Does ownership type influence decoupling between CSR
reporting and actual CSR performance?
Master Thesis N.R. van Manen Student number: s2490331 Hegeterp 13 8711 EP Workum Tel.: +31(0)6-41819571 E-mail: n.r.van.manen@student.rug.nl Program: MSc. Accountancy Supervisor: Dr. N. Hussain Date: 24-6-2019 Word count: 8,141 ABSTRACT:
The study empirically investigates the relationship between different ownership types and CSR decoupling through the lens of agency theory. We measure CSR decoupling by subtracting the CSR performance score from the CSR disclosure score. The study extends the literature by investigating the impact of foreign ownership, employee/family ownership and institutional ownership on the extent of CSR decoupling. The sample contains 6,314 firm-year observations of worldwide firms in the period over 2010-2017. We find a positive relation between institutional ownership and CSR decoupling, which is contradictory to agency theory assertions. Despite the presence of institutional investors it is desirable to have superior governance mechanism for monitoring the management and increasing transparency.
TABLE OF CONTENTS
1. INTRODUCTION 3
2. THEORETICAL FRAMEWORK 5
3. HYPOTHESIS DEVELOPMENT 9
4. METHODOLOGY 14
5. EMPIRCAL MODEL AND ESTIMATION PROCEDURE 18
6. EMPIRCAL RESULTS 18
7. DISCUSSION AND CONCLUSIONS 23
8. LIMITATIONS AND FUTURE RESEARCH 24
1. INTRODUCTION
Firms are developing corporate social responsibility (CSR) strategies and undertake environmental, social and corporate governance initiatives that will have a long-term positive impact on the company’s value and reputation (Waddock and Graves, 1997). Larry Fink, Chairman and CEO of BlackRock, said: “To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders…”. As a reaction firms are improving their CSR performance, increasing their reporting about CSR activities and thereby showing transparency to their stakeholders. The importance of CSR transparency became clear after the Deepwater Horizon oil spill disaster. A critical look of the public at the business practices of BP revealed a corporate culture that had ignored environmental standards and worker safety. Ironically, BP was at the same time a nominee for two federal safety awards and was representing itself as environmental friendly. The inconsistency between BP’s actual irresponsible behavior and advertising of being environmental friendly raised questions about the transparency of firms. There became more research to greenwashing practices and so called decoupling of CSR. Decoupling can be seen as overstating or understating of the CSR performance of the firm (Delmas & Burbano, 2011). The literature on decoupling has argued that decoupling is particularly likely when there is a conflicting institutional demand for conformity and institutional environments are multifaceted (Kraatz and Block, 2008; Marquis and Lounsbury, 2007; Pache and Santos, 2010; Seo and Creed, 2002). This literature only identified one direction of decoupling that is limited to exaggeration or greenwashing of organizational actions. This type of decoupling refers to “a symbolic strategy whereby firms overstate their CSR performance in their disclosures to strengthen their legitimacy” (Tashman, Marano & Kostova, 2019). The paper of Kim and Lyon (2015) has proposed the possibility of ‘undue modesty’ or brownwashing of organizational actions as another direction of decoupling, especially when it comes to environmental, social and governance issues. This type of decoupling refers to a strategy whereby firms understate their CSR performance to avoid negative scrutiny from shareholders (Görg, Hanley & Seric, 2018). Which form of decoupling the firm applies depends on firm characteristics, stakeholder preferences and the balance of power among competing stakeholder groups (Kim and Lyon, 2015).
The determinants on greenwashing have already been widely researched, but Kim and Lyon (2015) were the first ones that did research on the determinants of both greenwashing and brownwashing. They found that firm growth leads to greenwash as a result of increased interaction with stakeholders and regulators. Kim and Lyon (2015) showed that a deregulated environment, with lower profits lead to more brownwash, because of increased salience of shareholders. The research of Kim and Lyon (2015) also found that external research and monitoring of NGO’s and regulatory pressures lowers the extent of both brownwash and greenwash. Many other researchers have addressed factors that are derived externally to firms, like stakeholder expectations (Meyer & Rowan, 1977) and specific sector characteristics, like
the influence of values and beliefs and market forces (Scott & Meyer, 1983). Delmas and Burbano (2011) have stated that firm characteristics and individual characteristics of managers may also influence decoupling behaviors. There has also been much attention paid to determinants based on individual characteristics, such as managerial ethics (Hemingway and Maclagan, 2004) and external influences, such as heterogeneous stakeholders demands (Scherer, Palazzo and Seidl, 2013). In this study we will look at the influence of ownership type as a corporate governance mechanism on the extent of CSR decoupling.
At this point of time, there is no literature about the association between ownership and CSR decoupling. This means that there is a gap in the existing literature. Therefore, we discuss literature about comparing transparency and agency theory issues like managerial opportunism and information asymmetry, relating to earnings management. The paper of Kazemian and Sanusi (2015) reviewed and analyzed some major studies that did research on the influence of institutional- and managerial ownership on earnings management. They showed that, regardless different sample size and country, (almost) all studies have found a significant relationship between ownership and earnings management. This means that a firm’s ownership type has influence on earnings management (Kazemian and Sanusi, 2015). Therefore, the relationship between ownership structure and CSR decoupling is worthy of empirical investigation.
Multiple studies have focused on the influence of different ownership structures on CSR (Aguilera, Williams, Conley and Rupp, 2006; Dam and Scholtens, 2012; Fernández Sánchez, Sotorrio and Diez, 2011; Oh, Chang and Martynov 2011), and corporate social performance (Graves and Waddock, 1994; Johnson and Greening, 1999), but in these studies they did not pay attention to the challenging phenomenon called CSR decoupling. Several studies did research on this phenomenon (Graafland and Smith, 2016; Hawn and Ioannou, 2016; Tashman et al., 2019), but focused on different determinants or effects of decoupling. At the best of our knowledge, we are the first to address the association between shareholders and CSR decoupling. Our aim is to find out whether and how ownership type is connected with CSR decoupling. We ask whether the extent and the form of CSR decoupling may differ with different types of ownership. Therefore, the following research question will guide this research:
To what extent does a firm’s ownership type affect decoupling between CSR performance and CSR disclosure?
