The Effectiveness of CSR Related Proposals on CSP and the Impact of Societal Norms on the Implementation Process

The Effectiveness of CSR Related Proposals on CSP and the Impact

of Societal Norms on the Implementation Process

Pike Kijlstra S2545721

MSc Accountancy – Rijksuniversiteit Groningen Supervisor: Prof. dr. R. B. H. Hooghiemstra

Co-assessors: S. Wang and dr. S. Girdhar Date: 25-06-2018

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Abstract

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Table of content

1 Introduction 3

-2 Literature and theoretical background 6

-2.1 Proposals as shareholder activism - 6 -

2.1.1 CSR as an agency problem - 6 -

2.1.2 Shareholder activism - 7 -

2.1.3 CSR related proposals and CSP - 8 -

2.1.4 Effectiveness of CSR related proposals - 9 -

2.2 Social contract and the implementation of proposals - 11 -

2.2.1 Changing social contract - 11 -

2.2.2 Strictness of the social contract - 12 -

2.2.3 Religiosity and the social contract - 14 -

2.2.4 Environment and the social contract - 15 -

2.2.5 Education and the social contract - 16 -

3 Methodology 17

-3.1 Sample procedure - 17 -

3.2 Variable measurement - 17 -

3.2.1 Corporate Social Performance - 17 -

3.2.2 CSR related shareholder proposals - 19 -

3.2.3 Religiosity - 19 - 3.2.4 Environment - 20 - 3.2.5 Education - 20 - 3.2.6 Control variables - 20 - 3.3 Statistical method - 21 - 4 Results 21

-4.1 Descriptive statistics and correlations - 21 -

4.2 Hypotheses testing - 23 -

4.3 Supplementary analysis - 24 -

5 Discussion and conclusion 25

-5.1 Findings - 25 -

5.1.1 Hypothesis 1 - 25 -

5.1.2 Hypothesis 2 - 26 -

5.1.3 Research question - 29 -

5.2 Research limitations and further research - 30 -

5.3 Theoretical and practical implications - 31 -

6 References 32

-7 Appendices 37

-7.1 Appendix 1: Correlations - 37 -

7.2 Appendix 2: Regression analysis - 38 -

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1

Introduction

Corporate Social Responsibility (CSR) related shareholder activism has become increasingly popular in the field of corporate governance. With the withdrawal of the US from the Paris Climate Agreement, businesses take matters into their own hands to limit damage to the environment as much as possible (Fountain and Tabuchi, 2018). This is consistent with the increasing amount of investors who engage in socially responsible investing (Eding and Scholtens, 2017). These investors increasingly make use of Rule 14a-8 by the Securities and Exchange Commission (SEC) (EY, 2014; Michelon and Rodrigue, 2015), which allows shareholders to propose certain matters to the board and the Annual General Meeting (AGM) after which it is voted on1_{. This}

way shareholders are able to interfere with how the business is managed.

The goals of the shareholders issuing the CSR related proposals range from increased transparency (Michelon and Rodrigue, 2015), to improved employee wellbeing or improved CSR performance (Eding and Scholtens, 2017). However, previous studies questioned whether these goals are actually achieved. For example, Perrault and Clark (2016) argue that firms are more responsive towards shareholders with higher status and reputation. King, Bozos and Koutmos (2017) find that the effectiveness of the proposal depends on the nature of the proposal and the identity of the sponsor. David, Bloom and Hillman (2007) even argue, and find, that shareholder proposal activism reduces Corporate Social Performance (CSP).

Other researches tend to link the effectiveness of a proposal to the amount of votes a proposal gets. The exploratory research of Monks, Miller and Cook (2004) conclude that CSR related proposals don’t get as much support as corporate governance related proposals do. Flammer (2015) finds evidence for an increase in firm value if a proposal passes by a small margin compared to a proposal that fails by a small margin. However, no research has been done regarding the reason why shareholders still issue CSR related proposals despite 99,6% of approximately 1500 CSR related proposals over 10 years got a minority of votes. This study argues that firms should listen to its shareholders and that most CSR related proposals (also those with minority votes) are important to implement to prevent (reputational) damage. Therefore, CSR related proposals should be an effective means for shareholders to improve a firms CSP.

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The second perspective in the study of Rowley and Moldoveanu (2003) gives an explanation why shareholders issue a proposal when the chances are high it will not get the majority vote. The shareholders in the second, ‘identity-based’, perspective try to form a community pursuing their identity and vision. This is the perspective in which almost all CSR related proposals can be categorized. Even though most proposals will not get the majority of votes, their submitters still keep pursuing their believes. It is argued in this study that they still keep pursuing these goals, because the slightest amount of disapproval can have a big negative impact on a firm’s reputation (Hillman, Shropshire, Certo, Dalton and Dalton, 2011; Ferri and Maber, 2013). The impact this reputational damage can have is shown in a study by Lewis, O’Donovan and Willet (2017), in their research they conclude that not giving in to CSR activism became the downfall of a firm. The first hypothesis tested in this research is: “A positive relationship

exists between the issue of a CSR related shareholder proposal at the AGM and future CSP”.

Additionally, with the legitimacy theory, it is argued that differences in societal norms between states in the USA affect the relationship between CSR related proposals and CSP. Flammer (2013) concludes that the more the (environmental) norm becomes stricter, the more firms are punished for not following it. It is argued that firms need to keep to their social contract to be found legitimate (An, Davey and Eggleton, 2011). Expected is that in certain states, with stricter societal norms, these social contracts also are stricter and the pressure for firms to adopt a proposal is higher. The second hypothesis tested in this research is: “The strictness of societal

norms affects the positive relationship between the issue of a CSR related shareholder proposal at the AGM and future CSP”.

