1
MASTER’S
THESIS
IB&M
SEMESTER
1
2020-2021
EBM719A20
THE IMPACT OF CSR PERFORMANCE ON THE
DISCLOSURE OF FIRM-LEVEL CORRUPTION
AND THE EFFECT OF NATIONAL GOVERNANCE
By:
Koen Meutstege - S3198677
k.meutstege@student.rug.nl
+31640242443 University of Groningen Faculty of Economics and Business
W.A. Scholtenstraat 26-1-1 9712 KW Groningen
2
ABSTRACT
This study examines the relationship between corporate social responsibility (CSR) and the disclosure of firm-level corruption. Facing a measurement challenge referring to the firm‐ level of corruption, this study defines a corruption score based on corporate disclosures of corrupt activities. This corruption score is based on a self-created list of keywords addressing common issues related to corruption. Using a sample of the 104 largest firms in the world, this study shows that, first, CSR performance has a positive impact on the disclosure of firm-level corruption. And second, this effect is particularly strong for firms that are characterized by high-quality national governance.
Keywords: Firm-level Corruption, Disclosure, CSR performance, National Governance, Voice & Accountability, Political Stability, Regulatory Quality, Rule of Law
3 TABLE OF CONTENTS
1. INTRODUCTION……….4
2. LITERATURE REVIEW ………9
2.1. CSR PERFORMANCE ... 9
2.2. THE DISCLOSURE OF FIRM-LEVEL CORRUPTION ... 9
2.3.THE IMPACT OFCSR PERFORMANCE ON THE DISCLOSURE OF FIRMLEVEL CORRUPTION 10 2.4. NATIONAL GOVERNANCE ... 11
2.5. THE DIRECT EFFECT OF NATIONAL GOVERNANCE ON THE DISCLOSURE OF FIRM- LEVEL CORRUPTION ... 11
2.6. THE MODERATING EFFECT OF NATIONAL GOVERNANCE………12
2.7. CONCEPTUAL MODEL ………...14
3. METHODOLOGY……….15
3.1. SAMPLE ... 15
3.2. CSR PERFORMANCE ... 15
3.3. THE DISCLOSURE OF FIRM-LEVEL CORRUPTION ... 16
3.4. NATIONAL GOVERNANCE ... 18 3.5. CONTROL VARIABLES ... 19 3.6. METHOD OF ANALYSIS ……….20 4. RESULTS………..21 4.1. DESCRIPTIVE STATISTICS ... 21 4.2. REGRESSION ANALYSIS ... 22 4.3. ROBUSTNESS CHECK……….23 5. DISCUSSION………...25 5.1. INTERPRETATION OF RESULTS………25
5.2. LIMITATIONS AND FURTHER RESEARCH ... 27
6. CONCLUSION ...28
7. REFERENCES ...29
8. APPENDIX ...34
8.1. APPENDIX A: DESCRIPTIVE STATISTICS, PEARMAN CORRELATION COEFFICIENTS AND VIF-VALUES ... 34
8.2. APPENDIX B: REGRESSION ANALYSIS ... 38
8.3. APPENDIX C: ROBUSTNESS CHECK ... 39
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1. INTRODUCTION
Firm-level corruption is defined as the abuse of public office for private gains in a firm (World Bank, 2018). A more precise definition of corruption is the act or effect of giving or receiving an item of value, in order that a person, an institute or an agency does or omits to do something, in violation of a formal or implicit rule about what that person, institute or agency ought to do or omit to do, to the benefit of the one who gives the item of value or a third party (Argandona, 2005). Firm-level corruption disclosure is defined as the revelation and expose of corruption on firm-basis, it is the way firms publish information on their anti-corruption behaviour (Blanc et al, 2017).
Corruption is more uncontrolled and harmful in poorer countries where most citizens and businessmen tend to tolerate it (Ebben & de Vaal, 2009). According to the Corruption Perception Index (CPI) (2019), poorer countries as Somalia, South Sudan and Syria are scoring respectively 9, 12 and 13 points on a scale where 0 is highly corrupt and 100 is very clean of corruption. On this scale, countries as Denmark, New Zealand and Finland score respectively 87, 87 and 86 points. Despite these numbers, corruption is not only a third-world phenomenon. While it is more present in less developed countries, also democratic, western societies are not free of corruption (Ebben & de Vaal, 2009). This is also supported by the Corruption Perception Index, where no country earns a perfect score, and where western and democratic countries as the United States, Spain and Italy score respectively scores of 69, 62 and 53. According to the Global Fraud Survey (2018), only 6 out of 10 firms worldwide take enough action to avoid corruption. That corruption is present at firms in developed, democratic and western countries is also shown by a corruption scandal at Siemens, one of the biggest companies in Germany (Transparency International, 2019). For over a decade, Siemens paid bribes to government officials and civil servants around the world, amounting to approximately US$1.4 billion. While corrupt decision makers profited, citizens in the affected countries paid the costs of overpriced necessities such as roads and power plants (Transparency International, 2019).
