this theory, the board diversity will be developed further into detail below.
Board demographic diversity
10 characteristics tend to influence decision making and corporate strategy response to changes in the environment. This, in turn, can influence efficiency and productivity (Østergaard et al., 2011; Robinson & Dechant, 1997). This topic has gained more attention in the recent decade as many countries have mandated, for example, the presence of women on boards (Kagzi & Guha, 2017). A diverse human capital is predicted to contribute to different perspectives, which enhances group decision-making and hence problem-solving (Cox. et al. 1991; Carter et al., 2010). Thus, the hypothesis often used by scholars “value in diversity” will be examined and analysed. When considering diversity, there are two options, namely observable and non-observable. Observable demographics consider things such as age and ethnicity. The non-observable characteristics are, for example, differences in skill and knowledge (Mark & Gates, 2012). This study will be focusing on observable demographic characteristics.
Gender
Gender is one of the most heavily studied dimensions when it comes to demographic diversity (Hillman, 2015), as men and women tend to behave in a different manner, and the way of interpreting information and opportunities differ. Thus, it can be said that the two complement each other (Koellinger et al., 2008). Gender diversity is also more or less becoming a trend, where companies are implementing a diversified board in order to be perceived as good by society. Also, more policies are being adopted to increase diversity on the boards. For example, the European Parliament proposed a directive where companies need to become more transparent in disclosing non-financial information and diversity information (Eur-lex.europa.eu, 2014). Hence, the question arises whether a gender diversified board will be beneficial for the company or whether it is simply due to policy enforcement.
Rose (2004) argued that board gender diversity promotes sustainable global relationships and corporate decisions are considered on a wider scale, such as stakeholder orientation. Carter, Simkins & Simpson (2003) conducted a study between firms Tobin’s Q and women on board. The results suggest that a higher representation of women outperform the ones with low representation. This finding thus supports the economical standpoint of having a gender
11 According to this study, gender diversity will enhance a firms road to an increased CSR strategic positioning, increasing reputation, which ultimately can be financially beneficial.
This hypothesis is predicting that gender diversity will positively moderate the relationship between CSR and CFP. This follows the theories that anticipate that a more diversified board will positively enhance both firms CSR ratings and financial performance. Another hypothesis is to whether:
H2a: Board gender diversity will moderate the effect between CSR and financial performance Nationality
The nationality diversity on boards is examined regarding an increased internationalization in boards. Cox, Lobel & McLeod (1991) stated that people that possess a different ethnic background have different attitudes, values, and norms that are derived from their cultural heritage. Cox et al. also found evidence for a difference in group behavior, decision-making tasks and cooperation. Also, organisations are increasingly working in heterogeneous groups and therefore, it becomes increasingly ever more important to be able to manage work in groups with different ethnical backgrounds (Milliken & Martins, 1996). Milliken & Martins (1996)
conducted a study and concluded that ethnic diversity leads to a greater variety of perspectives, creativity and innovative solutions.
12 This hypothesis predicts that board ethnicity diversity moderates the effect between CSR and CFP, making the relationship more pronounced. The literature states that people with different ethnical background have different values, norms and behavior, but also increases group creativity. In particular, the hypothesis that will be tested for is that:
H2b: Board ethnicity diversity will moderate the effect between CSR and financial performance Culture (Long-term vs short-term orientation)
Cultures that score high on long-term orientation are more pragmatic. For example, thrift is encouraged as a way to prepare for the future (Hofstede, 2001).
As previously argued, social responsibility is likely not beneficial in the short-term. The focus is on the future rather than immediate results. Therefore, we can expect that whereas individuals are culturally more long-term oriented, we can expect a positive relationship. Also, when considering things such as firm reputation and survival, possessing a long-term trait appears to be of great importance, whereas short-term is more focused on immediate results and quick profits. For example, negative short-term returns can be associated with the liability of newness (Wang & Bansal, 2012). King & Lenox (2002) argue that the costs associated with implementing a socially responsible strategy are immediate, but the benefits take time to materialize. In other words, it takes time to see the benefits of implementing a CSR strategy on firm performance. Especially if we consider small businesses that need to focus on their core activities, pursuing a CSR strategy might be distracting which can lead to a derailing from the firms’ core activities (Davis, 1973). However, the negative effects can be offset by realizing what strategic decisions to pursue and realize the benefits of CSR (Wang & Bansal, 2012). Moreover, long-term
orientation offers a better opportunity for firms to engage more in stakeholder relationships and draw value from them (Barnett, 2007). Lastly, it will ease the process of managers to align the interests and motivations of different stakeholders that might have conflicting attitudes towards a firm’s solutions in social responsibility (Petts et al., 1999).
