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“Corporate governance and corporate

social responsibility decoupling: A test of

bundling hypothesis”

Abstract

Within the field of corporate governance and corporate social responsibility (CSR), the interests have shifted more and more towards CSR decoupling. CSR decoupling refers to the gap between the actual CSR performance and CSR disclosure, the communication towards the external environment of an organization. There is still a lot of ambiguity which corporate governance mechanisms are most important to make sure that organizations involve into the CSR related practices that are necessary in the rapid changing world of nowadays. Crucial seems the role of the board of directors. It is their responsibility to align the interests in such a way that the executives perform what they promise or communicate. Monitoring is one of the main elements in order to do this. This study analyzes which monitoring mechanisms are substitutive or complementary to each other in restraining CSR decoupling practices. We can conclude that no support is found for the substitutive effect of monitoring mechanisms. In contrast to this, support is found for the complementary hypothesis. Board gender diversity and board size seems to be a good combination in restraining CSR decoupling. Furthermore, this study shows that independence is not per se key within corporate governance related to CSR.

Daan Stam S3854191

d.d.stam@student.rug.nl

University of Groningen Faculty of Economics and Business

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Introduction

There is no doubt that corporate social responsibility (CSR) is a hot topic nowadays. Recently, several multinationals e.g. Danone and a unit of Unilever blew the whistle towards other multinationals. This reprimand concerned the attitude of companies like Apple and Amazon regarding the way they treat the planet (Wood, 2019). By raising the alarm, 30 American business leaders tried to strive for a more ethical way of operating by most big corporates. This example already shows that CSR plays a big role nowadays. Actually, CSR has become one of the main focus points for many organizations and their stakeholders (Sen and Cowley, 2013). CSR refers to corporate governance initiations towards social, environmental and ethical matters (Hawn & Ioannou, 2016).

Unfortunately, not all organizations perform their CSR initiations as proposed. Banerjee (2008) states that CSR initiations are a popular tool for “window dressing”. Window dressing demonstrates how supposedly committed a company is towards their responsibilities for society and environment. CSR is pre-eminently an element within a firm’s policy that lends itself easily to deceive external parties. This form of “window dressing” related to CSR is called decoupling.

Decoupling refers to not performing the policy or actions that were intended. Tashman et al. (2019) explains decoupling as the gap between CSR disclosure and CSR performance. CSR disclosure refers to the external actions of an organization. This is what an organization communicates towards the external environment. CSR performance is referred to as the internal actions and is about the actual CSR activities that an organization actually has undertaken (Hawn & Ioannou, 2016).

Crilly et al. (2012) translate decoupling into the question: “why do many firms not implement the policies that they adopt?”. By doing so, the external parties are satisfied but in reality, there is no modification in terms of the main activities. Therefore, academic interests recently shifted towards the decoupling effect of CSR practices. Still not much is known about CSR decoupling related to corporate governance behavior.

In order to make sure that the communicated CSR policy is executed properly and in line with the proposed intension, a crucial role lies within the board of directors. The board has the responsibility to align the interests of the executives with those of the stakeholders. According to agency theory, it is difficult to align the interests of the executives and the board of directors (Eisenhardt, 1989). The board of directors is responsible for monitoring the performance of the executives during daily practices. Monitoring is not always an easy task because of issues related to bounded rationality and information asymmetry (Ward et al., 2009). There are several monitoring mechanisms or elements that are frequently used e.g. the number of independent board members, board structure or board size (Hussain et al., 2018). Results regarding the impact of such monitoring mechanisms on aligning the interests of the executives and the owners of an organization are fragmented (Davidson et al., 2002; Yoshikawa & Phan, 2005). Even within organizations with a high degree of monitoring, it is still possible for managers to act in their own interests, due to information asymmetry (Ward et al., 2009). In addition, Sauerwald and Su (2019) state that still little is known about the influence of corporate governance bundles on CSR decoupling practices. Since monitoring is a substantial component of corporate governance bundles, it seems interesting to shed more light upon this matter.

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these issues. The focus of the current research lies with the influence of several monitoring mechanisms on CSR decoupling, and predominantly on whether these monitoring mechanisms are complementary or substitutive to each other. Existing research indicates that more monitoring mechanisms do not have to lead to a better firm performance for example (Jacobides & Croson, 2001). Besides this, some governance mechanisms are costly as well, which raises a question whether the benefits of multiple monitoring systems exceed the extra costs of implementing them (Schmidt & Spindler, 2002). In order to address these issues, the following main research question is formulated:

“To what extend are monitoring mechanisms complementary or substitutive in restraining CSR decoupling?”

The current study contributes towards corporate governance and CSR in both theoretical and practical ways. From a theoretical point of view, this study explores the relation between corporate monitoring mechanisms and CSR decoupling. The aim is to find if these monitoring mechanisms are complementary or substitutable for each other in restraining CSR decoupling. Previous studies found contradicting results regarding the influence of corporate governance mechanisms on CSR related practices (Graves & Waddock, 1994; Sethi, 2005; Oh et al., 2018; Hussain et al., 2018). Besides this, most studies focus on CSR performance or reporting instead of the decoupling part of this spectrum.

From a practical point of view, this study can help organizations by providing insights in which monitoring mechanisms are useful in restraining CSR decoupling. And especially whether these monitoring mechanisms are substitutable for each other, or whether they should be used in particular combinations. This may aid organizations in making trade-offs between the costs and benefits of such monitoring mechanisms (Zajac & Westphal, 1994).

The current study makes use of 3078 observations distributed over the years 2006 until 2017. Most of the data originates from The United states, but 33 other countries are represented as well. The data is received from Thomson Reuter’s ASSET4 database, Worldscope, and the Bloomberg database. A panel data regression has been conducted in order to find out the relationship between the several monitoring mechanisms and CSR decoupling.

