The effects of Integrated thinking and CSR-related executive
compensation on firm performance
Abstract: In this paper, the effects of “integrated thinking” and Corporate Social Responsibility (CSR) related executive compensation on firm performance are studied. Although integrated thinking is a recent development and relatively new in existing research, there are reasons to argue that it may increase firm performance. I hypothesise that integrated thinking can benefit firm performance, more specifically financial, environmental and social performance. My sample includes US S&P 500 firms over a 12-year period (2004-2015). Results show that integrated thinking has a significant positive relation with firm performance. Furthermore, I hypothesise that CSR-related executive compensation increases environmental and social performance but decreases financial performance. According to agency theory, CSR incentives should align firm’s and managers’ objectives and therefore increasing environmental and social performance. My findings show that environmental and social performance indeed increase. Additionally, I hypothesise that CSR-related executive compensation will mitigate the relation between integrated thinking and firm performance. I argue that using extrinsic motivation, such as CSR-related executive compensation is less effective and can even harm intrinsic motivation as seen in integrated thinking. The results show a negative significant coefficient on environmental and social performance, meaning that firms with high levels of integrated thinking generally have lower environmental and social performance when also using CSR-related executive compensation. It seems like these measures are substitutes rather than compliments.
Student: P. Vulik Student number: S2800535
Supervisor: Dr. R. Trapp 2nd Assessor: Dr. C.A. Huijgen
University of Groningen MSc A&C: Controlling
June 20, 2017 Word count: 9848
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Introduction
In recent years, the importance of Corporate Social Responsibility (CSR) and the acknowledgement that it can create a competitive advantage has established (Porter & Kramer, 2006, 2011). According to (McWilliams, 2000), CSR is build up from abstract actions contributing to social welfare, without requiring profit maximization. CSR has proven to be beneficial for firms by having a significant positive effect on customer satisfaction, customer trust, and employees’ commitment (Backhaus et al., 2002; Mory et al., 2017). Lee (2017) found that CSR can also benefit shareholders besides the more obvious “other stakeholders” by increasing the reliability of analytical forecasting. Accordingly, this has led to a global interest shown by firms, investors and regulators in CSR (Barth et al., 2016). According to Hong et al. (2012), large US firms are allocating hundreds of millions of dollars to CSR-related programmes. Given the upcoming importance of CSR, firms are expected to report what actions they take and what outcomes there are with regard to their CSR. CSR reporting has become of increased importance for stakeholders. According to Carrol (2015), stakeholders are demanding firms to be more than just moneymaking machines and simply law-obeying. Socially responsible firms are expected to communicate topics such as business ethics, corporate citizenship, stakeholder management, creating shared value and sustainability (Carrol, 2015). Therefore, it seems only appropriate for firms to do so. Firms are expected to find ways to establish a CSR orientation within the organization.
Firms report to inform stakeholders. This way, management justifies its decision-making and reduces information asymmetry. Information asymmetry in the principal-agent setting entails that management has more information regarding the firm than shareholders (Jensen & Meckling, 1976). According to Tschopp (2005), information asymmetry occurs in CSR activities because CSR reporting is often not extensive or mandatory. Consequently,
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Diebecker and Sommer (2017) found that an increase in CSR performance results in a lesser amount of information asymmetry. Information is a key concern of agency theory, which explains the relation between the objectives of management and shareholders.
This paper will focus on two approaches that might reinforce a firm’s CSR orientation. One way is to establish the concept of “integrated thinking”, another one is to introduce CSR-related executive compensation.
Originally, firms only reported financial performance to their shareholders. Nowadays, more firms are assuming their CSR and are thereby integrating information of financial, social, environmental and governance activities in their annual reports to fulfil the needs of their stakeholders (Hopwood et al., 2010). To accompany this information, firms are increasingly using a relatively new development called Integrated Reporting (<IR>), whereby firms combine financial and CSR-related disclosures, which has gained significant momentum in the last ten years (Perego et al., 2016; Serafeim, 2015). The main goal of <IR> is to show the ability of long term value creation (IIRC, 2013a). By providing CSR information to the ever-increasing number of stakeholders, one could say that <IR> shifts the focus of shareholder reporting to stakeholder reporting. This gives meaning to <IR> and argues that there is more behind the integrated report and that <IR> is not merely combining financial and CSR activities in one report. Churet and Eccles (2014) support this by stating that <IR> is only the minor visible part of a broader concept called integrated thinking. The International Integrated Reporting Council (IIRC) (2013b) considers <IR> to be a product of a broader concept integrated thinking.
Integrated thinking is viewed as how executive management can deal with tensions between corporate efficiency and a model that considers broader societal health (IIRC 2013b; Oliver et al. 2016). This means that firms should find a balance between on one hand, financial performance and on the other, environmental and social performance. The formation of the IIRC in 2010 has especially contributed to the development of integrated thinking (de Villiers
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et al., 2014). The IIRC is an organization containing regulators, investors and firms, who promote the use of integrated thinking within mainstream business practice. They do this by creating a framework to accelerate the development across the world.
It is important to investigate the relationship between integrated thinking and frim performance because it is still unclear whether integrated thinking has a positive effect on overall, or more specific types of firm performance. Integrated thinking offers several advantages that might improve firm performance. Examples of these advantages are a more comprehensive formulation and a more effective way of disclosing the firm strategy, reducing information asymmetry, or changes in environment and risks, which in turn results in better informed stakeholders and increases capital allocation (Lee & Yeo, 2016). Zhou et al. (2017) found that <IR>, which would require integrated thinking, can reduce information asymmetry and therefore a reduce analyst’s forecasts spread. Given that integrated thinking is balancing financial and CSR performance, there could be a structural difference in firm performance between firms who have reached a higher level of integrated thinking than others. Consequently, this leads to the first research question:
RQ1: How does the level of “integrated thinking” influence firm performance?
According to agency theory, incentives need to be in place to ensure that management (the agent) acts in the interest of the firm’s owners (the principals) (Baiman, 1990). It further assumes that the agent is opportunistic and self-serving, which leads to a corresponding need for an alignment of interests. To support this, firms could introduce CSR-related performance targets to executives with corresponding incentives to align their personal interest with the firm’s objectives. CSR-related executive compensation is a monetary reward offered to executives when targets in relation to social, environmental and governance matters are met. The goal of the incentives is to influence executive behaviour and thus influencing
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organizational behaviour. Examples of CSR-related performance targets are a reduction of CO2 emissions, an increase in transparency and more engagement with social communities. By making certain CSR-related subjects more attractive to executives by establishing incentives to activities such as waste prevention (King & Lenox, 2002) and environmental management (Klassen & McLaughlin, 1996), firms can realise a higher CSR performance.
According to Maas and Rosendaal (2015), existing compensation plans do not promote CSR targets enough and mainly focus on financial performance. Maas and Rosendaal (2015) examined the usage of sustainability targets in executive compensation and found that in 2010 on average 33 percent of firms used sustainability targets in executive compensation. As a reaction to the absence of CSR targets, a growing number of academics and practitioners recognise the need for inclusion of CSR targets in executive compensation plans (Maas & Rosendaal, 2015).