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what influence shareholder proposal activism can have on reducing agency problems. Moreover, it is important to know if there are motives for shareholders to keep pursuing their believes. Even when they don’t possess the characteristics, identified by David et al. (2007) and Perrault and Clark (2016), to get the majority of votes on their proposal. Furthermore, to the best of my knowledge, no research has been done on the influence of the social contract of a firm with society on the effectiveness of a CSR related proposal. While Clark, Salo and Hebb (2008) state that social activists have a large mandate from society, this hasn’t been empirically proven. It is important to research the effect of this outside pressure, since little to nothing is known about the role societal norms can play in the decision-making process to implement a proposal. Whereas previous literature has been done with limited data sets (Subramanian, 2016), this study is performed with a comprehensive dataset comprising of data for 613 firms over the period of 2006 up to and concluding 2015.

This study thus tries to make empirical and theoretical contributions to the literature on shareholder proposal activism and the influence of societal norms. Prior research is extended by contributing to the knowledge about the effectiveness of and responsiveness on CSR related shareholder proposals. Furthermore, a new research path is investigated by examining the effects of societal norms influencing the decision to implement a CSR related proposal.

This research is carried out by a study of data from Proxy Monitor over a time period from 2006 up to and concluding 2015. The societal norm will be assumed by examining different components related to norms in society. Data of these proxies are gathered from the Census Bureau of the American government and Pew Research Center. The influence of three components on the relationship between CSR related proposals and CSP will be researched, where CSP is comprised of data from the KLD database. The main goal of this research is to answer the following research question:

How effective is a CSR related proposal at the AGM to improve future CSP and to what extent does the strictness of social contracts affect this relationship?

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2

Literature and theoretical background

2.1

Proposals as shareholder activism

2.1.1 CSR as an agency problem

With the separation of ownership and management a new problem emerged, the agency problem. The main argument of agency theory is that the agent is not solely acting in the interests of the principal, but may try to pursue his/her self-interest reflecting the neo-classical notion that all individuals are driven by self-interest. This problem always exists, unless both the agent and principal are driven by completely the same interests (An et al., 2011). In the ideal situation, management of the firms should be solely acting in the interests of the shareholders and maximize shareholder value.

A particular agency problem becoming increasingly important is Corporate Social Responsibility (Monks et al., 2004). Broadly speaking, CSR can be defined as the “social, ethical, and environmental behavior of a firm as well as its governance that goes beyond any legal obligations” (Eding and Scholtens, 2017, p. 648). Multiple reasons exist for managers to engage in CSR policies and for shareholders to closely follow these decisions. Decisions of management to engage in (questionable) CSR policies often don’t have direct impact on shareholder value maximization. However, the indirect impact can be extensive. For example, in the ending of the last era Nike was outsourcing its production for the lowest price possible, this came however at the cost of child labor (Blamires, 1998). The moment this was revealed, Nike was criticized and became the target of worldwide campaigns. This lost them their reputation, which they had to carefully rebuild. An abundance of examples exist of companies whose reputation got damaged due to a lack of CSR. To name another, the explosion of ‘Deepwater Horizon’ in 2010, leased by British Petroleum (BP), caused an immense oil spill. In the beginning of 2017, the CEO of BP stated that ‘Deepwater Horizon’ was behind them and they expected to make a positive cash flow in 2018, eight years after the accident. BP still hasn’t recovered their reputation. Bottom line is that CSR can’t be just traded in for lower costs (and higher profits). The trade-off between CSR and costs (profits) must be made by the management, while the consequences are (also) at the cost of the shareholders.

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can add value which will eventually benefit the shareholders and the firm. High CSR performance is related to higher firm performance (Deng, Kang and Low, 2013), lower corporate risk (Albuquerque, Durnev and Koskinen, 2013) and to higher trust of consumers (Castaldo, Perrini, Misani and Tencati, 2009), which are likely to result in a higher firm and share value. Examples of good CSR initiatives can be found at XEROX, which enables their employees to engage in community-focused causes. Starbucks evaluates their supply chain on CSR criteria in their C.A.F.E. initiative, this is however offset by their (questionable) tax practices. It is thus in the interests of shareholders to avoid bad CSR and be positive about and enable good CSR practices.

2.1.2 Shareholder activism

When shareholders feel their interests aren’t represented by firm management they have two options according to Hirschman’s (1970) ideas: they can either “exit” or “voice”. The first option, “exit”, is described as the option in which employees or shareholders exit the company and customers stop buying the products. When (multiple) shareholders leave the company, due to the supply and demand principle, share value will drop. This can ultimately lead to bankruptcy of the firm if management is not able to recover the firm from the loss of shareholders and customers. This is the case in the study of Lewis et al. (2017) who researched the downfall of a firm due to bad CSR practices. The firm, ranked in the top 100 listed firms in Australia, had a long running dispute with environmental activists. This battle decreased the firm’s legitimacy, which lost them their shareholders and customers.

The second option, “voice”, is described as the expression of dissatisfaction of employees, customers or shareholders directly or indirectly to management. These expressions can be outed in the media. For example, Green Peace is well known for their unorthodox actions to confront organizations with the consequences of their activities. More direct expressions to the management can be found at shareholder activists. Shareholder activists actively communicate with management of firms and demand changes. In this research, another form of the voice option, submitting a proposal, will be the main subject.

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shareholders and the management of the firm. In this paper, consistent with Karpoff, Malatesta and Walkling (1996), a shareholder proposal is defined as the policy which is issued by a shareholder and is voted on at the AGM. Some proposals are settled by the management with the submitting shareholder before it reaches the AGM or are turned down because it violates SEC rules. These proposals are excluded in this research. The proposals which are settled are part of a research by Michelon and Rodrigue (2015), in which they conclude that more proposals are being withdrawn and shareholders are becoming better in influencing firm’s activities.

A lot of research has been done to uncover why and when stakeholders take action. Rowley and Moldoveanu (2003) built a model to categorize stakeholders (including shareholders) based on what principles they will act. They distinguish two groups, an interest- and an identity based perspective. The first one is based on the suggestion that stakeholders are more likely to pursue their interests when their dissatisfaction increases. These groups have the resources necessary to mobilize and are prepared to take action. In light of shareholder activism, institutional shareholders can be categorized in this perspective. They have the resources to pursue their interests and the ability to mobilize a big group of shareholders. The second perspective is based on the idea that some stakeholder groups are trying to pursue their vision. These groups are developing an identity. They are not able to mobilize a big group or don’t have the resources to do so, but they still want to pursue what they believe in. Even though these groups will likely not get the majority votes, their action matters. The solidarity among individuals creates groups, which will later be able to collectively take action. In the light of shareholder activism, the submitters of CSR related proposals can be categorized in this perspective as they only occasionally get the majority of votes.