After running the tests, only one combination of monitoring mechanisms indicated significant influence on restraining CSR decoupling, which supports the hypothesis of complementary effects. Monitoring mechanisms board gender diversity and board size are complementary in restraining CSR decoupling. Next to this finding, it seems that independence plays a crucial role in corporate governance as often referred to within literature.

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Theoretical background

Many studies have been conducted regarding the influence of corporate governance mechanisms on CSR (Oh et al., 2018). Even though it is widely supported that corporate governance mechanisms improve financial performance (Jensen & Meckling, 1976), it is still unclear if this also is the case for non-financial performance measures like CSR (Oh et al., 2018). Yet, CSR plays a major role within most companies because it is expected from the external environment e.g. stakeholders. As a result, communicating about CSR performance becomes increasingly important (Dhaliwal et al., 2012). However, studies claim that not all communicated CSR related actions or policies are actually performed as they were intended to do (Crilly et al., 2012).

Organizations and executive managers in particular, are willing to demonstrate decent CSR performances even though the actual performance may not be executed. It might happen that managers try to hide their unsustainable way of leading a company (Lyon & Maxwell, 2011). Possible argument for engaging into decoupling by executives may be a way to impress other corporates (Dhaliwal et al., 2011) or a way to secure their own jobs (Prior et al., 2008).

Another possible explanation for managers engaging into CSR decoupling may relate to a well-known agency problem; information asymmetry. Managers who are responsible for the daily practices are more up-to-date and that is why they can act more easily in their own interest. Fernández-Gago et al. (2018) argue that this agency problem can be reduced by decent CSR reporting.

According to Sauerwald and Su (2019), CEO’s are mainly focused on financial performance instead of CSR. This could be a cause for executives to engage into CSR decoupling related practices. According to Lyon and Maxwell (2011), decoupling practices can result in major problems when this comes to light, especially given the fact that CSR is one of the main focus points for most organizations (Sen & Cowley, 2013). It is assumable to state that this will hurt firm value, which means a direct loss for the shareholders. Therefore, it can be stated that decoupling practices can lead to agency issues.

According to the agency theory, several corporate governance mechanisms, such as monitoring, can be used to reduce these kind of agency problems.

Corporate governance

The agency theory describes the problems that occur when parties/people have to work together (Jensen & Meckling, 1976) and when there is a separation of ownership and control within an organization (Eisenhardt, 1989). The theory states that agency problems arise when (1) the goals or desires of the principal (i.e., shareholders) differ from those of the agent (i.e., executive directors) or (2) when it is expensive and difficult to control/monitor what the agent actually does (Eisenhardt, 1989).

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It is assumable that organizational outcomes are dependent on the effectiveness of the above-mentioned corporate governance bundles (Aguilera et al., 2008). This is because several corporate governance mechanisms are used within organizations and they all have a certain influence (Yoshikawa et al., 2014) which lead to different outcomes for an organization. To clarify, a high number of board meetings refer to an active board (Laksmana, 2008) and independence within a board is beneficial for the long-term which is needed for CSR (Jizi et al., 2014). These examples display that every certain (monitoring) mechanism has a different impact of its own. The way these monitoring mechanisms interact with each other is crucial (Ward et al., 2009). Because monitoring mechanisms are interrelated, it is important to analyze them as a bundled group (Desender, 2013; Yoshikawa et al, 2014). This is called the bundle approach (oh et al., 2018).

As mentioned above, a board uses different monitoring mechanisms to control daily practices. For example, this can be done by hiring an independent audit committee or by choosing for a certain board structure where the CEO takes place in the board or not. One of the reasons why a board monitors in different ways is because it is contingent. Some (combinations of) mechanisms are more efficient in a particular setting than others. This may depend on various matters such as ownership characteristics, which can differ in terms of type of shareholders (Desender et al., 2013). These ownership characteristics can be for example, (partial) governmental ownership or individual investors.

Since certain combinations of these monitoring mechanisms are more efficient than other combinations, one can consider these monitoring systems as complemental or substitutable to each other (Yoshikawa et al, 2014). Monitoring mechanisms are complementary when the marginal benefit increases in terms of organizational outcomes. For example, it is possible that the effect of board independence on CSR performance becomes increasingly positive in combination with a particular board structure. If so, it would be complementary, and it will increase firms (CSR) performance in the long term. The opposite applies to substitutive mechanisms. It will be less beneficial for the organizational outcome when several monitoring mechanisms are combined, while they do not have a complementary effect (Siggelkow, 2002). This means that combining these monitoring mechanisms will result in less (CSR) firm performance or that no difference is recognized. In this case, a trade-off between the costs and benefits should be made in order to make a proper decision which monitoring mechanism to use.

CSR

Even though CSR is a major topic nowadays, it has been researched since the 50s of the last decade (Carroll, 2008). CSR refers to social, moral and ethical responsibilities between organizations and their environment (David et al., 2005). Schultz et al. (2013) argue that an organization can communicate its role within a society through CSR, thereby demonstrating organizational legitimacy towards its stakeholders.

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which might be an incentive to engage in CSR. By doing so, the focus of organizations is more stakeholder orientated, rather than just creating value for the shareholders. Besides this, it seems to be beneficial for the long term to respond through CSR against pressures from these stakeholders (Clarkson, 1995; Eccles et al., 2014). When an organization takes interests of its stakeholders into account, a performance increase in the long term can be expected (Jensen, 2001). This better performance in the long term via CSR and maintaining the relations with stakeholders expresses itself via various ways. E.g. employees feel more engaged (Dutton et al., 1994), it leads to more knowledge sharing with suppliers, it gives more access towards international market, capital and investors and there is an increase in demand (Hawn & Ioannou, 2016).

These above-mentioned definitions and reasons for engaging into CSR are in line with the stakeholder theory of Freeman (1984). According to this theory it is beneficial to meet the needs of all stakeholders involved during the practices that are performed by any organization. Stakeholder theory is, even as the agency theory, a dominant theory that is being used to link corporate governance and CSR (Hussain et al., 2018).

