Managing CSR Decoupling Effectively: Composition and
Characteristics of the CSR Committee
Tessa Oosterom
S2973014
Abstract
Prior research has shown that firms’ corporate social responsibility (CSR) disclosure and performance are often misaligned, which results in a CSR gap. The difference between CSR disclosure and performance is referred to as CSR decoupling, and occurs when firms understate or overstate their CSR performance in public disclosures. Boards of directors are responsible for managing the CSR gap, and boards increasingly deal with social responsibility issues by creating a specialized committee. This study aims to contribute to a better understanding of how the design and characteristics of the CSR committee determine its effectiveness, specifically with regard to managing CSR decoupling. Moreover, this study contributes to the currently limited empirical evidence of determinants of CSR decoupling.
The hypotheses were tested using an international sample of 29,795 firm-year observations, from 2006 to 2017, and a subsample of 6,036 observations was available to test the hypotheses regarding committee characteristics. Fixed effect regression analyses revealed that the presence of a CSR committee, the size of the committee and average committee tenure are negatively related to CSR decoupling, while a positive association is identified between committee gender diversity and decoupling, and no significant results are found regarding committee independence. These findings provide support for the establishment of a CSR committee in order to manage CSR decoupling, and provides guidance on how to design this committee.
Keywords: Corporate Social Responsibility, CSR Decoupling, Corporate Governance, CSR Committee, Committee Size, Gender Diversity, Committee Independence, Committee Tenure
Master thesis, MSc Management Accounting and Control University of Groningen
Supervisor: dr. Nazim Hussain
January 20, 2020
Introduction
Pressure for companies to behave responsibly toward society and the environment, and to fulfill broader social goals beyond economic and legal requirements has increased over the years (Mohan, 2006; Aguilera et al., 2007). Firms should consider their impact on society and take stakeholders’ interests into account, in order to legitimize their activities, gain support from stakeholders, and guarantee their survival (Garcia-Torea et al., 2016).
Corporate Social Responsibility (CSR) has become an issue of interest to the public, corporate management, and academics. Companies have become accountable to a wider audience, for their financial as well as their non-financial performance (Fernández-Gago, Cabeza-García, and Nieto, 2018). Disclosures made by corporations are expected to satisfy the needs of not only their shareholders and creditors but also of other stakeholders, such as customers, suppliers, the government, and society in general (Kilic, Kuzey, and Ali, 2015). Accordingly, corporate sustainability reporting has become common practice, as stakeholders expect companies to be accountable and transparent regarding their social and environmental impacts (Boiral, 2013; Cho et al., 2015). However, the quality and completeness of these disclosures has been questioned (e.g. Adams, 2004; Patten, 2012), and transparency is often lacking (Boiral, 2013). Moreover, firms may overstate their CSR performance in CSR disclosures, in order to strengthen their legitimacy (Delmas and Burbano, 2011; Tashman, Marano, and Kostova, 2019), whereas other firms understate their CSR activities in their reports to divert attention from costly social and environmental initiatives (Kim and Lyon, 2014). Consequently, a gap is created between firms’ CSR disclosure and performance, which is referred to as CSR decoupling (Tashman et al., 2019).
Christensen, Morsing, and Thyssen (2013) refer to communication about CSR that announces ideals and intentions, rather than reflect actual behaviors, as aspirational talk. They argue that such aspirational talk is an important resource for social change and has the potential to advance organizations toward CSR improvements. Since aspirational talk is essential in pushing organizations toward higher CSR standards, they suggest that discrepancies between organizational talk and actions should be tolerated (Christensen et al., 2013). However, most of the literature considers CSR decoupling as problematic, because society is not able to hold corporations accountable for their impacts on society when they do not provide transparent and complete accounts of their CSR initiatives (Cho et al., 2015). In addition, companies risk damaging their legitimacy when CSR decoupling is detected (MacLean and Behnam, 2010; Tashman et al., 2019), and CSR decoupling has been found to negatively affect firm market value (Hawn and Ioannou, 2016).
specific aspects of governance (Spira and Bender, 2004; Van den Berghe and Levrau, 2004). The CSR committee plays an important role in formulating environmental and social policies and the implementation of CSR initiatives (Amran, Lee, and Devi, 2014; Dixon-Fowler et al., 2017; Mackenzie, 2007). At the same time however, several researchers suggest that companies may establish a CSR committee for symbolic and window-dressing purposes, solely to improve their public image (e.g. Berrone and Gomez-Mejia, 2009; McKendall, Sánchez, and Sicilian, 1999; Peters and Romi, 2014). Thus, the mere existence of a CSR committee might not be enough to improve CSR performance, and the characteristics and the structure of such a committee should be considered in relation to its effectiveness in improving CSR outcomes (e.g. Berrone and Gomez-Mejia, 2009; Eberhardt-Toth, 2017; Liao, Luo, and Tang, 2015). Therefore, this study examines several characteristics of the CSR committee in relation to CSR decoupling. The central research question of this paper is: “How do the presence and composition of a CSR committee affect the degree of CSR decoupling within a firm?”.