5 investment (Nguyen, 2016). Next to that, other empirical analyses have found losses for firms due to corruption. Corruption slows economic growth and private investments (Mauro, 1995), reduces foreign direct investments (Warren & Laufer, 2009), and limits international trade (Ades & Di Tella, 1999). Firms can also experience reputational damages, as happened to Siemens in the case described above (Transparency International, 2019). These negative effects of corruption can have serious social and financial consequences for firms (Nguyen, 2016). Despite that, there is a contrast in the literature on consequences of corruption which suggests that corruption may improve efficiency and help growth by greasing the wheels of rigid bureaucracy (Méon & Weill, 2010).
While reporting on anti-corruption programmes is crucial for large firms, they do not report enough on corruption programmes (Transparency International, 2012). Reporting on anti-corruption programmes gives a clear and comprehensive picture of a firms’ operations, revenues, profits and taxation. As a result, stakeholders have the information to make informed decisions and influence corporate behaviour (Transparency International, 2012). While even good reporting cannot ensure good firm behaviour, it is a good indication of commitment, awareness and action, and firms’ disclosure practices reveal empirical evidence regarding their sustainability and accountability (Transparency International, 2012). Because of this, in this study, the disclosure of firm-level corruption is measured by the way firms report on their anti-corruption behaviour. Although this is quite a rigorous assumption, it gives a good indication of the way firms behave to the problem of corruption. And, since firm-level corruption is difficult to measure directly by nature (Keig et al, 2015), the reporting on anti-corruption behaviour by firms may serve as proxy and be an interesting way to solve the problem of measuring firm-level corruption. And, because the studies of Lopatta et al. (2017) and Transparency International (2012) used this way of measuring firm-level corruption successfully before, this study will make use of this way of measuring firm-level corruption as well.
Nowadays, there are calls that the fight against corruption can be an important goal of any firm’s corporate social responsibility (CSR) (Lu et al, 2019). CSR is the commitment of business to contribute to sustainable economic development – working with employees, their families, the local community and society at large to improve the quality of life, in ways that are both good for business and good for development (World Bank, 2016).
6 supporting means for achieving other CSR goals and principles. Therefore, mitigation of corruption should become a priority for socially responsible firms (Lu et al, 2019). Following the study of Lopatta et al (2017), firms could minimize their potential exposure to corruption by changing their corporate strategies with regard to their CSR performance. The study shows that a better CSR performance can effectively help to lower firms’ exposure to corruption (Lopatta et al, 2017). Corruption is deemed incompatible with sustainable development given the social and economic damages caused by it. Such as the reducing of foreign direct investments (Warren & Laufer, 2009), and the limitation of international trade (Ades & Di Tella, 1999). The above leads to the assumption that a good CSR performance can limit the presence of corruption in firms, and can increase the disclosure of firm-level corruption. But, the impact of CSR performance on the disclosure of firm-level corruption is a research field that to date remains largely unexamined in the literature. This study will address this research gap. Also, this study will add to the literature by creating a list of keywords addressing common issues related to corruption. This will add to the existing literature because, in first, this study will focus on the firm-level of corruption, where previous studies on corruption mostly concentrated on the country-level of corruption. And, in second, with the list of keywords, this study is using an alternative method in contrast to other studies to find out corrupt activities on firm-level. Although this study is not the very first that addresses common issues related to corruption with a list of keywords, the use of keywords is still of value for future researchers as it helps in addressing the gap to a missing measure of firm-level corruption.
7 The phenomenon that corruption is effected by national governance is also showed by the research of Kaufmann et al. (2010), which shows countries that score high on corruption, also score high on national governance scores defined by Kaufmann et al. (2010). The poorer countries Somalia, South Sudan and Syria mentioned above score respectively 1.9, 2.4, and 1.9 on a scale where 0 is the lowest score of national governance and 100 is the highest score of national governance. The more developed countries Denmark, New Zealand and Finland mentioned above score respectively 93.3, 99.0 and 97.6 on this scale. These numbers show a relationship between corruption and national governance, where a higher national governance score leads to a lower corruption score.
Next to this direct effect of national governance on corruption, this study has also found an indirect effect suggesting a moderating effect of national governance on the impact of CSR performance on the disclosure of firm-level corruption. Social pressure on firms can increase or decrease the effectivity of the use of firm resources (Dupire & Mzali, 2018). In an environment with a high score on corruption, the use of firm resources will have less effect than in an environment with a low score on corruption.
National governance cannot be fully captured with a single indicator, as is concluded by Kaufmann et al. (2008), because the use of only single indicators would not lead to significant results. This study uses the World Governance Indicators (WGI) because they contain conceptually clear and theoretically relevant measures and have the greatest availability among national governance measures (Sommer, 2019). This study makes use of the WGI measures of voice and accountability, political stability, regulatory quality and rule of law. These four different dimensions of national governance do not fully capture national governance, but they do represent the most important forms of national governance that should influence the impact of CSR on firm-level corruption. This study is only using these four WGI because it considered that, in first, the indicator government effectiveness is less interesting to CSR performance and the disclosure of firm-level corruption, because this indicator showed less connection with CSR performance and the disclosure of firm-level corruption in the literature. And, in second, the indicator control of corruption is not used because it would lead to redundant results with the disclosure of firm-level corruption.
8 quality of national governance will be linked with the impact of CSR performance on the disclosure of firm-level corruption.
