The effects of CSR-related compensation on firm performance – The difference between stakeholder- and shareholder-oriented countries

performance – The difference between stakeholder- and

shareholder-oriented countries

Master thesis, Accountancy & Controlling

Rijksuniversiteit Groningen, Faculty of Economics and Business

20th

of June 2017

L.B. Hamilton Student number: s2210681 E-mail: l.b.hamilton@student.rug.nl

Thesis Supervisor / University of Groningen Dr. R.C. Trapp

Co-assessor / University of Groningen Dr. C.A. Huijgen

Dijkstraat 14 9724 KX Groningen Word Count: 11.778

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TABLE OF CONTENT

2.2.1STAKEHOLDER-ORIENTED COUNTRIES 11

2.2.2SHAREHOLDER-ORIENTED COUNTRIES 13

2.3THE EFFECT OF CSR-RELATED COMPENSATION ON FINANCIAL PERFORMANCE 14

2.3.1EMPLOYEES 15

2.3.2.CONSUMERS 15

2.3.3ENVIRONMENT 16

2.3.4.REGULATORS 16

2.4THE EFFECT OF CSR-RELATED COMPENSATION ON FIRM VALUE 17

2.4.1EMPLOYEES 18 2.4.2CONSUMERS 18 3. METHOD SECTION 21 3.1INDEPENDENT VARIABLE 23 3.2DEPENDENT VARIABLES 23 3.3MODERATING VARIABLE 23 3.4CONTROL VARIABLES 24 4. RESULTS SECTION 25 5. DISCUSSION 32 6. CONCLUSION 34 6.1CONTRIBUTIONS 34 6.2IMPLICATIONS 35 6.3LIMITATIONS 36 6.4FUTURE RESEARCH 37 APPENDIX A. VARIABLE DEFINITIONS AND DATA SOURCES 38 APPENDIX B. DESCRIPTION OF THE COUNTRIES 40 7. REFERENCE LIST 41

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Acknowledgement

First of all, I would like to express my sincere gratitude to my thesis supervisor, Dr. R.A. Trapp, for his great commitment and support throughout the whole process of writing this Master thesis. This process could be characterized by ups and some downs. However, due to the ongoing support of Dr. R.A Trapp and the extensive feedback he provided, this is the end result. In my opinion the feedback and the provided classes by Dr. R.A. Trapp kept me on the right track. Besides, Dr. R.A. has always been available for me to discuss some difficulties I faced, for this I would sincerely thank him.

Last year Corporate Social Responsibility (CSR) was the theme of my bachelor’s thesis. In my opinion this is a highly relevant and interesting topic in both the literature as in practice. Firms more and more need to take into account in which ways they possibly affect their increasing group of stakeholders. Since this theme is such of great importance I found

pleasure in exploring and writing about CSR and the related compensation of the executives.

Finally, I would like to show my deep appreciation and gratitude to my family. They supported me endlessly and always kept trust and patience in me.

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Abstract

Purpose – The aim of this paper is to investigate whether CSR-related compensation is positive related to firm performance. I assume that compensating executives for CSR-related initiatives led to a stronger focus on CSR. Firm performance is measured by financial

performance on one side and firm value on the other. Further, this paper attempts to find an answer regarding whether the relationship between CSR-related compensation and firms’ performance is stronger in countries that are stakeholder-oriented instead of shareholder- oriented.

Design/Methodology/Approach – The data of 1871 observations are used for the OLS regression and the moderated regression analysis. Financial performance is measured as the return on equity (ROE), while firm value is measured as Tobin’s Q. The distinction between stakeholder- and shareholder-oriented countries is made based on the stock exchange each firm is listed. For this research, I used quantitative data. The timeframe is 2012 – 2015. Findings – The findings provide empirical evidence that CSR-related compensation is positive related to both financial performance as to firm value. Further, this study also revealed evidence that the relationship between CSR-related compensation and firm performance is stronger in stakeholder-oriented countries than in shareholder-oriented countries. CSR-related compensation leads to an executive’s stronger focus on CSR activity. CSR activity ultimately leads to higher firm performance.

Originality/value – This paper sheds new light on the ongoing discussion concerning whether CSR actions by an executive, as a result of being compensated for it, is positive related to financial performance. Previous research found mixed results while this study indicates a positive result of CSR-related compensation on firm performance. Further, this is the first paper in related research that includes the stakeholder/shareholder-oriented variable. Based on the findings of this paper, it could be important to make a distinction between these countries in related papers in the future.

Keywords – Corporate Social Responsibility, Incentives, Financial Performance, Firm Value, Stakeholder, Shareholder

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1. Introduction

This research paper investigates the impact that CSR-related compensation has on both the financial performance of firms and the firms’ value. More specifically, this paper intends to investigate the impact of CSR-related compensation on financial performance and the firm value and if these relationships differ depending on whether a company is domiciled in a stakeholder- or a shareholder-oriented country.

In recent years, including Corporate Social Responsibility (CSR) criteria in the bonus schemes of managers has been a new and a highly relevant topic in both the literature and in corporate governance practice (Flammer, Hong and Minor, 2016). In order to explain CSR-related compensation, I first describe the definition of CSR. ‘CSR is the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large’ (Moir, 2001). The management thereby needs to act responsibly in its relationships with the stakeholders of the firm (Moir, 2001). Barnea and Rubin (2010) and Jo and Harjoto (2011) state that before CSR emerged, companies were expected to make profits for their shareholders since they are capital owners. Since shareholders are the providers of capital, they have a property claim on the residual earnings of a firm (Carroll and Shabana, 2010). However, according to the concept of CSR, firms need to consider the interests of all their stakeholders and not just the shareholders (Moir, 2001).

Since the financial crisis in 2008, the bonus schemes of firms have received strong criticism (Kolk and Perego, 2014). This criticism resulted in the growing demand for reforming bonus schemes and to include CSR-related criteria in executive compensation (Kolk and Perego, 2014). CSR-related criteria can be divided into the categories of environment (e.g., gas emissions, waste), social (e.g., human capital management) and corporate governance (e.g., board effectiveness) indicators (Kocmanová and Docekalova, 2012). Monetary incentives should align with the interests of both executives as the shareholders (Fabrizi, Mallin, and Michelon, 2014). Incentives related to certain goals that are set by the board motivate the executive to meet this goal in order to collect the bonus (Fabrizi et al. 2014). CSR-related investments are seen as risky since it can impair the financial results of a company in the short term. In order to motivate the executive to undertake the CSR-related initiative, the executive should be compensated financially for the increased risk (Berrone and Gomez-Meija, 2009b).

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Incentives in the form of a bonus linked to CSR criteria should motivate managers to undertake actions which are perceived as “good” by society (Berrone and Gomez-Mejia, 2009a). Against this background, I argue that CSR-related compensation is a powerful tool to motivate executives to invest in CSR. Therefore, the CSR-related compensation of executives leads to a higher emphasis on CSR.

Even though the relationship between CSR-related compensation and firm performance is of great importance, only some research has been performed regarding this topic. The reason that this relationship is of great importance is that CSR is associated with costly investments that could have positive as well as negative relationships with firm performance (Berrone and Gomez-Mejia, 2009b). Previous research found inconclusive results regarding whether CSR-related compensation leads to higher firm performance. Some researchers such as Berrone and Gomez-Mejia (2009b) and Hart (1995) found negative relationships since these costly investments could not lead to short-term financial performance. If CSR-related actions do not lead to a maximization of firm value, these CSR initiatives are a waste of valuable resources and could eventually negatively affect the firm’s value. If each additional dollar spent on CSR is greater than the increase in firm value, this eventually decreases the shareholders’ wealth (Barnea and Rubin, 2010). Even though CSR-related actions, as a result of the compensation, could have a negative relationship to firm performance, this renewed bonus scheme could encourage executives to invest in CSR since it could also have a positive relationship with firm performance.