Despite CSR-related executive compensation research being in its infancy, there is some previous research on the relation between CSR-related executive compensation and firm performance. However, results of previous research seem to be contradicting in some ways. On one hand, academics found that firms with shareholder-friendly corporate governance are more likely to provide compensation to executives linked to firm social performance outcomes (Hong et al., 2016). They further found that these direct CSR incentives for executives are an effective mechanism to increase firm social performance (Hong et al., 2016). Maas (2015) found that firms using quantitative and hard CSR-related compensation targets have significantly less CSR weaknesses and therefore a higher CSR performance.
On the other hand, academics argue that allocating capital to CSR-related activities can reduce capital allocation efficiency and thus reducing financial performance (Bhandari & Javakhadze, 2017). This gives reason to assume that financial performance may decrease when utilizing CSR-related executive compensation. Especially for shareholders, the benefits of
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integrated thinking seem lacking because the addition of CSR activities may reduce profitable investments.
Following agency theory, CSR-related executive compensation implies the potential to align the CSR objectives of a firm with its management and stakeholders, thus strengthening environmental and social performance. However, presenting CSR-targets to executives can also have negative effects on financial performance. Consequently, this leads to the second research question:
RQ2: How does CSR-related executive compensation influence firm performance?
Additionally, this study will test if the relationship between integrated thinking and firm performance is mitigated by CSR-related executive compensation. This interaction will test if CSR-related executive compensation is an effective additional tool if firms are already maintaining a high level of integrated thinking. According to agency theory, there is no reason to argue that CSR-related executive compensation would not reinforce this relationship.
However, there are arguments that CSR-related executive compensation will not reinforce the relation between integrated thinking and frim performance. According to Graafland and van de Ven (2006), extrinsic motives such as CSR-related executive compensation are not as effective than intrinsic motive, which is a moral duty felt by an individual. Because firms are not forced to implement integrated thinking they are mainly doing it because of intrinsic motive. Therefore, CSR-related executive compensation might not be effective in firms with a high level of integrated thinking. The effectiveness of one approach can be dependent on the other. Consequently, this leads to the third research question:
RQ3: To which extent does CSR-related executive compensation influence the relation
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The data for this study is mainly collected from the ASSET4 database by Thomson Reuters, specifically from the Environmental, Social and Governance (ESG) category. The ESG research data provides performance information on over 6.000 global firms with over 400 metrics including sustainability performance (Thomson Reuters, 2017). The performance data is categorised in four pillars; economic, social, environmental and corporate governance. Various performance indicators under the corporate governance pillar serve as a proxy for integrated thinking. Financial, environmental and social performance are collected by the overall score of the economic, environmental and social pillars respectively. I use United States (US) firms form the Standard & Poor’s (S&P) 500 index. US firms have been used before in research regarding CSR-related executive compensation (Hong et al, 2016), integrated thinking (Serafeim, 2015), CSR performance (Mishra, 2017) and economic performance (Sadovnikova & Pujari, 2017). Also, given that most data are available of the S&P 500 index by far, this will serve as an appropriate sample. To ensure the introduction and development process of integrated thinking is fully captured, data are collected from the year 2004 until the latest possible year 2015. To test the hypotheses, I use six regression models further specified into two or three sub models.
First, findings show that integrated thinking does have a positive and significant relation with firm performance. More specifically, the association on all three defined dimensions of firm performance, namely financial, environmental and social are positive and significant. Second, the results show a positive and significant direct relation between CSR-related executive compensation and CSR-related performance. However, when testing the moderating effect of CSR-related executive compensation on the relation between integrated thinking and firm performance, a negative coefficient was found for environmental and social performance. This means that firms with a high level of integrated thinking can mitigate their social and environmental performance by also using CSR-related executive compensation.
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This paper contributes to the emerging research of the implications of <IR>, integrated thinking and CSR on management accounting (e.g., Arjaliès & Mundy, 2013; Bouten & Hoozée, 2013; Gond et al., 2012). First, my findings will explore whether firm performance will be different for firms with a high or low level of integrated thinking. Previous research on <IR> and firm performance only focused on South Africa, where most research is conducted because <IR> is mandatory (Barth et al., 2016). In US firms, the spectrum of integrated thinking usage will be far more diverse. Second, this study investigates an additional association introducing CSR-related executive compensation as an independent and moderating variable. This will determine whether CSR-related compensation influences firm performance directly and the relation between integrated thinking and firm performance. Third, this research will contain a long timeframe capturing the introduction and development until the current state of integrated thinking and CSR-related executive compensation.
The remainder of this paper is structured as follows. In section 2 the concepts of integrated thinking, CSR-related executive compensation and financial, social and environmental performance are explored and the hypotheses are development. In section 3 the empirical method and data analysis are described. In section 4 the results are presented and section 5 discusses the results and concludes the paper.
Literature Review and Hypothesis Development
Integrated Thinking
This section reviews existing literature and develops a theoretical structure which ultimately leads to the formulation of the hypotheses. Integrated thinking and <IR> are two closely related concepts. According to King (2015), the use of <IR> influences executive behaviour by making management identify key stakeholders and taking their needs, interests
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and expectations into account. King (2015) further argues that to publish an integrated report, a firm would have had to adopt the concept of integrated thinking. Furthermore, the IIRC (2013b) also assumes that publishing an integrated report requires integrated thinking. Therefore, this paper assumes <IR> to be part of the broader concept integrated thinking. Previous research on <IR> can be relevant to create an idea of integrated thinking and will help develop the hypotheses.
Academics have used <IR> research data before to create a proxy for integrated thinking which could be somewhat imprecise (Churet and Eccles, 2014). Although <IR> type research can be helpful to base the hypotheses from, as it should also reflect integrated thinking within a firm, is not a perfect proxy for integrated thinking as it is merely the superficial product resulting from integrated thinking (IIRC 2013b). There is a chance that some firms only publish an integrated report for legitimacy reasons without it having much impact on the actual decision-making. This study will not measure if a firm publishes an integrated report with a dummy variable, but rather tries to capture the underling concept of integrated thinking. Different levels of integrated thinking will be measured of firms regardless if they use <IR>, publish standalone sustainability reports, or only use financial reporting.
The IIRC (2013b) defines four objectives of <IR>. First, <IR> aims to develop a more cohesive and efficient way to corporate reporting. Second, a more effective allocation of capitals to ensure short, medium and long-term value creation. Third, to enhance accountability and stewardship in capitals (financial, manufactured, intellectual, human, social and relationship, and natural). Forth and most relevant for this paper, to support integrated thinking and decision-making with a focus on value creation.
Integrated thinking is a relatively new and unexplored area in accounting for sustainability (Feng et al., 2017; Hurth, 2017; King, 2015; Oliver et al., 2016; Venter et al., 2016). The IIRC (2013b) defines integrated thinking as the active consideration by a firm of
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the relationships between the aforementioned capitals and various operating and functional units. They also mention that integrated thinking leads to integrated decision-making that considers the short, medium and long-term value creation. Interconnected factors that have significant impact on the value creation over time include: (1) the capitals and trade-offs between them, (2) the governance structure to prevent short term thinking and stakeholders’ needs, (3) the business model to respond to risks and opportunities and (4) the firm’s value drivers, activities and performance (IIRC 2013b). The more the concept of integrated thinking is embedded in the activities of an organization the more likely it is that stakeholders’ needs are reflected and the more natural it will be to collect connected information (IIRC, 2013b).