2.1.3 CSR related proposals and CSP

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when the results of a vote show that more than 50% of shareholders support the proposal, a firm is not obligated to follow it.

Recent research on CSR related proposals have focused on determinants why certain firms receive these proposals. Research about the determinants is, for example, that religious investors issue most of the CSR related proposals (Subramanian, 2017), because theirs and environmental investors’ interests often concern social and environmental issues. Michelon and Rodrigue (2015) find that usually the large companies are the target of such proposals. Rehbein (2016) looked at the activities a firm performs and the likelihood of receiving a CSR related proposal. Concluding with Eding and Scholtens (2017), they researched whether CSR performance was a determinant of receiving CSR related proposals. This was also a topic in the research of Cahan, Chen and Chen (2017).

However, on the submitters side, these CSR related policies are proposed to achieve two goals, to reduce information asymmetry (or increase transparency), and to increase CSP. As Kaymak and Bektas (2017) state, CSR reporting can be improved by reducing agency problems, e.g. by solving information asymmetry with transparency will lead to better reporting. A big portion of all CSR related proposals concern transparency, and are therefore meant to decrease the information asymmetry. As transparency is also regarded as a criterion to measure CSP, the proposals issued to increase transparency are therefore also included in this research. Another portion of CSR related proposals concern the improvement of CSP. Shareholders mostly propose to better animal-, employee- and human rights and increase health care.

2.1.4 Effectiveness of CSR related proposals

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related proposals (including minority votes) should be implemented and in general CSP should increase consequential to the issue of a CSR related proposal. Multiple reasons in support of this argument will be elaborated in the next paragraphs, starting with positive reasons why firms should implement CSR related proposals and increase their CSP. Thereafter the negative reasons, why firms should not ignore CSR related proposals, will follow.

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damage will result in a loss of firm value, customers, revenue and eventually bankruptcy (Lewis et al., 2017).

Another scenario is that the activists, categorized in the identity-based perspective (Rowley and Moldoveanu, 2003), will try again until they eventually have enough support and solidarity to threaten with the exit option. This exit option (Hirschman, 1970) is the next step when the voice option does not have the anticipated effects. The exit option will likely lead to a decrease in shareholder value. Especially because customers are likely to also choose the exit option, since shareholders have a mandate of society (Clark et al., 2008).

In line with the ideas central to agency theory it is beneficial for firms to listen to their shareholders. By implementing CSR related proposals the CSP of the firms should increase and by disclosing the results, information asymmetry will be reduced. Both will create shareholder value. For majority votes it is essential to implement the proposed policy. Concerning minority votes, it is (in most cases) still beneficial to implement the policy because (for a big part) it shows that the firm listens to their shareholders and take these CSR related proposals seriously. Expected is that CSR related proposals should lead to better CSR performance. This leads to the following main hypothesis in this research:

H1: A positive relationship exists between the issue of a CSR related shareholder proposal at the AGM and future CSP.

2.2

Social contract and the implementation of proposals

2.2.1 Changing social contract

Whereas agency theory explains the relationship between the management and the owners of the firm, in this section, legitimacy theory explains the impact that social norms can have on the decision to implement CSR related proposals. The main argument of legitimacy theory is that firms have no inherent right to exist. Firms exist to the extent that they are found legitimate by society. Firms are found to be legitimate when their actions are regarded as desirable, proper or appropriate within the system of norms, values and beliefs the firm operates in (Suchman, 1995).

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environment and role in society (Blasco and Zølner, 2010). These social and societal norms are formed by written and unwritten rules on how to behave, and vary between societies, states and areas. These norms are created by institutions, which can be defined as “socially shared patterns of behavior and/or of thought” (Dequech, 2009, p. 70). The written rules are created by formal institutions, such as laws and regulation drafted by the government. The unwritten rules originate from informal institutions, such as religions or culture, which prescribe how to behave.

The terms of the social contracts (i.e. written and unwritten societal expectations about what is legitimate) are not fixed but change over time (Deegan, 2002). According to a study by Savitz (2012), more than 80% of executives believe that society expects them and their businesses to interact with social, environmental and political issues more now than in 2007. If a business breaches this social contract, the firm will not be considered legitimate. In the current era, in which increasingly more is expected, the social contract is becoming more extensive. As Dequech (2009) describes it, individual’s perceptions, preferences, objectives and obligations are molded by institutions. If these institutions are (becoming) more strict, individuals and the social contract are as well. A firm thus has to constantly make decisions to keep to the (changing) social contract and be considered legitimate.

Maintaining this contract is crucial to survive (An et al., 2011). Deegan (2002) gives a few examples how society discourages the activities of an illegitimate firm. The demand for their products will be (almost) non-existent, the supply chain will decline to deliver, or fines are issued. Another discouraging factor is that no investor is interested in investing in these illegitimate firms. These factors form an abundance of incentives for businesses not to break the rules in their social contract.

2.2.2 Strictness of the social contract

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firm when it is confronted with a CSR related proposal. In an environment with a strict contract and high norms, firms are more pressured to act after a CSR related proposal at the AGM and implement the proposal better (and increase CSP more) to remain legitimate and keep to the social contract. In an environment with a loose contract and lower norms, firms aren’t pressured to implement a proposal better into CSP than usual.

That firms are influenced by this pressure to keep to their social contract is a general assumption that can be made. Findings of Wang, Gao, Hodgkinson, Rousseau and Flood (2015), in China, indicate that pressure of shareholders and the government has a positive effect on the decision of firms to make charitable donations. Flammer (2013) found that performing below the norm causes negative consequences, like stock price decreases. Rehbein et al. (2016) report an increase in proposals if a firm operates activities that are questionable considering the norm. Firms which are producing controversial products or have questionable care for employee well-being are a target for proposals. These studies indicate that there is pressure from outside the firm, which pressures them to behave according to the norm in that society. As stated, when these norms are stricter (looser), the social contract is as well. Whenever the firm then does not behave to their social contract, it is punished with reducing stock value or an increase in the amount of proposals.