The agency and stakeholder theory are also complementary to each other. The agency theory focuses at aligning the interests of the executive managers and the owners (shareholders) (Jensen & Meckling, 1978), whereas the stakeholder theory mainly is focused on aligning the interests of the stakeholders and the organization in particular (Freeman, 1984). Both theories discourage managements behavior in terms of just acting in their own personal interests (Michelon & Parbonetti, 2012). By combining these two theories, a holistic view is generated, thereby covering all aspects of the relationship between corporate governance and CSR. This shows the importance of decent corporate governance monitoring mechanisms to make sure the interests of all parties are fulfilled, and organizations do not run into decoupling activities.

CSR decoupling and corporate governance

Since CSR plays an important role within organization policies, and lies within the interest of their stakeholders, the communication of CSR becomes essential to actually succeed in CSR performance (Dhaliwal et al., 2012). When organizations communicate their CSR policy via official statements, stakeholder expectations rise, which leads to more pressure to put it in practical action (Christensen et al., 2013). This can result in managers hiding their practice of leading a company in a less sustainable or ethical way (Lyon & Maxwell, 2011). It happens on regular basis that companies do not always do what they have communicated or were intended to do (Crilly et al., 2012). Companies use their CSR communication to draw a “rosier” picture of their practices than actually is the case (Banarjee, 2008). This is called decoupling.

CSR decoupling can be considered as the difference between CSR performance and CSR disclosure (Tashman et al., 2019). CSR performance consist of the internal actions and refers to all CSR activities an organization undertakes (Hawn and Ioannou, 2016).The external actions are referred to by CSR disclosure. CSR disclosure is what an organization communicates, and all the initiatives a company performs which can be noticed by externals. A common way of communicating towards externals is done via CSR performance.

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refers to the policies companies wish to publicize and the actual implementation of this (CSR) policy. E.g. a company shows its intention towards their external environment, but their interests are mainly focused on different things which is not communicated. The second type of decoupling is called ‘means-ends decoupling’. Means-ends decoupling refers to the link between the implementation of a policy or program and the actual impact it has (Bromley and Powel, 2012). By doing so, companies can gain a good image or better status, while their actions do not add any value at all (Graafland and Smid, 2016).

According to Crilly et al. (2012), there are two reasons why organizations can engage into CSR decoupling. The first one is the high degree of several influences within firms regarding the policies that has to be followed. There are a lot of different and constantly changing pressures from external stakeholders, which makes it hard to respond appropriately towards every external influence. Besides that, most big corporates consist of multiple layers in terms of management teams, which can lead to an inconsistent way of implementing the strategy that has been communicated by the headquarters (World Bank, 2003). This means that decoupling does not have to be a coordinated preconceived practice which was intended to do.

The other reason of CSR decoupling can be information asymmetry (Crilly et al., 2012; Garcia-Sánchez et al., 2020), a well-known problem within the agency theory. The executives know more about the daily practices within their organization than board members, which makes it easier for the executives to operate in their own interests (Eisenhardt, 1989). This can lead to less CSR related actions then were intended. Since decoupling might arise from agency problems such as information asymmetry, it can be stated that, in order to restrain this CSR decoupling, monitoring by the board can play a crucial role.

Decoupling might arise to increase or protect the (self-)image of a company (Pratt et al., 2001), but decoupling does not only result in benefits. In fact, it can result in extra costs and other negative consequences, especially when companies are monitored closely by their stakeholders (Marquis and Qian, 2014). The same applies to companies who are operating in a competitive environment (Kim and Lyon, 2015). Besides that, when it turns out that a firm is guilty of decoupling, it can have disastrous consequences for a management team (Lyon and Maxwell, 2011). In addition, Garcia-Sánchez et al. (2020) provide evidence that CSR decoupling can destroy firm value and lead to a lack of stakeholder confidence.

Table 1 provides an overview of literature regarding corporate (monitoring) mechanisms and CSR related matters.

Table 1: Overview of prior research

Study Corporate governance

mechanism/independent variable

Dependent

variable Used theory Graves and Waddock (1994)

Coffey and Wang (1998) Kassinis and Vafaes (2002) Williams (2003)

Laux (2008)

CSP (+)

Independence (-) Independence (+)

Board gender diversity (+) Independence (+) Institutional investors CSP CSR CSR

CEO pay and turnover

Efficient market theory -

Agency theory -

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diversity (+), Independence (+) Environmental disclosure Agency theory Htay et al. (2012) Ben-Amar et al. (2013) CEO-chairman separation (.), board size (+), Independence (+) Board diversity (+/-) Environmental and social disclosure Firm performance Agency theory Agency theory

Janggu et al. (2014) Board size (+) Sustainability

disclosure Agency theory

Jizi et al. (2014) Independence (.), Board size (+), CEO-chairman separation (-) Sustainability disclosure Agency theory Garcia-Sanchez et al. (2014) Yoshikawa et al. (2014) Hawn and Ioannou (2016) Fernández-Gago et al. (2018) Independence (-) Interdependence governance mechanisms (-) CSR gap (-) Independence (+), board diversity (+) CSR reporting Decoupling practices Market value CSR reporting Agenda-setting theory Agency theory Neo-institutional theory Agency and stakeholder theory

Oh et al. (2018) Independence (-) CSR Agency theory

Hussain et al. (2018) Independence (+), CEO-chairman separation (-), board diversity (+), board meetings (+)

Sustainability performance

Agency and stakeholder theory

Sauerwald and Su (2019) CEO (+) CSR decoupling Agency theory

Garcia-Sánchez et al. (2020) CSR decoupling (-) Firm value Stakeholder and

disclosure theory + = positive, .= no significance, - = negative

Hypotheses development

In order to find out whether monitoring mechanisms are complementary or substitutive to each other, the current study selected the following frequently implemented monitoring systems: number of board meetings, board size, independence, CEO-chairman separation,

board structure and audit committee independence. .