In order to answer the research question, information on committee details are collected through the BoardEx database, and CSR data is obtained through the Bloomberg and Asset4 databases. The research hypotheses are tested using a final sample of 29,795 firm-year observations for the years 2006–2017, and a subsample of 6,036 observations from firms with a CSR committee. CSR decoupling, or the “CSR gap” is measured by determining the difference between a firm’s environmental, social and governance (ESG) disclosure index and its ESG performance score.
results. This paper concludes with a discussion of the main results, the limitations of this study, and suggestions for future research.
Literature Review and Hypotheses
Many companies have adopted CSR policies, such as codes of conduct, ISO certifications, business practices that support stakeholder initiatives, and alliances with nonprofit organizations (Graafland and Smid, 2019; Hess and Warren, 2008). However, doubts remain prevalent about the extent of commitments to CSR and to what degree corporate initiatives actually affect social and environmental conditions (Klettner, Clarke, and Boersma, 2014; Whiteman, Walker, and Perego, 2013). Legitimacy pressures and competing stakeholder expectations can result in decoupling processes (Meyer and Rowan, 1977), which explains why the adoption of policies does not necessarily result in CSR outcomes. According to legitimacy theory, firms must demonstrate to society that they operate in accordance with societal expectations, which will lead stakeholders to perceive the company’s activities as legitimate (Deegan, 2002). When a company’s legitimacy is threatened, it can either change its actions to align them with social norms (Michelon, Pilonato, and Ricceri, 2015), or manage public perceptions through CSR disclosures (Bebbington, Larrinaga, and Moneva, 2008; García-Sánchez, Suárez-Fernández, and Martínez-Ferrero, 2019). As long as decoupling is not detected by stakeholders, it might lead to increased legitimacy. However, when greenwashing accusations arise, firms will suffer from reputational damage and a loss of legitimacy (Seele and Gatti, 2017).
A practical example of CSR decoupling is the implementation of certifiable standards. Christmann and Taylor (2006) suggest, and have found empirical evidence, that standard certification can be decoupled from its implementation. International certifiable standards, those developed by the International Organization for Standardization (ISO) for instance, require certified firms to implement specific management processes that are designed to improve environmental and social responsibility. However, some companies may obtain certification for symbolic purposes, without substantive changes to their daily operations (Christmann and Taylor, 2006). The authors argue that firms decide upon the quality of the standard’s implementation based on a cost-benefit analysis. While for some firms, substantive implementation is of high importance to their customers, other customers might be satisfied with the firm’s standard certification, without concern for the quality of implementation (Christmann and Taylor, 2006). In contrast, Crilly, Zollo, and Hansen (2012) question whether decoupling is always an intentional response to stakeholder pressures. Inconsistent implementation of policies may be the result of organizational learning efforts, when different understandings of stakeholder pressures exist. Additionally, the difficulty of replicating practices throughout a firm may lead to the emergence of inconsistencies and decoupling of practices (Crilly et al., 2012).
literature (Hawn and Ioannou, 2016; Kim and Lyon, 2014). Hawn and Ioannou (2016) argue that a lack of sufficient external CSR actions (e.g. sustainability reports) undermines internal CSR actions (e.g. CSR-related change initiatives), because stakeholders will not recognize that the firm is engaging in CSR, due to information asymmetry. The findings of Hawn and Ioannou (2016) indicate that greater alignment between internal and external CSR actions is associated with greater legitimacy and a higher market value. Misalignment of external communications and internal CSR actions negatively affects firms’ market performance, due to a perceived lack of transparency and accountability by stakeholders (Hawn and Ioannou, 2016).