Oliver et al. (2016) argue that integrated thinkers can see details and relations between things to a higher degree than non-integrated thinkers. They also argue that integrated thinking can be split into hard and soft thinking based on the system thinking approaches of Checkland (1988). Hard systems thinking is a more analytical way of thinking that defines objectives and identifies techniques, which has been associated with traditional silo-type managements systems. Soft system thinking is more about non-concrete, complex, ill-defined matters, which is more likely to be in integrated management systems.
Integrated thinking and financial performance. There has been little research about the relationship between the concept of integrated thinking and firm performance (Knauer & Serafeim, 2014). Existing research is mainly qualitative because it can be challenging to define a quantitative measure of integrated thinking.
Knauer and Serafeim (2014) argue that through integrated thinking firms can change their investor base to be more long-term oriented by making sustainability issues a major strategic focus and reporting them in an integrated way. They created a framework that captures a firm’s competitiveness depending on preserving and enhancing different capitals to deliver excellent
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products and services while minimising negative externalities. Negative externalities are actions by a firm that generate marginal social costs for stakeholders other than shareholders, for example, environmental pollution (Knauer & Serafeim, 2014).
Contrary to research on integrated thinking, there is a considerable amount of research on the relationship between <IR> / sustainability reporting and firm performance, more specifically divided in the relation between <IR> and financial performance (Barth et al., 2016; Churet & Eccles, 2014; Eccles et al., 2014; Lee & Yeo, 2016; Zou et al., 2017) and the relation between <IR> and environmental and social performance (Lai et al., 2016; Mervelskemper & Streit, 2016). Although, as mentioned before, <IR> is not the same as integrated thinking, previous research can help to construct an idea of what effect integrated thinking could have on firm performance.
Integrated thinking can be important for all stakeholders. However, investors are ultimately interested in the effect on financial performance. Consequently, this paper first explores the domain of the relation between integrated thinking and financial performance. Churet and Eccles (2014) mention that the question if integrated thinking leads to higher financial performance remains largely unanswered. In their paper, they used Return On Invested Capital (ROIC) as a measure of financial performance and found no evidence that <IR> is correlated with a higher ROIC, but neither did they find evidence that <IR> negatively influences ROIC.
However, there is some research suggesting that a higher level of sustainability reporting is linked with higher financial performance. Proponents of integrated thinking argue that it increases the quality of information disclosed to the capital market, which in turn increases the efficiency of capital allocation (Lee & Yeo, 2016). Lee and Yeo (2016) state that some benefits of integrated thinking include: (1) a more effective formulation of the firm strategy and how it responds to changes in the external environment; (2) risks are formulated in a more
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comprehensive way and are disclosed in a more effective way, increasing value creation, Barth et al. (2016) add to this by arguing that a better understanding of risks can lead to lower cost of capital; (3) risk management is more comprehensive including opportunities to support value creation; (4) a more non-financial focus to meet stakeholders needs and interests; (5) a better disclosure of resource allocation; (6) a more integrated organization structure with more connected departments to produce an integrated report; (7) improved internal processes as a result of these integrated departments; and (8) a lower cost of capital.
According to Barth et al. (2016), because of integrated thinking, integrated reports have the potential to reduce information asymmetry. Barth et al. (2016) argue that <IR> presents a more holistic view and therefore improves the monitoring of managers’ decisions. They further argue that reporting concerning the aforementioned six capitals distinguished by the IIRC (2013b) can increase the association of employees and customers with the firm, resulting in increased sales and financial performance. Zhou et al. (2017) examined the benefits of <IR> that also resulted in a reduction of information asymmetry. They provided evidence that analyst forecast error reduces when firms align more with the <IR> framework, arguing that integrated reports provide new relevant information and report preceding information in a more effective way. With the reduction of information asymmetry, stakeholders are better informed and agency costs should reduce.
RobecoSAM (2011) identified sustainability trends that have impact on the value creating ability of a firm and studied the predictive power of sustainability scores that enhances the stock picking process. They found consistent outperformance by leading firms in sustainability reporting by having higher stock returns. Eccels, Ioannis and Serafeim (2014) ague that firms who voluntarily adopted sustainability are more likely to have processes for stakeholder engagement, to have a longer-term orientation and have a higher degree of measurement and disclosure of non-financial information, which are all traits of integrated
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thinking. They found evidence that support their reasoning and a strong positive relation between sustainability reporting and financial performance over the long term as well.
Although sustainability reporting is not the same as integrated thinking, Mervelskemper & Streit (2015) argue that firms using integrated reports often have even higher environmental and social performance than firms using standalone sustainability reports. Mervelskemper and Streit (2015) explain this by saying that having a standalone sustainability report results in a disconnectedness of information which has been criticized to be deficient to stakeholders. While there is not much research concerning the relation between integrated thinking and financial performance, the research available on the product of integrated thinking, namely <IR>, indicates that a higher amount of integrated thinking should result in higher financial performance.
Another argument that supports the relationship between integrated thinking and financial performance is that financial and CSR activities can be mutually beneficial for firm performance. To illustrate, higher financial performance can give more room to focus on environmental and social practices (e.g. Chia-Ying et al., 2017) and in turn, higher environmental and social performance can lead to a higher financial position (Eccels et al., 2014; RobecoSAM, 2001). These arguments lead to the following hypothesis.
H1 Integrated thinking is positively related to financial performance.
Integrated thinking and CSR performance. Second, this paper explores the domain of the relationship between integrated thinking and environmental and social performance. Similar to the relationship between integrated thinking and financial performance, it seems more natural for academics to resort to <IR> / sustainability reporting instead of trying to capture the broader concept of integrated thinking. According to King (2015), firm performance
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can only be sustained when sustainability issues are imbedded in the long-term strategy and if the firm makes money and products in a sustainable way.
Eccles and Krzus (2010) argue that firms using integrated thinking can show their environmental and social performance in a clearer and better understandable way since it is coupled to financial information reducing information asymmetry. They further argue that <IR> combines shareholder and stakeholder theory by offering value increasing information and describing how this value is generated which further decreases information asymmetry. Mervelskemper and Streit (2016) argue that integrated reports are qualitatively superior in the eyes of proponents and the found that capital market investors value environmental and social performance higher when firms publish a sustainability report regardless if it is integrated or not. Arnold et al., (2012) found similar results.
These studies are mostly using a dummy variable of <IR> and do not capture a concept of integrated thinking. Still, these previous results give reason to expect that integrated thinking should also have a positive effect on environmental and social firm performance leading to the second hypothesis.
H2 Integrated thinking is positively related to environmental and social performance.
CSR-related Executive Compensation
According to agency theory, agency costs can occur when management interests are not aligned with the interests of the owners reducing shareholder value (Jensen & Meckling 1976). Jensen and Meckling (1976) argue that if both the agent and the principal are pursuing to maximise their interests, it is likely that the agent does not always make decisions in the best interest of the principal. They further argue that the principal can limit this misalignment by implement appropriate incentives. However, by implementing these incentives the principal is confronted with monitoring and bonding costs, which are forms of agency costs. To increase
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firm performance, executive compensation incentives need to result in a higher financial return than the monitoring costs incurred.