In order to find an answer on the research question we make use of archival data from Thomson Reuters Asset4 and Bloomberg. Asset4 provides CSR performance scores and Bloomberg provides CSR disclosure scores, which are both suitable for quantitative analyses. Furthermore, the sample contains 6,314 firm year observations of worldwide firms over the period 2010-2017.
The results of our research show that institutional investor ownership leads to a higher extent of CSR decoupling. This might indicate that institutional investors do not play an active role in monitoring management activities (Claessens and Fan, 2002) and may be too much focused on meeting short term results (Bushee, 1998). This shareholder pressure plays an important role in the adoption of decoupling practices. Instead of substantive implementation, managers start to decouple the CSR practices. Furthermore, the results exhibit that there is no relationship between CSR decoupling and employee/family shareholders as well as foreign investors. This study makes several contributions to the current literature. First, this study contributes to the general literature on corporate social responsibility (CSR) (e.g. Ferrell, Liang and Renneboog, 2016; Kitzmueller and Shimshack, 2012; Margolis, Elfenbein and Walsh, 2009). Second, Jamali, Safieddine and Rabbath (2008) concluded in their research that there is still much room for additional research on the relationship between corporate governance and CSR. Multiple theoretical frameworks have been applied around corporate governance and CSR (Walls, Berrone and Phan, 2012), but our study, from an agency perspective, contributes to developing a theoretical framework to inform research in corporate governance, transparency and CSR. Third, a large number of scientific researchers have done studies on CSR, but very little on decoupling or its specific antecedents (Scott, 1995). Fourth, this study extents the literature by building further on the theoretical conceptualization of selective disclosure used by Tashman et al. (2019), where they examined whether CSR reporting is consistent with firms’ independently rated CSR performance (Tashman et al. 2019). We expand their research by using alternative empirical settings and a different theoretical view.
In the remainder of this thesis we will first discuss the theoretical background and hypothesis development. Second, we provide more information regarding the methodology section, where we address the data collection, sample selection and the measurement of the variables. Third, the results will be analyzed in the results section. And finally, in the last part the conclusions, limitations and recommendations for further research will be elaborated.
2. THEORETICAL FRAMEWORK
Because we are the first to address the relation between ownership and CSR decoupling, there is no specific literature available that gives insight in this relationship. Therefore, we first address the concept of agency theory, secondly we look at the literature on CSR, thirdly discuss literature on decoupling and lastly review literature from similar transparency areas like earnings management, managerial fraud and information asymmetry.
Review of existing literature reveals that agency theory (Jensen and Meckling, 1976) is the dominant perspective used to explain the relationship between ownership and transparency issues. The agency theory (Jensen and Meckling, 1976) explains the problems that arise with the separation of ownership and control between owners and managers. This theory is based on
the principal-agent conflict, where the principals (shareholders/owners) contract the agent (manager) with the authority to act on their behalf (Jensen and Meckling, 1976). The relationship between the principal and agent is complicated because of possible unaligned interests, managerial opportunism and asymmetric information. One of the problems is that managers might make suboptimal decisions in order to serve their own interests. Shareholders need to make agency costs to monitor whether the managers act in the interest of the shareholders.
Several studies analyzed the relation between ownership and CSR, but all show mixed results. For example, Aguilera et al. (2016) suggest that differences in corporate governance have an impact on CSR and that there is a strong and positive relationship between institutional ownership and CSR, while other researchers (Barnea and Rubin, 2010; Dam and Scholtens, 2012) conclude that there is no relationship between institutional ownership and CSR. This contradictory empirical evidence indicates that there is still need for additional research on this relationship. Furthermore, Dam and Scholtens (2012) found that the majority of prior studies did neglect the link between other ownership types and CSR. In line with Dam and Scholtens (2012), we include, apart from institutional investors, also foreign and employee/family ownership. We classified owners in these three categories because (1) institutional investors is one of the most researched ownership types and are traditionally large; (2) foreign investors have different preferences, time horizons and the problem of information asymmetry compared with domestic investors; (3) family/employee owners are closely related to the firm and therefore best-informed and in a position to have influence on the firms CSR strategies and investments. As a result of these differences, we expect variation in the extent of decoupling between the different ownership types.
Owners have various mechanisms through which they can affect the decision making by the managers. Essential is the percentage of the stock owned by one particular shareholder, because large shareholders will usually have the power to affect corporate decisions. This can be done via appointing directors on the board (Boyd, 1994) and shareholder activism (Admati, Pfleiderer and Zechner, 1994). Thus, we would expect to see more active monitoring and intervention of shareholders into corporate decision-making with regard to CSR when some large shareholders own significant amounts of equity. Earlier empirical research supports the assertion that ownership concentration has influence on corporate decision-making (Baysinger, Kosnik and Turk, 1991; Kochhar and David, 1996).
Over the years multiple studies have done research on CSR decoupling and have described CSR decoupling as a policy-practice gap, where the stated and reported CSR commitments are disassociated with the concrete CSR actions of the firm (Meyer and Rowan, 1977). Series of studies by Westphal and Zajac (1994, 1995, 2001) have shown that decoupling often occurs in response of stakeholder demands. Firms can report about activities and CSR policies that they do not execute, but can just “walk the talk” by appearing to conform to external pressures from
shareholders (Jamali, Lund-Thomsen and Khara, 2015). Therefore, CSR decoupling allows firm’s to attain and uphold legitimacy and can nourish the firm’s positive image without consequences for the internal efficiency (Meyer and Rowan, 1977). We assume that CSR decoupling occurs under certain circumstances leading to CSR reports that do not represent the firm’s real CSR activities and actions.
