The effect of the audit committee and
its characteristics on CSR decoupling
Arjen Kuipers, S3531031 University of Groningen
Abstract
Based on the agency theory, this study investigates the effect of audit committee characteristics on CSR decoupling. CSR decoupling can be described as the misalignment between CSR performance and CSR reporting. Research shows that CSR decoupling leads to lower firm value which is the complete opposite of the objective of the shareholders. Decoupling behavior by managers is possible because of information asymmetry between the managers and stakeholders. The audit committee can solve this agency problem by monitoring effectively and creating transparency. Based on a worldwide sample of 6,266 firm-year observations for 1,501 different listed companies in 41 different countries, I found that larger audit committees with a higher percentage of female members have a negative effect on CSR decoupling. In addition, audit committees consisting of on average older aged and longer tenured members have a negative effect on CSR decoupling as well. This negative effect of these characteristics results in a smaller gap between CSR performance and CSR reporting. I did not find significant evidence that an independent audit committee has a negative effect on CSR decoupling. This study contributes to the literature by linking the audit committee to CSR decoupling, thereby broadening the understanding of the determinants of CSR decoupling.
Keywords: CSR decoupling, Audit committee, CSR performance, CSR reporting, Corporate governance, Agency theory.
MSc Management Accounting and Control January 20, 2020
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INTRODUCTION
In the last couple of decades, “corporate social responsibility” (CSR) has become more important due to “growing institutional pressures for responsible practices, community involvement, increased transparency, higher labour standards, reduced greenhouse gas emissions, and many other environmental causes” (Hawn & Ioannou, 2016, p. 2569). However, literature about CSR started to show up from 1950 and the construct of CSR dates back to the 1930s and 1940s (Carroll, 1999). According to Bowen (1953), the hundred largest companies had so many power that their actions and decisions had influence on the lives of citizens. He defined CSR as “the obligations of businessmen to pursue those policies, to make those decisions, or to follow those lines of action that are desirable in terms of the objectives and values of our society” (Bowen, 1953, p. 6). This definition of CSR has not changed that much over time. McWilliams & Siegel (2001) described it as actions that are not required by law and are beyond the interest of the firm but are undertaken to do something good for society.
One of the goals of CSR is making companies not only responsible for their own profits but also for their stakeholders and the environment (Aguinis & Glavas, 2019). According to Boiral (2013), CSR is a way of informing stakeholders about the social and environmental impact of business activities. Another goal of reporting on CSR is taking away information asymmetry and thus agency problems between managers and its stakeholders, like customers, governments, institutional owners, suppliers, and employees (McWilliams & Siegel, 2001). Furthermore, in the literature researchers predominantly agree that it pays to be sustainable (Kim, Kim, & Qian, 2018; Waddock & Graves, 1997). Although the goals of CSR are clear, many studies found that CSR is more of improving a companies’ image and social legitimacy (Duchon & Drake, 2009). Banerjee (2008) even states that CSR is nothing more than window dressing. Furthermore, companies only adopt CSR when it fits in their strategic interests, and it is only done to uphold competitors an ideal image (Graafland & Smid, 2019; Harrison & Freeman, 1999).
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This pressure for a company to gain social legitimacy from stakeholders on the one hand and serving internal needs for efficiency and profits on the other hand might lead to decoupling behavior of companies (Cho et al., 2015; Meyer & Rowan, 1977). CSR decoupling can be defined as “the condition of full divergence among policies, programs, and impacts amounting to purely ceremonial CSR” (Graafland & Smid, 2019, p. 231). Tashman, Marano and Kostova (2019) describe CSR decoupling as the gap between CSR performance and CSR disclosure and Hawn and Ioannou (2016) describe it as the gap between internal and external CSR actions. An example of CSR decoupling could be the investment of 32 million USD by British Petroleum (BP) in a new beyond petroleum brand in 2000. Greenpeace showed later that this was more about showing good intentions instead of actually investing in renewable energy (Visser, 2011). Still, little research has been done about the determinants of CSR decoupling and about CSR decoupling in general, while according to Graafland & Smid (2019), the whole concept of CSR may become redundant when CSR has no observable impact on society anymore.
CSR decoupling is especially tempting in the absence of effective monitoring mechanisms (Greenwood & Hinings, 1996). In case of CSR decoupling, there is clearly a problem of information asymmetry between the stakeholders and the management (Spence, 2002). This might result in agency costs which reduces the value of the firm (Tashman et al., 2019). According to the agency theory, one way to solve information asymmetry and agency costs is monitoring by the board of directors and its committees (Eisenhardt, 1989). In this paper, I have investigated the characteristics of the audit committee because the goal of monitoring mechanisms to solve information asymmetry between managers and stakeholders is especially important for investors and financial intermediaries (Greenwood & Hinings, 1996). Furthermore, according to Appuhami & Tashakor (2017), the audit committee is one of the most important governance mechanisms. The Enron and WorldCom fraud and other financial misconducts showed that the audit committee has an important task in monitoring the reliability of reports for stakeholders, together with managers and external auditors (Thiruvadi & Huang, 2011). The audit committee monitors the financial and non-financial reports and tries to minimise information asymmetry (Karamanou & Vafeas, 2005). Because of the importance of the audit committee, and the demand for more research into the determinants of CSR decoupling by Graafland and Smid (2019), together with the future research direction into the role of the audit committee in CSR performance as suggested by Hussain, Rigoni & Orij (2018), I answered the question how the composition of the audit committee affects CSR decoupling. The characteristics I have hypothesized are size, independency, gender diversity, tenure, and age. According to Bédard, Coulombe & Courteau (2008), all these audit committee characteristics will have an impact on financial and non-financial disclosures of a firm.