This leads to the second general hypothesis. Firms have an abundance of incentives to give attention to their activities regarding corporate social responsibility. Firms are getting screened for their CSR performance and are getting targeted to improve their performance. A higher CSR performance is positively related to firm value and expected is that implementing CSR related proposals of investors increase shareholder value. It is expected that if perceived societal norms/pressure are stricter, firms will implement proposals better and improve their CSP more than when the perceived societal norms are looser. When the societal norms are perceived looser, there will be less pressure and a CSR related proposal will not be implemented different than normal. Then CSR performance will be less improved after receiving a proposal than in the case of a stricter social contract. The second hypothesis is the following:

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This overarching hypothesis will be empirically tested by measuring the effect of different informal institutions which influence the societal norms in an environment. As mentioned before, institutions change the preferences, perceptions, objectives and obligations of individuals. Below I will argue that the following are the relevant institutions that change the social contract and likely will strengthen the association between the issue of a CSR related shareholder proposal at the AGM and future CSP: religion, environment, and education.

2.2.3 Religiosity and the social contract

In this section, it is argued that religiosity is an informal institution able to strengthen the relationship between the issue of a CSR related shareholder proposal at the AGM and future CSP. In line with the definition of Dequech (2009, p. 70): “socially shared patterns of behavior and/or of thought”, religiosity can be regarded as an informal institution. Since religious texts provide guidelines how to interact and care for other individuals, the environment and society at large.

Religion is deeply embedded in the corporate world. The centers for responsible entrepreneurships in France and Mexico, respectively, did and still use phrases from religious texts (Blasco and Zølner, 2010), to encourage firms to behave (socially) responsibly. In some contexts, CSR initiatives are considered to be done out of religiosity and not as public activities done for work (Blasco and Zølner, 2010). In a similar vein, religious investors are the submitters of most CSR related proposals (Subramanian, 2017). To conclude, McGuire, Omer and Sharp (2012) find that religiosity is negatively associated with financial reporting irregularities, i.e. higher religious individuals are less likely to view manipulation as acceptable. The overarching relationship between these researches is that religious social norms can act as a mechanism to stimulate individuals to behave in a more socially responsible fashion.

More religious individuals are thus associated with more social responsible behavior. Indicating that higher religious states have a stricter social contract, because the society in that state expects firms to show more social responsible behavior. This should pressure the firms to implement a CSR related proposal better after its issue. Religiosity can thus be regarded as a proxy for societal norms.

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2.2.4 Environment and the social contract

Argued in this section is that environmental care is an institution able to strengthen the relationship between the issue of a CSR related shareholder proposal at the AGM and future CSP. Taking care of the environment can be done in multiple manners. It is defined in the Paris Climate Agreement as “a common cause to undertake ambitious efforts to combat climate change and adapt to its effects” ("The Paris Agreement | UNFCCC", 2018). Another generally known term in the corporate world is people, planet, profit, indicating those have to be harmoniously combined. Overall, environmental care can be regarded as an institution conform the definition of Dequech (2009, p. 70), as it’s a shared pattern of society to behave and think, to contribute to a better environment.

Firms already feel pressured to take care of the environment. According to O’Donovan (2012), firms disclose environmental information to be found legitimate, specifically, to gain, maintain or repair their legitimacy. Since legitimacy theory states that a firm is only legitimate if their actions are regarded as acceptable behavior, the findings of O’Donovan (2012) suggest there is a demand for environmental information from society. Firms thus disclose environmental information as it is expected of them by society. Furthermore, Rehbein et al. (2016) find that businesses which struggle on environmental performance receive more proposals, as social activists want to reduce the negative impact of this lower performance on nature, corporate reputation and the firm’s stock prices. Lower environmental performance is thus not regarded as socially acceptable behavior.

However, as societal norms regarding environmental care differs between states, the social contract does as well. To be perceived legitimate by society, firms have to perform to their social contract, which means they have to take care of the environment to the extent that is expected of them by society. States with overall higher care for the environment are expected to have a stricter social contract with the firms in that state. This is, because the society expects them to show the behavior conform their societal norms. This should pressure the firms to implement a CSR related proposal better into CSP after its issue. Environmental care can thus be regarded as a proxy for societal norms.

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take care of the environment. For instance, it is found by Antal and Sobczak (2007) that the French country has changed CSR practices (in firms) with regulation and more informal forms. Moreover, Di Giuli and Kostovetsky (2013) find that the political attitude of the state a firm is headquartered in, is associated with CSR score. These studies indicate that the policy of the government acts as a proxy for the norms of that society.

H2b: Environmental care strengthens the positive relationship between the issue of a CSR related shareholder proposal at the AGM and future CSP

2.2.5 Education and the social contract

In this section, argued is that education is an informal institution able to strengthen the relationship between the issue of a CSR related shareholder proposal at the AGM and future CSP. Education (system) is defined by Ioannou and Serafeim (2012, p. 840) as “the system that develops and certifies competences and skills”. This definition fits with the definition of an institution of Dequech (2009, p. 70) as education shapes a shared pattern of behavior and thought. For instance, Coenders and Scheepers (2003) find that the level of education is related to (ethnic) exclusionism and chauvinism. In a similar vein, Solmon (1985) finds that education has an effect on the lifetime earnings of students. These results suggest that education is likely to have an effect on the way people behave and think.

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educated citizens, because CSP is perceived to be related to extra (societal) benefits and a better employer and firm. When there are more educated citizens in the state who perceive CSR important, the societal norm becomes stricter. To be found legitimate, firms have to perform to this stricter norm and thus better implement proposals into CSP.