13 The last hypothesis anticipates that increased cultural diversity on the board moderates the effect between CSR and CFP. As predicted by the literature, long-term orientation constitutes to a more pronounced effect between CSR and CFP. The last hypothesis is to test:
H2c: Board cultural diversity will moderate the effect between CSR and financial performance Heterogeneity on the board is debatable in terms of financial performance. According to Watson, Kumar, & Michelsen (1993), diversity is a competitive advantage since it increases the
knowledge base, creativity, and innovation. Also, background diversity in the top management amplifies strategic decision making (Bantel, 1993). Siciliano (1996) conducted a study on 240 organisation’s by using a board diversity index. Occupational diversity on the board resulted in a higher level of social performance. This indicates that greater gender diversity on the board contributes to greater social performance. Regarding financial performance, Richard (2000) studied the banking industry and finds a positive relationship between diversity and added value. It does, however, depend on certain factors such as industry and competition. To the contrary, heterogeneity can induce conflicts and decrease the communication which will ultimately worsen the decision-making process (Bantel & Jackson, 1989). However, these reversed effects are considered whereas there is excessive heterogeneity on the board. Thus, assumable the effect of board heterogeneity has an inverted u-shape curve.
Financial Performance
Corporate financial performance can be measured by using either accounting-based measure or market-based measures. Determining which measure to use has both its advantages and
disadvantages. Some researchers decide to use both a market and accounting-based measure (Elsayed & Paton, 2009). Following Beurden & Gössling (2008), this study will use the accounting-based measures, namely ROA, ROIC and ROE. They argue that the market-based measures are more valid for stock market participants, and the accounting-based measures are more influenced by social performance, asset utilization and resource efficiency.
14 on companies and its strategic decisions. Thus, the overall idea that is to be examined is the moderating effect of board of directors’ diversity on the relationship between CSR and financial performance.
3. Data and Methodology
3.1 Data Sources and Sample
The sample for this study comprises all European firms CSR scores that are within the Eikon DataStream. In addition, I also gathered data for this study by using Hofstede’s cultural database. Hofstede’s database covers a range of cultural variables per country, and it is a common database in cultural studies. The primary data source Eikon, in turn, has a complete and broad range of data available, and Eikon is one of the largest providers of company financial and ESG data. However, the CSR values are based solely on company reported data which can be equivocal, and evaluating companies based on their CSR reports and activities is rather impossible (Adams & Frost, 2006). However, major empirical studies concerning CSR use the Eikon ESG ratings (Bouten et al., 2017), and therefore, this database is pertinent for this study. Furthermore, the financial performance indicators that I use in this study are also obtained from the Eikon database. The data included in the variable board diversity consists of the board of directors’ diversity in terms of gender, ethnicity and culture. The diversity in the board of directors’ analysis uses both Hofstede and Eikon data.
The sample for this study includes a variety of company-year observations from across Europe. Thus, an international study. The final total sample contains 1159 firms including 19,669 observations. The firm data ranges from the year 2002 to the year 2018. Total sample and countries for the whole time period can be found in Table 4 in the appendix. The longitudinal data were chosen in order to identify whether there are distinct trends or patterns. Also, the sample includes firms from a range of different industries to identify possible industry effects. 3.2 Measurement
15 above covers over 400 different sub-measures. The environmental score is measured by the resource use, emissions and innovation. The social score is computed by workforce, human rights, product responsibility and community. Lastly, the governmental score consists of CSR strategy, management and shareholders (Refinitiv, 2019).