In the past, these traditional incentives structures mainly focussed on financial targets (Ricart et al. 2005). Nowadays, more firms have been implementing CSR-related targets into the executive compensation structure (Maas & Rosendaal, 2016). Maas and Rosendaal (2016) studied CSR-related performance targets in executive remuneration in eleven countries including the USA. They found that in the S&P100 index, 28 firms used either environmental or social performance targets, which is slightly less than average.
CSR-related executive compensation and financial performance. Besides the perhaps more obvious increase in CSR-related performance, studies suggest contradicting results that CSR-related executive compensation can increase financial performance and therefore overall firm performance.
King and Lenox (2002) found that CSR activities such as waste prevention can often lead to improved measurement of the production process and therefore increased process innovation, which in turn leads to an increase in financial performance. Klassen and McLaughlin (1996) argue that environmental management has potential to increase financial performance by having minimal explicit costs but have large benefits such as increased morale or increased productivity. Hong et al. (2016) found evidence that CSR incentives increase overall shareholder value instead of resulting in more agency costs.
However, presenting CSR-targets to executives can also have negative effects on financial performance. Bhandari and Javakhadze (2017) propose that allocating capital to CSR-related activities reduces the firm-level capital allocation efficiency and thus reducing financial performance. They mention that CSR allocated capital could otherwise be used for funding growth opportunities (Preston & O’Bannon, 1997) and that CSR-linked executive
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compensation can potentially result in inefficiencies in investment policies (Cheng et al., 2013). They also argue that managers tend to strictly adhere CSR-targets, which may result in a further tendency to neglect profitable investments for shareholders that are potentially harmful for other stakeholders. This gives reason to assume that financial performance may decrease when utilizing CSR-related executive compensation.
Although there seem to be some advantages to financial performance with CSR-related executive compensation, they only seem to result from a better CSR performance. The direct effect of CSR-related executive compensation on financial performance is more likely to be negative because of a shift in focus towards CSR activities and ineffective capital allocation, which results in the third hypothesis.
H3 CSR-related executive compensation is negatively related to financial performance.
CSR-related executive compensation and CSR performance. Previous research concerning CSR-related executive compensation and CSR performance also seems to be somewhat contradicting. The relation between executive compensation and CSR performance has only been partially supported (Maas & Rosendaal, 2016).
On one hand, Maas and Rosendaal (2016) indicate that practitioners and academics have doubts about including CSR targets in executive compensation plans. Bender and Moir (2006) found that firms often have difficulties in determining performance related pay which in some cases drives to good behaviour and in others can lead to dysfunctional behaviour. Remuneration committees often consist of the board, executives and shareholders (Bender & Moir, 2006). Except for the sometimes-considered view of employees and customers, stakeholders are mostly not included in determining performance related pay (Bender & Moir, 2006). Considering CSR-related performance should align the objectives of executives and
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stakeholders, this raises the question if stakeholders are well represented in determining CSR targets and if not, if these CSR-related targets are effective.
On the other hand, Maas (2015) found that firms using CSR-related compensation targets have significantly less CSR weaknesses and thus a higher environmental and social performance. Hong et al. (2016) found that direct CSR incentives for executives is an effective mechanism to increase firm social performance.
According to agency theory, it seems that CSR-related executive compensation should have a positive impact on environmental and social performance. Although previous research on CSR-related executive compensation is somewhat contradicting, it seems to be leaning towards a positive relation between CSR-related executive compensation and environmental and social performance if used correctly. This leads to the forth hypothesis.
H4 CSR-related executive compensation is positively related to environmental and social
performance.
Moderation Effect
Graafland and van de Ven (2006) found that executives with moral (intrinsic) motive, which means that executives view CSR as a moral duty of the firm, results in a greater commitment to CSR performance than strategic (extrinsic) motive, which means that executives view CSR as a contribution to financial success. Hofeditz et al. (2017) present similar results and found that executives are particularly influenced by intrinsic motive compared to lower level management. This implies that creating intrinsic motivation through integrated thinking, may be more valuable to make executives focus on CSR performance than creating extrinsic motivation in the form of CSR performance targets. Additionally, the addition of CSR-related executive compensation may harm intrinsic decision-making by restricting or
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misguiding executives. This can lead to ineffective decision-making and can potentially result in a lower environmental and social performance. Therefore CSR-related executive compensation should have a mitigating effect on the relation between integrated thinking and environmental and social performance.
Additionally, the moderating effect of CSR-related executive compensation on the relation between integrated thinking and financial performance should be mitigating due to even less focus going to financial compensation targets. Bhandari and Javakhadze (2017) argue that executives tend to value CSR-related compensation targets more than financial targets. Integrated thinking already shifts the financial focus to a more CSR oriented one. CSR-related executive compensation could result in an even further distraction from financial targets. The effectiveness of integrated thinking could be dependent on CSR-related executive compensation. This leads to the following two hypotheses.
H5 CSR-related executive compensation mitigates the positive relation of integrated thinking
and financial performance.
H6 CSR-related executive compensation mitigates the positive relation of integrated thinking
and environmental and social performance.
The hypotheses development is summarized in the research model presented in Figure 1.
Figure 1. Research model
H5, H6 H1, H2
H3, H4
CSR-related executive compensation
Financial, environmental and social performance
Integrated thinking
CSR-related executive compensation
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Research Design
Data Collection and Sample
This section contains the justification of my research methodology, including the research approach, sample, data collection and data analysis. The research is based on archival data form secondary sources to find a relation between integrated thinking, CSR-related executive compensation and firm performance. In this case, archival data is the most appropriate because the study can have large quantities of information over a long timeframe, which gives insight in the whole development of integrated thinking and CSR-related executive compensation with limited resources. Furthermore, because of a large sample, archival data can result in newer and more powerful statistics (Shultz et al., 2001). This may create different results than existing qualitative research on integrated thinking.
To construct the sample, I use US firms, more specifically from the S&P index, for a number of reasons. First, US firms have been used before in research regarding CSR-related executive compensation (e.g. Hong et al, 2016), Integrated thinking (e.g. Serafeim, 2015), CSR performance (e.g. Mishra, 2017) and economic performance (e.g. Sadovnikova and Pujari, 2017). Second, most of the archival data is available for US firms giving a more reliable result and less exclusion. Third, data is available for a long-time period capturing the introduction and development process of integrated thinking and CSR-related compensation. Forth, the spectrum of integrated thinking in US firms is diverse ranging from pure financially driven to highly CSR conscious firms. In the Thomson Reuters ASSET4 ESG database, Environmental Social and Governance data is available starting from 2002. However, in 2002 and 2003, data is only available of roughly 50% of the S&P 500 index. Because of this, I decided to collect data from 2004 until the latest possible year 2015. This decreased the number of possible observations
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from 7000 to 6000. Integrated thinking was still very new in 2002 and 2003 and the sample is still sufficiently large so this will most likely not result in a selection bias.