CSR Committee and CSR Decoupling
Although the presence of a CSR committee in relation to CSR decoupling has not been previously studied, a CSR committee has been empirically examined in relation to both CSR disclosure and performance. Since CSR decoupling has been conceptualized as the difference between CSR disclosure and CSR performance (Tashman et al., 2019), it is useful to assess prior literature on the association between a CSR committee and both aspects of CSR decoupling. Table 1 provides an overview of studies that have been published on the relationship between the presence of a CSR committee and CSR disclosure and performance. Although some studies did not document a significant relationship, the majority of studies reported a positive association between a CSR committee and both CSR disclosure and performance. For example, Ienciu, Popa, and Ienciu (2012), and Amran et al. (2014) find that the presence of a CSR or environmental committee is associated with increased social and environmental reporting quality. Several studies have also found a positive relationship between the presence of a CSR committee and CSR performance (e.g. Dixon-Fowler et al., 2017; Mallin and Michelon, 2011; Walls, Berrone, and Phan 2012).
Table 1 Overview of prior studies on CSR committees and CSR disclosure and performance Study Theory Independent
variable
Dependent variable(s)
CSR measure Sample Results
CSR Disclosure Amran et al. (2014) Legitimacy theory and resource-based view CSR committee Sustainability reporting quality Sustainability reporting quality index 113 reports from Asia-Pacific firms, for the year 2010 + Cowen et al. (1987) NA CSR committee Disclosure of human resource information The number of social responsibility disclosures 134 annual reports from US companies, for the year 1978 + Cucari et al. (2018) Stakeholder theory CSR committee CSR disclosure Bloomberg environmental, social, and governance (ESG) disclosure score 54 Italian firms for the years 2011–2014 + Giannarakis et al. (2019) Stakeholder theory Sustainable committee Environmental disclosure Bloomberg environmental disclosure score 278 US firms 0 Helfaya and Moussa (2017) Stakeholder and legitimacy theory CSR committee Quantity and quality of environmental disclosure Content analysis of CSR and annual reports Reports from 94 UK listed firms for the year 2010 + Ienciu et al. (2012) Agency theory Environmental committee Environmental reporting Environmental reporting score from Roberts Environmental Center 54 largest petroleum companies worldwide, for the year 2010 + Liao et al. (2015) Stakeholder theory Environmental committee
GHG disclosure Carbon Disclosure Project (CDP) reports 2010 CDP reports from 329 largest UK firms 0 Michelon and Parbonetti (2012) Stakeholder theory CSR committee Sustainability disclosure Content analysis of CSR and annual reports 114 reports from the year 2003, from US and European firms 0 Peters and Romi (2014) Stakeholder theory Environmental committee Disclosure of greenhouse gas (GHG) information Carbon Disclosure Project’s GHG emissions questionnaire 1,238 observations from US firms for the years 2002–2006 + Peters and Romi (2015) Legitimacy theory Environmental committee Voluntary assurance of CSR reports Sustainability report assurance (SRA) 912 US reports from the years 2002–2010 0 Rankin et al. (2011) Institutional governance theory Environmental committee Credibility and extent of GHG disclosures Content analysis of public reports 187 Australian firms, for the year 2007
Study Theory Independent variable
Dependent variable(s)
CSR measure Sample Results Rupley et al. (2012) Agency and legitimacy theory CSR committee Quality of environmental disclosure Environmental disclosure index 361 observations from 127 US firms for the years 2000– 2005 0 CSR Performance Burke et al. (2019) Accountability theory Sustainability committee Corporate social performance CSP strengths and concerns from MSCI (KLD) database 11,458 observations from 1,742 firms for the years 2003–2013 + Dixon-Fowler et al. (2017) Agency and resource-dependence theory Environmental committee Environmental strengths and weaknesses
KLD ratings 485 US firms for the year 2004 + Godos-Díez et al. (2018) Agency, stakeholder, and resource-dependence theory CSR committee CSR engagement Participation in the United Nations Global Compact 398 observations from 81 Spanish firms for the years 2009–2013 + Hussain et al. (2018) Agency and stakeholder theory Sustainability committee Triple bottom line sustainability performance Product of disclosure index and quality index for each
sustainability dimension
152 sustainability reports from US firms, issued in the period 2007–2011 + Mallin and Michelon (2011) Resource- dependence and legitimacy theory CSR committee Social performance KLD ratings 278 observations from 176 US firms, for the years 2005– 2007 + McKendall et al. (1999) Corporate illegality CSR committee Environmental violations Enforcement actions by the Environmental Protector Agency 150 largest publicly owned manufacturing firms in the US 0 Orazalin (2019) Stakeholder and resource dependence theory Sustainability committee Environmental and social performance Environmental and social performance scores from Asset4 837 observations from 109 UK firms, for the years 2009–2016 + Rodrigue et al. (2013) Stakeholder and impression management theory Environmental committee Environmental performance Regulatory compliance, pollution prevention, and environmental capital expenditures 219 observations in the period 2003– 2008 from US firms in environmentally sensitive industries 0 Spitzeck (2009) Stakeholder theory CSR committee Corporate responsibility Business in the Community (BITC) Corporate Responsibility Index (CRI) 51 UK firms, for the years 2002– 2007 + Walls et al. (2012) Agency and stakeholder theory Environmental committee Environmental strengths and concerns KLD ratings 2,002 observations from 313 US firms for the years 1997– 2005
+
Since CSR decoupling is conceptualized as the difference between CSR reporting and performance, and prior literature documents that a CSR committee is associated with both improved CSR reporting and performance, it might be expected that the presence of a CSR committee could lead to better alignment of a firm’s CSR reporting and its CSR performance, thus resulting in a smaller disclosure– performance gap. In the next section, hypotheses will be developed regarding the relationship between the presence and characteristics of a CSR committee and CSR decoupling.