Measure of Financial Performance: Return-on-assets, ROA, is calculated as net profit after tax divided by the total assets. The ratio measures how efficiently the company is operating based on its profits derived from the total assets (Kabajeh & Qabajeh, 2012). Return-on-equity, ROE, measures the shareholder return on their investment in the company. It can be obtained by dividing net profit after taxes divided by total shareholder equity (Kabajeh & Qabajeh, 2012). Return-on-invested-cash, ROIC, is how a business measures how much return on capital is earned on an investment. It is calculated by dividing net operating profit after tax by invested capital (Damodaran, 2007).
Measure of Board Diversity: The board diversity variables consist of three different dimensions. This is due to the nature of measuring board diversity which simply does not only consist of one measurement but several different measurement possibilities. In the literature section, I
elaborated on why the following variables are included in the analysis.
Firstly, board diversity will be measured by the percentage of females on the board. The variable was first log-transformed in order to ensure linearity, independence and homoscedasticity, following Stuart (2000). Furthermore, I winsorized this variable at the bottom 1% to limit outliers accordingly with Stevens (1984). Secondly, as data for solely cultural variety on board was not attainable, the second dimension will consist of gender and cultural diversity on the board of directors. This variable will count for both whether there is a female on board or whether a cultural difference is present on the board as a percentage. The variable takes a range from 0 to 100 percentages. Lastly, the part for the cultural dimension long-term orientation will be inspected by using Hofstede’s cultural values. The values for long-term orientation consists of values from 0 to 100, with the latter representing cultures that are more oriented towards long-termism.
16 moderator to examine whether there is an effect and whether the effect will be positive or
negative.
Measure of control variables: In line with the literature, a few control variables were included, respectively. The control variables are Board size, Current ratio, and Financial leverage, and they are acquired from the Eikon database. The control variables are incorporated into the analysis in order to amplify the explanatory power of the model.
In order to measure a company’s liquidity, it is possible to use the company current ratio. It measures the liquidity more in terms of the short term; hence, short current assets divided by short current liabilities. The current ratio has been used in several studies measuring profitability. Shin & Soenen (1998) concluded that current ratio is positively linked to firm profitability. Secondly, Financial leverage can be seen as the level of risk tolerance. A higher financial leverage ratio implies that there is a relatively higher amount of debt to equity ratio. This is turn will shape and influence the firms (or managements) approach towards social actions (Waddock and Graves, 1997). The variable was winsorized at the top 99,5% to limit outliers, accordingly with Stevens (1984). Last, Board size measures the number of people on the board. Studies have shown that larger boards are positively related to increased performance in firms. This can be explained by the resource dependence theory and that there is a link between the number of board members and access to external resources (Siciliano, 1996). Thus, this study will
17 3.3 Method
In order to investigate the hypotheses that I summarized in the previous section; I test them by using a random effects regression. In Model (1) I start by testing the hypothesis that CSR has a positive influence on financial performance. In Models (2), (3) and (4) I test the hypotheses 2a, 2b and 2c that board diversity has a moderating effect on the relationship between CSR and financial performance. These models are the following:
(1) CFPi,t = α0 + α1CSRi,t + α3LEVi,t+ a4BSIZEi,t+ α5CRi,t + i,t
(2) CFPi,t = β0 + β1CSRi,t + β2PWi,t + β3CSRi,t x PWi,t + β4LEVi,t + β5BSIZEi,t + β6CRi,t + i,t
(3) CFPi,t = β0 + β1CSRi,t + β2WOCi,t + β3CSRi,t x WOCi,t + β4LEVi,t + β5BSIZEi,t + β6CRi,t + i,t
(4) CFPi,t = β0 + β1CSRi,t + β2LTOc + β3CSRi,t x LTOc + β4LEVi,t + β5BSIZEi,t + β6CRi,t + i,t
CFP { 𝑅𝑂𝐸 𝑅𝑂𝐴 𝑅𝑂𝐼𝐶
18 assumptions are met, I will proceed by starting to conduct the analysis and test the previously built hypotheses.
4. Results
4.1 Sample Characteristics
Table 2, summarises the sample characteristics by the number of observations, mean, standard deviation and minimum and maximum observed values. Furthermore, table 2, presents the correlation matrix excluding the interaction variables. When referring to the correlation matrix, we can conclude that there are no high correlations exceeding the often use threshold of 0,5. Hence, multicollinearity is not present. As can be noted, the dependent variables, ROE, ROA and ROIC correlate highly with each other, but they will not be analyzed simultaneously and can, therefore, be ignored. Moreover, the variables women or culture and percentage of women are highly correlated. But again, they will be analyzed separately and will therefore not cause any statistical errors.