Other researchers found positive relationships between CSR-related compensation and firm performance. Performing as what is seen as ‘good’ by society could be used as a tool to advertise their socially and responsible reputation to their consumers. This form of positive advertising could be an effective way to communicate with the consumers. This could result into a higher total demand of the firm’s products, since the presumption is that firms that support CSR are more reliable and their products are of higher quality (Brammer and Millington, 2008). Berrone and Gomez-Meijia (2009b) argue that firms with CSR-related initiatives face lower costs of capital since they incur lower unsystematic market risk. Falck and Heblich (2007) see CSR as an investment for the long term since it should be planned specifically, supervised and evaluated on a regular basis. Falck and Heblich (2007) conclude that if companies do well for society, society will notice this and reward the company in several ways for their social initiatives.

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In addition, I predict a positive relation of CSR-related compensation on firm value. Not only do CSR-related actions lead to higher consumers’ demand, a social and responsible firm is also able to attract young and talented employees, which uses their skills and abilities to create high organizational performance (Luo and Bhattacharya, 2006). This ultimately leads to higher firm value. The effect of CSR-related compensation on financial performance and firm value are comprehensively discussed in the literature review.

This paper makes a distinction between stakeholder- and shareholder-oriented countries and intends to provide new insights on whether there are differences between the financial performance and the firm value of the companies listed in these countries. A possible explanation that contributes to the mixed findings regarding the financial performance and firm value may be that previous research was based on all the countries taken together instead of making a distinction between firms that are listed in countries that are stakeholder- or shareholder-oriented. Stakeholder groups in stakeholder-oriented countries have considerable influence on the corporate activities of companies and, according to the stakeholder theory, firms should consider the impact they could have on their stakeholders. (Falck and Heblich (2007). Stakeholders expect firms to engage in CSR activities (Schons and Steinmeier, 2016). Since CSR covers a broad area, it is a powerful tool to take into account the various interests of stakeholders (Ricart, Rodriguez and Sanchez, 2005).

This is in contrast with shareholder-oriented countries, whereby companies are seen as instruments that solely create shareholder value. The shareholders are the suppliers of capital and have a property claim on the residual earnings of a firm (Carroll and Shabana, 2010). In shareholder-oriented countries, shareholders’ interests are prioritized over the interests of the remaining stakeholders (Simnett et al. 2009).

By taking their interests into consideration and thereby not solely prioritizing the demands of the shareholders, a firm is able to build and maintain strong and cooperative relationships with their stakeholders. According to Barnett (2007), managing these relationships is an essential part of CSR. As a result of these strong relationships, consumers, for example, are more likely to buy the company’s products (Barnett, 2007). On the other hand, loyalty may be created among employees as a result of the strong relationship that has been created between the firm and its employees (Hillman and Keim, 2001). Barnett (2007) argues in his paper that a strong and cooperative relationship between the stakeholders and a company outperforms competitors with weaker relationships. Based on this, it seems likely that firms in stakeholder- oriented countries strive for strong and cooperative relationships among their stakeholders,

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and that these strong relationships ultimately lead to higher firm performance. Companies domiciled in shareholder-oriented countries find the interests of their shareholders the most important and could therefore neglect the various interests of their stakeholders. Firms in shareholder-oriented countries might fail by not understanding the importance of strong relationships among the stakeholders in order to improve the firm performance.

Since CSR is a powerful tool to build strong relationships (Barnett, 2007) among stakeholders and because managing these relationships is an essential characteristic of CSR, I assume that the relationship between CSR-related compensation and firm performance is stronger in countries where the stakeholders are of great importance to the firm. Therefore, I assume that the financial performance and firm value of the firms in these two countries might differ. By taking the predictions concerning CSR-related compensation and its relationships with financial performance and firm value together with the assumptions regarding the role of stakeholders, I formally state the following research question:

What is the relationship between CSR-related compensation and the firm’s performance, and is there a difference in performance between stakeholder-oriented countries compared with shareholder-oriented countries as a result of CSR-related compensation?

For the investigation, if there is a difference in performance between shareholder- and stakeholder-oriented countries, I used the results of the research of Simnett et al. (2009). They concluded that companies domiciled in common law countries are considered to be shareholder-oriented, while companies domiciled in code law countries are stakeholder- oriented (Simnett et al. 2009). I included the United Sates and the United Kingdom as the shareholder-oriented countries. On the other hand, Germany, France, the Netherlands, Spain and Japan are included as stakeholder-oriented countries. The research period of this paper is 2012-2015.

The results of the analysis indicate that CSR-related compensation has a positive relationship to both financial performance and firm value. Consequently, I conclude that it does ‘pay’ to act socially and responsibly. Further, the findings of this paper suggest that the relationship between CSR-related compensation and financial performance and firm value is stronger in stakeholder-oriented countries than in shareholder-oriented countries. Both results are in line with my predictions.

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The reason I investigate whether financial performance and firm value are influenced is that I want to conclude whether incentivizing ‘doing good’ socially results into ‘doing well’ financially. My contribution to the current literature is that this paper investigates whether CSR-related compensation leads to different financial performance and firm value of companies that are listed in a stakeholder –or shareholder-oriented country. Further, the described distinction between stakeholder- and shareholder-oriented countries has not been examined in the current CSR-related compensation literature and could be a possible explanation as to why there are still non-conclusive results related to company performance.

In order to answer the research question, it is essential to begin by reviewing all relevant literature on CSR-related compensation, the difference between stakeholder- and shareholder-oriented countries and the relationships between CSR and financial performance and firm value. From this review, a conceptual model is designed. Following this model, the design and the setting of the research model is presented and analyzed. Subsequently, in the discussion section, the findings of this study will be further discussed and linked to the existing literature. Finally, the conclusion provides both theoretical and practical implications, limitations of this paper and suggestions for future research.

2. Literature Review and Hypothesis Development

First, the emergence of the CSR-related compensation is discussed. The bonus schemes of executives have attracted much attention since the 2008 financial crisis (Cai, Ho, & Pan, 2011). The bonuses that the executives received raised economic questions as well as ethical concerns by investors, regulators and commentators (Cai et al. 2011). Bogle (2008) and Posner (2009) claim that boards are too generous in compensating their executives. The short-term bonus that is linked to financial targets has become a symbol which intensifies irresponsible behavior by the executive and governance failure (Cai et al. 2011). Hahn, Kolk and Winn (2010) state that executives were rewarded for short-term objectives and could therefore bypass the long-term societal goals. Further, the executive bonuses encouraged executives to take excessive risk and cost-cutting actions which created the conditions for the global financial crisis. Ultimately, the financial crisis resulted in the economic regression (Lorsch and Khurana, 2010). The shareholder value and the financial performance were

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considered to be more important than the interests of the remaining stakeholders (Kolk and Perego, 2014).

Since the criticism related to the bonus schemes of the executives was a highly trending topic beginning in 2008, there was a growing demand to reform the current bonus system (Kolk and Perego, 2014). Kolk and Perego (2014) argue that in order to reform the bonus schemes, sustainable related incentives should be introduced. This led to a focus towards corporate responsibility (Kolk and Perego, 2014). Carroll (2004) stated that firms have both ethical and moral obligations to society. These obligations are expected to be met by the society in which the firm operates (Carroll, 2014). By including both social and environmental criteria in the executives’ compensation, firms indicated that they recognize societal and stakeholder considerations, while previously the traditional focus was on shareholder value (Kolk and Perego, 2014).