This study will test if CSR performance has a significant impact on the disclosure of firm-level corruption. And next to that, this study will focus on the possible impact of national governance on the relationship between CSR performance and the disclosure of firm-level corruption. The research question that arises from the above is:
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2. LITERATURE REVIEW
2.1. CSR performance
There does exist a large literature on CSR performance. The adoption and implementation of CSR initiatives have generated a growing interest in both practice and academic research (Krüeger, 2015) The issue of CSR is a growing concern in the business world (Abdul & Ibrahim, 2002). There is an inherent increase of interest in CSR studies and the field is gaining much attention (Thomsen, 2004). Because of this, in the recent years a growing number of firms are adopting various CSR initiatives (Ioannou and Serafeim, 2005). In this study, CSR performance is defined as the continuing commitment and performance by business to be ethically right and contribute to economic development while improving the quality of life of the workforce as well as the local community and society at large (World Business Council for Sustainable Development, 2000).
The core idea behind CSR is that a business should accept that it must play more than just an economic role in society (Robins, 2008). Most of the existing literature shows that CSR performance improves a firm’s reputation (Godfrey 2005), which makes the enterprise less vulnerable to negative events (Peloza 2006). Next to that, companies with a high CSR performance go beyond compliance and engage in actions that appear to advance a social cause (Rodriguez et al, 2006). And, there is found evidence a higher CSR performance leads to a higher firm social and financial performance (Rodriquez et al, 2006; Lopatta et al, 2017). Also, CSR performance can make important differences between firms in terms of performing overall (Elifneh, 2017). In other words, CSR is related to issues such as environmental protection, health and safety at work, relation with local communities, and human rights (Elifneh, 2017). And, CSR is related to differences between countries all of the world (Elifneh, 2017).
2.2. The disclosure of firm-level corruption
10 help to bypass other existing obstacles faced by the firm, mainly poor bureaucratic quality (Goedhuys, et al. 2016). Most studies stated that corruption can be a major impediment for a firms’ social and economic performance (Krishnamurti et al, 2016; Nguyen, 2016; Warren & Laufer, 2009; Ades & Di Tella, 1999; Olken, 2006). Also, the study of Goedhuys et al. (2016) stated that corruption has a negative impact on innovation and economic development of firms. Because of that, this study states that corruption negatively impacts firms’ social and economic performance.
2.3. The impact of CSR performance on the disclosure of firm-level corruption
Corporate social responsibility as an essential firm attribute and its relationship with the firm‐ level of corruption has not been conclusively examined (Watson and Hirsch, 2010). Furthermore, this relationship is far from intuitively clear (Lopatta, et al, 2017). From a researchers’ perspective, the relationship between CSR performance and the disclosure of firm‐ level corruption is therefore especially interesting, because it is a topic that is still in its infancy (Lopatta et al, 2017).
Firms have to satisfy many constituents such as workers, customers, and suppliers, as their support may have a direct effect on firms’ outcome (Lopatta, et al, 2017). Firms’ performance is therefore related to these stakeholder groups, and that is why firms have to act in a socially ethical way that is accepted by these stakeholder groups (Ackerman, 2004). From the point of view of the firm, CSR represents a set of moral duties towards society that the firm assumes as a result of its economic, social, political, and ethical reflection (Argandoña and von Hoivik, 2009). Firms that are reputable primarily due to their social responsibility maximize their internal and external stakeholders’ trust (Orazalin & Baydauletov, 2020). The firm's CSR performance thus provides a unique way through how to adapt to the environment of stakeholders.
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If a firm does not report on their anti-corruption behaviour, this can be seen to be in obvious contrast to a firm’s respect for its social responsibilities and ethical obligations (Keig et al, 2015). Firms utilize corporate disclosure as a management tool for managing the informational needs of various powerful stakeholder groups (Reverte, 2009). In fact, a firm’s decision to disclose social information is found to be positively related to both social and financial performance (Lopatta et al, 2017). And that is why CSR performance is likely to increase the disclosure of firm-level corruption (Lopatta et al, 2017).
In other words, it is expected that high ethical standards lower firms’ risk to participate in corrupt behaviour. And thus, it is expected that a higher CSR performance leads to less firm-level corruption. All of this leads to the conclusion that a higher CSR performance of firms leads to a higher disclosure of firm-level corruption.
The above leads to the following hypothesis:
H1: CSR performance has a positive impact on the disclosure of firm-level corruption. 2.4. National Governance
National governance consists of the traditions and institutions by which authority in a country is exercised. This includes the process by which governments are selected, monitored and replaced, the capacity of the government to effectively formulate and implement sound policies and the respect of citizens and the state for the institutions that govern economic and social interactions among them (Worldbank, 2018). National governance varies among different countries. In general, poorer and less developed countries score lower on the indicators of national governance than western and more developed countries do, as showed before. Although, there is no country that scores perfect on all the indicators of national governance. This study uses four of the Worldwide Governance Indicators to capture national governance. It makes use of the WGI measures of voice & accountability, political stability, regulatory quality and rule of law. It is expected that national governance has a direct effect on the disclosure of firm-level corruption, and a moderating effect on the impact of CSR performance on the disclosure of firm-level corruption.
12 The perception of free expression and accountability strongly decreases corruption, indicating that providing greater opportunities for citizens to participate in their government, more freedom of expression and free media are effective ways of curbing corruption (Elbahnasawy & Revier, 2012). This gives an indication that firms established in countries characterized by high-quality voice & accountability, are likely to lead to a decrease of corruption.