Table 2, Country- and Firm-Level Characteristics, Europe, 2002-2018
The table below displays the summary statistics of the firm-specific characteristics for the sample used in the three different models. The sample includes all European firms from the Eikon DataStream database over the years 2002 to 2018 and includes a total of 30 European countries. The variable Long-term orientation, that is country-specific, is acquired from the Hofstede database. The data is reported yearly, excluding Long-term orientation which is time-invariant.
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Table 3, Pearson Correlation Matrix of the Main Variables, 2002-2018
This correlation matrix displays the correlations between the main variables and control variables. The matrix does not indicate any
multicollinearity. CSR reflects a balanced view of a company’s performance regarding economic, environmental, social and corporate governance pillars. ROE is return-on-equity, ROA is return-on-assets, and ROIC is return-on-invested-capital. * shows significance at the .05 level
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Figure 1, Mean values for the main variables 2002-2018
This figure illustrates the mean values for each of the main variables included in the analysis from year 2002 to 2018.
22 4.2 Regression Results
The regression analysis in table 4 will analyze the relationship between the independent, dependent and control variables excluding the moderating variables.
Table 4, the Effect of CSR on CFP
In this table, we can see the effect of CSR on the different CFP measures. All observations are by year, at the firm-level. The sample size is reported in the last row of the table (N). The statistical significance levels are reported as ***, ** and * and illustrate the significance levels at the 1%, 5%, and the 10% levels, respectively. ROE is return-on-equity, ROA is return-on-assets, and ROIC is return-on-invested-capital. The independent variable CSR reflects a balanced view of a company’s performance regarding economic, environmental, social and corporate governance pillars. Standard errors in parentheses. LEV is financial leverage, BSIZE is board size, and CR is current ratio. The dependent variables are in the first row.
The regression analysis in table 4 shows that there is a positive significant effect of CSR on all of the three financial performance indicators. CSR on ROE (B= 0.025, p < 0.001), ROIC (B= 0.021, p < 0.05) and ROA (B= 0.023, p < 0.001). Therefore, the regression results fail to reject
hypothesis 1 as corporate social responsibility results in higher financial performance and is statistically significant proven in all of the cases. This is in line with McWilliams and Siegel (2001) that argued that CSR can help a firm gain value from differentiation strategies and reputation. Thus, the positive effects discussed in the theoretical part have a more pronounced effect on financial performance and overweight the negative effects.
The control variables are only significant in two of the tests, namely ROE and ROIC. In the first test (1)ROE, current ratio was positively highly significant (B= 0.029, p < 0.001) and board size
Variable (1)ROE (2)ROIC (3)ROA
CSR 0.025*** (0.009) 0.021** (0.008) 0.023*** (0.004) CR 0.209*** (0.020) 0.105*** (0.018) 0.009 (0.008) LEV -0.008 (,030) -0.016 (0.027) 0.015 (0.013) BSIZE -0.361*** (0.083) -0.299*** (0.073) -0.045 (0.033) Constant 47.255*** 50.287*** 50.068*** R2 0.045 0.024 0.008
Country Dummy Yes Yes Yes
Sig. 0.000 0.000 0.000
23 negatively highly significant (B= -0.361, p < 0.001). In the second test (2)ROIC, current ratio was positive and highly significant (B= 0.105, p < 0.001), and board size was negative highly significant (B= -0.299, p < 0.001). This would indicate that a firm’s liquidity is positively related to its financial performance as suggested by Shin & Soenen (1998). On the other hand, board size is negatively related to firm financial performance. This contradicts the finding of Siciliano (1996), who predicted a positive association between board size and firm performance. The rest were not significant and will thus not be reported. Moreover, all of the models were highly significant with p<0.001. Referring to the R-Squared, the models explain (1) 4,5%, (2) 2,4% and (3) 0,8% of the change. The corresponding VIF values for all of the models were 1, that is below the lower threshold of 5, which indicates that no multicollinearity is present.