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mechanism, board size, loses quality in terms of monitoring when the number of board members increases (De Andres et al., 2005; Kassinis and Vafaes, 2002). By taking this into account, it could be possible that increasing the number of board meetings is more efficient in restraining decoupling practices, than increasing the board size. If so, one could speak of a substitutable effect taking place.

Thirdly, CEO duality refers to the situation where the CEO is also member of the board of directors. The most frequently heard argument against CEO duality is that the CEO will take advantage by acting in its own personal interests (Fama & Jensen, 1980). This is in line with agency theory (Eisenhardt, 1989). According to Laux (2008), the monitoring role of the board is questionable when the CEO in particular has to control his/herself. This makes it likely that CEO duality needs to be combined with another monitoring mechanism to make sure the organization engages in CSR practices as they were initially proposed.

It could also be the case that CEO duality should be substituted by the fourth mechanism; board independence. Board independence refers to the number of outside directors. According to the stakeholder theory, more independence within a board is related to better CSR related practices. Jizi et al. (2014) add that independent directors lead to more transparency and a long-term view, which is essential for CSR. A similar way of thinking applies to the fifth mechanism, board diversity. For example, more women within the board seems to positively influence CSR practices in general (Williams, 2003). This makes it interesting to analyze whether board diversity and board independence together lead to less CSR decoupling or not. The sixth mechanism is audit committee independence. Such a committee is responsible for reporting financial processes and both internal and external audit results. Ward (2009) argues that committees are often vulnerable for agency problems which makes it difficult to monitor. Ward (2009) continuous that there are mixed results of the impact of committees. This makes it assumable that such a committee needs to be complemented in order to improve the monitoring practices which in the end should lead to less decoupling practices

Within existing literature, there are a lot of contradicting findings about monitoring mechanisms and whether combinations of these are complementary or substitutive. These fragmented findings will be discussed below, followed by the developed hypotheses concerning the effects of these monitoring mechanisms on CSR decoupling.

Complementary monitoring mechanisms and CSR decoupling

Several studies found a positive relationship between effective monitoring and CSR performance (Graves & Waddock, 1994; Sethi, 2005). Hussain et al. (2018) found evidence for a positive relationship between complementary monitoring mechanisms and decision making in terms of environmental and social related matters. Within their research, board independence, board diversity, the number of board meetings and the presence of a CSR committee has led to better monitoring practices. These findings are also in line with the agency and stakeholder theory that will be followed during this study.

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results is visible regarding the influence of outside directors on CSR performance. According to Coffey and Wang (1998), there is no relationship while Kassinis and Vafaes (2002) argue a positive relationship exists. Other studies found a similar positive influence of monitoring mechanisms, e.g. board size and CEO duality (Janggu et al., 2014; Jizi et al., 2014) but it remains unknown whether these mechanisms are complementary of substitutable to each other. It seems clear that there is still no unambiguously answer to which monitoring mechanism has its influence on CSR and CSR decoupling.

One way of approaching the issue regarding the amount of monitoring corporate governance mechanisms needed, is by making a calculation of the costs and benefits (Zajac & Westphal, 1994). It seems logical to assume that when more monitoring mechanisms are being used, the costs will increase as well. For example, Laux (2008) states that more independence is associated with a higher CEO pay. When the benefits of more monitoring mechanisms exceed these costs, it can be stated that mechanisms are complementary to each other (Schmidt & Spindler, 2002). Next to just taking the benefits and costs into account, it is also important to take other aspects in terms of effectiveness in consideration. Therefore, an analytical view is needed to determine the trade-offs a company has to make, thereby keeping goals of stakeholders in mind (Crouch et al., 2005).

Organizations that are actively involved into CSR practices, and operate in line with stakeholder theory, have to deal with a lot of external influences. As mentioned earlier, it is likely that these kinds of organizations engage into CSR decoupling (Crilly et al., 2012). Because of various external influences, there are a lot of contingencies that should be taken care of. Earlier research indicates that complementary mechanisms are needed when an organization has to cope with these external influences, simply because one monitoring mechanism cannot cover all contingencies (Aguilera et al., 2008), . This means that organizations operating in a dynamic environment with a lot of stakeholders’ interests, probably need multiple monitoring mechanisms. This leads to the hypothesis that there will be an effect of complementary corporate monitoring mechanisms on CSR decoupling.

Hypothesis 1: There will be complementary effects of corporate monitoring mechanisms on CSR decoupling.

Substitutive monitoring mechanisms and CSR decoupling

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board members (Fernando-Gago et al., 2018). Therefore, it is questionable if CSR policy and performances are better aligned, if extra monitoring mechanisms are added to this. For example, board diversity is recommended within corporate governance, but Ben-Amar et al. (2013) argues that this depends on the ownership structure. Besides this, but one could question its necessity in a situation where there is already a high number of independent board members present, which might be less dependent of the ownership structure.

Oh et al. (2018) state that corporate governance mechanisms function mainly as substitutes in CSR practices. This means that if an organization wants to excel in social and environmental performances, it should be critical in selecting corporate (monitoring) mechanisms. Following this line of reasoning, it is reasonable to argue that one monitoring mechanism should be enough to mitigate CSR decoupling practices, keeping in mind that corporate governance mechanisms are costly (Zajac & Westphal, 1994). This finding is in contrast with the above-mentioned arguments of Hussain et al. (2018), which again shows a knowledge gap regarding the influence of monitoring on CSR practices.

Within literature focusing on corporate governance bundles, evidence shows that a certain governance mechanism can lead to less efficiency of other governance mechanisms. E.g. the presence of monitoring mechanisms replaces the need for long-term incentives for CEOs (Zajac & Westphal, 1994), while CSR is considered as a long-term orientated subject. Besides this, within firms with few agency problems, increasing monitoring mechanisms is not needed to improve organizational performance (Randøya & Goel, 2003).

This taken into consideration leads to the hypothesis that there will be an effect of substitutive corporate monitoring mechanisms on CSR decoupling.