Whereas the research of Ioannou and Serafeim (2012) is conducted with data of readily available skilled workers, this research uses data of the percentage of people with a bachelor’s degree or higher per state. The level of education is therefore used as a proxy for societal norms and values. This results in the following hypothesis:

H2c: Education strengthens the positive relationship between the issue of a CSR related shareholder proposal at the AGM and future CSP

3

Methodology

3.1

Sample procedure

In this research, data from the KLD database is used to investigate the CSP of firms. In this database, firms get a score per CSR related criterion depending on the performance on this criterion. Scores, for the sample of this research, in the KLD database range from -5 to 0 for negative performance and 0 to 9 for positive performance. The sample consists of Fortune250 companies from 2006 up to and concluding 2015. The sample is constraint, because this study is dependent on the Proxy Monitor database only containing Fortune250 companies. The final sample consists of 611 firms, involving 3411 firm year observations.

3.2

Variable measurement

3.2.1 Corporate Social Performance

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Consistent with Cahan et al. (2017) the score from the corporate governance dimension is excluded from the total CSP score and added as control variable. That is because this dimension can’t be categorized as social, but it influences firms activities to the extent it can better the CSR of firms. Besides, some studies suggest to also exclude the diversity dimension from the total CSP score as it would cause endogeneity problems (Mallin and Michelon, 2011). In addition, Eding and Scholtens (2017) find some evidence that CSR performance is related with the likelihood to receive a proposal. This suggests there is evidence for an endogeneity problem. Therefore, the dimension for diversity will also be excluded and added as control variable to ascertain no endogeneity problems exist. Ultimately, the CSR score ranges from -10 to 16 (see table 2, page 22). The influence of proposals on CSP will be measured by a regression which compares the proposals of year t with the CSP of year t+1.

Table 1: Composition of variables

Variable Measurement

Dependent variable

CSP KLD cumulated score, +1 for strength, -1 for concerns

Independent variable

PROPOSAL Cumulative proposals per year per firm

Moderating variables

RELIGIOSITY Combined score of two elements per state ENVIRONMENT State environmental expenses per capita

EDUCATION Percentage of population with a bachelor's degree or higher

Control variables

BTM Book-to-market value ratio

CASH Ratio of cash over total assets

DIVIDENDS Ratio of cash dividends over total assets DEBT Ratio of total debt over total assets SIZE Natural logarithm of total assets

ROA Ratio of income to total assets

BDIVERS Percentage of women on the board

CGKLD KLD cumulated score on CG, +1 for strength, -1 for concerns DIVKLD KLD cumulated score on Diversity, +1 for strength, -1 for concerns YearDummies Dummies, per year, 1 or 0

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To control for the fact that (most) Fortune250 firms are operating worldwide, in a supplementary analysis, CSR scores will be multiplied by the part of revenues which is made in the US. This way ensured is that influences from outside of the US are better taken into account. Furthermore, the method of measurement for CSP by composing a net score is subject to growing criticism, as strengths and concerns both measure a different construct, namely Corporate Social Responsibility and Corporate Social Irresponsibility (CSiR). Therefore, a supplementary analysis will be performed to ascertain the robustness of the results against the operationalization of CSP.

3.2.2 CSR related shareholder proposals

The data on shareholder proposals (variable PROPOSAL, table 1) are obtained from the Proxy Monitor database. In this database, proposals are collected that were voted on at annual general meetings of Fortune250 firms. Details on these proposals range from the proponent who issued the proposal, the proposal type and the amount of votes. The total sample is restricted to CSR related proposals, which are defined as social proposals in the database. This sample restriction is consistent with the exploratory research of Subramanian (2017). This eventually leaves a sample of 611 firms and a total amount of 1269 proposals. For each year and each firm the proposals are cumulatively counted, which constitutes the variable PROPOSAL. This is consistent with David et al. (2007), however they also researched omitted and settled proposals.

3.2.3 Religiosity

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Data from the Pew Research Center is available from 1987 up to and concluding 2012. After 2012 data is available separately, however data for some years is missing. By examining the trend from 1987 up to and concluding 2015 the data from these missing years is interpolated. A robustness test is performed to validate the data. In the robustness test, the interpolated data of the missing years is replaced by the closest score prior to the missing year.

3.2.4 Environment

The variable ENVIRONMENT (table 1) will be measured with the proxy governmental environmental expenditures. Konisky and Woods (2012) wrote a paper on the different types to measure state environmental policy. They state that it is a common approach to use government expenditures as a measure for environmental policy. In this research, data from the US government Census Bureau will be used to measure the amount of environmental expenditures per citizen. The Census Bureau, amongst other things, keeps track of government expenditures, but also issues surveys about the daily life of US citizens. Data is available for every year (excluding 2015) and every state. The data for 2015 will be interpolated by trend analysis. A robustness test, similar to the robustness test of religiosity, will be performed to validate the data. The amount of citizens per state per year will also be collected from the Census database.

3.2.5 Education

To measure the variable EDUCATION (table 1), for the level of education per state, data is obtained from the American Community Survey. The percentage of population with a bachelor’s degree or higher poses as a measure for the level of education. This is in contrast with Ioannou and Serafeim (2012) who use data from IMD World with the variable ‘readily available skilled workers’. In this research, the effect of society is measured, that is the percentage of population with a bachelor’s degree or higher should be used, not only those unemployed.

3.2.6 Control variables

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and greenhouse gas (GHG) disclosure. In this research, it will be controlled for gender diversity in the board, since Liao et al. (2015) find that females are related to more GHG disclosure. To conclude, year dummies are added to control for year dependent statistics.

3.3

Statistical method

To test the hypotheses mentioned in the Literature and Theoretical Background section, with the moderated linear regression analysis, the following model is tested:

CSP = β0 + β1PROPOSAL + β2Z_Religiosity + β3(Proposal x RELIGIOSITY) + β4Z_Environment + β5(Proposal x ENVIRONMENT) + β8Z_Education +

β9(Proposal x EDUCATION) + β10ControlVariables + εi

4

Results

4.1

Descriptive statistics and correlations

In table 2, the main descriptive statistics of the variables used to test my hypotheses can be found. Before the analysis was carried out, the main independent variables were standardized. The moderating variables could afterwards be computed.