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scores. CSR performance scores are based on ESG ratings which consists of environment, social and governance scores. CSR reporting scores are based on the intensity of CSR reporting of a company. The misalignment between CSR performance and CSR reporting can be seen as CSR decoupling. As been done in previous studies, I have used control variables that can influence CSR decoupling as well. The control variables I have used in this research are firm size, firm performance, leverage, board independence, board size, R&D intensity, capital intensity, CEO duality, organizational slack, and analyst coverage (Appuhami & Tashakor, 2017; Graafland & Smid, 2019; Hawn & Ioannou, 2016; Tashman et al., 2019). In addition to the original test, I have performed an additional analysis to test dimensional decoupling. In this way I was able to determine whether the audit committee characteristics only had influence on CSR decoupling as a whole or also on environmental and social decoupling separately. To test the hypotheses, I have used a sample of 6,266 firm-year observations for 1,501 different listed firms from 41 different countries worldwide. The year span I investigated ranged from 2006 till 2017 and I included firm, year, and industry fixed effects. The data to measure CSR decoupling were retrieved from Thomson Reuters ASSET4 and Bloomberg, and the audit committee data was retrieved from BoardEx. The control variables were retrieved from Thomson Reuters ASSET4 and BoardEx.
This paper makes two contributions to the literature. First, this is the first paper that explores the effect of the audit committee characteristics on CSR decoupling based on a large worldwide sample for the years 2006-2017. Both audit committee characteristics and CSR decoupling have been explored independently but there are no studies that have linked these topics. Secondly, this study expands the knowledge of CSR decoupling and its determinants which is underexplored at the moment according to Graafland & Smid (2019).
In this research I hypothesized that audit committee size, independence, gender diversity, tenure, and age will have a negative effect on CSR decoupling. This negative effect indicates a smaller gap between CSR performance and CSR reporting. I found evidence that a larger audit committee and a higher percentage of women on the audit committee will have a negative effect on CSR decoupling. Furthermore, an audit committee with longer tenured and older members will have a negative effect on CSR decoupling as a whole, and on environmental and social decoupling separately as well. Additionally, the control variables showed that larger firms that are performing well and that are monitored by an independent board are decoupling less. On the other hand, firms that are highly visible due to high analyst coverage are decoupling more.
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LITERATURE REVIEW AND HYPOTHESES
Literature review
CSR policies and actions are becoming more and more important, and as a result of this, more companies start adopting CSR policies like ISO certifications, codes of conduct, and stakeholder initiatives (Graafland & Smid, 2019). An important reason for this shift towards CSR compliance comes from the increased pressure of stakeholders (Chen & Wang, 2011). Besides that, previous studies found that CSR policies and actions will lead to a competitive advantage for companies due to the generation of valuable firm resources (Choi & Wang, 2009; McWilliams & Siegel, 2001). This increased pressure of stakeholders to be socially responsible, together with the possible competitive advantage can result in decoupling behavior of companies. CSR decoupling can be described as the misalignment between internal CSR performance and external CSR reporting (Tashman et al., 2019).
Some potential benefits of CSR decoupling can be that socially responsible companies have better investment opportunities (Sen, Bhattacharya, & Korschun, 2006), are more attractive to employees, and are better able to retain employees (Greening & Turban, 2000). Moreover, firms that are decoupling have better access to capital, and companies that implement CSR policies have better firm performance (Orlitzky, 2008; Saeidi, Sofian, Saeidi, Saeidi, & Saaeidi, 2015). On the other hand, Hawn and Ioannou (2016) found that CSR decoupling is associated with lower firm value due to a wider gap between internal and external CSR actions.