Hypothesis 2: There will be substitutive effects of corporate monitoring mechanisms on CSR decoupling.

Method

Data

The dataset used within this study consist of data from Thomson Reuter’s ASSET4 database, Worldscope, and the Bloomberg database. The data about CSR performance is received from ASSET4. ASSET4 provides environmental, social and governance (ESG) information which comes from global organizations. The data about CSR disclosure is received from Bloomberg. CSR performance and CSR disclosure together are used to determine CSR decoupling. Worldscope provides mainly financial market related information, which is used for the control variables.

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Variables

Within the current study, the dependent variable is CSR decoupling. CSR decoupling is measured according to previous studies of Tashman et al. (2019) and Garcia-Sánchez et al. (2020), by taking the difference between CSR performance and CSR disclosure. By subtracting the external performance (CSR disclosure) by the internal performance (CSR performance), the extent of decoupling can be calculated. If this number is positive, one can state that CSR decoupling is present because there is less actual performance than was communicated to externals. When the outcome is negative, it means that there is more actual CSR performance than was communicated to externals. In table 2, an overview and explanation of all variables taken into consideration is presented.

The current study makes use of six independent variables, which are the previously explained monitoring mechanisms. The first one is the number of board meetings. This is the number of meetings within one year. The second variable is the board size, which is expressed in the number of board members. Independence is a percentage of the outside directors compared to the total number of directors within the board. CEO-chairman separation is about if the CEO also takes place in the board. Within the data, yes means in this case that the CEO does not take place within the board. No means that the CEO plays a double role by taking place in the board as well. Board structure refers to the percentage of female directors within in the board. The independence of an audit committee is expressed as the percentage of (independent) outside directors within such a committee.

Next to the independent and dependent variables, control variables are included as well. This is done in order to take other influences into account that could affect the independent and dependent variable. These control variables are selected because of the impact it can have on CSR related practices. The first control variable is firm size. Larger organizations have to deal with more external influences which could lead to more CSR (decoupling) practices (Crilly et al., 2012). This is in line with the stakeholder theory. Firm size is measured by taking the natural logarithm of the total assets. This is one of the ways that is mostly used for measuring firm size within research (Dang et al., 2018). Another organizational characteristic that is taken into account is the organizational age. Earlier work indicates that organizational age has a positive influence on CSR (Chang et al., 2012).

As mentioned earlier, type of ownership is also important when it comes to corporate monitoring mechanisms’ efficiency. This is because monitoring mechanisms are contingent to their environment. The ownership characteristic has its influence as well (Desender et al., 2013). Therefore, the percentage of governmental and individual ownership is also taken into account as control variables.

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Table 2: Variable and definition/measurement explanation

Variable Definition/measurement Data Source

CSR decoupling The gap between CSR performance

and CSR disclosure

ASSET4 Bloomberg Number of board meetings The number of board meetings per year Worldscope

Board size The number of board members Worldscope

Independence A percentage of the number of outside

directors to the total number of board members

Worldscope

CEO-chairman separation Yes = the CEO does not take place

within the board

No = the CEO takes place within the board

Worldscope

Board structure A percentage of the number of female

directors within the board

Worldscope

Audit committee independence A percentage of the number of outside directors within the committee

Worldscope

Organizational size The natural logarithm of the total assets Worldscope Governmental ownership

Individual ownership

The percentage of strategic holdings of the government

The percentage of strategic holdings of employees or individuals

Worldscope

Worldscope

Organizational age The number of years an organization

exists

Worldscope

Financial performance The return on assets (ROA) Worldscope

Organizational slack Industry

Country Year

Current ratio and debt to asset ratio Based on the first two digits of SIC codes

Based on ISO country codes The particular year the data comes from Worldscope Worldscope Worldscope Worldscope Statistical test

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2006 till 2017, while the ASSET4 data had observations of 2002 till 2007. Therefore, all observations from before 2006 were removed. This reduced the number of observations drastically. Second, all observations with non-applicable in the independent, dependent or control variables were removed out of the sample. This reduced the number of observations to 3.078. Third, in order to make sure to get a normal distribution for the control variable of firm size, the natural logarithm was taken. By doing so, it is possible to limit the skewness because of the high values. Fourth, calculations were made in order to get the right variables that were needed. I.e. the CSR disclosure and CSR performance score had to be subtracted to get to CSR decoupling. Similar calculations were conducted for the current ratio, the debt to asset ratio and the organizational age. Fourth, to control for effects over time, country and industry dummy variables were constructed.

Since the dataset contains data from the years 2006 till 2017, the data was considered as panel data. Before statistical regression tests can be performed with panel data, it was important to check whether a fixed- or random-model was appropriate. This was done by conducting the Hausman test (Hausman & Taylor, 1981), via Stata. After running the Hausman test, a significant result was present, which meant that a fixed-model effect was more appropriate.

To test the complementary or substitutive effect between the corporate monitoring mechanisms, interaction terms were constructed. After the interaction terms were constructed, the panel data regression has been done to find out which interaction effects have a significant influence on CSR decoupling. After this, a simple slope test is conducted for the significant interaction effect. By doing so, it is possible to analyze the interaction effect in terms of a complementary or substitutive effect in restraining CSR decoupling. For example, a complimentary effect will be the case when independence still has its influence even though there is a high or low degree of board gender diversity. In order to find a complementary or substitutive effect, high and low degrees of these monitoring mechanisms had to be made. This was done by taking 1 SD above and 1 SD below the mean centered variables, which is in line with previous research (Garcia-Sánchez et al., 2020).

Results

In table 3, an overview is given of the descriptive and correlation statistics of the dependent, independent and control variables, except for the industry, country and year dummy variables. The mean of CSR decoupling is -33.65 and the standard deviation is 22.84 within this sample. Not all six corporate monitoring mechanisms were correlated significantly; NBM (r = .00, n.s.), BS (r = .19, p < .01), IND (r = .13, p < 0.01), CHS (r = .00, n.s.), BGD (r = -.18, p < 0.01), ACI (r = -.11, p < 0.05)

In table 4, an overview is given of the results of the multiple panel data regression and the interaction effects of the several corporate monitoring mechanisms on CSR decoupling. In the first model, only the control variables (including industry, country and year) and the monitoring mechanisms were taken into account. In model 2 until model 16 the interaction effects on CSR decoupling are included as well.