Table 5, The effect of CSR on CFP, with Long-Term Orientation Moderating Variable
Table 5 shows the moderating effect of Long-term orientation on the relationship between CSR and different CFP measures. All observations are by year, at the firm-level, except LTO, which is at the country-level. The sample size is reported in the last row of the table (N). The statistical significance levels are reported as ***, ** and * and illustrate the significance levels at the 1%, 5%, and the 10% levels, respectively. Standard errors in parentheses. ROE is return-on-equity, ROA is return-on-assets, and ROIC is return-on-invested-capital. The independent variable CSR reflects a balanced view of a company’s performance regarding economic, environmental, social and corporate governance pillars. LTO is long-term orientation, LEV is financial leverage, BSIZE is board size, and CR is current ratio. The dependent variables are in the first row.
Variable (1)ROE (2)ROE (3)ROA (4)ROA (5)ROIC (6)ROIC
CSR 0.023*** (0.003) 0.021*** (0.004) 0.036*** (0.008) 0.020** (0.009) 0.028*** (0.007) 0.017** (0.008) CSR x LTO 0.000 (0.000) 0.000 (0.000) 0.000 (0.001) 0.001** (0.001) 0.001 (0.000) 0.001 (0.001) LTO -0.029*** (0.010) -0.029** (0.013) -0.103*** (0.034) -0.103*** (0.036) -0.091*** (0.028) -0.080*** (0.031) CR 0.007 (0.008) 0.211*** (0.020) 0.108*** (0.018) LEV 0.010 (0.014) -0.024 (0.032) -0.026 (0.029) BSIZE -0.042 (0.034) -0.352*** (0.084) -0.295*** (0.074) Constant 51.198*** 51.609*** 52.279*** 48.888*** 56.846*** 51.600 R2 0.010 0.010 0.007 0.054 0.010 0.029
Country Dummy Yes Yes Yes Yes Yes Yes
Sig. 0.000 0.000 0.000 0.000 0.000 0.000
24 In the analysis in table 5, the interaction term CSR x LTO is only significant in one of the tests, namely (4)ROA, and we can only partially confirm the hypothesis. The effect is statistically significant, but considerably small with a coefficient of B= 0.001, p < 0.005. Furthermore, interestingly the variable LTO seems to have a negative relationship towards all the financial performance measures. This would indicate that the greater the long-term orientation the greater the company will be affected in a negative way. As discussed by King and Lenox (2002), short-term costs are recognized, whereas long-short-term benefits take time to realize. Board size appears to negatively affect ROA and ROIC, whereas current ratio seems to have a positive relationship towards ROA and ROIC. These results indicate that the larger the board size, the worse the economic implications are for the firm. For example, Wondem & Batra (2019) had a similar negative finding on board size and CFP. The authors reasoning was that the more board
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Table 6, The effect of CSR on CFP, with Female or Culture Moderating Variable
In this table we can see the moderating effect of Long-term orientation on the relationship between CSR and different CFP measures. All observations are by year, at the firm-level. The sample size is reported in the last row of the table (N). The statistical significance levels are reported as ***, ** and * and illustrate the significance levels at the 1%, 5%, and the 10% levels, respectively. Standard errors in parentheses. ROE is return-on-equity, ROA is return-on-assets, and ROIC is return-on-invested-capital. The independent variable CSR reflects a balanced view of a company’s performance regarding economic, environmental, social and corporate
governance pillars. Standard errors in parentheses. WOC is women or culture, LEV is financial leverage, BSIZE is board size, and CR is current ratio. The dependent variables are in the first row.