The data for the dependent, independent and moderating variables are collected from the Thomson Reuters ASSET4 ESG database. The database is a rich source of ESG data with over 150 expert ESG analysts collecting more than 400 data measures from over 6,000 companies, which makes it one of the largest ESG content collection operators in the world (Thomson Reuters, 2017). All data is manually gathered form publicly available information sources to ensure standardised, comparable and reliable information, then all ESG data is quality controlled and verified by experienced analysts and robust automated checks, which ensures reliability (Thomson Reuters, 2017). The data framework is built around four pillars, economic, environmental, social and corporate governance performance. These four pillars are build up from categories. To give an illustration of these categories here are three examples. The first is the emission reduction category under the environmental pillar. This category measures the commitment and effectiveness of management to reduce environmental emission in several forms such as air emissions, waste, hazardous waste and water discharges. The second example is the workforce health and safety category under the social pillar. This category measures the commitment and effectiveness of the management to ensure a healthy and safe workplace by determining factors as workforce loyalty, productivity, well-being and stress. The third category is board functions within the corporate governance pillar. This category measures the commitment and effectiveness of the management to follow best practice corporate governance principles and the way a firm ensures an effective board by having board committees with tasks and responsibilities. In turn, these categories consist of more specific indicators.
To summarize, category scores are compiled from the underlying indicator scores and pillar scores are calculated using the category scores. These scores have previously been used
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in ESG and CSR research (Chen et al. 2013; Ioannou & Serafeim. 2012; Mervelskemper & Steit, 2016; Serafeim, 2015).
Variables
The dependent variable firm performance is measured based on the sub-variables financial, environmental and social performance. Financial performance (FINSCORE) is captured by the pillar score of economic performance. This pillar does not only consist of key financial numbers and ratios such as ROA and operating profit margin, but also includes a reflection of the overall health and the ability to generate long term shareholder value with less “hard” measures. Examples are, the long-term communications strategy with shareholders, client base satisfaction programmes, avoiding anti-competitive behaviours and price fixing. Environmental performance (ENVSCORE) is captured by the environmental pillar score. This pillar measures a firm’s impact on natural systems and reflects how management avoids environmental risks and capitalizes on environmentally related opportunities to ensure long-term shareholder value. Social performance (SOCSCORE) is captured by the social pillar score. This pillar score measures the ability to create loyalty and trust among the society, customers and the workforce. It reflects a firm’s reputation and the health of its licence to operate. All dependent sub-variables are metric on a scale from 0 to 100.
To measure the independent variable level of integrated thinking (ITSCORE), I use the category score “Integration/Vision and Strategy” under the corporate governance pillar. This category contains 39 dummy and metric indicators including “Does the company set specific objectives to be achieved on the integrated strategy?”, “Has the company set targets or objectives to be achieved on the integration of ESG issues into its strategy and day-to-day decision making” and “Does the company report about the challenges or opportunities linked to the integration of financial and extra-financial issues?”. The category score is metric on a
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scale of 0 to 100 and calculated using percentile rank scoring methodology having the advantage of not being sensitive to outliers.
The independent and moderating variable CSR-related executive compensation is measured by the indicator “Policy/Sustainability Compensation Incentives” (CSRCOMP). This is a metric indicator capturing the amount of senior executive’s compensation linked to CSR/Sustainability targets displayed as a metric value between 0 and 100.
To control for other factors expected to influence firm performance, I use commonly regarded control variables for firm performance (Crifo et al., 2016; Schons & Steinmeir, 2016). I use return on assets (ROA) for profitability as in general this affects firm performance (Waddock & Graves, 1997). This control variable differs from the dependent variable FINSCORE because ROA will just measure profitability whereas FINSCORE is a broader variable including a reflection of the overall health and the ability to generate long term shareholder value of a firm. I use sales (SALES) and sales growth (SALESGROWTH) for size and growth respectively (Schons and Steinmeier, 2015), and financial leverage (LEVERAGE) (Hong et al., 2016). Furthermore, I added dummy variables for year (YEAR) and industry (INDUSTRY). All control variables are taken from the Thomson Reuters Worldscope database. An overview of variables with additional details is presented in Table 1.
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Table 1. Variable Table
Variable Description Data source
FINSCORE Financial firm performance captured by the pillar score of economic performance
Thomson Reuters ASSET 4 ESG ENVSCORE Environmental firm performance captured by the pillar score
of environmental performance
Thomson Reuters ASSET 4 ESG SOCSCORE Social firm performance captured by the pillar score of social
performance
Thomson Reuters ASSET 4 ESG ITSCORE Integrated thinking score captured by the “Integration/Vision
and Strategy” category score under the corporate governance pillar
Thomson Reuters ASSET 4 ESG
CSRCOMP CSR-related executive compensation captured by the indicator score “Policy/Sustainability Compensation Incentives”
Thomson Reuters ASSET 4 ESG
ROA Return on assets to capture firm profitability measured as net
income over total assets
Thomson Reuters Worldscope SALES To capture firm size measured by dollar amount of net sales or
revenue
Thomson Reuters Worldscope SALESGROWTH To capture firm growth measured by annual sales growth Thomson Reuters
Worldscope LEVERAGE To capture leverage measured as total debt to common equity Thomson Reuters
Worldscope YEAR Categorisation by year measured by a dummy variable Thomson Reuters
Worldscope INDUSTRY Categorisation by six industry types measured by a dummy
variable
Thomson Reuters Worldscope
Data Analysis
I use multiple linear regression to test my hypotheses. This type of regression is most suited because there are multiple independent and control variables consisting of continuous data. To test the relation between integrated thinking and financial performance stated in H1, I
use regression model (1).
𝐹𝐼𝑁𝑆𝐶𝑂𝑅𝐸 = 𝛽0+ 𝛽1𝐼𝑇𝑆𝐶𝑂𝑅𝐸+ 𝛽2𝑅𝑂𝐴 + 𝛽3𝑆𝐴𝐿𝐸𝑆 + 𝛽4𝑆𝐴𝐿𝐸𝑆𝐺𝑅𝑂𝑊𝑇𝐻 + 𝛽5𝐿𝐸𝑉𝐸𝑅𝐴𝐺𝐸 +
23
To analyse the relation between integrated thinking and environmental and social performance stated in H2, I use the models (2) and (3).
𝐸𝑁𝑉𝑆𝐶𝑂𝑅𝐸 = 𝛽0+ 𝛽1𝐼𝑇𝑆𝐶𝑂𝑅𝐸+ 𝛽2𝑅𝑂𝐴 + 𝛽3𝑆𝐴𝐿𝐸𝑆 + 𝛽4𝑆𝐴𝐿𝐸𝑆𝐺𝑅𝑂𝑊𝑇𝐻 + 𝛽5𝐿𝐸𝑉𝐸𝑅𝐴𝐺𝐸 +
𝛽6𝑌𝐸𝐴𝑅 + 𝛽7𝐼𝑁𝐷𝑈𝑆𝑇𝑅𝑌 + 𝜀 (2)
𝑆𝑂𝐶𝑆𝐶𝑂𝑅𝐸= 𝛽0+ 𝛽1𝐼𝑇𝑆𝐶𝑂𝑅𝐸+ 𝛽2𝑅𝑂𝐴 + 𝛽3𝑆𝐴𝐿𝐸𝑆 + 𝛽4𝑆𝐴𝐿𝐸𝑆𝐺𝑅𝑂𝑊𝑇𝐻 + 𝛽5𝐿𝐸𝑉𝐸𝑅𝐴𝐺𝐸 +
𝛽6𝑌𝐸𝐴𝑅 + 𝛽7𝐼𝑁𝐷𝑈𝑆𝑇𝑅𝑌 + 𝜀 (3)
To analyse the direct relation between CSR-related executive compensation and financial performance, I use regression model (4). Additionally, model (4) is used to test the moderating effect of CSR-related executive compensation on the relationship between integrated thinking and financial performance. The model is used to test H3 and H5.