Mahoney and Thorn (2006) examined the impact that CSR-related compensation has on the socially and responsible actions of executives. They lagged the executive compensation structure for one year and found that the criteria to which the executives’ compensation is linked is an effective tool to encourage executives to engage in CSR. (Mahoney and Thorn, 2006). As stated earlier, if the total amount of monetary reward of an executive is dependent on the results of an action, the executive has an incentive to undertake such initiatives (Fabrizi et al., 2014). If an executive is compensated for taking the risk of investing in CSR, he is more likely to actually undertake such an initiative. According to the agency theory, the principals (shareholders) and the agents (executives) have divergent interests. In order to maximize the interests of the shareholders, incentive schemes, such as stock options for executives, are developed to reward the executives financially. The financial interests of executives and shareholders are thereby aligned (Jensen and Meckling, 1976). Based on this, it is important to note that in this paper I assume that the CSR-related bonus is an incentive for executives to take CSR-related actions. If a firm has a CSR-related incentive in its bonus scheme, it is highly likely that the executive will have a focus on CSR and its related investments and activities.

2.2 Stakeholder- versus shareholder-oriented countries

In this part of the paper, the distinction between stakeholder- and shareholder-oriented countries is made. I assume that the relationships between CSR-related compensation and

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firm performance is higher in stakeholder-oriented countries than in shareholder-oriented countries. The main reason I make this assumption is that since managing the relationships with a firm’s stakeholders is an essential part of CSR (Barnett, 2007), I expect that firms domiciled in stakeholder-oriented countries put more emphasis on meeting the demands of their stakeholders and thereby develop and maintain cooperative relationships. This is discussed in more detail in part 2.2.1 and 2.2.2.

2.2.1 Stakeholder-oriented countries

Simnett et al. (2009) found that stakeholders in stakeholder-oriented countries are seen by society as a group that has a legitimate interest in corporate activities. Stakeholders in these particular countries can use this legitimate interest as a tool to influence the activities of the company (Simnett et al. 2009). Freeman (1984) acknowledged that companies should take the interest of stakeholders into consideration since they can affect the accomplishment of the goals and success of the company. The stakeholder theory is the cornerstone for the CSR business case, and the theory highlights the importance of creating and maintaining relationships with the company’s stakeholders (Frieman, 1984). Stakeholder relationship orientation is according to Barnett (2007) an essential characteristic of CSR. Particular CSR-related initiatives are attempts to establish trust between the company and its stakeholders by creating cooperative relationships (Barnett, 2007). Jones (1995) argues that the established mutual trust and the cooperative relationship between the company and the stakeholder lead to a competitive advantage over companies that do not contract with their stakeholders. This competitive advantage is discussed in the section 2.3 financial performance and 2.4 firm value. Companies can use political lobbying or make campaign donations in order to establish relationships with stakeholders such as regulators, legislators and nongovernmental organizations (Barnett, 2007). These donations are made since it can strengthen their relationship with these stakeholders and eventually curry favor with the legislative and the regulating bodies (Hillman, Keim and Schuler, 2004). Stakeholders such as employees participate in the production process that directly affects the company’s profit (Marens and Wicks, 1999). Improving the working conditions could positively influence the productivity (Marens and Wicks, 1999). According to the stakeholder theory, executives serve their shareholders as well as their remaining stakeholders whereby the executives consider the various stakeholders’ claims. (Ricart, Rodriguez and Sanchez, 2005). Based on the stakeholder theory, a company has relations with a broad variety of stakeholder groups, namely: employees, competitors, consumers, environment, media, government, action groups,

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environmental advocates and others. For this reason, executives are seen as spokesmen for these stakeholders and as builders for coalitions among their external stakeholders (Freeman, 1984). Since CSR covers a wide range of areas such as employee relations, the community, environment, corporate governance and diversity of the workforce, CSR has received increasing attention since it could resolve problems between the stakeholders (Jensen, 2002). CSR is a powerful tool to solve these problems since the stakeholder theory states that a firm needs to consider the interests of all its stakeholders and tries to act in its most favorable way (Jensen, 2002). As a result, these firms face lower conflicts of interest between their managers and the stakeholders (Jensen, 2002). Cai et al. (2011) conclude that resolving the conflicts between managers and stakeholders and thereby improving relations with stakeholders leads to lower firm risk, since it is less likely that labor strikes and legislation risk occur. Therefore, I assume that firms in stakeholder-oriented countries take into consideration how their social and responsible behavior could affect stakeholders individually (Brown and Forster, 2013). Moreover, Chakravarthy (1986) argued that firms could be viewed as a set of interdependent relationships with their stakeholders. This is illustrated by the following example: if the desires of the consumers not are delivered the sales will drop. This negatively affects the present and future expectations of the firm, which leads to lower a stock price. The lower financial performance results into lower taxes that have to paid by the firm. This perfectly underlines the interdependence among the different stakeholders, namely when the desires of a stakeholder (consumer in this case) are not delivered this could negatively affect the rest of the stakeholders (Hillman and Keim, 2001). Based on the theory that the firms in stakeholder- oriented countries are more likely to take into account the interests of the various groups of stakeholders, the possibility of such negative events is lower than in shareholder- oriented countries.

Further, Smith (2005) found that companies in stakeholder-oriented countries are more likely to disclose information regarding CSR activities, relative to the companies in shareholder- oriented countries. CSR is used to strategically manage the relationships with stakeholders. According to Simnett et al. (2009), the demand for assurance on sustainability reports is also higher in stakeholder-oriented countries than in shareholder-oriented countries. This highlights the importance of CSR in stakeholder-oriented countries.

Based on this and on the stakeholder theory, it is highly likely that both stakeholders and firms in these countries find CSR important. Therefore, I expect that stakeholders agree that a CSR-related incentive is a justifiable incentive. I assume that stakeholders reward the firm for

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its efforts in undertaking CSR-related initiatives. Rewarding a company by, for example, buying its products (consumers) or by sticking at a firm (employees) ultimately leads to higher performance.

2.2.2 Shareholder-oriented countries

Shareholders are the firm’s suppliers of capital, and in return, shareholders have a property claim on residual earnings of the firm (Carroll and Shabana, 2010). The goal of a company in shareholder-oriented countries is to maintain their shareholders’ wealth whereby economic performance is perceived with great importance. The shareholder value maximization (SVM) model has somewhat fallen into disgrace since the financial crisis (Kolk and Perega, 2014). Creating shareholder value is a result and not the strategy of a firm. The SVM model focuses on short-term performance whereby the bonus system is structured by the principles (Kok and Perega, 2014). To reward executives on the short-term assumes that the principles lacked a long-term perspective. Since they are compensated for short-term performance, executives were unlikely to undertake actions for the long term and thereby neglect the long-term perspective. (Kolk and Perega, 2014). This underlines the importance of compensating executives for CSR-related actions, since otherwise they are unlikely to perform socially and responsibly.