Research Hypotheses
The board of directors may address social and environmental issues by forming specialized board committees which are designed to oversee social responsibilities and corporate environmental policy (Dixon-Fowler et al., 2017; Rodrigue, Magnan, and Cho, 2013; Walls et al., 2012). The establishment of a CSR committee is a voluntary decision made by the firm, which could indicate a firm’s commitment to CSR and transparency (Peters and Romi, 2014) and represents a means to meet stakeholders’ expectations (Rodrigue et al., 2013).
Board committees are given specific responsibilities regarding important organizational issues and research has shown that specialized committees may significantly influence corporate policies and strategies (Dixon-Fowler et al., 2017). The creation of a CSR committee can be used to ensure consistency in the implementation of sustainability strategies (Klettner, Clarke, and Boersma, 2014). Committee members are responsible for evaluating the company’s performance against its policies, as well as ensuring the quality of the firm’s CSR reporting (Mackenzie, 2007; Michelon and Parbonetti, 2012). The experience, skills and knowledge of CSR committee members are expected to play an important role in formulating sustainable strategies and translating these into tangible actions (Amran et al., 2014). Moreover, firms that rate CSR as highly important will assign responsibility at board level rather than at lower levels in the company (Graafland and Smid, 2019). The members of a CSR committee are made accountable for the firm’s social activities, and the integration of CSR policies into organizational processes is likely to be facilitated by organizational structures that make managers accountable for implementation (Godos-Díez et al., 2018; Graafland and Smid, 2019). Additionally, the monitoring role of the board is improved when a sub-committee is created for CSR issues, because the committee members are responsible for evaluating CSR policies and practices against rigorous criteria, therefore managers are encouraged to make good social and environmental decisions in the long-term interest of the firm (Godos-Díez et al., 2018).
Therefore, I hypothesize that CSR decoupling is less likely to occur within a firm, when a CSR committee is present.
Hypothesis 1. The presence of a CSR committee is negatively associated with CSR decoupling.
Prior research on the relationship between a CSR committee and CSR outcomes is inconclusive. Findings from previous empirical studies suggest that the presence of a CSR committee is associated with increased social and environmental reporting quality (Amran et al., 2014; Helfaya and Moussa, 2017). Furthermore, some empirical evidence supports the existence of a positive relationship between a governance committee and environmental performance (Dixon-Fowler et al., 2017; Walls et al., 2012) and CSR practices (Spitzeck, 2009), although others have not found a significant impact of a CSR committee on CSR outcomes (e.g. McKendall et al., 1999; Rodrigue et al., 2013). These mixed empirical results could be explained by the fact that some firms may establish a CSR committee for the purpose of creating a sustainability image, and not necessarily with the intention to improve actual performance outcomes (Peters and Romi, 2014). The structure and composition of sub-committees are therefore relevant in considering its meaningfulness and effectiveness (Godos-Díez et al., 2018; Berrone and Gomez-Mejia, 2009).
The size of a board committee is associated with its power and effectiveness (Becker-Blease and Irani 2008; Kalbers and Fogarty, 1993). Additionally, a larger committee is likely to improve the resource provision role of the board, as a larger number of directors would bring more experience, and a greater knowledge base would be created (De Villiers, Naiker, and Van Staden, 2011; Godos-Díez et al., 2018; Peters and Romi, 2014). A larger committee size would lead to more diversification of expertise and skills (De Villiers et al., 2011; Van den Berghe and Levrau, 2004), as well as more links with the external environment, which would encourage the committee to take into account the interests of the community and society (Chang, 2010; Deschênes et al., 2015).