𝐹𝐼𝑁𝑆𝐶𝑂𝑅𝐸= 𝛽0+ 𝛽1𝑍𝑆𝐶𝑂𝑅𝐸𝐼𝑇𝑆𝐶𝑂𝑅𝐸+ 𝛽2𝑍𝑆𝐶𝑂𝑅𝐸𝐶𝑆𝑅𝐶𝑂𝑀𝑃+ 𝛽3 𝐼𝑇𝑆𝐶𝑂𝑅𝐸 𝑥 𝐶𝑆𝑅𝐶𝑂𝑀𝑃+ 𝛽4𝑅𝑂𝐴 +
𝛽5𝑆𝐴𝐿𝐸𝑆 + 𝛽6𝑆𝐴𝐿𝐺𝑅𝑂𝑊𝑇𝐻 + 𝛽7𝐿𝐸𝑉𝐸𝑅𝐴𝐺𝐸 + 𝛽8𝑌𝐸𝐴𝑅 + 𝛽9𝐼𝑁𝐷𝑈𝑆𝑇𝑅𝑌 + 𝜀 (4)
To analyse the direct relation between CSR-related executive compensation and environmental and social performance, I use regression models (5) and (6). Additionally, I use models (5) and (6) to test for the moderating effect of CSR-related executive compensation on the relationship between integrated thinking and environmental and social performance. These models are used to test H4 and H6. As shown in the models (4), (5) and (6), I z-standardized
ITSCORE and CSRCOMP.
𝐸𝑁𝑉𝑆𝐶𝑂𝑅𝐸 = 𝛽0+ 𝛽1𝑍𝑆𝐶𝑂𝑅𝐸𝐼𝑇𝑆𝐶𝑂𝑅𝐸+ 𝛽2𝑍𝑆𝐶𝑂𝑅𝐸𝐶𝑆𝑅𝐶𝑂𝑀𝑃+ 𝛽3 𝐼𝑇𝑆𝐶𝑂𝑅𝐸 𝑥 𝐶𝑆𝑅𝐶𝑂𝑀𝑃+ 𝛽4𝑅𝑂𝐴 +
𝛽5𝑆𝐴𝐿𝐸𝑆 + 𝛽6𝑆𝐴𝐿𝐺𝑅𝑂𝑊𝑇𝐻 + 𝛽7𝐿𝐸𝑉𝐸𝑅𝐴𝐺𝐸 + 𝛽8𝑌𝐸𝐴𝑅 + 𝛽9𝐼𝑁𝐷𝑈𝑆𝑇𝑅𝑌 + 𝜀 (5)
𝑆𝐶𝑂𝑆𝐶𝑂𝑅𝐸= 𝛽0+ 𝛽1𝑍𝑆𝐶𝑂𝑅𝐸𝐼𝑇𝑆𝐶𝑂𝑅𝐸+ 𝛽2𝑍𝑆𝐶𝑂𝑅𝐸𝐶𝑆𝑅𝐶𝑂𝑀𝑃+ 𝛽3 𝐼𝑇𝑆𝐶𝑂𝑅𝐸 𝑥 𝐶𝑆𝑅𝐶𝑂𝑀𝑃+ 𝛽4𝑅𝑂𝐴 +
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Results
Integrated Thinking and Firm Performance
This section contains the descriptive statistics, correlations and the results of regression models (1), (2) and (3). With these results, I will be able to address H1 and H2, which stated the
positive effect of integrated thinking on financial (H1), environmental (H2) and social (H2) performance.
In Table 2 the descriptive statistics are displayed. The means of the independent and dependent variables range from (48.54) for ITSCORE to (62.01) for FINSCORE. The standard deviations range form (24.99) for FINSCORE to (30.18) for ENVSOCRE, which suggests a decent amount of variation.
Table 2. Descriptive Statistics
N Minimum Maximum Mean Std. Deviation
ITSCORE 6000 8.71 98.64 48.54 29.91 FINSCORE 6000 1.58 98.97 62.01 24.99 ENVSCORE 6000 8.28 97.47 53.19 30.18 SOCSCORE 6000 3.55 98.93 56.26 26.39 CSRCOMP 6000 24.48 100.00 50.38 25.92 ROA 6000 -104.18 104.52 7.43 8.06 SALES* 6000 0.2 485651 17996 35192 SALESGROWTH 6000 -88.62 370146.67 76.80 4778.96 LEVERAGE 6000 -77921.74 32245.91 78.30 1532.40
Valid N (list wise) 6000 *SALES in thousands
Table 3 shows the correlation of the variables. The table reports that ITSCORE, FINSCORE, ENVSCORE, SOCSCORE and CSRCOMP are all significantly correlated with each other. Meaning that if a firm scores high on one pillar/category it is likely to score high in other pillars/categories as well, indicating that the relationship between environmental, social and financial performance is mutually reinforcing. These results are in line with previous
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findings (Chia-Ying et al., 2017; Eccels et al., 2014; RobecoSAM, 2011). The correlation between independent variables all have a variance inflation factor lower than 1.2, which indicates that there are no multicollinearity problems. Furthermore, these correlations do not lead to multicollinearity issues because they are partially between dependent sub-variables.
Additionally, the table reports that ROA has a positive significant correlation with FINSCORE (.051) and a negative significant correlation with CSRCOMP (-.029). While the correlation of ROA and FINSCORE may be expected, it is interesting to observe that firms with a lower ROA generally have a lower level of CSRCOMP. However, these correlations are not very impactful. SALES seem to have a far larger significant positive correlation with the dependent variables. This means that firms generally score higher in the financial, environmental and social scores when sales are higher. Because sales are a frequently used measure for firm size, it seems that larger firms generally score higher. Additionally, the correlation between SALES and ENVSCORE (.274) and SOCSCORE (.236) are higher than the correlation to FINSCORE (.168) which is quite remarkable.
Table 3. Correlations 1. 2. 3. 4. 5. 6. 7. 8. 1. ITSCORE 1 2. FINSCORE .475*** 1 3. ENVSCORE .796*** .480*** 1 4. SOCSCORE .728*** .590*** .764*** 1 5. CSRCOMP .311*** .154*** .266*** .282*** 1 6. ROA -.025 .051*** -.020 -.010 -.029** 1 7. SALES .273*** .168*** .274*** .236*** .149*** -.038*** 1 8. SALESGROWTH -.007 -.023 -.016 -.023 -.004 .001 -.007 1 9. LEVERAGE .010 -.018 .016 .006 .007 .006 .004 .001 *Significance at the 5% level
**Significance at the 1% level ***Significance at the 0.1% level
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Table 4 shows the multiple regression results of the level of integrated thinking and financial firm performance. The table includes two models. The first model (1a) consists of the control variables and the dependent variable FINSCORE. The second model (1b) introduces the independent variable ITSCORE. As shown in model 1b, the coefficient for ITSCORE indicates that the level of integrated thinking is significantly and positively related to firm financial performance (β= .390, p< .001). This finding supports H1, which stated that an
increase in the level of integrated thinking leads to a positive increase in firm financial performance. Therefore, I conclude that integrated thinking is positively related to financial performance. Of the control variables, ROA and SALES have a significant positive impact on financial performance with coefficients of (β= .179, p< .001) and (β= .000 p< .001) respectively in model 1b. Although the relation with sales is significant, it seems to be surprisingly low.