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is found for hypotheses 2 about the substitutive effects. A positive significant effect interaction effect was found between gender diversity and board size on CSR decoupling (!=.03, p<.001). A simple slope test was conducted, to check if these two monitoring mechanisms act as substitutes or as complements. The test indicated that there is a significant relationship between board gender diversity and board size when board size is high (simple slope = -.27, p < .001). The same applies for this relationship when the board size is low (simple slope = -.37, p < .001). This means that a complementary effect was present between board gender diversity and board size. This is also shown in figure 1 where a graph is drawn to display this the complementary effect. This result states that more gender diversity within a board helps restraining CSR decoupling in combination with a higher number of board members.

Figure 1

The complementary effect between board size and board gender diversity

Additional analyses

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16 Table 3

Descriptive Statistics & Correlations

Note: Correlations with ** are significant at the 0.01 level, correlations with * are significant at the 0.05 level. This is a two-tailed coefficient

test, with N = 3078. CSR = corporate social responsibility; CEO= chief executive officer

Variable M SD 1 2 3 4 5 6 7 8 9 10 11 12 13 1. CSR Decoupling -33.80 23.16 2. Number of Board Meetings 8.90 4.62 .00 3. Board Size 10.04 3.07 -.19** -.10** 4. Independence 80.12 15.59 -.13** -.05** .07** 5. CEO-Chairman Separation 0.41 0.49 -.004 -.12* .12** .03

6. Board Gender Diversity 14.47 11.37 -.18** -.04** .15** .17** .06**

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17 Table 4

Coefficients CSR decoupling

Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8

β SE β SE β SE β SE β SE β SE β SE β SE Constant 57,84*** 5.28 58.05*** 5.29 57.73*** 5.29 57.74*** 5.31 58.43*** 5.28 57.72*** 5.28 57.69*** 5.28 57.74*** 5.28 Control variables Organizational Size -4.09*** .32 -4.08*** .32 -4.09*** .32 -4.10*** .32 -4.10*** .32 -4.08*** .32 -4.06*** .32-.01 -4.09*** .32 Ownership by Government -.01 .06 -.00 .06 -.01 .06 -.00 .06 -.01 .06 -.01 .06 -.01 .06 -.01 .06 Ownership by Individuals .01 .03 .01 .03 .02 .03 .01 .03 .01 .03 .01 .03 .01 .03 .01 .03 Organizational Age -.05*** .01 -.05 .01 -.05*** .01 -.05*** .01 -.05*** .01 -.05*** .01 -.05*** .01 -.05*** .01 Financial Performance -.17*** .03 -.17*** .04 -.17*** .04 -.17*** .03 -.17*** .03 -.17*** .03 -.17*** .03 -.17** .03 Current Ratio .20** .08 .21** .08 .21** .08 .21** .08 .21** .08 .20** .08 .20** .08 .21** .08 Debt-to-Asset Ratio 10.26** 2.13 10.19*** 2.13 10.29*** 2.13 10.26*** 2.13 10.22** 2.13 10.34*** 2.13 10.30*** 2.13 10.27*** 2.13

Controlled for industry, country and time

Independent variables

Number of Board Meetings (NBM) .02 .09 .03 .09 .04 .09 .03 .09 -.01 .09 -.01 .09 .02 .09 .03 .09

Board Size (BS) -.62*** .17 -.62*** .17 -.62*** .17 -.62*** .17 -.61*** .17 -.61*** .17 -.68*** .18 -.61*** .17

Independence (IND) -.26*** .04 -.26*** .04 -.26*** .04 -.26*** .04 -.26*** .04 -.26*** .04 -.26*** .04 -.26*** .04

CEO-Chairman Separation (CHS) .39 .84 .40 .84 .39 .84 .38 .84 .23 .85 .34 .84 .35 .84 .39 .84

Board Gender Diversity (BGD) -.14*** .04 -.14*** .037 -.14*** .04 -.14*** .04 -.14*** .04 -.14*** .04 -.14*** .04 -.14*** .04

Audit Committee Independence (ACI) -.04 .02 -.04 .02 -.04 .02 -.04 .023 -.04 ,02 -.04 .02 -.04 .02 -.04 .03 Interactions NBM_ACI .00 .00 NBM_BS .00 .03 NBM_IND -.00 .01 NBM_CHS -.34 .18 NBM_BGD -.01 .01 ACI_BS -.01 .00 ACI_IND .00 .00

Note: Correlations with *** are significant at the 0.01 level, correlations with ** are significant at the 0.05 level. This is a two-tailed coefficient

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18 Table 4

Coefficients CSR decoupling

Model 9 Model 10 Model 11 Model 12 Model 13 Model 14 Model 15 Model 16

β SE β SE β SE β SE β SE β SE β SE β SE Constant 58.42*** 5.30 57.93*** 5.33 57.98*** 5.28 57.82*** 5.29 57.35*** 5.28 57.86*** 5.28 57.96*** 5.32 57.84*** 5.28 Control variables . Organizational Size -4.09*** .32 -4.09*** .32 -4.10*** .32 -4.09*** .32 -4.07*** .32 -4.10*** .32 -4.09*** .32 -4.09*** .32 Ownership by Government -.00 .06 -.01 .06 -.01 .06 -.01 .06 -.01 .06 -.00 .06 -.01 .06 .-01 .06 Ownership by Individuals .01 .03 .01 .03 .01 .03 .01 .03 .01 .03 .01 .03 .01 .03 .01 .03 Organizational Age -.05*** .01 -.05*** .01 -.05*** .01 -.05**8 .01 -.05*** .01 -.05*** .01 -.05*** .01 -.05*** .01 Financial Performance -.17*** .03 -.17*** .03 -.17*** .03 -.17*** .03 -.18*** .03 -.17*** .03 -.17*** .03 -.17*** .03 Current Ratio .20** .08 .21** .08 .20** .08 .21** .08 .20** .08 .21** .08 .21** .08 .21** .08 Debt-to-Asset Ratio 10.20*** 2.13 10.27*** 2.13 10.14*** 2.13 10.27*** 2.13 10.23*** 2.13 10.24*** 2.13 10.26*** 2.13 10.27*** 2.13 Controlled for industry, country and

year Independent variables

Number of Board Meetings (NBM) .03 .09 .02 .09 .03 .09 .02 .09 .01 .09 .03 .09 .02 .09 .02 .09