As can be seen from table 2, the total sample consisted of a minimum of 2280 observations. The difference in samples between variables can be explained by the difference in population per variable. Whereas the data for the variable CSP has been collected from 2002 up to and concluding 2015, data for some independent variables was gathered from 2006 and on. Additionally, as mentioned, the independent variables are standardized, hence a mean of zero and a standard deviation of 1 for most of the independent variables. A negative minimum for PROPOSAL can therefore be explained by the standardization. Besides, the moderating variables have a mean close to zero and a standard deviation close to 1, as they are a product of two standardized variables.

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This is after the variable is winsorized. Also, even though SIZE (mean of 10,285) is measured by the logarithm of total assets of the firm, it can be concluded that the sample consists only of big firms. Which is consistent with the use of data of Fortune250 firms.

Table 2: Descriptive statistics

The results of the correlations can be found in table 3 (Correlations) in Appendix 1. First of all, it can be concluded that most independent variables correlate with each other. This is usual for a research design with (multiple) moderating variables. Multiple correlations between independent variables does suggest a multicollinearity problem exists. However, additional analyses, by examining VIF values in the regression analyses, show no multicollinearity problems are present, as the highest VIF values are below 10. Whereas a VIF value of 10 and higher is generally conceived as a presence of multicollinearity (Alin, 2010).

Additional conclusions from table 3 (Correlations) are notable correlations in relation to the dependent variable CSP. The main independent variable PROPOSAL has, unlike expected, a significant negative correlation with CSP. This correlation is consistent with the research of David et al. (2007) who concluded that proposals are

Variable N Minimum Maximum Mean Std. Deviation

Dependent variable CSP 2916 -10,000 16,000 0,102 3,281 Independent variables PROPOSAL 2645 -0,472 9,376 - 1,000 Z_Religiosity 2645 -5,976 2,506 - 1,000 Z_Education 2280 -2,162 6,157 - 1,000 Z_Environment 2280 -1,224 8,521 - 1,000 ProposalsxRELIGIOSITY 2645 -24,710 8,690 -0,032 1,200 ProposalsxEDUCATION 2280 -8,500 22,140 0,042 1,129 ProposalsxENVIRONMENT 2280 -10,330 32,650 0,058 1,415 Control variables BTM 2684 0,150 19,600 2,347 3,199 CASH 2860 - 0,428 0,069 0,064 DIVIDENDS 2860 -0,074 39,930 - 1,000 DEBT 2860 - 1,200 0,198 0,162 SIZE 2860 5,311 14,761 10,285 1,329 ROA 2860 -1,375 0,379 0,091 0,079 BDIVERS 3394 - 0,556 0,170 0,086 CGKLD 2916 -4,000 2,000 -0,431 0,882 DIVKLD 2916 -2,000 7,000 1,372 1,722

Table 2: Descriptive statistics

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negatively related to CSP. Furthermore, the standardized variables Z_Religiosity and Z_Education both have a significant positive correlation with CSP. Additionally, the moderating variables EDUCATION and ENVIRONMENT are not significantly correlated with CSP. In contradiction, the moderating variable RELIGIOSITY has a significant positive relationship with CSP, as expected. Furthermore, most of the control variables also have the expected correlation with CSP. Except for DIVIDENDS, DEBT and SIZE, all control variables are significant on the 1% level.

4.2

Hypotheses testing

To test the two hypothesis in this research, three different regression models are analyzed. The results can be found in table 4 (Regression analysis) in Appendix 2. Model 3 is also split up to test the separate moderating effect of the different societal norms. The following regression models were tested:

1. Dependent variable and control variables

2. Dependent variable, independent variable of hypothesis 1 and control variables 3. Dependent variable, independent variable of hypothesis 1, standardized values

of hypothesis 2, moderating variables of hypothesis 2 and control variables As can be seen in table 4 (Regression analysis) in Appendix 2, the adjusted R-squared for the different models are respectively 0,430, 0,451 and 0,459. Indicating that the control variables alone explain 40,3% of the variance in the dependent variable CSP. For model 2 and 3, this is respectively 45,1% and 45,9%, indicating that the variables in the hypotheses do not explain much of the variance in CSP. However, the F-value in every model is very high, which means that the model is significant and does not support the null-hypothesis. Therefore, the F-value suggests that, based on the significance of the models, hypothesis 1 and 2 can be accepted.

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moderating variable EDUCATION (b=0,124; p<0,01) has a significant positive relation with CSP. Therefore, hypothesis 2c can be accepted. The standardized variables Z_Education (b=0,116; p<0,1) and Z_Environment (b=-0,168, p<0,05) are significantly related to CSP, indicating a direct connection with CSP.

4.3

Supplementary analysis

Supplementary analyses were performed to ascertain the robustness of the results against design choices. As mentioned in the Method section, multiple robustness tests are performed by replacing the primary variables (one by one) with the robustness variables in the regression analysis. These additional regressions were performed for the variables RELIGIOSITY, ENVIRONMENT and EDUCATION. The regressions indicated that the primary variables are reliable and valid. The significance and the direction of the coefficient of the variables did not vary between the main and robustness variables. Furthermore, the beta coefficients are equivalent with the main analysis.

A second supplementary analysis was performed to control for worldwide statistics. While Fortune250 firms perform their activities worldwide, this research is only investigating the effect of United States’ societal norms. In the main analysis is assumed that a firms CSP score is dependent on the location of the headquarters. In the supplementary analysis, the model is controlled for the worldwide activities by adding a control variable computed of the total CSP score multiplied by the percentage of sales outside the United States. Results of the model when controlled for the outside percentage of CSP are included in model 4 of table 5 (Supplementary regression analysis) in Appendix 3.

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Next, a third supplementary analysis was performed to ascertain the robustness of the results against the operationalization of CSP. As mentioned in the Method section, critics suggest not to measure CSP as a net score, but as a separate strength and concern dimension. According to the results in model 5 of table 5 (Supplementary regression analysis) in Appendix 3, the results obtained with the main regression analysis are valid. In model 5, CSP Strengths (+1 for every strength) is the dependent variable, whereas in model 6 CSP Concerns (-1 for every concern) is the dependent variable. The variable PROPOSAL is in both models significant and negative, consistent with the main analysis. The most notable differences are the moderating relationships of societal norms on CSR related proposals and future CSP. RELIGIOSITY seems to be related to Corporate Social Responsibility. Whereas EDUCATION and ENVIRONMENT are related to Corporate Social Irresponsibility. The hypothesis for RELIGIOSITY and EDUCATION can still be accepted, whereas the hypothesis for ENVIRONMENT cannot as the direction of the coefficient is unlike expected negative.