According to (Mombeuil et al, 2019), the more political stability a country has, the less likely it is that corruption occurs. Also, according to (Alemu, 2018) a combination of stronger institutions and more political stability leads to less corruption. This gives an indication that firms established in countries characterized by high-quality political stability, are likely to lead to a decrease of corruption.
An improvement in regulatory quality can lead to the diminution of corruption (Capasso et al, 2019). This gives an indication that firms established in countries characterized by high-quality regulatory quality, are likely to lead to a decrease of corruption.
Following a study of (Elbahnasawy & Revier, 2012), the perception of strong support for rule of law is strongly correlated with reduced corruption, suggesting that a better quality of law enforcement reduces corruption. And, a study of Capasso et al. (2019) states that an improvement in rule of law can lead to the diminution of corruption. This gives an indication that firms established in countries characterized by high-quality rule of law, are likely to lead to a decrease of corruption.
All of the above means that the four indicators of national governance are likely to lead to a decrease of firm-level corruption, this also makes it likely that national governance overall is likely to lead to a decrease of firm-level corruption. And, this makes it likely that national governance leads to an increase of the disclosure of firm-level corruption.
2.6. The moderating effect of national governance
As discussed before, CSR performance likely positively impacts the disclosure of firm-level corruption. Next to that, national governance will likely impact this relationship.
13 This effect can be explained by the concept of new institutional theory. New institutional theory focuses on the constraining and enabling effects of formal and informal rules on the behaviour of individuals and groups (Di Maggio & Powell, 1983). The new institutional theory states actors confirm to institutional structures in their environment. Rational actors make their firms increasingly similar as they try to change them (Di Maggio & Powell, 1983).
The mechanisms of the new institutional theory are coercive, mimetic and normative isomorphism. Coercive isomorphism stems from regulatory influence and the problem of legitimacy, mimetic isomorphisms result from standard responses to uncertainty and normative isomorphisms are associated with professionalization (Di Maggio & Powell, 1983). The main driver is coercive isomorphism, since this involves pressures by an organization and by cultural expectations from society (Di Maggio, & Powell, 1983).
Because actors confirm to institutional structures in their environment, these actors are likely to confirm to an environment with a certain habit of corruption as well. These environments can be classified in voice & accountability, political stability, regulatory quality and rule of law. This suggests that the impact of CSR performance is less effective in environments with a high score on corruption, and is more effective in environments with a low score on corruption. In conclusion, CSR performance likely positively impacts the disclosure of firm-level corruption. Because of the above, this positive impact of CSR performance on the disclosure of firm-level corruption is particularly strong in countries characterized by high-quality voice & accountability, political stability, regulatory quality, rule of law, and national governance overall.
The above leads to the following hypotheses:
H2: The positive impact of CSR performance on the disclosure of firm-level corruption is particularly strong in countries characterized by high-quality national governance.
H3: The positive impact of CSR performance on the disclosure of firm‐level corruption is particularly strong in countries characterized by high-quality voice & accountability.
H4: The positive impact of CSR performance on the disclosure of firm‐level corruption is particularly strong in countries characterized by high-quality political stability.
14 H6: The positive impact of CSR performance on the disclosure of firm‐level corruption is particularly strong in countries characterized by high-quality rule of law.
2.7. Conceptual model
The relationships described above are shown in a conceptual model below. National governance contains the four World Governance Indicators: voice & accountability, political stability, regulatory quality and rule of law.
Figure 1:
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3. METHODOLOGY
This study is quantitative. To test the hypotheses, this study will make use of existing archival datasets and will create a list of keywords in an attempt to quantify the disclosure of firm-level corruption. These data are collected for different firms in different countries. In this way, this study can analyse the disclosure of firm-level corruption, the CSR performance level and national governance in certain countries, and test the relationships.
3.1. Sample
The selection of companies was based on the 2019 ranking of the World’s Biggest Public Companies published by Forbes Magazine the 104 World’s biggest Public Companies by Orbis Database and the 104 biggest firms according to Transparency International (2012). Together these companies are worth more than US$11 trillion and touch the lives of people in more than 200 countries across the globe, wielding enormous and far reaching power (Transparency International, 2020).
The 104 largest multinational companies by operating revenue were chosen, because operating revenue is a good indicator of the size of a firm (Investopedia, 2020). In this way, Orbis Database provided an easy way to collect data of the largest firms in the world. Some firms were eliminated from the sample because they are single-country operators and could not be assessed for the country-by-country score, others were eliminated because they missed out data on the CSR score, or because their data was not up to date. For example, State Grid Corporation of China is eliminated from the sample because it is a corporation that is only operating in China. Joint Stock Company VTB Capital is eliminated from the sample because their CSR data was not available, and Glencore PLC was eliminated from the sample because their data was only available till the year of 2017. Other firms like China Life Insurance, Ping An Insurance Group and Saudi Arabian Oil Company are also eliminated from the sample due to the same reasons. The data contains the year of 2019 and no other years are tested in this study. 3.2. CSR performance
16 (Thomson Reuters CSR ratings, 2019) was to establish common standards for rating the environmental, social and governance of corporate entities. The database provides firm-level
data for more than 4500 public companies worldwide, and it provides objective, relevant and
systematic environmental, social and governance information based on 250+ key performance indicators and 750+ individual data points along with their original data sources (Thomson Reuters CSR ratings, 2019).