In addition, decoupling of CSR can be seen as a result of shareholders activism and misalignment between managers and shareholders. Decoupling occurs where managers respond to shareholder activists’ demands and commit to a change, but instead of performing specific actions that address the CSR problems at its core, managers engage window dressing activities and impression management (Hadani, Goranova and khan, 2011). Corporate managers’ response may be influenced by the ability of the shareholders activists to monitor whether proposed CSR changes are implemented substantively rather than symbolically (Zajac and Westphal, 1995). In other words, managers may be more inclined to decouple CSR actions when there is more information asymmetry.
The agency theory, information asymmetry and CSR decoupling are closely related to transparency. Transparency can be seen as the practice of honestly and openly disclosing information to stakeholders of a firm. In other words, firms need to say what they do. Several studies find that different ownership types influence the extent of information asymmetry (Su, 2004; Yook, Gangopadhyay and McCabe, 1999). Information asymmetry leads to lower transparency and higher agency costs. Earnings management can be used as a proxy for agency costs, since it is in conflict with the agency contract of shareholders and managers (Ali, Salleh and Hassan, 2008). Findings of Kazemian and Sanusi (2015) show that earnings management is affected by the ownership structure of the firm. From this we can argue that a firms’ ownership type has influence on the level of transparency, and thus on the extent of CSR decoupling.
Table 1 Literature review
Study
Dependent variable
Independent
variable Result Country Theory
Kim and Lyon (2015) Deviation between reported and acutal emissions reductions
Firm growth, Profits, Deregulation, Interaction with External Scrutiny
“Growth, deregulation and low profits under deregulation do significantly affect the choice between greenwashing and brownwashing. External scrutiny mitigates the effects of growth and profits” U.S. Institutional Theory Crilly, Zollo and Hansen (2012) Intentional and emergent decoupling Stakeholder consensus, information asymmetry
“Firms facing identical pressures decouple policy from practice in different ways and for different reasons” Worldwide Institutional Theory and Behaviroura l Theory Hawn & Ioannou (2016)
Market value Distinction between internal/external actions
“Firms undertake on average more internal than external CSR actions and they theorize that a wider gap between external and internal actions is negatively associated with market value”
Worldwide Neo Institutional Theory Marquis and Qian (2014) CSR reporting substantiveness CEO as government official, regional institutional development
“Government pressure and a firm's location in an area with greater government institutional development are significant predictors of substantive CSR reporting” China Institutional Theory Weaver, Trevino and Cochran (1999) Easily decoupled ethics practice: Policy communications, integrated ethics practice: Ethics-oriented performance appraisals Management awareness of USSC guidelines, negative media attention, presence at Conference Board ethics meeting, top management commitments
“External pressures for social performance encourage easily decoupled processes, but top management commitments can encourage both easily decoupled and integrated processes”
V.S. Institutional Theory Tashman, Marano and Kostova (2018)
CSR decoupling Home country institutional voids, internationalization
“Home country institutional voids drives EM-MNEs' to engage in more CSR decoupling and greater levels of
internationalization motivate EM-MNEs' to avoid CSR decoupling” Worldwide Neo Institutional Theory Marquis, Toffel and Zhou (2016) Selective disclosure magnitude Environmental damage
“Firms that are more
environmentally damaging are less likely to engage in selective disclosure” Worldwide Institutional Theory Westphal and Zajac (2001) Repurchase plan implementation
CEO power over the board, Interlock ties
“Decoupling is more likely to occur when top executives have power over boards to avoid institutional pressures for change and when social structural or experiential factors increase awareness among those actors of the potential for organizational decoupling”
US Institutional Theory and Agency Theory
Marano and Kostova (2015) CSR adoption Strength of CSR Institutional Forces, Exposure to
Countries with More Stringent CSR Institutional Requirements
“Firm's economic dependence on a particular country,
heterogeneity of institutional forces with in the firm's transnational field, exposure to leading countries with more stringent CSR templates, and intensity and commitment to particular economic linkages make pressures more salient than others” Worldwide Institutional Theory Schons and Steinmeier (2016) Financial performance Distinction symbolic/sbustantive actions “Substantive/symbolic CSR actions have a positive impact/no impact on financial performance if directed toward high-proximity stakeholders, and the opposite is true of actions directed at low-proximity stakeholders” Worldwide Neo Institutional Theory Graafland and Smid (2016) CSR policies, implemenation and impact Decoupling of CSR policies and programs
“High quality CSR policies have strong effects on CSR
implementation, high quality CSR programs have strong effects on CSR impacts, low quality CSR policies enforce the incidence and quality of
programs in comparison with having no policy at all and weak programs have more impact on the realization of CSR goals than having no program at all”
Worldwide Institutional Theory Delmas and Burbano (2011) Greenwashing External organizational and individual drivers “Recommendations for managers, policymakers and NGOs to decrease greenwashing” N.A. Institutional Theory Hemingway and Maclagan (2004) Formulation, adoption and implementation of CSR policies Individual personal values
“It is suggested that in so far as CSR initiatives represent individuals' values, to the ‘responsibility" in evidence is less obviously "corporate’”
3. HYPOTHESIS DEVELOPMENT
Research (Dahlquist and Robertsson, 2001) states that foreign ownership can be seen as a corporate governance mechanism to monitor the management of a firm, which is expected to reduce the manipulation of earnings for private purposes. Their monitoring role is similar to that of institutional investors. Informed foreign investors, without social ties to management, have a strong incentive to monitor managers and reduce earnings management (Ferreira and Matos, 2008). In addition, the results of the study of Omar and Hind (2012) show that foreign institutional ownership is positively associated with earnings management. Frydman, Gray, Hessel and Rapaczynski (1999) presumed that foreign owners have an advantage over other owners in monitoring the managers as a result of their corporate governance expertise, financial resources and managerial know how. Alzoubi (2016) also found a significant negative relationship between foreign ownership and earnings management for listed firms in Jordan. From this literature we can conclude that actively monitoring of foreign investors may reduce the ability of managers to manipulate earnings to maximize their private benefits.