5

Discussion and conclusion

5.1

Findings

5.1.1 Hypothesis 1

The first hypothesis tested was the following: A positive relationship exists between the

issue of a CSR related shareholder proposal at the AGM and future CSP. Using a linear

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firm and its shareholders are better off when shareholders issue proposals which are certain to get the majority of votes. Shareholders issuing proposals only based on their believes have the potential to be counterproductive. Therefore, the hypothesis that CSR related shareholder proposals should result in an improvement of future CSP is rejected.

5.1.2 Hypothesis 2

Following the social contract a firm has with society, it was argued that this social contract would change over time (Deegan, 2002) and it is crucial to maintain this contract (An et al., 2011). It was expected that the strictness of the social contract would vary between states and therefore pressure firms in certain states more to implement a proposal into CSP. The second hypothesis tested was the following: The

strictness of societal norms affects the positive relationship between the issue of a CSR related shareholder proposal at the AGM and future CSP. This was an

overarching hypothesis which was measured by looking at the effect of the following institutions: religion, environment and education.

First of all, it was expected that religiosity would strengthen the positive relationship between a CSR related shareholder proposal at the AGM and future CSP. Interpreted from the interaction plot (figure 1, based on model 3 in Appendix 2: Regression Analysis) can be that RELIGIOSITY (b=0,120, p>0,05) mitigates the decrease of CSP when a CSR related proposal is issued. This is consistent with firms feeling pressure from a stricter social contract. Even though proposals are negatively related to CSP, pressure from the social contract reduces this negative reaction. Hypothesis 2a is supported, to the extent that the strictness of the social contract reduces this negative reaction. For the interaction plot (figure 1) is chosen for a starting point of zero for ‘few proposals’. This is because Z_Religiosity (b=0,100, p>0,1) is insignificant, therefore no conclusion can be made if firms have a higher CSP score when they are located in a state with low (high) religiosity.

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Figure 1: Interaction plot moderating variable RELIGIOSITY

Secondly, argued was that when the norms of a society regarding environmental care are higher, the social contract with firms would be stricter. These norms would be carried out through the policy of the government. So, it was expected that environmental care strengthens the relationship between a CSR related proposal at the AGM and future CSP. No empirical evidence is found to support this hypothesis. The regression analysis (model 3 in Appendix 2: Regression Analysis) shows that ENVIRONMENT (b=-0,061, p>0,1) does not have a significant moderating effect. An explanation could be found in the supplementary regression analysis. The results from model 6 indicate that environment as societal norm is only related to CSP Concerns. However, these results also indicate that higher environmental care strengthens the negative effect of CSR related proposals at the AGM on future CSP. Furthermore, Z_Environment (b=-0,168, p<0,05) is negative and significant, implying that firms in states with lower environmental care have a higher CSP score. An explanation can lie in the article of Fountain and Tabuchi (2018), that businesses take matters into their own hands to limit the damage on the environment, when the government fails to do so.

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Additionally, the standardized variable Z_Environment (b=-0,152, p<0,05) is still significant and negative.

Thirdly, following the argumentation of Ioannou and Serafeim (2012) that higher educated citizens perceive CSP as more important, it was expected that more higher educated citizens would result in a stricter societal norm. The hypothesis was tested if the level of education (as strictness of the social contract) would strengthen the positive relationship between the issue of a CSR related proposal at the AGM and future CSP. I find empirical evidence to support this hypothesis to the extent that the level of education mitigates the decrease of CSP when a CSR related proposal is issued at the AGM.

The interaction plot of the regression analysis (figure 2, based on model 3 in Appendix 2: Regression Analysis) shows the moderating effect of EDUCATION (b=0,124, p<0,05). Firms located in states with higher educated citizens are related to a less negative impact of a CSR related proposal at the AGM on future CSP. This is consistent with firms pressured to perform to a stricter social contract if a state has a higher percentage of educated citizens. Therefore, hypothesis 2c is accepted. Furthermore, Z_Education (b=-0,168, p<0,05) is negatively significantly related to CSP. In figure 2 can be seen that there is a slight difference in starting point for ‘few proposals’. Firms in lower educated states are related to a slightly higher CSP.

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In the separate regression analysis (model 3b in Appendix 2: Regression analysis) EDUCATION (b=0,022, p>0,1) and Z_Education (b=0,047, p>0,1) are not significant. An explanation can be that the proxy for education partially reflects the other societal norms (environmental care and religiosity). Therefore, in the separate model, it does not reflect the underlying concept of education. The total model 3 gives a better indication of the true effect of Education, because in the total model education does not reflect the other societal norms.

By large, the second hypothesis can be accepted, as 2 out of 3 moderating variables affect the relationship between a CSR related shareholder proposal at the AGM and future CSP. It is hard to conclude on the impact of the strictness of the social contract on the relationship between a CSR related shareholder proposal at the AGM as no other research has examined this effect. The moderating variables explain 0,8% of the variance in CSP whereas a CSR related proposal explains 2,1%. I interpret this as logical, as the direct pressure of a shareholder proposals should be bigger than the indirect pressure of the strictness of the social contract. However, compared to the delta adjusted R-squared of a proposal, the delta adjusted R-squared of the moderation is quite big. Concluded can thus be, that for every proposal, the strictness of the social contract can definitely pressure a firm to reduce the negative impact a proposal can have on CSP.