On the other hand, the effectiveness of the committee might decrease with the number of members, due to the potential group dynamics problems associated with large groups (Van den Berghe and Levrau, 2004). In relation to board size, prior research suggests that larger groups experience problems with coordination, communication and organization (Goodstein, Gautam, and Boeker, 1994; Van den Berghe and Levrau, 2004). Furthermore, larger boards may be less participative and cohesive, which affects the quality of decision-making (Goodstein et al., 1994; Jensen, 1993). Similar consequences could be associated with the size of committees.
results of the study by Eberhardt-Toth (2017) suggest that high corporate social performance is less likely when the CSR committee consists of a larger number of directors.
A CSR committee is voluntary and implemented at the discretion of the firm, Therefore, its presence and design is a potential indicator of the firm’s commitment to CSR, and the importance that is placed on environmental and social strategy may be illustrated by a larger committee size (Dixon-Fowler et al., 2017; Peters and Romi, 2014). Hence, in the present study, it is expected that the size of a CSR committee is negatively associated with CSR decoupling, as it is less likely that a firm established the committee for symbolic purposes when a larger number of directors serve on the committee.
Hypothesis 2. The size of the CSR committee is negatively associated with CSR decoupling.
Gender diversity within the board of directors is a widely discussed issue in the academic literature and has been linked to financial as well as non-financial organizational outcomes, including CSR (Hafsi and Turgut, 2013; Rao and Tilt, 2016). Scholars have argued that women on the board can contribute to more effective decision-making with regard to CSR, because they are more socially oriented than men and tend to take into account the interests of a wide range of stakeholders (Burges and Tharenou 2002; Ibrahim and Angelidis 1994; Konrad and Kramer, 2006). Moreover, Zhang, Zhu and Ding (2013) suggest that female directors may be more sensitive to certain stakeholders’ claims because of the psychological characteristics they tend to possess. Relative to men, women possess more communal traits. For example, they are affectionate, helpful, sympathetic, interpersonally sensitive, and concerned about others’ welfare (Eagly, Johannesen-Schmidt, and van Engen, 2003). Nielsen and Huse (2010) argue that women’s attention and concern for others’ needs may lead to their active involvement in strategic issues regarding the firm and its stakeholders. Consequently, the presence of women on a CSR committee could improve the ability of the committee to deal effectively with issues of corporate social responsibility (Setó-Pamies, 2015; Zhang et al., 2013).
Female directors adopt ethical criteria in their decision-making process (Thorne, Massey, and Magnan, 2003) and are committed to provide voluntary disclosure of higher quality and superior transparency (García-Sánchez et al., 2019). Furthermore, García-Sánchez et al. (2019) argue that gender diversity within the board increases the quality of CSR information, and a more diverse board is less likely to use an optimistic tone in CSR reporting that makes it difficult to evaluate the real social and environmental performance of the firm. The results of the study by García-Sánchez et al. (2019) suggest that female directors are less likely to engage in impression management strategies with regard to CSR reports, and that having more female directors on the board leads to more balanced, concise, clear, comparable and reliable CSR information (García-Sánchez et al., 2019).
Rahman, and McQuillen, 2015). Thus, prior research suggests that firms with more female directors on their boards tend to act in more socially responsible ways than those with no women or fewer women (Post et al., 2015).
To summarize, when a higher number of women are part of the CSR committee, the committee’s decision-making might be more effective because stakeholders’ interests are more likely to be taken into account. The CSR committee is responsible for the firm’s CSR reporting (Mackenzie, 2007), and increased gender diversity is expected to increase the quality and transparency of CSR reports (García-Sánchez et al., 2019). Therefore, a higher proportion of female directors on the CSR committee could lead to improved alignment of CSR disclosure and performance.
Hypothesis 3. The proportion of female directors within the CSR committee is negatively associated with CRS decoupling.
In the literature on board composition, independent directors have been considered of high importance in relation to CSR (Godos-Díez et al., 2018). Coming from outside the firm, independent directors can be seen as representatives of outside stakeholders (Johnson and Greening, 1999; Wang and Dewhirst, 1992). Independent directors tend to have closer relations with stakeholders, are more conscious of their expectations and needs, and are more likely to meet their demands (Ibrahim & Angelidis, 1995; Wang and Dewhirst, 1992). Moreover, independent directors may be more concerned with socially responsible behavior, because their reputation is likely to be enhanced by serving firms that engage in ethical and responsible behavior, which can lead to continued director appointments (De Villiers et al., 2011; Fernández-Gago et al., 2018).