The database classifies this data into categories within each major pillar. The Thomson Reuters Corporate Responsibility Ratings follow this convention in data aggregations (Thomson Reuters CSR ratings, 2019). For example, the environmental pillar consists of three category groupings: emission reduction, product innovation, and resource reduction. The governance pillar has five categories: board functions, board structure, compensation policy, shareholders policy, and vision-and-strategy. The social pillar is the most complex with seven categories: community, diversity, employment quality, health-and-safety, human rights, product responsibility, and training-and-development (Thomson Reuters CSR ratings, 2019).
3.3. The disclosure of firm-level corruption
The dependent variable in this study is the disclosure of firm-level corruption. To measure this variable, this study created a list of keywords addressing common issues related to corruption. Firm-level corruption is not easy to measure, because firm-level corruption indices are limited in scope (Keig et al, 2015). To overcome this problem as good as possible, this study based firm-level corruption scores on multiple studies and databases. The keyword list is created to solve the measurement problem of quantifying the risk of corrupt activities on a firm-level basis. The keyword list is based on the study of Lopatta et al (2017), the corruption watch transparency organization, WBES and the World Bank’s Business Environment and Enterprise Performance Survey. These questionnaires, studies and databases and their results were investigated in order to identify the most commonly used words related with corrupt practices. Words used in these frameworks that are directly related to corrupt activities and environments were added to the keyword list. The keyword list provides around 30 words and is visible in Appendix D.
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than any other type of media (Haniffa and Cooke, 2002). Presuming that firms refrain from reporting on issues related to corruption when exposed to a corrupt environment and therefore to the risk of engaging in corrupt activities (Lopatta et al, 2017), this study quantified the ratio of words referring to corruption to the total number of words that firms used in their annual reports. In this way, this study shows a good indication of corruption on firm-levels.
Following previous research of Transparency International (2012), this study determines the corruption score on three dimensions of transparency: (1) Public reporting on anti-corruption programmes (ACP), covering bribery, facilitation payments, whistleblower protection and political contributions. (2) Organisational transparency, including information about corporate holdings (OT), (3) Country-by-country reporting (CBC).
This study counted the words referring to the three dimensions of transparency and quantified the ratio of words to the total number of words that firms used in their annual reports. Every keyword is related to one of the three dimensions, as is shown in Appendix D. For every firm, it gave a score on all the three dimensions, additionally, it gave a weighted score on the three dimensions, this score is the firm-level corruption score and this is the score that is used in the analysis.
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on their anti-corruption programmes and global activities are more likely to be part of the solution than the problem (Transparency International, 2012).
In order to ensure the robustness of the self-defined corruption score, this study reruns the regression using the country-level corruption scores of Corruption Perception Index (2019). This study assigned each firm to the CPI score of the country the firm is based in.
3.4. National Governance
As discussed before, national governance cannot be fully captured with a single indicator (Sommer, 2019). This study uses the World Governance Indicators (WGI) to measure national governance, because they contain conceptually clear and theoretically relevant measures and have the greatest availability among national governance measures (Sommer, 2019). This study makes use of the WGI measures of voice and accountability, political stability, regulatory quality and rule of law.
These four dimensions are defined by (Kaufmann et al, 2008) as followed: Voice and accountability is defined as measuring perceptions of the extent to which a country's citizens are able to participate in selecting their government, as well as freedom of expression, freedom of association, and a free media (Kaufmann et al, 2008). Political stability is defined as measuring perceptions of the likelihood that the government will be destabilized or overthrown by unconstitutional or violent means, including politically-motivated violence and terrorism (Kaufmann et al, 2008). Regulatory quality is defined as measuring perceptions of the ability of the government to formulate and implement sound policies and regulations that permit and promote private sector development (Kaufmann et al, 2008). And as of last, rule of law is defined as measuring perceptions of the extent to which agents have confidence in and abide by the rules of society, and in particular the quality of contract enforcement, property rights, the police, and the courts, as well as the likelihood of crime and violence (Kaufmann et al, 2008).
19 The WGI indexes measure separate, but related, concepts regarding the quality of governance (Langbein & Knack, 2008). Many of these indicators provide highly specific and disaggregated information about particular dimensions of governance that are of great independent interest (Kaufmann et al, 2010) Kaufmann et al. (2010) provide a dataset with scores on all the dimensions.
This study assigned each firm to the national governance score of the country the firm is based in. It assigned each firm a score on the four separate dimensions and provided a weighted national governance score on all the four dimensions.
3.5. Control variables
The control variables in this study include several firm specific indicators, including turnover, return on assets (ROA), the amount of employees and the market value of the firms. Turnover is a synonym for a company’s total revenues (Investopedia, 2020) and a measure of the size of corporate operations. A greater turnover means more prosperity and this typically means more resources devoted to curbing corruption (Capasso et al, 2019). ROA is an accounting indicator of how well a company utilizes its assets, by determining how profitable a firm is relative to its total assets (Investopedia, 2020). A greater ROA also means more prosperity and this means more resources devoted to curbing corruption (Capasso et al, 2019). The amount of employees is the total amount of employees working for a firm. The more employees, the less likely it is that every employees has a voice to their discontent and to remove corrupt politicians from office (Capasso et al, 2019). Market value is the price an asset would fetch in the marketplace, or the value that the investment community gives to a particular firm. Market value is used to refer to the market capitalization of a publicly traded company, and it is calculated by multiplying the number of its outstanding shares by the current share price (Investopedia, 2020). A greater market value usually means more prosperity and this means more resources devoted to curbing corruption (Capasso et al, 2019).