But on the other hand, foreign investors are associated with an informational disadvantage with respect to local firms, which results in higher monitoring costs. Higher levels of information asymmetry due to spatial distance and cultural barriers make it harder for foreign investors to monitor a firm (Dvorak, 2005). This implies that foreign investors may be associated with higher levels of earnings management.
The research of Choi, Lam, Sami and Zhou (2013) examined the impact of foreign ownership on information asymmetry in China. They stated that foreign ownership has two conflicting effects on information asymmetry. Effective monitoring, more demands for disclosure due to local investor’s advantage, incentive alignment, better accounting and auditing standards and long term investment horizon by foreign ownership will decrease information asymmetry, while increased agency costs, information asymmetry problems, superior information processing capability and short term investment associated with foreign ownership will increase information asymmetry.
Based on arguments of the Agency theory, foreign ownership leads to increased dispersion of corporate ownership. When there is more dispersion, owners may demand more detailed CSR disclosure to substantiate their decision-making (Haniffa and Cooke, 2002). Studies of Barako, Hancock and Izan (2006) and Haniffa and Cooke (2002) stated that in response, managers might have higher incentives to disclose more detailed CSR information to reduce these agency conflicts. In addition, Haniffa and Cooke (2005) argue that geographical separation between the managers and owners can also be seen as a reason for managers to disclose more CSR information. Based on these arguments we can conclude that managers have incentives to
disclose CSR information that enables foreign investors to monitor managers’ CSR disclosure activities and practices (Darus, Arshad and Othman, 2009).
Apart from reducing agency conflicts, Haniffa and Cooke (2005) argue that foreign investors are more likely willing to invest in firms that actively engage in CSR activities because of less uncertainty and information asymmetry. This means that a high CSR performance will attract foreign investors to invest in the firm. But, this does not preclude active monitoring and participation in decision making by the foreign investors. The foreign investor will pressure managers to further improve CSR performance and increase CSR disclosures.
In view of different expectations regarding the effect of foreign ownership on earnings management and CSR, our hypothesis is non-directional and posits:
Hypothesis 1. The presence of foreign ownership is associated with the degree of misalignment between a firm’s CSR reporting and CSR performance.
The data from Bloomberg defined employee and family ownership as one ownership type, because they are both closely related to the company and there exists less information asymmetry between the owner and principal with both ownership types. There are several reasons for firms to let employees participate in the firm by providing them shares. First, firms want to strengthen the bond between the firm and the employees and second, the Agency theory suggests that it is a way to reduce agency problems by aligning the interests of owners and employees. In addition, research from McConnell and Servaes (1990) state that managers are more likely to make decisions that will maximize shareholder’s value when managers own significant amounts of shares. Thus, we can expect that the incentives to manipulate earnings will decrease with managerial ownership. Studies of Branderlipe (2009), Ebrahim (2007) and Warfield, Wild and Wild (1995) conform this statement and find that madopt policies
anagerial ownership is negatively associated with earnings management. Additionally, prior literature found that earnings manipulation and income smoothing were lower in family firms compared with non-family firms (Li and Hung, 2013; Tong, 2007; Wang, 2006), because family controlled firms are focused towards increasing long term wealth.
Nevertheless, studies of Denis and McConnell (2003), Fama and Jensen (1983) and Weisbach (1988) argue that to the extent that managers’ and shareholders’ interests are not fully aligned, managerial stock ownership may result in the power to pursue private goals with less fear of punishment. Managerial stock ownership may lead to increasing managerial opportunism (Fama and Jensen, 1983), instead of reducing managerial incentive problems. Managers can use earnings management to maximize their personal wealth (Cheng and Warfield, 2005; Healy, 1985) by keeping stock prices high and increasing the value of their shares (Yang, Lai and Tan, 2008). The results of Cheng and Warfield (2005) and Mitani (2010) indicate that firms higher managerial ownership are positively associated with earnings management.
Furthermore, family ownership is associated with greater information asymmetries between the controlling family and other minority shareholders. In order to achieve their own goals, controlling shareholders will use earnings management to manipulate earnings (Haw, Hu, Hwang and Wu, 2004; Leuz, Nando and Wysocki, 2003). If the information asymmetry takes serious forms, then a firm is more likely to engage in accruals management (Chang and Fang, 2006).
CSR engagement will increase the firm’s value in the long-term (Waddock and Graves, 1997) what might increase the incentives for managers to engage in CSR when they personally own shares (Oh, Chang and Martynov, 2011). Empirical findings of Johnson and Greening (1999) also found a positive relationship between ownership by managers and CSR performance. But, more recent research of Dam and Scholtens (2012) found that firms owned by employees have a relatively poor CSR performance. In addition, Oh et al. (2011) concluded that ownership by managers has a significant negative effect on CSR ratings in Korea, as a result of tied relationships between managers and the founding families. They argue that in this case managers might adopt policies that only benefit the family at the price of other stakeholders. Family owners play a dominant role in CSR strategies and are likely to be less concerned about organizational legitimacy and public accountability (Muttakin, Khan and Subramaniam, 2014). At family and employee owned firms there is less pressure from outside to engage in CSR. Therefore, these firms tend to report less about CSR, even when the CSR performance is high. Chau and Gray (2002) argue that family owned firms have few incentives to disclose CSR information in excess of mandatory requirements, because the demand for public CSR disclosure is relatively weak in comparison with firms that have dispersed ownership. Concentrated ownership of families and or employees enables managers to dominate the firm and make decisions about CSR strategies and policies. The costs of CSR investments may outweigh its potential benefits and that’s why it can be expected that these firms will not have a high CSR performance and CSR disclosure. Prior research of Ghazali (2007) also found a negative relationship between family ownership and the extent of CSR disclosure.