Research has shown that outside directors have a different CSR orientation compared to inside directors, which helps to broaden the perception of stakeholder claims and thus increase their salience (Zhang et al., 2013). Independent directors, with an outsider view on the firm, may be more sensitive to stakeholder demands than non-independent directors which is likely to correspond with higher corporate social performance (Eberhardt-Toth, 2017). This is supported by the empirical evidence found by Eberhardt-Toth (2017), who has found a positive and significant relationship between the proportion of independent directors on the CSR committee and a firm’s corporate social performance.
Hypothesis 4. The proportion of independent directors within the CSR committee is negatively associated with CSR decoupling.
Longer tenure of a director leads to familiarity with the firm’s strategic issues and management practices, as well as the accumulation of firm-specific knowledge and experience (Kesner, 1988; Patro, Zhang, and Zhao, 2018). Tenured directors are probably more effective in advising management about CSR initiatives, as they have developed a deep understanding of the implications of a firm’s potential CSR initiatives (Patro et al., 2018).
With regard to independent directors, researchers have argued that they become less effective in their monitoring role as their tenure increases (e.g. Vafeas, 2003). When independent directors serve on a board or committee for a long time, it can be argued that they lose their independence, and they might be less likely to adopt a longer-term view of CSR, especially when such strategies are in conflict with the firm’s short-term financial goals (Patro et al., 2018).
The literature also suggests that extended tenure might cause directors to become entrenched, which means that their capacity to break established cognitive patterns is diminished and they become more rigid in decision-making (Golden and Zajac, 2001; Veltrop et al., 2018). Additionally, extended tenure of directors can result in reduced openness to outside information and increased commitment to the status quo (Kor and Sundaramurthy, 2009; Veltrop et al., 2018). A higher turnover could be beneficial for committee effectiveness, because new directors bring innovative ideas and inspiration into the committee (Deschênes et al. 2015; Dou, Sahgal, and Zhang, 2015; Godos-Díez et al., 2018).
To conclude, directors gain experience and knowledge about a firm’s CSR practices when they are part of the CSR committee for a longer period of time, and this enables them to advise management more effectively (Patro et al., 2018). However, when directors have been a part of the CSR committee for a long time, they may become entrenched, and when the majority of the committee members becomes entrenched, the effectiveness of the CSR committee will be diminished. Therefore, a higher average committee tenure is expected to be associated with a higher degree of CSR decoupling.
Hypothesis 5. Average CSR committee tenure is positively associated with CSR decoupling.
Methodology
Sample and Data
Information on the characteristics of individual directors was also obtained through BoardEx, which includes directors’ gender, independence, and the time they have served on the CSR committee. For the dependent variable, CSR data were retrieved from the Thomson Reuters Asset4 and Bloomberg databases. Finally, firm financial information was extracted from the WorldScope database.
Observations were excluded when information was missing for any of the variables of interest. Missing values for each control variable have been replaced with the mean value of this variable, in order to preserve the number of observations available for analyzing the study’s variables of interest. The final sample consists of 29,795 observations from 4,851 firms for the years 2006-2017. The sample is unbalanced, since not all firms are represented in all years. Using two-digit SIC codes, 73 industries are identified in the sample, and firms originate from 49 different countries.
Hypothesis 1 was tested using the full sample. To test hypotheses 2 to 5, a subsample of 1,099 firms with a CSR committee was available, which resulted in 6,036 firm-year observations to analyze CSR committee characteristics.
Measurement of Variables Independent variables
The presence of a CSR committee is a binary variable, which takes the value of 1 when the company has a CSR committee and the value of 0 when such a committee is not present. The size of a CSR committee is measured as the number of directors that are member of the CSR committee in the year of observation. Gender diversity is measured as the ratio of female directors to the total number of directors in the committee. Committee tenure is measured as the average number of years that the committee members have served on the CSR committee at the moment of observation. Finally, committee independence is measured as the ratio of independent directors to committee size. A committee member is characterized as an independent director when they are a non-executive director, which is specified in the BoardEx database.
Dependent variable
efforts exceed its actual performance (Tashman et al., 2019). Misalignment can occur in both directions; therefore, the dependent variable may also have a negative value (Hawn and Ioannou, 2016).
Control variables
Several control variables are included in the empirical model that have been associated with CSR in prior research. Gender diversity within the board of directors and independence of the board have been positively associated with CSR performance in prior studies (e.g. Dêschenes et al., 2015; De Villiers et al., 2011). The size of the board of directors is also included as a control variable (Burke, Hoitash, and Hoitash, 2019). Previous research provides contradictory evidence on the relationship between board size and CSR outcomes (Walls et al., 2012). CEO duality has previously been examined in relation to CSR and is included as a dummy variable that takes the value of 1 when the CEO is also the chairperson of the board. For instance, Webb (2004) finds that CEO duality is negatively associated with socially responsible behavior, and Giannarakis (2014) finds that CEO duality may limit the transparency of the firm’s CSR disclosures.