In this way, it is controlled for the possible limitation of the sample that large firms may be less likely to engage in corruption and may have better reporting strategies (Lopatta et al, 2017). To avoid outliers, this study made use of logarithms in case of the control variables turnover and market value.
20 score is not driven by country-specific corruption instead of firm-level corruption (Lopatta et al, 2017).
3.6. Method of analysis
The purpose of this study is to examine a firm’s CSR performance and its impact on the disclosure of firm-level corruption. To test the hypotheses in the current research, bivariate and multivariate methods are used.
In first, there is conducted a descriptive statistics analysis with summary statistics on all the variables. To avoid outliers, this study made use of logarithms in case of the control variables turnover and market value. Additionally, there is conducted a Pearson Correlation test to show binary relationships and to give an indication of possible multicollinearity.
In following, there is conducted a regression method to test the impact of CSR performance on the disclosure of firm-level corruption, and to test the direct effect of national governance and its indicators on the disclosure of firm-level corruption. Additionally, there is conducted another regression method to test the moderating effect of national governance and its indicators on the impact of CSR performance on the disclosure of firm-level corruption.
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4. RESULTS
4.1. Descriptive Statistics
Summary statistics are plotted in Appendix A: Table 1. Panel A shows that the corruption score mean equals 4.88 on a 0-10 scale, indicating that firms on average do not score adequately on their disclosure of corruption and that firms are still having a long way to go to improve transparency. However, it has to be noted that this low weighted score is mainly due to a mean of 15,61 on a scale of 0-100 on country-by-country reporting. The means of anti-corruption reporting (60,62) and organizational transparency (69,03) are clearly higher, indicating that firms score seriously insufficient on country-by-country reporting, but score adequately on anti-corruption reporting and organizational transparency. An average score on anti-anti-corruption reporting and organizational transparency would lead to an adequate corruption score. As (Transparency International, 2012) already stated, firms rarely publish information on their country-by-country reporting. Meaning that firms do not publish data across all their operations in all countries, which could be an indication of corruption on firm-level (Transparency International, 2012).
A CPI mean of 64,64 on a scale of 0-100 indicates that the countries represented in the sample score adequate on corruption. This is, however, not surprising as the firm sample includes the world’s largest firms that are normally domiciled in developed economies. Nevertheless, even if it is believed that corruption is more common in developing economies (Ebben & de Vaal, 2009), it shows that corruption is present at all stages of development.
Concerning industry affiliations of firms in Table 1 Panel B, the results show high to medium scores on the disclosure of corruption in the consumer non-durables, chemicals, utilities and manufacturing industries. These findings can be traced back to the nature of the sample and the fact that it contains the world’s largest firms. The results show low scores on the disclosure of corruption in the healthcare, telecommunication and ‘others’ industries. These findings can be traced back to the fact that it contains in general less large firms. All these findings could also be biased by the low samples of these industries. Because of that, it is questionable if all the industry results are justifiable.
22 is also in line with the argument of Ebben & de Vaal (2009) that corruption is more common in developing economies, with the exception of Saudi Arabia, Iran and the United States, and less common in western economies. But, it also shows that corruption is still present at all stages of development. All these findings could also be biased by the low samples of these countries. Because of that, it is questionable if all the country results are justifiable.
Correlation coefficients of the variables that are considered in the regression models are further analyzed in Appendix A: Table 2. The corruption score is positively correlated to CSR and all indicators of national governance (p < 0,01). National governance and its indicators are strongly correlated with each other, r which is also concluded by Kaufmamn et al. (2010).
Furthermore, to test for multicollinearity among the regressor variables, this study computed additional diagnostics. VIF values are widely used to measure the degree of multicollinearity between independent variables in a regression model (O’Brien, 2007). The VIF values are reported for each independent variable and are showed in Appendix A: Table 3. Since the VIF values of ASSET 4 ESG, national governance and the control variables are way below the widely used threshold of 10 there appears to be no issue of multicollinearity in these cases (Olibe et al, 2008). However, the indicators of national governance, mainly voice & accountability, regulatory quality and rule of law, are surpassing this threshold of 10. These high VIF scores are due to the fact that the indicators of national governance are comparable and strongly correlated to each other (Kaufmann et al, 2010.) Because of this, it is not possible to use these variables together in a regression analysis. However, these indicators of national governance will be used separately.
As last, to test for heteroskedasticity among the regressor variables, this study used the Breusch- Pagan and White test. This is computed to assume that the error terms are normally distributed. It tests whether the variance of the errors from a regression is dependent on the values of the independent variable (Investopedia, 2020). Applying the steps of the Breusch-Pagen test, when compared to a Chi-squared distribution with 1 degree of freedom, the resulting p-value came above the standard 0.05 level. Thus this study has clear evidence that there is no reason to reject the hypothesis of homoskedasticity and conclude that this study does not have heteroskedasticity in the regression model.