Table 4. Regression Model 1 - Integrated thinking and financial performance Model 1a: Multiple regression
(Dependent variable: FINSCORE)
Model 1b: Multiple regression (Dependent variable:
FINSCORE)
Variable name Coefficient estimate Std. Error Coefficient estimate Std. Error
Constant 41.334 *** 12.211 17.872 10.920 ITSCORE 0.390 *** 0.010 ROA 0.168 *** 0.041 0.179 *** 0.036 SALES 0.000 *** 0.000 0.000 *** 0.000 SALESGROWTH 0.000 0.000 0.000 0.000 LEVERAGE 0.000 0.000 0.000 0.000
Industry and year effects Yes Yes
n 6000 6000
F-statistics F = 15.980; p = .000 F = 88.270; p = .000
Adjusted R2 0.050 0.242
*Significance at the 5% level **Significance at the 1% level ***Significance at the 0.1% level
The relation of the level of integrated thinking and environmental performance of regression model 2 is presented in Table 5. The table includes two models. The first model (2a)
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consists of the control variables and the dependent variable ENVSCORE. The second model (2b) introduces the independent variable ITSCORE. The findings reveal a significant positive coefficient for ITSCORE (β= 0.779 p< .001). This means that when the level of integrated thinking within a firm is high, the environmental performance tends to be higher too. The only control variable to have a significant relationship with environmental performance is sales, (β= .000 p< .001), although this effect seems to be minimal. The findings in Table 5 provide partial support for H2, which stated that the level of integrated thinking has a positive effect on firm
environmental and social performance. I conclude that integrated thinking is positively related to environmental performance.
Table 5. Regression Model 2 - Integrated thinking and environmental performance Model 2a: Multiple regression
(Dependent variable: ENVSCORE)
Model 2b: Multiple regression (Dependent variable: ENVSCORE) Variable name Coefficient estimate Std. Error Coefficient estimate Std. Error Constant 61.378 *** 14.236 14.579 9.087 ITSCORE 0.779 *** 0.008 ROA -0.041 0.047 -0.019 0.030 SALES 0.000 *** 0.000 0.000 *** 0.000 SALESGROWTH 0.000 0.000 0.000 0.000 LEVERAGE 0.000 0.000 0.000 0.000
Industry and year effects Yes Yes
n 6000 6000
F-statistics F = 38.191; p = .000 F = 486.961; p = .000
Adjusted R2 0.115 0.641
*Significance at the 5% level **Significance at the 1% level ***Significance at the 0.1% level
The results of the relation between integrated thinking and social performance are shown in Table 6. The table includes two models. The first model (3a) consists of the control variables and the dependent variable SOCSCORE. The second model (3b) introduces the independent
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variable ITSCORE. The regression results show a significant positive coefficient on ITSCORE (β= .634 p< .001). This means that the level of integrated thinking has a significant positive relation with social performance. This finding further supports H2, which stated that an increase
in the level of integrated thinking will lead to an increase in environmental and social performance. Therefore, I conclude that integrated thinking is positively related to social performance. Together models 2b and 3b provide support for H2.
Table 6. Regression Model 3 - Integrated thinking and social performance Model 3a: Multiple regression
(Dependent variable: SOCSCORE)
Model 3b: Multiple regression (Dependent variable:
SOCSCORE)
Variable name Coefficient estimate Std. Error Coefficient estimate Std. Error
Constant 54.803 *** 12.665 16.684 8.990 ITSCORE 0.634 *** 0.008 ROA -0.018 0.042 0.000 0.030 SALES 0.000 *** 0.000 0.000 *** 0.000 SALESGROWTH 0.000 0.000 0.000 0.000 LEVERAGE 0.000 0.000 0.000 0.000
Industry and year effects Yes Yes
n 6000 6000
F-statistics F = 27.170; p = .000 F = 320.906; p = .000
Adjusted R2 0.084 0.540
*Significance at the 5% level **Significance at the 1% level ***Significance at the 0.1% level
To summarize, findings suggest significant positive coefficients for ITSCORE in models (1b), (2b) and (3b) indicating that the level of integrated thinking is positively related to financial, environmental and social performance, supporting H1 and H2. Together the
findings indicate a significant positive relation between integrated thinking and firm performance.
29 CSR-related Executive Compensation
This section contains the results of regression models (4), (5) and (6). With the results, I will be able to address H3 and H4, which stated a negative effect of CSR-related executive
compensation on financial performance and a positive effect of CSR-related executive compensation on environmental and social performance respectively. Furthermore, I will be able to address H5 and H6, which stated the mitigating effect of CSR-related executive
compensation on the relationship between integrated thinking and financial, environmental and social performance.
Table 7 shows the direct effect of CSR-related executive compensation on financial performance and the moderating effect on the relationship between the level of integrated thinking and financial performance. The table includes three models. The first model (4a) consists of the control variables and the dependent variable FINSCORE. The second model (4b) introduces independent variables ITSCORE and CSRCOMP showing the direct relation of CSR-related executive compensation and financial performance. The third model (4c) introduces the two-way interaction of ITSCORE and CSRCOMP.
Similar to regression model 1b, the results in model 4b show a significant positive coefficient on ITSCORE and for control variables ROA and SALES, which indicates they are significantly and positively related to financial performance. However, model 4b also shows that CSR-related executive compensation has no significant coefficient and therefore has no significant negative relation with financial performance (β= .431 p .151). These results do not support H3.
Furthermore, the moderating effect of CSR-related executive compensation from the two-way interaction in model 4c also does not show a significant coefficient (β= .084 p .768). This means that implementing CSR-related executive compensation targets does not mitigate the relation between integrated thinking and financial performance. These results do not support
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H5, stating that CSR-related executive compensation mitigates the relation between integrated
thinking and financial performance. Therefore, I conclude that CSR-related compensation has no significant direct or moderating relation with financial performance.
Table 7. Regression Model 4 - Integrated thinking, CSR-related compensation and financial performance
Model 4a: Multiple
regression (Dependent variable: FINSCORE) Model 4b: Multiple regression (Dependent variable: FINSCORE) Model 4c: Moderation regression (Dependent variable: FINSCORE) Variable name Coefficient estimate Std. Error Coefficient estimate Std. Error Coefficient estimate Std. Error Constant 41.334 *** 12.211 36.940 *** 10.903 36.942 *** 10.904 ITSCOREx CSRCOMP 0.084 0.283 ITSCORE 11.554 *** 0.311 11.561 *** 0.312 CSRCOMP 0.431 0.300 0.401 0.316 ROA 0.168 *** 0.041 0.180 *** 0.036 0.180 *** 0.036 SALES 0.000 *** 0.000 0.000 *** 0.000 0.000 *** 0.000 SALES GROWTH 0.000 0.000 0.000 0.000 0.000 0.000 LEVERAGE 0.000 0.000 0.000 0.000 0.000 0.000 Industry and
year effects Yes Yes Yes
n 6000 6000 6000
F-statistics F = 15.980; p = .000 F = 84.537; p = .000 F = 81.006; p = .000
Adjusted R2 0.050 0.243 0.242
*Significance at the 5% level **Significance at the 1% level ***Significance at the 0.1% level
The findings of regression model 5 are reported in Table 8 and show the direct effect of CSR-related executive compensation on environmental performance and the moderating effect of CSR-related executive compensation on the relation between the level of integrated thinking and environmental performance. The table includes three models. The first model (5a) consists of the control variables and the dependent variable ENVSCORE. The second model (5b) introduces independent variables ITSCORE and CSRCOMP showing the direct relation of
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CSR-related executive compensation and financial performance. The third model (5c) introduces the two-way interaction of ITSCORE and CSRCOMP.