The regression analysis in table 6 shows that there is a significant positive effect of the moderator on all of the financial performance measures. Hence, hypothesis 2b was confirmed and statistically significant in all of the models. This indicates that having more foreign members or females on the board can moderate the effect between firms CSR strategies and financial performance. This result confirms the literature arguing for diversity, as it brings more creativity, innovation and decision-making to the board, enhancing the relationship between CSR and CFP (Watson, Kumar & Michelsen, 1993; Bantel, 1993). For ROE, it is significant at the 10% level; however, the coefficient of 0.000 indicates that the impact is extremely small. Furthermore, for ROA and ROIC, the moderator is highly statistically significant at the 1% level. The coefficients, in this case, are also very small, having a coefficient of 0.001. This would indicate that the
Variable (1)ROE (2)ROE (3)ROA (4)ROA (5)ROIC (6)ROIC
CSR 0.022*** (0.003) 0.022*** (0.004) 0.048*** (0.009) 0.038*** (0.010) 0.044*** (0.008) 0.036*** (0.009) CSR x WOC 0.000* (0.000) 0.000* (0.000) 0.001*** (0.000) 0.001*** (0.000) 0.001*** (0.000) 0.001*** 0.000) WOC 0.008*** (0.003) 0.007** (0.004) -0.002 (0.007) -0.016* (0.009) -0.019*** (0.007) -0.021*** (0.008) CR 0.008 (0.009) 0.211*** (0.021) 0.103*** (0.018) LEV 0.016 (0.013) -0.006 (0.030) -0.013 (0.027) BSIZE -0.055 (0.035) -0.332*** (0.086) -0.275*** (0.076) Constant 51.141*** 51.606*** 52.029*** 48.216*** 51.378*** 51.200*** R2 0.008 0.010 0.001 0.041 0.002 0.020
Country Dummy Yes Yes Yes Yes Yes Yes
Sig. 0.000 0.000 0.000 0.000 0.000 0.000
27
Table 7, The effect of CSR on CFP, with Percentage of Women Moderating Variable
In this table we can see the moderating effect of Long-term orientation on the relationship between CSR and different CFP measures. All observations are by year, at the firm-level. The sample size is reported in the last row of the table (N). The statistical significance levels are reported as ***, ** and * and illustrate the significance levels at the 1%, 5%, and the 10% levels, respectively. Standard errors in parentheses. ROE is return-on-equity, ROA is return-on-assets, and ROIC is return-on-invested-capital. The independent variable CSR reflects a balanced view of a company’s performance regarding economic, environmental, social and corporate
governance pillars. Standard errors in parentheses. PW is percentage of women, LEV is financial leverage, BSIZE is board size, and CR is current ratio. The dependent variables are in the first row.
From table 7, we can determine that there is no statistically significant effect of the moderator on any of the financial performance measures. Hence, the percentage of women on the board does not appear to have a significant effect on the relationship between CSR and financial
performance. Comparing table 7 to the findings in table 6 that were significant, nationality diversity appears to play a bigger role in the firm. Moreover, both ROE models show a positive statistically significant effect of percentage of women on with (B= 0.422, p < 0.05), and (B= 0.428, p < 0.1). Percentage of women appears to be positively highly statistically significant for ROA (B= 1.389, p < 0.001). Thus, there is a significant impact on firms ROA from having women on the board. This is therefore consistent with the proponents for a gender diversified board to achieve better CFP as documented by Simkins & Simpson (2003). Furthermore, we
Variable (1)ROE (2)ROE (3)ROA (4)ROA (5)ROIC (6)ROIC
CSR 0.025*** (0.004) 0.025*** (0.005) 0.047*** (0.010) 0.045*** (0.013) 0.046*** (0.009) 0.045*** (0.011) CSR x PW 0.001 (0.006) 0.003 (0.008) 0.020 (0.014) 0.012 (0.018) -0.007 (0.013) -0.002 (0.016) PW 0.442** (0.177) 0.428* (0.232) 1.389*** (0.412) 0.007 (0.516) 0.550 (0.381) -0.070 (0.451) CR 0.009 (0.011) 0.175*** (0.026) 0.075*** (0.022) LEV 0.026* (0.014) -0.012 (0.030) -0.021 (0.026) BSIZE -0.073* (0.042) -0.433*** (0.099) -0.367*** (0.084) Constant 51.293*** 51.896*** 51.817*** 50.594*** 50.986*** 52.944*** R2 0.008 0.012 0.005 0.055 0.006 0.034
Country Dummy Yes Yes Yes Yes Yes Yes
Sig. 0.000 0.000 0.000 0.000 0.000 0.000
28 could again identify that board size has a negative effect on financial performance measures and that current ratio has a positive impact. All of the models were highly significant with p < 0.001.