In shareholder-oriented countries, companies are mainly seen as instruments which create value for their shareholders. According to Friedman (1970), the main desire is that a company should make as much money as possible, while the company should also conform to the basic rules of the society it operates in. These rules can be divided into laws and ethical expectations (Friedman, 1970). Explaining the social activities the firm undertakes is a challenge for managers, since these initiatives come at a cost to the shareholders and other investors (Brown and Forster, 2013). In shareholder-oriented countries, shareholders are seen as the most important group, while other stakeholder groups have less legitimacy. Since they are seen in these countries as less legitimate, companies take their interests less into consideration (Simnett et al. 2009). That explains why the remaining stakeholders in shareholder-oriented countries have less power to actually influence the activities that companies undertake (Bradley, Schipani, Sundaram and Walsh, 1999). Brown and Forster (2013) make a distinction between justice and beneficence and that it allows firms to choose which CSR-related initiatives are prioritized over other initiatives. This decision implies who should benefit from these CSR-related initiatives (Jones, 1991). Since the interests of the shareholders in shareholder-oriented countries are seen as very important, executives might

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undertake CSR-related initiatives which are not shareholder-value destroying. By prioritizing the interests of the shareholders over the interest of the stakeholders, executives might undertake CSR-related initiatives which are solely in favor of the shareholders’ wealth and thereby neglect the claims of the remaining stakeholders.

Neglecting the remaining claims of the stakeholders contradicts the stakeholder view whereby the firm takes into account relatively more claims of different stakeholders. CSR initiatives could be seen as value-destroying in the shareholder model. Investments in CSR could be a waste of valuable resources whereby it has no positive effect on the performance of a firm in the short term (Barnea and Rubin, 2010). In stakeholder-oriented countries, firms are more likely to consider the claims of the different stakeholders, while the shareholders’ claims in shareholder-oriented countries are prioritized. This clearly describes the contradictions between the priorities of different groups in stakeholder- and shareholder-oriented countries. In summary, I assume that a linkage of CSR-related compensation is more strongly appreciated in stakeholder- than in shareholder-oriented countries.

Simnett et al. (2009) made in their paper a distinction between stakeholder- and shareholder-oriented countries. For this research, I will make use of this distinction in order to determine if there is a difference in the relationship between CSR-related compensation and performance outcomes of firms that are listed in either of these countries. Regarding the stakeholder-oriented countries, I included the following: Germany, France, the Netherlands, Spain and Japan. On the other hand, these are the shareholder-oriented countries which will be included in this research, namely: the United Sates and the United Kingdom.

2.3 The effect of CSR-related compensation on financial performance

As noted earlier, I assume that the focus on and the corresponding investments/activities depend on whether an executive is compensated for it. Brown and Forster (2013) argue that engaging in CSR could reduce the costs and the risks of a firm. The firm builds a competitive advantage, enhances reputation and legitimacy and could also create synergies (Salazar and Husted, 2008). If a firm decides to perform CSR-related actions such as making contributions to a charity, this could positively influence the firm’s community image and eventually lead to higher sales (Brown and Forster, 2013). CSR can enhance the reputation of different stakeholders, namely customers, employees, suppliers and regulators (Berman, Wicks, Kotha and Jones, 1999). Being ‘good’ as a firm for a community by, for example, donating millions of dollars to medical drugs for people who suffer from river blindness and who are unable to

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buy the drug themselves, the firm Merck accepted the risk that it hereby decreased its operating profits (Brown and Forster, 2013). It was an ethical decision for this firm, but the question arises how far a company should go when the costs of a CSR-related action become significant and the outcome of these actions are unclear (Brown and Forster, 2013).

Based on the research of Agle, Mitchell and Sonnenfeld (1999), stakeholders such as employees, customers, governments and the media tend to have favorable responses to CSR initiatives. As discussed earlier, Jones (1995) argued that building these strong, cooperative relationships with stakeholders could be a competitive advantage related to competitors with weaker relationships. The following stakeholders and the positive effects these strong relationships with them could have on the financial performance of a firm are discussed next; employees, consumers, environment and regulators.

2.3.1 Employees

First, employees are seen as an incredibly valuable source to create competitive advantage (Berman, Wicks, Kotha, and Jones, 1999). Strong relationships can be created by, for example, improving employee working conditions. This lowers the costs related to absenteeism and turnover rates, training costs and recruitment (Johnson and Greening, 1999). Further, improved working conditions increases productivity, which leads to more commitment, employee effort and, eventually, employee loyalty to the firm (Berman et al. 1999). Besides, certain types of CSR may lead to more trusting labor relations. This could increase the retention rates of the employees and eventually decrease the total labor costs (Barnett, 2007). The reputation of being social and responsible attracts and retains high-quality employees with innovative capabilities (Turban and Greening, 1997).

2.3.2. Consumers

Other stakeholders of great importance to the financial performance of a firm are its consumers. The production of ecofriendly products that appeal to the wishes of consumers could create a competitive advantage (Dechant, Altman, Downing and Keeney, 1994). Further, making improvements related to the quality and the safety of the products could positively influence the perceptions of customers and improve the reputation of the company. CSR could also create unique products that positively affect the product’s differentiation factor in the market and thereby create a competitive advantage (Klassen and Whybark, 1999). This results in higher sales and therefore leads to higher financial performance (Waddock and Graves, 1997). The perceptions of customers related to the company and the strong, cooperative relationship may create consumer loyalty. Finally, the research of Janney

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and Gove (2011) concluded that the current working conditions of employees in a firm might influence consumers’ buying behavior. If a firm is seen as social and responsible with regard to its employees, this positively influences the firm’s sales.

2.3.3 Environment

As stated earlier in this paper, the environment is also an important stakeholder of a firm. When a company considers the effects it can have on the environment and thereby becomes proactive on environmental issues, this can benefit the company in several ways (Berman et al. 1999) Making investments in order to be more efficient regarding energy consumption drives down operating costs. (Russo and Fouts, 1995).

2.3.4. Regulators

Finally, regarding the relationships with regulators, Waddock and Graves (1997) found that a strong relationship with this stakeholder could result in tax advantages and reduced regulation. The associated costs would then be thereby reduced.

Based on this, it has become clear that investing in relationships with stakeholders such as employees, the environment, consumers, and regulators positively affects the financial performance of a firm. All of the abovementioned improvements lead to higher financial performance (Surroca, Tribo and Waddock, 2010).

The problem that arises when executives are compensated for CSR initiatives is that it could negatively decrease the shareholders’ wealth. As said before, the primary claim of legitimacy of the shareholders is that they are the owners of the firm (Brown and Forster, 2013). In order to maintain shareholders’ wealth, Friedman (1970) debated that economic initiatives should be prioritized over philanthropic actions under the shareholder-centric rubric.

Obviously, CSR principles are associated with costs. Firms might need to purchase environmentally friendly equipment, stricter quality controls may need to be implemented or the management structure may need to change (Christmann, 2000). Certain CSR initiatives such as protecting the environment while simultaneously reducing costs involve multiple learning processes, and new knowledge and new capacities need to be developed for these programs (Christmann, 2000). Another example is if a firm intends to change and upgrade the employee work environment, this means the current facility needs to be updated. This results in extra financial costs to the firm’s budget (Johnson and Greening, 1999). If CSR is

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implemented at a rapid pace, it will put heavy financial burdens on this firm in the short term while later enduring a slow payback period. For that reason, it is stated that short-term performance is compromised (Tang, Hulland and Rothenberg, 2012).

Given the numerous advantages that a stronger emphasis on CSR-related activities, as a result of the executive compensation, implies higher financial performance, I assume that these benefits outweigh the costs. Since this paper makes a distinction between stakeholder- and shareholder-oriented countries, I expect that firms domiciled in stakeholder-oriented countries are more likely to create and maintain strong and cooperative relationships with their stakeholders. On the other hand, I expect that firms domiciled in shareholder-oriented countries have weaker relationships with their stakeholders. Therefore, I expect that the relationship between CSR-related compensation and financial performance is stronger for firms in stakeholder-oriented countries than for firms in shareholder-oriented countries.