Board Size (BS) -.64*** .17 -.62*** .17 -.58** .18 -.62*** .17 -.56** .17 -.61*** .17 -.61*** .17 -.62*** .17

Independence (IND) -.26*** .04 -.26*** .04 -.27*** .04 -.26*** .04 -.26*** .04 -.26*** .04 -.26*** .04 -.26*** .04

CEO-Chairman Separation (CHS) .54 .84 .39 .84 .35 .84 .39 .84 -.29 .84 .43 .84 .39 .84 .38 .04

Board Gender Diversity (BGD) -.14*** .04 -.14*** .04 -.14*** .04 -.14*** .04 -.13*** .04 -.14*** .04 -.14*** .04 -.14*** .04

Audit Committee Independence (ACI) -.14*** .03 -.04 .02 -.04 .02 -.04 .02 -.05* .02 -.04 .02 -.04 .02 .04 .02

Interactions ACI_CHS -.04 .04 ACI_BGD .00 .00 BS_IND .01 .00 BS_CHS .02 .27 BS_BGD .03** .01 IND_CHS .06 .05 IND_BGD .00 .00 CHS_BGD -.00 .07

Note: Correlations with *** are significant at the 0.01 level, correlations with ** are significant at the 0.05 level. This is a two-tailed coefficient

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Discussion

The main goal of this study was to explore if there are any complementary or substitutable effects of six different corporate monitoring mechanisms on restraining CSR decoupling. For 14 out of 15 combinations no significant relationship was found. This means that there is no support for the hypothesis of substitutive effects. There is evidence found that supports the hypothesis for complementary effects. Board gender diversity and board size seems to be complementary to each other in restraining CSR decoupling. Despite of the fact that in most cases no significance was found does not automatically mean that this study does not give some meaningful, new theoretical and practical contributions.

The first remarkable finding concerned the mean i.e. -33.80 of CSR decoupling (table 3). The mean shows that organizations in general, have a higher CSR performance than they actual communicate towards their environment. This is in contrast with the idea that organizations often use their CSR communication to draw a more positive picture and get a better image (Prior et al., 2008), which is referred to as CSR decoupling. When such a situation occurs, information asymmetry works the other way around compared to how it was explained previously. According to Hawn and Ioannou (2016), such a gap between the internal and external actions is due to a misaligned of CSR actions. When an organization performs more internal than external actions, the external parties are not able to recognize the value that might be created via CSR. Hawn and Ioannou (2016) state that this could lead to a ‘disadvantageous situation’ for an organization and a decrease in market value.

This means that monitoring mechanisms should not only control the CSR policies being communicated. It seems just as important to focus on the communication about CSR performance, to make sure the external environment is aware of the internal actions. Apparently, the monitoring mechanisms that are taken into account during this study fail to do so. This is in conflict with the agency- and stakeholder theory, which argues that independence within a board should lead to better (CSR) disclosure. According to Garcia-Sanchez et al. (2014), this can be due to a limited influence of independent board members on CSR disclosure. Independent board members are not well suited or qualified in evaluating CSR related practices (Garcia-Sanchez et al., 2014). In most cases, this is not part of their responsibilities or expertise. By reasoning in this way, independent board members are wary to get involved into disclosure. They are afraid it might harm their reputation because they are not specialized in these kinds of practices.

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practices. Table 3 indicates that the individual effect of independence is negative (leads to less CSR decoupling), but this effect is weaker than the effect of board size or board gender diversity.

This last finding corresponds with the study of Oh et al. (2018), in which it is argued that independence should not be the primary focus within corporate governance mechanisms anymore. The focus should shift towards the interdependence among the various corporate (monitoring) mechanisms. This is in contrast with the main focus on independence within corporate governance, especially in terms of CSR related practices. It seems that still not much is known about which corporate (monitoring) mechanisms interact properly with each other and this study cannot give an unambiguous answer as well.

One possible answer is given above. Independent board members do not (always) possess the right qualifications or expertise in terms of CSR (Garcia-Sanchez et al., 2014). The consequence of this is that they are afraid of their own reputation when they use their superior position to get something done, which is not part of their own specialty. For example, CSR disclosure.

Even though the focus within this study was not on the individual effects of monitoring mechanisms, it is interesting to see that four of the six mechanisms, correlate significant in a way that it restrains decoupling. These mechanisms are the following; board size, independence, board gender diversity and audit committee independence. This finding indicates that monitoring in general has a positive effect in terms of less CSR decoupling. But it seems that these monitoring mechanisms on its own, or in combination with each other, are not sufficient in dismantling CSR decoupling practices. Therefore, this study is partially in line with most studies who argue that most corporate governance mechanisms have a positive influence on CSR (Hussain et al., 2018). Adding to this, it could be more decisive to operate with corporate governance bundles where incentive alignments are included. According to the agency theory, incentive alignments are a useful way in aligning the interests between executives and a board (Eisenhardt, 1989).