Firm size is included as a control variable, because smaller firms may lack the resources to implement the management systems required for substantive implementation of CSR policies (Christmann and Taylor, 2006). Firm size is measured by the natural logarithm of total assets. Firm age is measured as the natural log of the number of years since the firm has been founded and is expected to be positively related to CSR (De Villiers et al., 2011). Profitability has also been associated with CSR and is measured as return on assets (ROA), and a positive relationship is generally found (e.g. McKendall et al., 1999). R&D intensity and capital intensity have also been associated with CSR (Harjoto and Jo, 2015; McWilliams and Siegel, 2000), and are calculated by dividing R&D expenses and total assets by sales respectively. Leverage of a firm is calculated as a ratio of debt to total assets. Prior research has documented a positive relationship between leverage and CSR disclosure (Clarkson et al., 2008) and CSR engagement (Jo and Harjoto, 2011), and is therefore expected to be negatively related to CSR decoupling. In Table 2 an overview is provided of all variables used in this study, their measurement and the source from where the data for each variable were obtained.
Model Specification
Table 2 Measurement of variables
Variables Description Source
CSR decoupling Difference between CSR disclosure and CSR performance Bloomberg and Asset4 CSR committee Dichotomous variable which takes the value of 1 when a CSR
committee is present
BoardEx CSR committee size The number of directors on the CSR committee BoardEx CSR committee gender
diversity
Ratio of female directors on the CSR committee to total number of members of the CSR committee
BoardEx CSR committee
independence
Ratio of independent directors on the CSR committee to total number of members of the CSR committee
BoardEx CSR committee director
tenure
The average committee tenure of members of the CSR committee BoardEx Board size The number of members on the board of directors Asset4 Board gender diversity Ratio of female board members to total number of board members Asset4 Board independence Ratio of independent directors to total number of board members Asset4 CEO duality Dichotomous variable which takes the value of 1 when the CEO is
the chairperson of the board
Asset4
Firm size Log of total assets WorldScope
Firm age Log of number of years since the firm was founded WorldScope Profitability Ratio of net profit to total assets (ROA) WorldScope R&D intensity Log of the ratio of R&D expenditures to sales WorldScope Capital intensity Ratio of total assets to sales WorldScope Leverage Ratio of total debt to total assets WorldScope
Results
Tables 3 and 4 report the means, standard deviations, and Pearson correlations for all variables. In Table 3, descriptive statistics and correlations are based on the full sample. The mean value of CSR decoupling is negative, which suggests that, on average, firms understate their CSR performance. In Table 4, descriptive statistics and correlations are presented for the subsample of firms that have a CSR committee. The mean committee size is 4.58, the mean proportion of women on the committee is 26.34%, the mean committee tenure is 3.36 years, and CSR committees consist for 90.11% of independent directors on average.
To estimate the effect of the presence of a CSR committee and its characteristics on CSR decoupling, fixed effect regression analysis was performed. The regression results are reported in table 5. Model 1 presents the result of the test of hypothesis 1. The (unstandardized) regression coefficient for CSR committee is negative and significant (b = –2.243, p < 0.001), thus supporting hypothesis 1. Of the set of control variables, board size, capital intensity, and leverage are not found to be significant predictors of CSR decoupling.
Model 2 shows the results of the test of hypotheses 2–5. A negative and significant relationship is found between CSR committee size and CSR decoupling (b = –0.370, p = 0.035). Therefore, hypothesis 2 is supported; the regression results suggest that CSR decoupling decreases with a larger CSR committee size. Contrary to the study’s expectations, a positive and significant relationship is found between gender diversity within the CSR committee and CSR decoupling (b = 0.046, p < 0.001). Committee independence is not significantly related to CSR decoupling (p = 0.596). The coefficient for average committee tenure of directors on the CSR committee is negative and significant (b = –1.004, p < 0.001), the sign of the coefficient is thus opposite to the hypothesized effect. The results suggest that CSR decoupling within a firm decreases with the average duration that directors are a member of the CSR committee.