Summarizing the above arguments, I posit the following two hypotheses whereby the stakeholder-oriented variable is taken as the moderator:

Hypothesis 1: CSR-related compensation is positive as related to the financial performance of a firm.

Hypothesis 2: The positive relationship between CSR-related compensation and financial performance is stronger in stakeholder-oriented countries than in shareholder-oriented countries.

2.4 The effect of CSR-related compensation on firm value

There is an ongoing debate about whether CSR initiatives, as a result of a CSR-related incentive for the executive, is value-enhancing (Jo and Harjoto, 2011). Barnea and Rubin (2006) stated in their research that CSR initiatives should maximize firm value. Otherwise, it could be a waste of valuable resources and could eventually have the potential to be value destroying (Barnea and Rubin, 2010).

The prediction in this research is that firms which initiate CSR-related actions have a higher firm value than firms that do not engage in CSR. If the investments in CSR are not seen as a

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waste of scarce resources by the financial market, this could positively affect the firm value (Jo and Harjoto, 2011).

Barnett (2007) stated in his research that the impact of CSR on firm value depends on whether it could influence the stakeholders of the firm. Next, employees and consumers and the influences they could have on firm value are discussed separately.

2.4.1 Employees

Employees are another stakeholder which could have a significant impact on firm value. Moskowitz (1972) stated that firms should consider the working conditions and labor practices since they could improve productivity and reduce error rates. Besides, a company is seen as a more attractive employer when it is publicly known that it undertakes social actions. Employees perceive that the working conditions of the company are positive, and therefore the company is able to attract and maintain high-quality employees over their competitors. (Turban and Greening, 1997). Further, internal morale and commitment within the firm can be boosted by CSR initiatives (Godfrey, 2005). Attracting young and talented workers leads to a high-quality employee base. Since these employees are more skilled and have more abilities, the quality of their services increases which ultimately leads to higher organizational performance (Grow et al. 2005). Higher organizational performance contributes to higher firm value. Also, by maintaining their employees, the firm faces a lower turnover ratio (Tuban and Greening, 1997).

A case study regarding Taco Bell found that the sales and profits of the stores which are ranked with the lowest employee turnover were 55% higher than the stores with the highest employee turnover. Ultimately, this resulted in a higher firm value (Ballou, Godwin, Shortridge, 2003).

2.4.2 Consumers

Servaes and Tamayo (2013) focus in their paper on one of the key stakeholders, namely the consumers. In this paper, they describe the important role that consumers have in the creation of firm value. Consumers should be made aware of the CSR strategy of a firm to be influenced in their buying behavior. Their buying behavior influences the financial performance and ultimately also the firm value (Servaes and Tamayo, 2013). CSR efforts should, however, be in line with the reputation of the firm (Servaes and Tamayo, 2013). If a certain CSR-initiative is not in line with the current reputation of a company, consumers are less likely to respond positively to these CSR-initiatives (Schuler and Cording, 2006). These initiatives could actually lead to the opposite effect on the firm value. However, if a firm

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continues to engage in CSR-related activities, this could change the perceptions of the stakeholders and create firm value in the long term (Servaes and Tamayo, 2013).

Reputation building plays a significant role in the relation between CSR and performance of a firm (Luo and Bhattacharya, 2006). CSR is a powerful tool to increase customer satisfaction. An increase in customer satisfaction positively influences the financial returns of the firm. The higher the financial returns, the higher the firm value (Lu and Bhattacharya, 2006). When managers are aware that CSR is an effective tool which could have a positive effect on the performance of the firm, it is likely that executives undertake CSR-related initiatives (Houston and Johnson, 2000). When their bonus is dependent on certain CSR activities, managers are even more likely to undertake these actions.

In conclusion, to outperform competitors’ firms by creating firm value, firms should have resources that are valuable, inimitable and rare (Hillman and Keim, 2001). Resources that meet these criteria form the company’s reputation, long-term relationships with consumers and knowledge (Hillman and Keim, 2001). In this paper, the importance of company reputation is discussed; it is a valuable resource to attract and maintain both consumers and employees. Knowledge assets as a resource are dependent on the quality of the employees. As argued, if a company is considered to be act in socially and responsible ways, it is able to attract and maintain young, talented and skillful employees. Finally, this paper states the importance of strong and cooperative relationships among consumers. Loyalty among consumers results in continued participation and an ongoing and growing demand in the company’s products.

Based on the given arguments, I assume that CSR-related compensation encourages executives to undertake CSR-related initiatives. I expect that these initiatives have a positive effect on the firm value. Further, I assume that the same line of reasoning could be applied regarding the difference between stakeholder- and shareholder-oriented countries. I expect that the different interests of stakeholders are more seriously taken into consideration in stakeholder-oriented countries. By taking these various interests into consideration, firms are able to create and maintain strong relationships with their stakeholders. Strong relationships with, for example, employees and consumers ultimately leads to a higher firm value. Therefore I assume that the relationship between CSR-related compensation and firm value is stronger in stakeholder-oriented countries than in shareholder-oriented countries. This is

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formally stated in two hypotheses, whereby the stakeholder-oriented variable is taken as the moderator:

Hypothesis 3: CSR-related compensation is positively related to firm value.

Hypothesis 4: The positive relationship between CSR-related compensation and firm value is stronger in stakeholder-oriented countries than in shareholder-oriented countries.

Figure 1. Conceptual framework.

This figure represents the conceptual framework of this empirical study. CSR-related compensation is the independent variable, while financial performance and firm value are the dependent variables. I expect that CSR-related compensation is positively CSR-related to financial performance as well as to firm value. The stakeholder-orientation variable is the moderating variable. I expect that if a firm is listed on an index in a stakeholder- oriented country, this has a positive moderating effect on the relationship between CSR-related compensation and financial performance on the one side and firm value on the other side.

CSR-related

Compensation

Stakeholder-

Oriented Country

Firm Value

Financial

Performance

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3. Method Section

This paper intends to investigate the main effect of CSR-related compensation on financial performance and on firm value. Further, I analyze the moderating effect of stakeholder orientation on both relationships. For this research, I will rely on data from different but very reliable resources (Thomson Reuters Worldscope and Asset4). The data is directly obtained from these databases. To distinguish between the two countries in which the companies are listed, I used the findings of Simnett al. (2009). Their paper makes a distinction between code law countries and common law countries. Simnett et al.’s (2009) paper assumes that code law countries have a more stakeholder-oriented corporate governance, while common law countries are more shareholder-oriented. The findings of this paper are used in this research to determine if a company is listed in a stakeholder- or shareholder-oriented country (Simnett et al. 2009). Based on the paper of Simnett et al. (2009), I selected the following stakeholder-oriented countries: Germany, France, the Netherlands, Spain and Japan. These particular stakeholder-oriented countries are part of the sample, since these countries publish most frequently a separate sustainability report (Simnett et al. 2009). Therefore, I assumed that the firms in these countries are more likely to have CSR-related compensation in their bonus schemes.

On the other hand, the shareholder-oriented countries which are included in this research are the United States and the United Kingdom. The companies that have been selected are the largest companies from the stock exchange in a specific country. The companies located the US are for example the companies that are listed on the S&P 500.