One of the monitoring mechanisms that could benefit from adding incentive alignments while restraining CSR decoupling is CEO-chairman separation. This variable does not have a significant influence, neither in combination with other mechanisms as individually. The mean of this variable is 0.41, which indicates that most companies within the sample make use of a construction where the CEO takes place in the board as well. Such a dual role is often associated with a more powerful position of the CEO within the organization (Sauerwald and Su, 2019). The agency theory argues that an CEO will always try to maximize its personal welfare. Sauerwald and Su (2019) add to this that CEO’s are mainly focused on improving the financial performance of the organization, instead of non-financial performances. It seems that the other monitoring mechanisms does not cover these shortcomings of CEO duality in such a way that it leads to a significant effect of restraining CSR decoupling practices. By introducing incentive alignments, next to monitoring mechanisms, the interests of the CEO possibly shift more towards CSR related practices instead of just focusing on the financial performance.

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practices and therefore it is not surprising that it also has its influence on restraining CSR decoupling. Besides this, Hussain et al. (2018) found evidence that board gender diversity, in combination with mechanisms e.g. independence and the presence of a CSR committee, leads to improved monitoring. The reason for this can be that adding more women to a board, result in different kind of knowledge and expertise because of other educational backgrounds and interests (Williams, 2003).

Even though there is a critical stream within research about board size (De Andres et al., 2005), other studies argue that boards with a higher number of members consist of more expertise and knowledge (Guest, 2009). Multiple board members could lead to better monitoring practices, also because workload per board member becomes reduced when more members are involved. Next to this, a bigger board size may imply that there is more space for feminine influence. A bigger board size, in combination with the above-mentioned arguments could be an explanation why these two monitoring mechanisms work as complements to each other in restraining CSR decoupling.

This finding brings us to the practical implication of this study, by stating that it is beneficial to invest in board members, preferably by adding women, with different educational backgrounds and expertise.

Adding more expertise, different educational backgrounds and knowledge is not just beneficial in restraining CSR decoupling. As is mentioned above, the reason why independent board members sometimes fail in CSR disclosure is because they do not possess the right knowledge. By adding this knowledge and expertise to a board, the gap between internal and external actions can be reduced, which is essential for the market value of an organization (Hawn and Ioannou, 2016).

Fifth, in contrast to the above-mentioned mechanisms, the number of board meetings has no influence on restraining CSR decoupling. Even though the individual effect was not significant (p = .09), this can be considered as remarkable and is in contrast to previous research. The agency theory argues that the number of board meetings indicates that more attention can be paid towards stakeholders and recent research have shown that this has positive influence towards CSR related practices (Jizi et al.,2014; Hussain et al., 2018).

Conclusion, limitations and future research

This research shows that putting in place the right corporate monitoring mechanisms is not an easy task. It might by tempting to use as many monitoring mechanisms as possible to restrain CSR decoupling practices. In fact, this study shows no evidence that combining several monitoring mechanisms automatically means that less decoupling occurs. This means that there is still some ambiguity regarding which monitoring mechanisms could be combined in order to restrain CSR decoupling, except for one combination. To increase the marginal benefit, it is wise to invest in more diversity within a board. This could be implemented by adding more feminine influence. It seems to be important to have various educational backgrounds, interests and expertise within a board. It is likely that women possess these characteristics and are more CSR focused in general, which in the end is expected lead to less CSR decoupling practices.

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governance. Also, the idea that most organizations try to create a “rosy” picture by using excessive CSR communication should not be fallen for to easily. Instead, more attention should go out to the ways of communicating actual CSR performance in order to make sure organizations do not miss out the credits they deserve.

The current study also has its limitations, which in turn opens up opportunities for future research to delve into the interesting but complex field of complementary and substitutive effects on corporate governance mechanisms. The first limitation concerns the dataset. The data that is used to calculate the gap between CSR disclosure and CSR performance comes from two different data providers. As a result, a lot of observations had to be removed in order to match the scores properly. Even though both data providers use comparable data indicators, there are small differences since the data are not gathered or weighted in exactly the same way.

Besides this, the data consists for a big part of US based companies. It is clear that culture has a certain impact on corporate governance related practices. For example, within US firms it is more common to work with incentives for managers to align the interests compared to European countries such as The Netherlands (Jansen et al., 2009). This means that less monitoring might be needed or is used to make sure the executives take care of all CSR related policies and could have had its impact on the results. This opens doors for future research to focus on just one country or continent. By doing so, less cultural differences within a sample will be present, which gives a clearer or more specific image of which monitoring mechanisms are suited for restraining CSR decoupling.

A similar conclusion can be drawn regarding the different industries that were included within this study. These industries have to deal with varying external factors and contingencies. Organizations within the manufacturing industry have other factors or institutions to be taken into account, than organizations within the retail industry for example. According to the stakeholder theory, these external factors play a major role for organizations in developing their (CSR) policy and behavior. This could have led to a less unambiguity answer which monitoring mechanisms together are the perfect fit or work as substitutes. By conducting the same research within a particular industry, more clarity can be created.

Another limitation is the time span of the data. The sample that is being used contains observations from 2006 till 2017. Within this time period, the world has faced an economic crisis, as well as economical glory days. It is generally known that in times of economic crisis organizations scrimp on CSR expenses (Garcia-Sanchez, 2014), which lead to different CSR policy and behavior. This may give a distorted picture of the CSR data.

Before the actual regression could be conducted, a Hausman-test was done in order to find out if the fixed- or random effect model was more appropriate. The methodological limitation is that the test showed that the fixed effect was appropriate in this case, but subsequently no relationships were found. Therefore, the decision is made to run the random effect model while the industry, country and year dummies where included as control variable. From a methodological perspective this was not the ideal way.

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also possible to include incentive alignments. By doing so, corporate governance mechanisms are more broadly covered, since incentive alignments are also used to align the interests (Eisenhardt, 1989). A recent study regarding bundling monitoring mechanisms and incentive alignments found mainly substitutable effects (Oh et al., 2018). In the study of Oh et al. (2018) just one of the monitoring mechanisms that is being used within this study was included (independence). This opens doors to link the other monitoring mechanisms to incentive alignments in order to find complementary or substitutive effects.

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