Based on the competing results of employee and family ownership on accruals management and CSR, so our hypothesis is non-directional and posits:
Hypothesis 2. The extent of family/employee ownership is associated with the degree of misalignment between a firm’s CSR reporting and CSR performance.
Institutional investor ownership relates to the stock market investments of institutional investors. Institutional investors are insurance companies, pension funds and mutual funds. Agency theory suggests that monitoring by institutional investors can be an important corporate governance mechanism (Alves, 2012). In contrast to smaller, less informed or more passive investors, institutional investors are in a position to actively monitor manager’s behavior
(Almazan, Hartzell and Starks, 2005). Multiple studies (Hartzell and Starks, 2003; Nesbitt, 1994; Smith, 1996) find evidence that intensive monitoring by institutional owners can inhibit managers’ behavior, by forcing them to focus more on corporate performance instead of self-serving or opportunistic practices. Additionally, large long term focused institutional investors have the resources, opportunity, ability to monitor, influence and discipline managers (Chung, Firth and Kim, 2002). If institutional investors increase monitoring of management activities, the ability of managers to opportunistically manipulate earnings will be reduced. In line with this statement, several studies concluded that ownership by institutional investors constrain managers to opportunistically engage in earnings management (Bushee, 1998; Chung et al, 2002; Cornett, Marcus and Tehraniam, 2008; Koh, 2003). In contrast, Claessens and Fan (2002) argue that institutional investors do not actively monitor management actions. Duggal and Millar (1999) state that “institutional investors are passive investors who are more likely to sell their holdings in poorly performing firms than to expend their resources in monitoring and improving their performance”. Especially small institutional investors may be unable of exerting their monitoring role and vote against managers, because they may collude with management (Sundaramurthly, Rhoades and Rechner, 2005) and damage their business relationships with the firm. Furthermore, Bushee (1998) argued that institutional investors are too much focused on short-term results and thus are unable to effectively monitor management practices. In this case, institutional investors will pressure the management to meet short-term earnings expectations, which may increase managerial incentives to engage in earnings management.
Over the years institutional investor ownership is one of the most researched ownership types in relation with CSR. Studies of Neubaum and Zahra (2006) and Shleifer and Vishny (1997) have reported that institutional owners are influential in corporate decisions by exercising substantial voting power. Furthermore, Schnatterly, Shaw and Jennings (2008) argue that corporate owners have asymmetric advantages over other shareholders. As a result of their power and information, institutional investors manage to be more actively involved in the firms’ decisions than other shareholders (Brickley, Lease and Smith, 1988).
Graves and Waddock (1994) concluded that institutional owners are likely to support CSR related actions. In the academic literature we found two reasons for this. First, institutional investors use CSR to show their existing and potential clients responsibility and reliability (Siegel and Vitaliano, 2007). Second, institutional investors acknowledge the long-term benefits of a firm’s investments in CSR (Turban and Greening, 1997). Long-term performance can be improved by adequate management practices and therefore institutional holders are inclined to support CSR-related actions (Oh et al., 2011). Thus, in case of institutional ownership CSR helps to reduce conflicts, does not impact on financial returns and may even mitigate firm specific risks (Harjoto and Jo, 2011; Margolis et al., 2009; Scholtens, 2008).
As with foreign investors, institutional investors put pressure on the management to engage in CSR activities and are actively monitoring the management. Research of Diamond and Verrecchia (1991) state that firms with substantial shareholdings by institutional investors may support higher disclosure to reduce information asymmetry.
Based on the different influence between long term institutional investors and short term institutional investors on earnings management and CSR, our hypothesis is non-directional and posits:
Hypothesis 3. The extent of institutional investor ownership is associated with the degree of misalignment between a firm’s CSR reporting and CSR performance.
4. METHODOLOGY
Data and Sample
In this sample we make use of information from different databases. The data related to CSR performance were obtained from Thomson Reuters ASSET4 ESG Database, which is the leading global provider of environmental/social/governance (ESG) data. The use of data from ASSET4 is already validated in prior CSR literature (Dyck, Lins, Roth and Wagner, 2018; Hawn and Ioannou, 2016). The ASSET4 database consists of relevant, systematic, objective and auditable CSR information that is obtained at annual frequency by trained research analysts, who translate objective and publicly available qualitative data (e.g. from annual reports and sustainability reports) into quantitative units to enable quantitative analyses (Hawn and Ioannou, 2016). ASSET4 provides a z-score which we use to compare the CSR performance with the intensity of CSR reporting. The data for CSR reporting were also obtained from Asset4. Asset4 provides for each firm an ESG score from 0 to 100, depending on the number of data points disclosed in their reports. The more ESG information the company discloses, the higher the score. Research of Lo and Kwan (2017) concluded that ESG estimation covers a broad range of items and are not verifiable, but despite their limitation we use ESG scores to measure CSR decoupling between CSR performance and CSR reporting.
Finally, additional accounting data for control variables were also collected from Thomson Reuters ASSET4 ESG Database. Our sample contains 6,314 firm-year observations of worldwide firms in the period of 2010-2017.