The timeframe of this research is the period 2012 – 2015. I chose this period because after 2008, the bonus schemes of executives faced some significant changes. Since the CSR-related compensation emerged recently and not all the companies included it immediately, my research period starts four years later (Kolk and Perego, 2014). The ordinary least squared (OLS) (Servaes and Tamayo, 2013) regression is often used in related studies, and therefore this method is also applied for this paper (Aras et al. 2010). The OLS regression is used for hypothesis 1 and 3. To investigate the moderating effect of the stakeholder-oriented variable on the relation between CSR-related compensation and firm performance, I used the moderated regression analysis. This method is applied for hypothesis 2 and 4. To actually investigate which influences CSR-related compensation has on the performance of a

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company, the data of the CSR-related bonus variable is conducted from the period 2011– 2014.

The following models are specified to test the hypotheses: Hypothesis 1: 𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝑝𝑒𝑟𝑓𝑜𝑟𝑚𝑎𝑛𝑐𝑒 = 𝛼_! + 𝛽_! 𝐶𝑆𝑅 𝐶𝑂𝑀𝑃𝐸𝑁𝑆𝐴𝑇𝐼𝑂𝑁_!,!!!+ 𝛽_!𝑆𝑎𝑙𝑒𝑠_!,!+ 𝛽_!𝐴𝑠𝑠𝑒𝑡𝑠_!,! + 𝛽_!𝑙𝑒𝑣𝑒𝑟𝑎𝑔𝑒 + 𝛽5𝑛𝑜𝑛𝑒𝑥𝑒𝑐𝑢𝑡𝑖𝑣𝑒𝑠 + 𝛽5𝑏𝑜𝑎𝑟𝑑𝑠𝑖𝑧𝑒 + 𝑌𝑒𝑎𝑟𝐷𝑢𝑚𝑚𝑖𝑒𝑠 + 𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑦𝐷𝑢𝑚𝑚𝑖𝑒𝑠 + 𝜀_!,! Hypothesis 2: 𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝑝𝑒𝑟𝑓𝑜𝑟𝑚𝑎𝑛𝑐𝑒 = 𝛼_!+ 𝛽1 𝐶𝑆𝑅 𝐶𝑂𝑀𝑃𝐸𝑁𝑆𝐴𝑇𝐼𝑂𝑁𝑖, 𝑡 − 1 + 𝛽2𝑆𝑡𝑎𝑘𝑒ℎ𝑜𝑙𝑑𝑒𝑟 𝛽_! 𝐶𝑆𝑅 𝐶𝑂𝑀𝑃𝐸𝑁𝑆𝐴𝑇𝐼𝑂𝑁_!,!!!∗ 𝑆𝑡𝑎𝑘𝑒ℎ𝑜𝑙𝑑𝑒𝑟 + 𝛽_! 𝑎𝑙𝑒𝑠_!,! + 𝛽_!𝐴𝑠𝑠𝑒𝑡𝑠_!,!+ 𝛽6𝑙𝑒𝑣𝑒𝑟𝑎𝑔𝑒 + 𝛽7𝑛𝑜𝑛𝑒𝑥𝑒𝑐𝑢𝑡𝑖𝑣𝑒𝑠 + 𝛽8𝑏𝑜𝑎𝑟𝑑𝑠𝑖𝑧𝑒 + 𝑌𝑒𝑎𝑟𝐷𝑢𝑚𝑚𝑖𝑒𝑠 + 𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑦𝐷𝑢𝑚𝑚𝑖𝑒𝑠 + 𝜀_!,! Hypothesis 3: 𝐹𝑖𝑟𝑚 𝑣𝑎𝑙𝑢𝑒 = 𝛼_!+ 𝛽_! 𝐶𝑆𝑅 𝐶𝑂𝑀𝑃𝐸 𝑆𝐴𝑇𝐼𝑂𝑁_!,!!!+ 𝛽_!𝑆𝑎𝑙𝑒𝑠_!,! + 𝛽_!𝐴𝑠𝑠𝑒𝑡𝑠_!,! + 𝛽4𝑅𝑂𝐴, 𝑖, 𝑡 + 𝛽5𝑅𝑂𝐸𝑖, 𝑡, +𝛽𝑆𝑎𝑙𝑒𝑠𝑔𝑟𝑜𝑤𝑡ℎ, 𝑖, 𝑡 + 𝛽6𝑅&𝐷𝑖𝑛𝑡𝑒𝑛𝑠, 𝑖, 𝑡 + 𝛽7𝐶𝑎𝑝𝑖𝑡𝑎𝑙𝑖𝑛𝑡𝑒𝑛𝑠, 𝑖, 𝑡 + 𝛽8𝑒𝑣𝑒𝑟𝑎𝑔𝑒 + 𝛽9𝑛𝑜𝑛𝑒𝑥𝑒𝑐𝑢𝑡𝑖𝑣𝑒𝑠 + 𝛽10𝑏𝑜𝑎𝑟𝑑𝑠𝑖𝑧𝑒 + 𝛽11𝐴𝑢𝑑𝑖𝑡𝐶𝑜𝑚𝑚𝑖𝑡𝑒𝑒 + 𝑌𝑒𝑎𝑟𝐷𝑢𝑚𝑚𝑖𝑒𝑠 + 𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑦𝐷𝑢𝑚𝑚𝑖𝑒𝑠 + 𝜀_!,! Hypothesis 4: 𝐹𝑖𝑟𝑚 𝑣𝑎𝑙𝑢𝑒 = 𝛼!+ 𝛽1 𝐶𝑆𝑅 𝐶𝑂𝑀𝑃𝐸𝑁𝑆𝐴𝑇𝐼𝑂𝑁𝑖, 𝑡 − 1 + 𝛽2 𝑆𝑡𝑎𝑘𝑒ℎ𝑜𝑙𝑑𝑒𝑟 + 𝛽_!𝐶𝑆𝑅 𝐶𝑂𝑀𝑃𝐸𝑁𝑆𝐴𝑇𝐼𝑂𝑁_!,!!!∗ 𝑆𝑡𝑎𝑘𝑒ℎ𝑜𝑙𝑑𝑒𝑟 + 𝛽_!𝑆𝑎𝑙𝑒𝑠_!,!+ 𝛽_!𝐴𝑠𝑠𝑒𝑡𝑠_!,! + 𝛽6𝑅𝑂𝐴, 𝑖, 𝑡 + 𝛽7𝑅𝑂𝐸𝑖, 𝑡, +𝛽8𝑆𝑎𝑙𝑒𝑠𝑔𝑟𝑜𝑤𝑡ℎ, 𝑖, 𝑡 + 𝛽9𝑅&𝐷𝑖𝑛𝑡𝑒𝑛𝑠, 𝑖, 𝑡 + 𝛽10𝐶𝑎𝑝𝑖𝑡𝑎𝑙𝑖𝑛𝑡𝑒𝑛𝑠, 𝑖, 𝑡 + 𝛽11𝑛𝑜𝑛𝑒𝑥𝑒𝑐𝑢𝑡𝑖𝑣 𝑠 + 𝛽12𝑙𝑒𝑣𝑒𝑟𝑎𝑔𝑒 + 𝛽13𝑛𝑜𝑛𝑒𝑥𝑒𝑐𝑢𝑡𝑖𝑣𝑒𝑠 + 𝛽14𝑏𝑜𝑎𝑟𝑑𝑠𝑖𝑧𝑒 + 𝛽15𝐴𝑢𝑑𝑖𝑡𝐶𝑜𝑚𝑚𝑖𝑡𝑒𝑒 + 𝑌𝑒𝑎𝑟𝐷𝑢𝑚𝑚𝑖𝑒𝑠 + 𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑦𝐷𝑢𝑚𝑚𝑖𝑒𝑠 + 𝜀_!,!

The total number of observations was 4532. However, due to the fact that not all the companies provide information regarding the variables, I have excluded 2661 observations. This results in the total amount of 1871 observations.