5.1.3 Research question

With these findings, I am able to answer the research question: “How effective is a

CSR related proposal at the AGM to improve future CSP and to what extent does the strictness of social contracts affect this relationship?” First of all, it is concluded that a

CSR related shareholder proposal at the AGM is significantly negatively related to future CSP. Therefore indicating that a CSR related proposal is generally not effective to improve CSP. The second part of the research question can also be answered. It is concluded already that the strictness of social contracts do have an effect on the relationship between CSR related shareholder proposals at the AGM on future CSP. Two out of three moderating variables reduce the negative impact of a proposal on CSP. However, the impact of the strictness of social contracts is difficult to interpret, as there is no research to compare with.

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research question gives an explanation. Even though proposals have a counterproductive effect on CSP, the findings show that pressure from the societal norms decrease this effect. Social activists may not be concerned about the effect on CSP, but they want to carry out society’s mandate by sending the firm signals to show the firm that they always have to keep their corporate social responsibility in mind (Clark et al., 2008).

5.2

Research limitations and further research

This research is subject to certain limitations. First of all, as already mentioned, it is difficult to control for the worldwide activities of Fortune250 firms. The proxy used in this research, the multiplication of total CSP and percentage of sales in the USA, is not perfect, as it does not perfectly measure the CSP generated in the USA. Additionally, it also limits the dataset. Further research could focus on societal norms and proposals related to certain countries or find a better proxy to control for the worldwide activities. Furthermore, this research is done by examining big, Fortune250, firms. These findings are therefore not generalizable to smaller firms with few shareholders, as these shareholders tend to have more influence. Regarding geography, this research focus is on firms in the United States, rules regarding the submission of proposals differ from other countries. However, the findings are based on proposals which got the minority of votes, which are generally treated identical in other countries as in the USA. The main finding, that CSR related proposals reduce CSP, is therefore likely generalizable to other countries with similar laws.

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related proposals on CSP, further research is recommended to validate these findings. Besides, societal norms differ between countries. Therefore, the findings regarding societal norms cannot be generalized to other countries without research outside the United States. Which makes this an investigating research to the effects of societal norms in the USA.

Finally, further research could try to find an explanation on the question why shareholders keep submitting proposals, even though it reduces CSP. Is the explanation suggested in the prior section correct, or are shareholders unaware their proposals have a counterproductive effect on CSP?

5.3

Theoretical and practical implications

The theoretical implication of this research concerns the addition of knowledge to the literature about the effectiveness of CSR related proposals. The finding that CSR related shareholder proposals at the AGM is negatively related with future CSP is consistent with the findings of David et al. (2007). Furthermore, the findings support the legitimacy theory, as a firm is influenced by its social contract. Even more, this research adds to the literature by investigating the pressure of three different societal norms captured in the social contract.

A practical implication of this research is the understanding that, in general, a CSR related proposal does not help to improve a firm’s CSP. The findings in this research can help shareholders realize why it isn’t effective to issue a CSR related proposal when it is not expected it will get the majority of votes. Another practical implication is that shareholders are supported in their actions by society through the social contract. Higher pressure from society is able to mitigate the negative effect a CSR related proposal can have on CSP.

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6

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7.2

Appendix 2: Regression analysis

Variable (1) (2) (3) (3a) (3b) (3c) PROPOSAL -0,526*** -0,512*** -0,485*** -0,523*** -0,526*** Z_Religiosity 0,100 0,157*** Z_Education 0,116* 0,022 Z_Environment -0,168** -0,152** ProposalsxRELIGIOSITY 0,120** 0,121*** ProposalsxEDUCATION 0,124** 0,047 ProposalsxENVIRONMENT -0,061 -0,040 BTM -0,011 -0,029 -0,027 -0,022 -0,027 -0,031 CASH 2,916*** 3,201*** 3,357*** 3,340*** 3,178*** 3,394*** DIVIDENDS 0,130 0,110 0,103 0,175 0,109 0,113 DEBT -0,556 -0,556 -0,656* -0,634* -0,555 -0,606 SIZE -0,056 0,155** 0,158** 0,089 0,156** 0,166*** ROA 1,982** 3,223*** 3,254*** 2,985*** 3,281*** 3,205*** BDIVERS 2,798*** 2,414*** 2,407*** 2,329*** 2,419*** 2,458*** CGKLD 0,509*** 0,464*** 0,440*** 0,423*** 0,461*** 0,466*** DIVKLD 0,532*** 0,531*** 0,546*** 0,522*** 0,530*** 0,538*** Adjusted R-squared 0,430 0,451 0,459 0,449 0,451 0,454 F-value 80,557*** 83,320*** 65,429*** 77,161*** 75,399*** 76,153*** Highest VIF 1,848 1,916 1,968 1,874 1,944 1,926

Table 4: Regression analysis

***, ** and * are respectively significant at the 1%, 5% and 10% level (using a two-tailed test).

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7.3

Appendix 3: Supplementary regression analysis

Variable (4) (5) (6) PROPOSAL -0,199** -0,135** -0,508*** Z_Religiosity 0,012 -0,046 0,182*** Z_Education 0,008 0,047 0,090* Z_Environment -0,045 -0,141** -0,053 ProposalsxRELIGIOSITY 0,016 0,118*** 0,032 ProposalsxEDUCATION 0,020 0,048 0,123*** ProposalsxENVIRONMENT -0,043 0,045 -0,129*** CSP_Worldwide 0,771*** CSP_Strengths -0,139*** CSP_Concerns -0,213*** DIV_Strengths 0,607*** 0,051 CG_Strengths 1,013*** -0,455*** DIV_Concerns 0,091 0,238*** CG_Concerns -0,028 0,509*** BTM -0,026 -0,079*** 0,052*** CASH -2,124*** 1,684** 2,036*** DIVIDENDS 0,034 0,015 0,106 DEBT -0,964*** 0,205 -1,131*** SIZE 0,068 0,469*** -0,351*** ROA -1,002 3,437*** 0,136 BDIVERS 1,284** 1,191* 1,667*** CGKLD -0,168** DIVKLD -0,115*** Adjusted R-squared 0,701 0,578 0,613 F-value 110,449*** 94,113*** 108,764*** Highest VIF 2,107 2,548 2,586

Table 5: Supplementary regression analysis

***, ** and * are respectively significant at the 1%, 5% and 10% level (using a two-tailed test).