Dependent variable
The dependent variable is the degree of decoupling between CSR performance and CSR reporting. To measure the dependent variable, we use the method of Tashman et al. (2019). They conceptualized CSR decoupling as “the degree of misalignment between a firm’s CSR reporting and CSR performance” and measured this variable by “subtracting the standardized
values of CSR performance from the standardized value of the intensity of CSR reporting”. In line with Tashman et al. (2019) have we standardized the CSR performance and CSR decoupling score to ensure that they had the same measurements units. This means that we also measured the CSR decoupling score in standard deviations. Higher scores on the decoupling measure imply that firms have a higher score of CSR reporting relative to CSR performance and thus have greater degrees of misalignment between disclosure and actual performance (Tashman et al., 2019), which is defined as greenwashing. Lower scores on the decoupling measure imply that firms have a higher score of CSR performance relative to CSR reporting, which is defined as brownwashing. Our approach follows the measurement method of Tashman et al. (2019), which is based on the measurement method developed by Marquis, Toffel and Zhou (2016), who measured “a form of corporate environmental responsibility-related decoupling called ‘Selective environmental disclosure magnitude’ as the difference between the scope of firm’s environmental reporting and the salience of the environmental impacts that it reports” (Tashman et al., 2019). Earlier research has found limitations that have been associated with aggregate CSR measures, but Tashman et al. (2019) state that this measure of CSR decoupling is more accurate than existing measures, which mostly relied on the quality of a company’s disclosures to recognize the symbolic involvement of companies in CSR (e.g. Marquis and Qian, 2014; Luo, Wang and Zhang, 2017).
To measure CSR performance, we rely on the CSR performance scores in the Asset4 database, which are based on 900 individual data points used as inputs to calculate 250 key performance indicators. These key performance indicators are further organized into 15 categories within three pillars: environmental, social and governance. The key performance indicators, categories and pillars can be used for our research because they are equally weighted calculations of relative company performance. These ratings are expressed in Z-scores (from 0 to 100) that are comparable across years and firms. The primary data used by Asset4 has to be publicly available, like annual reports, CSR reports, websites and more. In this study we use the aggregate score over the environmental, social and governance scores incorporating all the 15 categories and 250 key indicators. We do not focus on a specific area of CSR.
We measure CSR disclosure by relying on the ESG disclosure score provided by Bloomberg. Bloomberg gives firms a score from 0 to 100 on their ESG data disclosure, based on 100 out of 219 raw data points that Bloomberg collects based mainly on GRI requirements. Each data point is weighted in terms of importance and is tailored to different industries. This means that each firm is only assessed on the basis of the data relevant to its industry sector, because each sector has unique characteristics and challenges regarding CSR concerns (Fafaliou, Lekakou and Theotokas, 2006; Giannarakis and Litinas, 2011). The ESG disclosure data concerns the same three pillars as the ESG performance data, what makes it possible to measure the decoupling between performance and disclosure.
Independent variable
Regarding our independent variables, data on ownership percentages is from Asset4. However not all companies disclose their main shareholders and therefore we exclude those companies. We classified shareholders in three groups: foreign investors, institutional investors and employee/family owners. Foreign ownership is measured as the percentage of ownership by foreign investors. Employee/family ownership is measured as the percentage of ownership by employees/family. Institutional ownership consists of three ownership type data, which we merged together as one. Institutional ownership is measured as the percentage of ownership by government, pension funds and investment companies. All three variables are calculated as the number of shares owned by the particular owner divided by the total number of outstanding shares.
Control variables
We make use of control variables to control for other influences that may influence the decoupling of CSR. Previous literature (Graafland and Smid, 2016; Weaver, Trevino and Cochran, 1999) found that company size, industry type and financial performance are important control variables for CSR decoupling. Therefore, we use total assets, return on assets, sales growth, capital intensity, R&D intensity, industry type, year and country of origin as control variables.
We control for firm size because research of Lepoutre and Heene (2006) reported that smaller companies are often less able to implement CSR programs due to a lack of experience. We therefore expect firm size to be negatively related to CSR decoupling. Firm size is measured by taking the natural log of a firm’s total assets. The slack resource theory states that better economic performance potentially can result in the availability of slack resources, which firms can use for CSR investments (Waddock and Graves, 1997). Therefore, profitability may be positively related to decoupling. In addition, Delmas and Burbano (2011) state that more profitable firms can better deal with the consequences of reputational damage when being accused of greenwashing. Financial performance is measured by the return on assets. In line with Hussain, Rigoni and Orij (2018) we include sales growth as control variable. We expect sales growth to be negatively correlated because it is an indicator for more opportunities to invest in CSR issues and neglect decoupling practices. Capital intensity is measured as a value of total assets divided by sales (Marano and Kostova, 2016). In line with McWilliams and Siegel (2000) we controlled for Research and Development intensity, which can affect the adoption of CSR practices. R&D intensity is measured as a value of R&D expenditures divided by sales (Marano and Kostova, 2016). The industry and country dummies are measured by the industry and country classification benchmarks from Bloomberg.
Table 2 Measurement of dependent, independent and control variables
Name of variable Mnemonics Role Measurement
CSR Decoupling DEC Dependent Ratio of standardized CSR performance score minus standardized CSR disclosure score
Foreign Ownership FOR_OWN Independent Percentage of foreign ownership Employee/family
Ownership
EF_OWN Independent Percentage of employee/family ownership Institutional Ownership INS_OWN Independent Percentage of institutional ownership
Firm Size FSIZE Control Log of total assets
Profitability ROA Control Ratio of net income and total assets
Sales growth SGROW Control Percentage of change in net sales with respect to previous year Capital intensity CAPINT Control Ratio of capital expenditure and total sales
R&D intensity RDINT Control Ratio of total R&D expenditure and total sales
Table 3 Descriptive statistics and Pearson correlation
Variables Mean Std.Dev. (1) (2) (3) (4) (5) (6) (7) (8) (9)
(1) DEC 0 1.26 1.000 (2) FOR_OWN 4.57 12.33 0.026 1.000 (3) EF_OWN 3.19 10.35 0.013 0.082 1.000 (4) INS_OWN 7.28 12.20 0.064 0.027 -0.086 1.000 (5) FSIZE 17.80 2.76 -0.248 -0.089 -0.109 -0.093 1.000 (6) ROA 5.95 7.71 0.078 0.041 0.010 0.024 -0.112 1.000 (7) SGROW 0.09 1.56 0.004 0.035 0.024 -0.007 0.004 0.047 1.000 (8) CAPINT 12.44 550.82 0.017 -0.003 -0.005 0.008 -0.013 -0.013 0.002 1.000 (9) RDINT 188.19 14474.47 0.021 -0.005 -0.004 -0.008 -0.003 -0.002 -0.001 0.648 1.000
5. EMPIRCAL MODEL AND ESTIMATION PROCEDURE
The aim in this study is to test the relationship between ownership types and CSR decoupling over a time span of eight years for a given set of firms. We estimate the following equition:
CSR decouplingit = α + βOTit + γControlit + μit, (1)
Where i represents the firm dimension and t the time dimension. The dependent variable CSR decouplingit is a measure of the decoupling between CSR performance and CSR disclosure,
OTit the set of aggregate shareholdings per type, Controlit a vector of firm specific control
variables and μit an error term. We run these regressions including industry, country and year
specific effects. We provided a detailed measurement of each variable in Table 2.