5. Conclusion
This study examined (1) the relationship between CSR and CFP, and (2) the moderating effect of a diversified board on the relationship between CSR and CFP. I analysed the relationship and moderating effect by using a random effects model. The sample is panel data consisting of 1159 firms from 30 European countries over the years 2002 to 2018. This study contributes to the literature by adding board diversity as a moderating variable between CSR and CFP.
This paper was aimed to understand the effects of CSR on CFP, and in particular, the effect of a diversified board on a firms CSR strategy and the firm’s financial performance. The first
29 results, one important take away is that gender diversity is beneficial for the firms’ performance. Interestingly ROIC turned out to be affected negatively by the variable female or culture. An implication of this is the possibility that the investors might feel like the company puts less emphasis on maximizing shareholder value, and instead emphasizes social goals. In addition, I also find that firm-level characteristics influence firm CFP. Particularly board size and current ratio had a significant effect on firm CFP levels.
30 understanding of the cultural values needs to be developed. It would be interesting to see which cultural traits in particular might contribute to an enhanced relationship.
31
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37
Appendix
Table 1, The effect of CSR on CFP, with Female or Culture Moderating Variable, Robust regression
In this table we can see the moderating effect of Long-term orientation on the relationship between CSR and different CFP measures. All observations are by year, at the firm-level. The sample size is reported in the last row of the table (N). The statistical significance levels are reported as ***, ** and * and illustrate the significance levels at the 1%, 5%, and the 10% levels, respectively. Standard errors in parentheses. ROE is return-on-equity, ROA is return-on-assets, and ROIC is return-on-invested-capital. The independent variable CSR reflects a balanced view of a company’s performance regarding economic, environmental, social and corporate
governance pillars. Standard errors in parentheses. WOC is women or culture, LEV is financial leverage, BSIZE is board size, and CR is current ratio. The dependent variables are in the first row.
Variable ROE ROE ROA ROA ROIC ROIC
CSR 0.022*** (0.004) 0.022*** (0.006) 0.048*** (0.014) 0.038** (0.018) 0.044*** (0.012) 0.036** (0.015) CSR x WOC 0.000 (0.000) 0.000 (0.000) 0.001** (0.000) 0.001* (0.000) 0.001** (0.000) 0.001** (0.000) WOC 0.008** (0.003) 0.007 (0.005) -0.002 (0.011) -0.016 (0.014) -0.019** (0.010) -0.021* (0.011) CR 0.008 (0.011) 0.211*** (0.039) 0.103*** (0.032) LEV 0.016 (0.022) -0.006 (0.046) -0.013 (0.039) BSIZE -0.055 (0.041) -0.332*** (0.099) -0.275*** (0.086) Constant 51.141*** 51.262*** 52.349*** 48.216*** 51.378*** 51.200*** R2 0.008 0.010 0.001 0.041 0.002 0.020
Country Dummy Yes Yes Yes Yes Yes Yes
Sig. 0.000 0.000 0.000 0.000 0.000 0.000
38
Table 2, The effect of CSR on CFP, with Long-term orientation Moderating Variable, Robust regression
In this table we can see the moderating effect of Long-term orientation on the relationship between CSR and different CFP measures. All observations are by year, at the firm-level, except LTO, which is at the country-level. The sample size is reported in the last row of the table (N). The statistical significance levels are reported as ***, ** and * and illustrate the significance levels at the 1%, 5%, and the 10% levels, respectively. Standard errors in parentheses. ROE is return-on-equity, ROA is return-on-assets, and ROIC is return-on-invested-capital. The independent variable CSR reflects a balanced view of a company’s performance regarding economic, environmental, social and corporate governance pillars. LTO is long-term orientation, LEV is financial leverage, BSIZE is board size, and CR is current ratio. The dependent variables are in the first row.