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Next, I will discuss all the investigated variables, how these are measured and from which databases the data is collected.

3.1 Independent variable

Data on CSR-related compensation is obtained from the Asset4 database. This database provides information on whether a CSR-related bonus is included in executives’ bonus schemes. Some firms do not provide information about this sustainable or CSR-related bonus and are therefore excluded from this research. This database is often used for CSR-related researches (Sassen, Hinze, and Hardeck, 2016). CSR-related compensation is used as a dummy variable in this research. If a company includes CSR-related compensation in its bonus scheme, it is labeled as 1. If not, it is labeled as 0.

3.2 Dependent variables

To investigate the impact that CSR-related compensation has on the financial performance of a firm, I looked up in the literature which methods and which variables are most often used. Related to financial performance, return on equity (ROE) is used to measure the first dependent variable: namely, the financial performance of a firm. Aras, Aybars and Kutlu (2012) used accounting-based measures ROE to capture financial performance in their paper. To measure the second dependent variable, firm value, previous researchers (e.g., Hartzell and Starks, 2003) used Tobin’s Q, which is the market value of assets over the book value of assets. Both variables are obtained from the Worldscope database.

3.3 Moderating variable

I expect that the stakeholder and shareholder variable has a moderating effect on the relationship between CSR-related compensation and financial performance and firm value. This is a dummy variable. If a company is domiciled in a stakeholder-oriented country, it is equal to 1, while if a company is domiciled in a shareholder-oriented country, it is labeled as 0. Based on the findings of Simnett et al. (2009), I decided if a company is listed in a stakeholder- or in a shareholder-oriented country. Simnett et al. (2009) made a distinction between common law and code law countries. Code law countries have a stakeholder-oriented model, while common law countries have a shareholder-oriented model (Simnett et al. 2009). To illustrate, the UK is a common law country and has a shareholder-oriented model. To obtain information from firms traded on the UK stock exchanges, I used LFTSE100 as the stock exchange list. The Netherlands, on the other hand, is a code law country and has a

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stakeholder-oriented model. The data of Dutch companies is conducted from the firms traded on the AEX. A table with the various countries and the corresponding stock exchange lists are included in the appendix.

3.4 Control variables

Several firm characteristics, which are used in previous and related research, are included as control variables. All the financial-related control variables are obtained from Worldscope. The corporate governance variables are obtained from Asset4.

Researchers like Cai et al. (2011) used in their related paper firm size as a control variable, which is the log of total assets in US dollars. This control variable is included to account for size effects on firm risk. Previous research (e.g., Tang et al. 2012) indicated that larger firms adopt CSR more often. Total sales as a control variable is also often applied in related papers (Cai et al. 2011). The higher the sales, the bigger the company is likely to be, and the higher the possibility that the firm invests in CSR. (Tang et al. 2012). These control variables are used for both financial performance and firm value. Winsorizing is applied for both the total assets in US dollars and the total sales in US dollars to transform statistics and reduce the possibility of outliers. After I transformed these variables, I took the log and used these numbers in the regression analysis.

Another control variable, which is deemed important in related research for both financial performance (Nelling and Webb, 2009) and firm value (Hartzell and Starks, 2003), is leverage (Nelling and Webb, 2009). Leverage controls the impact of the capital structure of a company. Leverage is calculated as long-term debt divided by the total assets (Nelling and Webb, 2009).

Two specific control variables which will only be used for firm value as the dependent variable are the ROE and ROA as control variables (Harjoto and Jo, 2011). In previous and related research concerning firm value, these variables are often included as control variables. ROA is the operating income before depreciation, scaled by the book value of assets (Nelling and Webb, 2009). Where the ROE was used as the dependent variable for hypotheses 1 and 2, in the analysis of firm value it was used as a control variable.

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Lenox and King (2002) used in their paper capital intensity and sales growth as control variables to measure firm value. Capital intensity is measured as the capital expenses in a year divided by the total sales. Sales growth is measured as the proportional growth of sales in year t related to the sales in year t-1 (Lenox and King, 2002).

Further, R&D intensity is included as a control variable. Servaes and Tamayo (2013) argue that R&D expenses create value for a firm. Therefore, R&D intensity is used as a control variable in order to measure firm value. R&D intensity is measured as the R&D expenses divided by the total sales (Servaes and Tamayo, 2013).

Related to the governance mechanisms of a firm, the percentage of non-executives on the board of directors and the presence of an audit committee are often used in research where performance is the outcome dimension (Weir, Laing and McKnight, 2002). A significant representation of non-executives ensures that the actions of the managers are monitored and that they act in the best interests of their shareholders. Regarding the presence of an audit committee, Weir et al. (2002) found that the market reacted positively after an audit committee was established. Weir et al. (2002) also included board size as a control variable, which is also used in this research. The percentage of non-executives and board size are included as control variables for the analysis of financial performance, while for firm value I added audit committee next to these two variables as control variables. These variables are obtained from Asset4.

Finally, I have created both year dummies and industry dummies to control for years and for industries. A distinction is made for the following industries: oil and gas, basic materials, industrials, consumer goods, health care, consumer services, telecommunications, utilities, financials and technology.

4. Results Section

Table 1 presents both the mean and the standard deviations of the dependent, independent and control variables. Further, table 3 presents the correlation between the variables. The mean of the ROE is 24,68 and the mean of the firm value is 1,85. Finally, the mean of CSR-related compensation is 0,54. This indicates that 54% of companies actually include a CSR-related bonus system.

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Table 1. Descriptive statistics

Variable name Mean Standard Dev.

1. Stakeholder 0,35 0,477 2. CSR compensation 0,54 0,498 3. ROE 24,68 250,50 4. Tobin's Q 1,85 1,17 5. ROA 6,28 5,88 6. Sales in $ 27088085 49382923 7. Sales growth 14,12 110,67 8. Assets in $ 35764638 57559027 9. Leverage 24,81 14,36 10. R&D intensity 5,07 6,94 11. Capital Intensity 6,02 6,37 12. % of Non-Executive Board Members 68,72 31,37 13. Audit committee 0,86 0,351 14. Board Size 11,63 3,375 15. CSR * Stakeholder 0,000 0,498

The table presents summary statistics for the different dependent, independent and moderating variables used in the empirical study. Definitions, measurement, proxies and the source from which the data of the variable is obtained included in Appendix A.

Table 2 presents the Pearson correlations between the variables. The highest correlation is between total assets in US dollars and sales in US dollars, namely 0,721. There could be multicollinearity since the correlation is higher than 0,7. However, when I performed the regression, the variance indicator factor (VIF) is not higher than 10. Therefore, the regression analysis could be executed without difficulties.

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Table 2. Correlations of Variables

This table shows the correlations between the variables. The highest correlation is between the total assets in $ and the total sales in $, namely 0,721. Due to the fact that the variance inflation factor (VIF) for both variables is lower than 10, there is no multicollinearity.