OLS regression is a frequent used technique for testing hypothesis on panel data and after trying different regressions, we concluded that a simple OLS regression is the most suitable to see whether a particular ownership type is to be associated with CSR decoupling. We clustered year, industry and country dummies to correct for repeated measures and correlations.
6. EMPERICAL RESULTS
Descriptive statistics and Pairwise correlation
We present the descriptive statistics and the results of the Pearson correlation in Table 3. In columns 2 and 3 we present the mean and standard deviation, followed by the results of the Pearson correlation test. The Pearson correlation test shows that there is no sign of correlation among the different ownership types. Additionally, we tested for multicollinearity among the variables by calculating the variance inflation factors (VIF). The variance inflation factors where all around 1. We conclude that the results of the variance inflation factors are corresponding to the correlation matrix and do not give any sign of high correlation between the variables.
Estimation results
In this section we provide regression results of CSR decoupling and ownership types. The estimation results for equation (1) are presented in table 4. It shows that there is a statistical significance for institutional ownership.
Table 4, model 1 contains the regression of CSR decoupling on the independent and control variables. Firm size measured by the log of total assets, is very important for the extent of CSR decoupling and has a negative significant influence (t = -16.60, p < 0.01). This is in accordance with Lang and Lundholm (1996). They found that firm size is associated with greater information production by managers. This results in less information asymmetry and a lower
extent of CSR decoupling. We find that firm performance measured by return on assets is positively related to decoupling at 1% significance level. Sales growth is insignificant. Furthermore, capital intensity has insignificant positive coefficients. Finally, R&D intensity is found to be positively related to CSR decoupling at 1% significance level. We do not report the results for the industries, countries and years for brevity.
Table 4 model 1 shows that ownership by foreign owners does not significantly impact on CSR decoupling and we therefore reject hypothesis 1. There is no significant association between foreign ownership and CSR decoupling.
On the basis of the results in table 4 model 1, we reject hypothesis 2 about the relationship between employee/family ownership and CSR decoupling. We find no significant relation between employee/family ownership and CSR decoupling.
Lastly, the estimation results do confirm hypothesis 3 about the relation between institutional ownership and CSR decoupling. The results show that institutional ownership is positive and significant related to CSR decoupling.
The results were highly influenced by the high amount of zeros in the data. In model 2 we replaced the zeros for the mean of every single ownership type to find out whether the results would change without the zeros. Table 4 model 2 shows that the results for hypothesis 1 and 2 are still insignificant and we therefore have to reject those hypothesis. Foreign and employee/family ownership are not significantly related to CSR decoupling. The results of model 2 reveal that institutional is still positive and significant related to CSR decoupling, and we therefore accept hypothesis 3. It appears that ownership by institutional investors has to be associated with a relatively high extent of CSR decoupling.
Robustness
As a robustness check, we will relate ownership types to the three CSR dimensions, “environment”, “social” and “governance” . We will investigate whether ownership type has influence on decoupling of the specific CSR dimensions.
In Table 5 model 1, we report the regression of ownership structure on decoupling of the
environment dimension. In the second model we analyze the impact of ownership on decoupling of the social dimension. The last model contains the results of ownership on decoupling of the governance dimension.
Table 5 shows that there are significant differences between the ownership types and the three dimensions. Institutional ownership is significant and positively associated with environmental decoupling. The impact of other ownership types is not statistically significant. Regarding the dimension social, we find that foreign ownership as well as employee/family ownership are significantly and negatively related. For governance, we find there is a significant and positive
association with ownership by foreigners and employees/families. Thus, the positive association between institutional ownership and CSR decoupling is driven mainly by the positive association with environment. The extent of decoupling differs significant among the three dimensions for each ownership type. This finding suggests that different investor types are decoupling on different CSR dimensions.
Table 4 OLS regression Variables (1) DEC (2) DEC FOR_OWN 0.00 (0.55) EF_OWN -0.00 (-0.41) INS_OWN 0.00*** (3.11) FOR_OWN_MEAN 0.00 (1.16) EF_OWN_MEAN -0.00 (-0.72) INS_OWN_MEAN 0.00*** (2.94) ROA 0.01*** (4.30) 0.01*** (4.33) SGROW 0.00 (0.36) 0.00 (0.31) RDINT 0.01*** (3.18) 0.01*** (3.20) CAPINT 0.00 (0.81) 0.00 (0.86) FSIZE -0.12*** (-16.80) -0.12*** (-17.00) Constant 1.78*** (14.88) 1.78*** (14.64) Adj. R² 0.07 0.07
Industry effects Yes Yes
Country effects Yes Yes
Year effects Yes Yes
t statistics in parentheses * p<0.1, ** p<0.05, *** p<0.01
For brevity, the industry, country and year fixed effects (dummy variable for each industry, country and year) are not reported. The industries are Oil & Gas Producers, Oil Equipment, Services & Distribution, Alternative Energy, Chemicals, Forestry & Paper, Industrial Metals & Mining, Mining, Construction & Materials, Aerospace & Defense, General Industrials, Electronic & Electrical Equipment, Industrial Engineering, Industrial Transportation, Support services, Automobiles & Parts, Beverages, Food Producers, Household Goods & Home Construction, Leisure Goods, Personal Goods, Tobacco, Health Care Equipment & Services, Pharmaceuticals & Biotechnology, Food & Drug Retailers, General Retailers, Media, Travel & Leisure, Fixed Line Telecommunications, Mobile telecommunications, Electricity, Gas, Water & Multi-utilities, Nonlife Insurance, Real Estate Investment & Services, Real Estate Investments Trusts, Financial services, Software & Computer Services and Technology Hardware & Equipment.