Additional Analyses
Discussion
In this study, the presence of a board CSR committee and its characteristics were empirically examined in relation to CSR decoupling. The presence of a CSR committee was hypothesized to improve alignment of the firm’s CSR reporting and performance, as it is expected to perform as a governance mechanism responsible for monitoring management and providing advice on CSR practices (Rodrigue et al., 2013). The regression results provide support for hypothesis 1. The presence of a CSR committee is negatively and significantly associated with CSR decoupling. This result is consistent with a stakeholder perspective, which suggests that establishing a CSR committee assigned with the responsibility to oversee CSR strategy is an effective way of meeting stakeholder demands for sustainability (Rodrigue et al., 2013).
The results of this study suggest that CSR committees are effective in providing advice on CSR issues, as well as monitoring the alignment of the firm’s CSR performance and disclosures made by the firm. The results are consistent with some prior studies, which have found that the CSR committee is influential in improving sustainability reporting quality (Amran et al., 2014; Ienciu et al., 2012) and CSR performance (Dixon-Fowler et al., 2017; Mallin and Michelon, 2011).
At the environmental dimensional level, a negative and significant relationship was also found between the presence of a CSR committee and decoupling. At the social dimensional level, a significant relationship was not found. These results suggest that the CSR committee might be able to influence the alignment of environmental reporting practices and environmental performance, while the committee might not be effective in managing the social dimension of CSR decoupling.
The negative and significant regression coefficient for committee size suggests that the size of CSR committees is an indicator of its influence on CSR strategy and that committees are likely to be more effective in aligning CSR disclosure and CSR performance when the number of directors that are on the committee increases. This finding is consistent with the view that the size of the CSR committee indicates the firm’s commitment to CSR (Peters and Romi, 2014). In addition, the results of this study suggest that a larger CSR committee might be more effective due to the increase in knowledge and experience (De Villiers et al., 2011), and the representation of more stakeholder groups (Godos-Díez et al., 2018; Van den Berghe and Levrau, 2004).
board and board committees in order to improve their reputation, without the intention to improve its overall CSR performance or the quality and transparency of CSR reporting. The presence of women on boards may signal socially responsible behavior to stakeholders and is positively related to a firm’s reputation (Bear et al., 2010).
The hypothesized effect of committee independence on CSR decoupling is not supported by the regression results. García-Meca and Sánchez-Ballesta (2010) performed a meta-analysis on the relationship between board independence and voluntary disclosure and argue that insignificant results could be explained by the measurement of directors’ independence. Non-executive directors are considered to be independent in the current study, and García-Meca and Sánchez-Ballesta (2010) found that board independence is not significantly associated with voluntary disclosure when authors adopt this approach. Other factors that might affect the independence of directors, such as directors’ financial interests in the firm or social relationships with management (De Villiers et al., 2011; Hillman and Dalziel, 2003), have not been considered in this study. Measurement of this variable is limited by the use of archival data in this study.
The negative regression coefficient for committee tenure is opposite to the expected result. Although diminished committee effectiveness was expected with increased average committee tenure, the results suggest that directors may become more effective during the time that they serve on the CSR committee, as they acquire organization- and job-specific expertise. As average committee tenure increases, the committee is more likely to be effective in managing CSR decoupling, which leads to a smaller gap between CSR disclosure and CSR performance.
Conclusion
The objective of this study was to develop theoretical expectations regarding the CSR committee and its characteristics in relation to CSR decoupling, as well as to empirically examine this relationship. Data was collected from the BoardEx database for the independent variables, and information on CSR decoupling was collected from the Asset4 and Bloomberg databases for the years 2006–2017, which resulted in a final sample of 29,795 firm-year observations and a subsample of 6,036 firm-year observations was available from firms with a CSR committee. The findings from the regression analysis indicate that firms establishing a CSR committee can be effective in reducing the gap between CSR disclosure and CSR performance, and that the committee’s size, gender diversity and average committee tenure affect the committee’s ability to manage CSR decoupling.
The empirical findings have practical implications for the design of a CSR committee. The results indicate that the size of a committee should be considered, as increased knowledge and experience contribute to the committee’s decision-making capability. Furthermore, turnover of committee members should not be too high, as committee members acquire job-specific expertise over time, which helps them to perform their jobs more effectively. Finally, although prior research suggests that increased gender diversity is important for improved CSR outcomes, the results from this study indicate that gender diversity is associated with a larger difference between CSR disclosure and performance. Further research might be needed to understand this finding, as it contradicts prior literature on gender diversity. This study has several limitations. First, the results might not be generalizable to non-listed and smaller firms. Additionally, as a measure of committee independence, the ratio of non-executive directors to committee size was used as a proxy. Other important aspects of independence were not considered in this study, because this information was not available from the data sources used for data collection.
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