4.2. Regression Analysis
23 performance on the disclosure of firm-level corruption and the direct effect of national governance on the disclosure of firm-level corruption. Table 4 also shows the results of the moderating effect of national governance on the impact of CSR performance on the disclosure of firm-level corruption. The equations are estimated with robust standard errors, noted within the brackets in Table 4.
The findings support H1 and confirm that firms’ CSR performance has a positive impact on the disclosure of firm-level corruption (p < 0,01). The findings also suggest a significant direct effect of national governance on the disclosure of firm-level corruption (p < 0,05), and the findings suggest a significant interaction effect of CSR performance and national governance on the disclosure of firm-level corruption. This indicates that a higher national governance score in a country results in less corruption in firms in this country. However, the findings do not suggest a significant direct effect of either voice & accountability, political stability, regulatory quality and rule of law on the disclosure of firm-level corruption (p > 0,05).
Surprisingly, the findings do not support H2, H4, H5 and H6 and thus do not confirm that the positive impact of CSR performance on the disclosure of firm-level corruption is particularly strong in countries characterized by high-quality political stability, regulatory quality, rule of law and national governance
However, the findings do support H3 and thus confirm that the positive impact of CSR performance on the disclosure of firm-level corruption is particularly strong in countries characterized by high-quality voice & accountability.
Considering controls, Table 4 shows that turnover, the amount of employees, market value and ROA do not show a significant relation with firm-level corruption disclosure (p > 0,05). Industry and country controls are significant indicators of firm-level corruption disclosure. 4.3. Robustness Check
In order to ensure the robustness of the self-defined corruption score, this study reran the regression using an alternative corruption measure. This study utilized country-level corruption scores of Corruption Perception Index (CPI) (2019). This study assigned each firm to the CPI score of the country the firm is based in.
24
national governance indicators political stability and rule of law show a significant direct effect on CPI, as they did not on the self-created corruption score.
25
5. DISCUSSION
5.1. Interpretation of results
This study investigates whether a firm’s CSR performance has a positive impact on the disclosure of firm-level corruption and whether national governance is moderating this relationship.
The first hypothesis predicted that CSR performance has a positive impact on the disclosure of firm-level corruption. The results show this positive effect and are supporting H1. This indicates that a firm with a higher CSR performance score results in a higher firm corruption disclosure score. So, if a firm performs well on CSR, they are more likely to report on their anti-corruption programmes. And, because reporting on anti-corruption programmes is crucial (Transparency International, 2012), it is concluded that a high CSR performance leads to less corruption risk, and thus, firms can lower their corruption risk by improving their CSR performance. These findings are also supported by the robustness test.
The second hypothesis predicted that the positive impact of CSR performance on the disclosure of firm-level corruption is particularly strong in countries characterized by high-quality national governance. The third, fourth, fifth and sixth hypothesis predicted that the positive impact of CSR performance on the disclosure of firm‐level corruption is particularly strong in countries characterized by high-quality voice & accountability, political stability, regulatory quality and rule of law.
The results imply that national governance has a direct impact on the disclosure of firm-level corruption and show signs of an indirect effect on the relationship between CSR performance and the disclosure of firm-level corruption. The results show a direct effect of the weighted score of national governance on the disclosure of firm-level corruption. This indicates that a higher national governance score in a country results in less corruption in firms in this country. However, the findings do not suggest a significant direct effect of either voice & accountability, political stability, regulatory quality and rule of law on the disclosure of firm-level corruption, indicating that the indicators of national governance on its own do not lead to less corruption in firms in their home countries.
26 H4, H5 and H6. However, the findings suggest a significant interaction effect of CSR performance and national governance on the disclosure of firm-level corruption. This could nevertheless support H2 and indicate that the positive effect of CSR performance on the disclosure of firm-level corruption is particularly strong in countries characterized by high-quality national governance.
And, the findings show a significant moderating effect of voice & accountability on the relationship between CSR performance and the disclosure of firm-level corruption and thus support H3. Indicating that, firms located in a country where citizens are able to participate in selecting their government, as well as freedom of expression, freedom of association and a free media, are experiencing a stronger positive effect of CSR performance on the disclosure of firm-level corruption. So, in these countries characterized by high-quality voice & accountability, firms can additionally lower their corruption risk by improving their CSR performance. These findings are also supported by the robustness test. However, in the robustness test, political stability and rule of law also appear to be significant moderators on the relationship between CSR performance and the disclosure of firm-level corruption.
The research question in this study is: What is the impact of CSR performance on the disclosure of firm-level corruption? And how is national governance moderating this relationship? As concluded above, the results show a positive impact of CSR performance on the disclosure of firm-level corruption. And thus, firms can lower their corruption risk by improving their CSR performance. Meaning that CSR performance has a significant impact on the disclosure of firm-level corruption.
Additionally, as concluded above, the results show a partly moderating effect of national governance on the relationship between CSR performance and the disclosure of firm-level corruption. The interaction effect of CSR performance and national governance significantly impact the disclosure of firm-level corruption. And, the indicator voice & accountability has a significant moderating effect on the relationship between CSR performance and the disclosure of firm-level corruption. Meaning that CSR performance has an even stronger impact on the disclosure of firm-level corruption when firms are based in countries characterized by high-quality national governance and mainly voice & accountability.
27 countries, because in these countries the national governance and voice & accountability scores, in general, are higher.