Variable ROE ROE ROA ROA ROIC ROIC
CSR 0.023*** (0.004) 0.021*** (0.005) 0.036*** (0.012) 0.020 (0.016) 0.028** (0.011) 0.017 (0.013) CSR x LTO 0.000 (0.000) 0.000 (0.000) 0.000 (0.001) 0.001 (0.001) 0.001 (0.001) 0.001 (0.001) LTO -0.029*** (0.009) -0.029** (0.011) -0.103*** (0.034) -0.103*** (0.036) -0.091*** (0.027) -0.080*** (0.030) CR 0.007 (0.011) 0.211*** (0.038) 0.108*** (0.031) LEV 0.010 (0.025) -0.024 (0.055) -0.026 (0.047) BSIZE -0.042 (0.041) -0.352*** (0.101) -0.295*** (0.087) Constant 51.198*** 51.609*** 52.279*** 48.888*** 56.846*** 51.600*** R2 0.010 0.010 0.007 0.054 0.010 0.029
Country Dummy Yes Yes Yes Yes Yes Yes
Sig. 0.000 0.000 0.000 0.000 0.000 0.000
39
Table 3, The effect of CSR on CFP, with Percentage of Women Moderating Variable, Robust regression
In this table we can see the moderating effect of Long-term orientation on the relationship between CSR and different CFP measures. All observations are by year, at the firm-level. The sample size is reported in the last row of the table (N). The statistical significance levels are reported as ***, ** and * and illustrate the significance levels at the 1%, 5%, and the 10% levels, respectively. Standard errors in parentheses. ROE is return-on-equity, ROA is return-on-assets, and ROIC is return-on-invested-capital. The independent variable CSR reflects a balanced view of a company’s performance regarding economic, environmental, social and corporate
governance pillars. Standard errors in parentheses. PW is percentage of women, LEV is financial leverage, BSIZE is board size, and CR is current ratio. The dependent variables are in the first row.
Variable ROE ROE ROA ROA ROIC ROIC
CSR 0.025*** (0.005) 0.025*** (0.008) 0.047*** (0.017) 0.045** (0.022) 0.046*** (0.015) 0.045*** (0.018) CSR x PW 0.001 (0.007) 0.003 (0.010) 0.020 (0.023) 0.012 (0.033) -0.007 (0.019) -0.002 (0.025) PW 0.442** (0.190) 0.428 (0.268) 1.389** (0.617) 0.007 (0.818) 0.550 (0.512) -0.070 (0.628) CR 0.009 (0.015) 0.175*** (0.048) 0.075* (0.039) LEV 0.026 (0.022) -0.012 (0.056) -0.021 (0.047) BSIZE -0.073 (0.050 -0.433*** (0.116) -0.367*** (0.095) Constant 51.293*** 51.896*** 51.817*** 50.594*** 50.986*** 52.944*** R2 0.008 0.012 0.005 0.055 0.006 0.034
Country Dummy Yes Yes Yes Yes Yes Yes
Sig. 0.000 0.000 0.000 0.000 0.000 0.000
40
Table 4 Total Sample with Countries from 2002 to 2018
Table 4 presents the total sample included in the analysis. No. and Country stands for each country included in the analysis, with a total of 30 countries and 19669 observations. Total observations illustrates the number of observations aquired by country, and percent (%) of total sample displays how much of the total sample the observations consists of.
No. Country Total
observations Percent (%) of total sample 1 Austria 272 1,38 2 Belgium 527 2,68 3 Bermuda 187 0,95
4 British Virgin Islands 34 0,17
41
Table 5 Variable Definitions
This table shows the variables, their abbreviations, and descriptions of the variables included in the analyses.
Variable Name Abbreviation Description
Measure of CFP Return-on-equity ROE 𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟 𝑒𝑞𝑢𝑖𝑡𝑦 Return-on-assets ROA 𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 Return-on-invested-cash ROIC 𝑁𝑒𝑡 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑝𝑟𝑜𝑓𝑖𝑡 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥 𝐼𝑛𝑣𝑒𝑠𝑡𝑒𝑑 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 Measure of CSR
CSR CSR A balanced view of a company’s
economic, environmental, social , and corporate governance scores.
Measure of control variables
Current ratio CR 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
Financial leverage LEV 𝑇𝑜𝑡𝑎𝑙 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠
𝑇𝑜𝑡𝑎𝑙 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
Board size BSIZE Measure the total number of people
on the board
Measure of moderator variables
Long-term orientation LTO Scores between 0 and 100
Percentage of women PW Measures the percentage of women on the board