Table 3 presents the findings related to the first two hypotheses; (1) the effect of CSR-related compensation on financial performance and (2) the moderating effect of a

stakeholder-oriented country. Column 1 presents the findings of the regression analysis with only the control variables included. Column 2 presents the findings of the first hypothesis while

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 1.Stake-holder 2.CSR compens ation -,271** 3.ROE ,049* -,071** 4.Tobin’ s Q 0,043 -,455** ,097** 5.ROA ,046 * -,415** ,111** ,546** 6.Sales in $ ,235** _,075** -0,023 -,283** -,142** 7.Sales growth 0,000 0,022 -_0,004 0,005 -_0,018 -_0,013 8.Assets in $ ,273** _0,031 -0,039 -,297** -,171** ,721* * -0,01 8 9.Leve-rage ,080** -,084** ,087** -_,102** -_,150** ,049* -0,01 5 ,102* * 10.R&D intensity -0,027 -,210** -_0,016 ,431** ,064** -,208* * 0,01 8 -,110* * -,200* * 11.Cap intensity ,114** -0,041 -0,016 -,083** -,082** -0,010 -0,02 8 ,158* * ,151* * -,117* * 12.%of nonEx. Board ,387** -,471** 0,041 ,306** ,264** ,104 * * -0,00 1 ,146* * 0,03₀ ,119 * * 0,02₁ 13.Aud. comm. ,276** -,378** 0,026 ,204** ,149** ,089 * * -0,01 3 ,116* * ,055* ,094 * * 0,03₇ ,568 * * 14.Board Size ,107 ** _,214** -0,017 -,152** -,129** ,409* * 0,00 8 ,414* * ,078* * -,161* * ,055 * ,148* * ,08 7** 15.CSR *Stakeh. ,516 ** _,348** -0,028 -,140** -,180** ,253* * 0,01 6 ,261* * 0,01 0 -,085* * 0,01 8 ,218* * ,11 9** ,2 69 **

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column 3 presents the findings of the second hypothesis. Both hypotheses include the same control variables.

As said, column 2 presents the findings related to the first hypothesis which stated that CSR-related compensation leads to higher financial performance. The adjusted R squared of the hypothesis 1 is 0,12 and the F value is 2,341. The coefficient indicates that CSR-related compensation is significantly and positively related to the financial performance of a firm (β =25,808, p=0,031). This finding supports the hypothesis and based on that, there is evidence to conclude that CSR-related compensation leads to higher financial performance.

The adjusted R squared of the second model is also 0,12 and the F value is 2,493. The coefficient related to hypothesis 2 indicates a significant and positive relationship between CSR-related compensation and financial performance, whereby the stakeholder-oriented country has a moderating effect on this relationship (β =21,474, p<0,1). Therefore, these findings indicate that hypothesis 2 may be accepted and that the stakeholder-oriented variable has a moderating effect on the relationship between CSR-related compensation and financial performance of a firm. In other words, the relationship between CSR-related compensation and financial performance is stronger in stakeholder-oriented countries than in shareholder-oriented countries. Concerning the control variables in this model, only board size seems to have no significant relationship.

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Table 3. OLS Regression analysis for hypothesis 1 and 2 (Dependent Variable: financial performance, ROE) Control Variables Coefficient estimate H1 Std. Error H1 Coefficient estimate H2 Std. Error H2 Constant 124,203* 157,641** 88,312 138,470* 89,060 Sales in $ 55,551** 56,874** 32,078 57,956** 32,087 Assets in $ (78,106)*** (84,024)*** 31,738 (83,224)*** 31,761 Leverage 1,719*** 1,693*** 0,427 1,604*** 0,431

Non ex. Board members 0,429** 0,286* 0,207 0,243* 0,246 Board Size -1,444 -1,259 1,947 -0,223 2,033 Stakeholder -27,572** 16,038 CSR compensation (H1) - 25,808** 13,817 49,650** 25,437 CSR * Stakeholder (H2) - 21,474* 52,718 Adjusted R squared 0,120 0,120 0,150 F statistics 2,341 2,493 2,428 Highest VIF 8,670 8,690 8,785 N 1871 1871 1871 1871 1871

This table shows the results from the OLS regressions of CSR-related compensation on financial performance (ROE) The dependent variable for hypothesis 1 and 2 is financial performance. Information related to the variables are provided in Appendix A. The first hypothesis is estimated with OLS. The second hypothesis is estimated with the moderated OLS. The stakeholder-oriented variable is the moderator in this model. The adjusted R-squared is the estimated regression model.

*** Correlation is statistically significant at level 0,01 (two-tailed) ** Correlation is statistically significant at level 0,05 (two-tailed) * Correlation is statistically significant at level 0,10 (two-tailed)

Table 4 presents the findings related to the third and fourth hypothesis; (3) the effect of CSR-related compensation on firm value and (4) the moderating effects of a stakeholder-oriented country. Column 1 indicates the regression analysis with only the control variables included. Column 2 presents the findings of the third hypothesis and the related control variables. The third hypothesis stated that CSR-related compensation leads to higher firm value. Finally, the adjusted R squared of the third model is 0,038 and the F value is 95,755. The coefficient related to the third hypothesis indicates a significant and positive relationship between CSR-related compensation and firm value (β =0,076, p=0,000). Based on this, I found evidence that hypothesis 3 may be accepted. This indicates that CSR-related compensation is positively

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associated with firm value. However, it should be noted that the coefficient is low, which implies that CSR-related compensation increases the firm value slightly.

The fourth hypothesis stated that the stakeholder-oriented variable has a moderating effect on the relationship between CSR-related compensation and firm value. The adjusted R squared of the fourth model is 0,569 and the F value is 95,675. The interaction term for this hypothesis is positive and significant. (β =1,595, p=0,000). Based on that, I found evidence that

hypothesis 4 may be accepted. This indicates that the stakeholder-oriented variable has a moderating effect on the relationship between CSR-related compensation and firm value. More specifically, there seems to be a stronger relationship between CSR-related

compensation in stakeholder-oriented countries than in shareholder-oriented countries. Concerning the control variables, all these variables seem to have a significant relationship in the third and fourth model.

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Table 4. OLS Regression analysis for hypothesis 3 and 4 (Dependent Variable: firm value, Tobin’s Q) Control Variables Coefficient estimate H3 Std. Error H3 Coefficient estimate H4 Std. Error H4 Constant 3,204*** 3,305*** 0,289 3,691*** 0,286 ROE 0,000** 0,000** 0,000 0,000** 0,000 ROA 0,088*** 0,088*** 0,003 0,078*** 0,004 Sales in $ 0,638*** 0,640*** 0,113 0,675*** 0,110 Sales Growth 0,053* 0,058* 0,000 0,068* 0,000 Assets in $ (1,079)*** (1,095)*** 0,111 (1,144)*** 0,109 Leverage 0,003*** 0,003*** 0,001 0,001** 0,001 R&D intensity 0,075*** 0,075*** 0,004 0,069*** 0,004 Capital intensity 0,013*** 0,013*** 0,004 0,013*** 0,003 % of Non-Ex.Board Members 0,005*** 0,004*** 0,001 0,002** 0,001 Board Size 0,000* 0,000* 0,006 0,014*** 0,006 Audit Committee 0,316*** 0,312*** 0,072 0,212*** 0,071 Stakeholder -0,329* 0,046 CSR compensation (H3) - 0,076** 0,044 0,731*** 0,084 CSR * Stakeholder (H4) - - 1,595*** 0,174 Adjusted R square 0,549 0,549 0,569 F test 99,681 95,755 95,675 Highest VIF 9,582 9,657 9,695 N 1871 1871 1871 1871 1871

This table shows the results from the OLS regressions of CSR-related compensation on firm value (Tobin’s Q) The dependent variable for hypothesis 3 and 4 is firm value. Information related to the variables are provided in Appendix A. The first hypothesis is estimated with OLS. The second hypothesis is estimated with the moderated OLS. The stakeholder-oriented variable is the moderator in this model. The adjusted R-squared is the estimated regression model.

*** Correlation is statistically significant at level 0,01 (two-tailed) ** Correlation is statistically significant at level 0,05 (two-tailed) * Correlation is statistically significant at level 0,10 (two-tailed)