5.2. Limitations and further research
This study is limited by the fact that it has utilized a list of 104 worldwide largest firms by Transparency International’s. Yet, this study had to utilize this dataset, as it is the only one to provide firm-level corruption measures and thus a possibility to reliably test for the robustness of the self-defined corruption score. Further research should consider this and rest upon a larger set of diverse firms. Next to that, not all the largest firms in the world are included in this study because some firms missed out data or were only domestically performing. Further research could also look at different or supplementary ways to collect firm-level corruption data. This study is also limited by the fact that it only makes use of a sample of 104 firms. Mainly in the case of the industry and country dummies, this could lead to non-justifiable results.
28
6. CONCLUSION
This study contributes to the current literature by providing a firm-level corruption score based on the content analysis of corporate disclosures. Although it is not the first study that provides a firm-level corruption score, the score is still of value for future researchers as it helps in addressing the gap to a missing measure of firm-level corruption. There is provided strong evidence for the explanatory power of this self-defined corruption score, as it is in line with other corruption indices on country level.
Furthermore, this study presents international, evidence-based results that a better CSR performance can effectively help to lower firms’ exposure to corruption. The study also shows that national governance of a country impacts the exposure to corruption for firms in these countries. Next to that, it shows that national governance can strengthen the impact of CSR performance on the disclosure of firm-level corruption, however, unfortunately, there is not found evidence for all indicators of national governance.
In closing, it can be said that the research agenda on firm-level corruption is still in its infancy and that a long list of other corporate factors can have an impact on firm-level corruption and need to be also addressed in future research. As last, this study gratefully thanks Lopatta et al (2017) for their research and their basis for the self-defined firm-level corruption score of this study.
29
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8. APPENDIX
8.1. Appendix A: Descriptive Statistics, Pearman Correlation Coefficients and VIF-Values Table 1: Descriptive Statistics
Panel A: Summary Statistics
Category Variable No. Mean SD Min Median Max Kurtosis
Corruption Indices Corruption Score 104 4,88 2,00 ,70 4,75 9,10 -,645
s ACP 104 60,62 24,80 ,00 69,00 100 -,580 OT 104 69,03 27,84 ,00 74,00 100 -1,050 CBC 104 15,61 24,45 ,00 ,00 80,00 ,537 CPI 104 64,64 13,92 26,00 69,00 85,00 ,008 CSR ASSET4ESG 104 70,08 12,90 30,80 72,90 93,20 -,236
National Governance Weighted NG 104 7,13 2,08 1,22 7,88 9,64 ,171
Voice&Accountability 104 67,27 31,09 5,90 78,80 97,50 ,093
PoliticalStability 104 58,20 15,86 6,10 57,60 94,70 ,828
RegulatoryQuality 104 79,69 20,50 6,70 88,90 98,00 ,904
RuleofLaw 104 80,16 19,49 24,00 89,00 99,00 ,363
Controls Turnover Logarithm 104 8,07 ,20 7,84 8,00 8,72 ,800
Employees 104 223.008 246.610 92 164.500 2.200.000 40,019 MarketValue Logarithm 104 7,91 ,45 7,04 7,89 9,11 -,158 ROA 104 ,044 ,045 -,032 ,030 ,221 3,822
36 Table 2: Pearson Correlation Coefficients
38 8.2. Appendix B: Regression Analysis
Table 4: CSR performance and its impact on the disclosure of firm-level corruption, and the direct and moderating effect of national governance
Variable Corruption Score Moderating effect of national governance
ASSET 4 ESG ,046** (,014) National Governance ,005* -,001 (,019) (.006) Voice&Accountability ,021 ,000** (,026) (,000) PoliticalStability ,019 ,000 (,018) (,001) Regulatory Quality ,102 ,004 (,075) (,004) RuleofLaw -,106 -,005 (,054) (,005) ASSET4_NationalGovernance ,005** (,001) Turnover ,000 (,000) Employees ,000 (,000) Marketvalue ,000 (,000) ROA ,562 (4,952) Industry YES Country YES F-Value ,716** Adjusted R-square ,407 Observations 104
39 8.3. Appendix C: Robustness Check
Table 5: Robustness Check
Variable Corruption Score CPI
ASSET 4 ESG ,046** ,039** (,014) (,027) National Governance ,005* ,101** (,019) (,151) Voice&Accountability ,021 ,119 (,026) (,038) PoliticalStability ,019 ,198** (,018) (,032) Regulatory Quality ,102 ,187 (,075) (,107) RuleofLaw -,106 ,492** (,054) (,089) ASSET4_NationalGovernance ,005** ,007** (,001) (,000) Turnover ,000 ,032 (,000) (,000) Employees ,000 -,003 (,000) (,000) Marketvalue ,000 -,038 (,000) (,000) ROA ,562 ,034 (4,952) (7,839) Industry YES YES Country YES YES F-Value ,716** ,701**
Adjusted R-square ,407 ,559
Observations 104 104
40 8.4. Appendix D: List of Keywords
Public reporting on anti-corruption programmes (ACP): Abuse Bribery Co-determination Compliance Corruptible Corruption Cronyism Ethical business Extortion Firm scandals Fraud Graft Immorality Nepotism Unofficial payments Whistleblowing Manipulate Power Venality