Table 5 OLS regression
Variables (1) Environment (2) Social (3) Governance FOR_OWN -0.00 (-0.10) -0.00*** (-2.93 0.01*** (4.61) EF_OWN -0.00 (-0.27) -0.01*** (-3.55) 0.00*** (3.12) INS_OWN 0.00*** (2.89) 0.00 (0.04) -0.00 (-0.96) ROA 0.01*** (2.65) 0.00* (1.86) 0.00 (0.27) SGROW 0.00 (0.21) 0.00 (0.90) -0.01 (-0.82) RDINT 0.00* (1.74) 0.01*** (3.80) 0.00 (1.15) CAPINT 0.00*** (11.36) 0.00*** (3.04) 0.00 (0.86) FSIZE -0.07*** (-11.09) 0.01 (1.32) -0.13*** (-24.59) Constant 1.24*** (10.16) -0.17 (-1.39) 2.33*** (22.19) Adj. R² 0.03 0.01 0.10
Industry effects Yes Yes Yes
Country effects Yes Yes Yes
Year effects Yes Yes Yes
t statistics in parentheses * p<0.1, ** p<0.05, *** p<0.01
7. DISCUSSION AND CONCLUSIONS
This paper analyzes whether CSR decoupling of firms can be related to different ownership types. In particular, we investigate the role of ownership by foreign investors, employees/families and institutional investors on CSR decoupling. The extent of CSR decoupling might differ because these owner types have different preferences, resources and role and position in society as well as in the firm. Our study is the first to explicitly address the association between CSR decoupling and ownership types. Due to endogeneity issues we are cautious to make any causal claims.
We find that the three different ownership types are all related in a different manner to CSR decoupling. Firm ownership by institutional investors is to be associated with a relatively high extent of CSR decoupling. This implicates that firms owned by institutional investors experience information asymmetries and a lack of transparency. These findings are inconsistent with the agency theory argument that monitoring by institutional investors can be an important corporate governance mechanism (Alves, 2012) to reduce information asymmetries and opportunistic management behavior. The results support the argument of Claessens and Fan (2002) that institutional investors do not act as governance mechanism by monitoring management activities. The reason may be that institutional investors are too much focused on short-term results (Bushee, 1998) and therefore pressure management to meet certain results. Hadani, Goranova and Khan (2011) and Kim and Lyon (2015) argue that these shareholder activists’ demands plays an important role in the adoption of decoupling practices. Instead of substantive implementation managers start to decouple the CSR practices.
We do not find support that ownership by foreign investors has a significant influence on CSR decoupling. These results suggest that foreign investors generally play a myopic role. They do not monitor effectively because they may experience spatial distance and cultural barriers (Dvorak, 2005). Other explanation of the insignificant results could be the existence of opposing effects of foreign ownership on the information environment and transparency (Choi, Lam, Sami and Zhou, 2013).
The results suggest that employee/family ownership has not a significant impact on CSR decoupling. We do not find support for the agency theory statements that employee/managerial ownership should align the interests of owners and employees/managers or contradictory lead to an increase in managerial opportunism (Fama and Jensen, 1983).
Another interesting finding is that we can relate different owners to decoupling of specific CSR dimensions. For example, foreign ownership and employee/family ownership have a significant negative effect on social decoupling, but a significant positive effect on governance decoupling. Institutional ownership is only significant and positive related to environment decoupling. The results are in line with results of Dam and Scholtens (2012) and Barnea and Rubin (2010) who concluded that there can be frictions between shareholders and CSR.
Altogether, our results largely contradict theoretical assertions of the agency theory regarding the role of ownership on CSR decoupling. Our results imply that CSR decoupling can be seen a result of shareholder pressure and unaligned interests, different risk appetites and asymmetric information between managers and shareholders. Despite the presence of institutional investors it is desirable for firms to have superior governance mechanism for monitoring the management and increasing transparency.
8. LIMITATIONS AND FUTURE RESEARCH
Our research has a few limitations. The first limitation of our study is that we have to rely on data collected from databases. This makes it difficult to account for causality and endogeneity. The article of Fogarty (2006) advises to hand collect minimal one variable to ensure that results are not dependent on the trustworthiness of the databases. Despite the (possible) negative influence on our results, we collected all our data from databases to save time. The second limitation is that our sample only exists of data from Asset4 and Bloomberg. Including data from additional databases could lead to a higher reliability of the results. Third, the firms in the sample are worldwide, which is positive for the external validity, but limits the internal validity. Future research with more data could examine this relationship on continent or country level to increase the internal validity. Fourth, using database collected data from multiple countries and industries implies the risk of an omitted variable bias regarding factors like political, cultural and social differences. However, we ran our regression with country and industry fixed effects to prevent such a bias. In this way we have the chance to study our phenomenon in a cross-country and cross-industry context, while we controlled for those influencing factors. Future studies could use these factors and do research to the influence of political, cultural and social differences on the extent CSR decoupling. Fifth, we did not pay attention to the different effects of decoupling, which are brownwashing (lack of transparency) and greenwashing (faking it). Future research could dive deeper into this gap and gain more knowledge about the different decoupling strategies.
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