Interestingly, model 5b shows that CSR-related executive compensation seems to have a significant positive coefficient regarding the relation with environmental performance (β= .583 p< .05). This means that CSR-related executive compensation has a direct positive relation with environmental performance. These results support H4.
The moderating effect in model 5c shows an opposite significant negative coefficient on the two-way interaction ITSCORExCSRCOMP (β= -1.129 p< .001). However, the significant adjusted R squared of model 5c (R2= .642), does not change much compared to the adjusted R squared of model 5b (R2= .641). This means that the added two-way interaction of
level of integrated thinking and CSR-related executive compensation only accounts for a very small portion of environmental performance, thus being a weak relation. However, these results do support H6, which stated that CSR-related executive compensation has a mitigating effect
on the relation between integrated thinking and environmental performance. I conclude that CSR-related compensation is negatively and significantly associated to the relation between integrated thinking and environmental performance.
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Table 8. Regression Model 5 - Integrated thinking, CSR related compensation and environmental performance
Model 5a: Multiple
regression (Dependent variable: ENVSCORE) Model 5b: Multiple regression (Dependent variable: ENVSCORE) Model 5c: Moderation regression (Dependent variable: ENVSCORE) Variable name Coefficient estimate Std. Error Coefficient estimate Std. Error Coefficient estimate Std. Error Constant 61.378 *** 14.236 52.539 *** 9.071 52.517 *** 9.054 ITSCOREx CSRCOMP -1.129 *** 0.235 ITSCORE 23.124 *** 0.259 23.036 *** 0.259 CSRCOMP 0.583 * 0.249 0.983 *** 0.263 ROA -0.041 0.047 -0.017 0.030 -0.019 0.030 SALES 0.000 *** 0.000 0.000 *** 0.000 0.000 *** 0.000 SALES GROWTH 0.000 0.000 0.000 0.000 0.000 0.000 LEVERAGE 0.000 0.000 0.000 0.000 0.000 0.000
Industry and year
effects Yes Yes Yes
n 6000 6000 6000
F-statistics F = 38.191; p = .000 F = 466.374; p = .000 F = 449.558; p = .000
Adjusted R2 0.115 0.641 0.642
*Significance at the 5% level **Significance at the 1% level ***Significance at the 0.1% level
The final regression model in Table 9 shows the direct effect of CSR-related executive compensation on social performance and the moderating effect of CSR-related executive compensation on the relation between the level of integrated thinking and social performance. The table includes three models. The first model (6a) consists of the control variables and the dependent variable SOCSCORE. The second model (6b) introduces independent variables ITSCORE and CSRCOMP showing the direct relation of CSR-related executive compensation and financial performance. The third model (6c) introduces the two-way interaction of ITSCORE and CSRCOMP.
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Similar to model 5b and 5c, CSR-related executive compensation has a significant positive coefficient regarding the relation with social performance shown in model 6b (β= 1.875 p< .001). This means that the direct CSR-related executive compensation has a direct positive relation with social performance. These findings also support H4.
The moderating effect in model 6c shows a significant negative coefficient (β= -.533 p< .05). Corresponding to model 5c, the moderating effect only accounts for a small portion of social performance with almost no change in adjusted R squared between model 6b and 6c (ΔR2= .001). H6 stated that the moderating effect of CSR-related executive compensation
should mitigate the relation between integrated thinking and environmental and social performance. The findings of model 6c suggest support for H6. Therefore, I conclude that
CSR-related compensation is negatively and significantly associated to the relation between integrated thinking and social performance.
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Table 9. Regression Model 6 - Integrated thinking, CSR related compensation and social performance
Model 6a: Multiple
regression (Dependent variable: SOCSCORE) Model 6b: Multiple regression (Dependent variable: SOCSCORE) Model 6c: Moderation regression (Dependent variable: SOCSCORE) Variable name Coefficient estimate Std. Error Coefficient estimate Std. Error Coefficient estimate Std. Error Constant 54.803 *** 12.665 47.988 *** 8.934 47.978 *** 8.931 ITSCOREx CSRCOMP -0.533 * 0.232 ITSCORE 18.444 *** 0.255 18.403 *** 0.255 CSRCOMP 1.875 *** 0.246 2.063 *** 0.259 ROA -0.018 0.042 0.004 0.030 0.003 0.030 SALES 0.000 *** 0.000 0.000 ** 0.000 0.000 *** 0.000 SALES GROWTH 0.000 0.000 0.000 0.000 0.000 0.000 LEVERAGE 0.000 0.000 0.000 0.000 0.000 0.000 Industry and
year effects Yes Yes Yes
n 6000 6000 6000
F-statistics F = 27.170; p = .000 F = 312.423; p = .000 F = 299.840; p = .000
Adjusted R2 0.084 0.544 0.545
*Significance at the 5% level **Significance at the 1% level ***Significance at the 0.1% level
To summarize, there is no significant support for the direct relation between CSR-related executive compensation and financial performance as stated in H3. Findings do support H4
stating that CSR-related executive compensation increases environmental and social performance. No support for H5 has been found due to an insignificant result of the two-way
interaction of ITSCORExCSRCOMP on financial performance. Although the results on the tow-way interaction ITSCORExCSRCOMP on environmental and social performance are significant, the findings have been found are very weak and do not explain a change in performance very well with (ΔR2= .001). However, the findings are significant and do support
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between ITSCORE and ENVSOCRE/SOCSCORE. The relations regarding the results are presented in Figure 2.
Figure 2. Results
Robustness Check
To check for robustness, I created a different measure for the independent variable level of integrated thinking. The reason for this is that ASSET4 assigns some items to the “Integration/Vision and Strategy” category that do not necessarily represent an accurate indication of integrated thinking. Examples of these indicators are; “Is the company a signatory of the Global Compact?” and “Is the company's CSR report published in accordance with the GRI guidelines?”. To exclude these indicators, I created an alternative level of integrated thinking score based on five indicators from the Thomson Reuters ASSET4 database, which are further described in Appendix A. I measured integrated thinking based on 5 indicators in the category “Integration/Vision and Strategy”, which are all on a scale from 0 to 100. Cronbach’s alpha confirmed the scale to be reliable (α= .72).
Results are generally the same as with the original measure of integrated thinking. Overall the beta is higher on the alternative measure but changes in R squared remain very similar. One interesting observation is that results of the moderating effect of CSR-related executive compensation on the relation between integrated thinking and financial performance became far less insignificant (from (β= .084 p .768) with the old measure to (β= -.445 p .154)
CSR-related executive compensation
Financial, environmental and social performance H5, H6(-) H1(+), H2(+) H3, H4(+) Integrated thinking CSR-related executive compensation