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Following the agency theory, one way to solve this information asymmetry and reduce agency costs is implementing effective corporate governance mechanisms, like monitoring by the board of directors and its committees (Eisenhardt, 1989). Besides that, the agency theory implies that effective corporate governance mechanisms improve a firms’ legitimacy (Michelon & Parbonetti, 2012). The board of directors makes sure that the interest of the shareholders are guaranteed (Fama & Jensen, 1983). According to King, Lenox & Terlaak (2005), boards can serve as a third party to communicate compliance and give their certification. Furthermore, CSR decoupling can be reduced when the responsibility for CSR reporting is shifted towards the board of directors, consisting of committed board members (Graafland & Smid, 2019). Committed board members will have a positive effect on decreasing decoupling because they will not be satisfied with decoupled communications which in the end stimulates employees to reach their social responsible goals (Waldman, Siegel, & Javidan, 2006). As mentioned before, CSR decoupling is more tempting in situations without monitoring mechanisms (Greenwood & Hinings, 1996), and sometimes organizations deceive its board of directors in their monitoring task (Egels-Zandén, 2007). Another reason that the board of directors can solve the CSR decoupling problem is that the allocation of CSR programs to the top level of the company gives a strong signal to the stakeholders that the company is really committed to CSR. This will lead to increased legitimacy, and the company will maintain this by making sure that their commitment to CSR results in CSR impact (Graafland & Smid, 2019). Based upon the above, the agency theory accentuates the importance of the monitoring role of the board of directors to decrease CSR decoupling at the management level. In addition to that, this monitoring role of the board will result in more transparency which will decrease decoupling possibilities (Halme & Huse, 1997). In this research, I focus on one specific committee of the board of directors, the audit committee.
The audit committees’ main tasks are minimising information asymmetry between management and stakeholders, and monitoring the financial and non-financial reports (Karamanou & Vafeas, 2005). According to Kolk & Pinkse (2010), the audit committee has to make sure that companies take responsibility for long-term environmental, economic and social impact on stakeholders. The audit committee is seen as the most important governance mechanism which makes sure that the firm is transparent and credible for its activities (Appuhami & Tashakor, 2017). Following this stream of literature, the main task of the audit committee is creating transparency which minimises the information asymmetry between management and stakeholders. Therefore, the information asymmetry resulting from CSR decoupling can be reduced by the audit committee.
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Hypotheses development
The Sarbanes-Oxley Act from 2004 states that American listed firms have to appoint an audit committee and according to this act, the audit committee must consist of independent directors with at least one director who is a financial expert (Rockness & Rockness, 2005). Adding to this, the Blue Ribbon Committee (BRC) (1999) recommends a minimum size of the audit committee of 3 members and according to the National Association of Corporate Directors (NACD) the size of the audit committee should be limited to 6 members (NACD, 2000). Following the literature, large audit committees will improve the monitoring quality and thus reduce CSR decoupling because they have more status and power within an organization (Kalbers & Fogarty, 1993), and they have access to more valuable resources (Pincus, Rusbarsky, & Wong, 1989). According to Bédard et al. (2004), large audit committees have “the necessary strength, diversity of expertise and views to ensure appropriate monitoring” (p. 18). Guest (2009) argues that more diversity in expertise will result in more qualitative advice. Based on the agency theory I therefore expect that larger audit committees are better able to monitor the managers which will decrease information asymmetry and thus have a negative effect on CSR decoupling. Therefore, the first hypothesis is stated as follows:
H1: Larger audit committees have a negative effect on CSR decoupling.
When we look at the independence of the audit committee, the Sarbanes-Oxley Act states that all the audit committee members should be independent outside directors (Rockness & Rockness, 2005). A director is independent when he or she has no ties with the firm and is only paid for director services (Zhang, Zhou, & Zhou, 2007). From the literature we see that audit committee independence is seen as an important factor for effective controlling by the audit committee. Pucheta-Martinez and De Fuentes (2007) found that “an audit committee formed exclusively of external and independent directors would result in better accountability and transparency for organizations” (p. 308). Besides that, independent audit committee members are better able to make independent decisions without influence from the company, which enhances the credibility of the financial and non-financial reports (Mangena & Pike, 2005; Pucheta-Martınez & De Fuentes, 2007). Collier and Gregory (1999) found that insiders on the audit committee have a negative impact on the activity of the audit committee. From an agency perspective a more effective monitoring process as a result of an independent audit committee will protect stakeholders from opportunistic behavior of the management (Jing Li, Mangena, & Pike, 2012). Therefore, I expect that an independent audit committee will have a negative effect on CSR decoupling because of the effective monitoring role of an independent audit committee. Hypothesis 2 is therefore stated as follows:
H2: An independent audit committee has a negative effect on CSR decoupling.
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monitoring and oversight function (Stewart & Munro, 2007). Following the agency theory, better monitoring and oversight will lead to better financial reporting quality which in the end will lead to less manipulation, fraud and earnings management (Thiruvadi & Huang, 2011). Furthermore, women in the audit committee are more “risk averse, cautious and ethical than men” (Thiruvadi & Huang, 2011, p. 486). Also, audit committees with female members do have a positive influence on the reporting quality of managers and it will have a positive effect on the audit quality (Thiruvadi & Huang, 2011). Moreover, female members in the audit committee “will enhance the confidence of the public regarding accounting information” (Thiruvadi & Huang, 2011, p. 484). They sent a positive signal about the trustworthy and legitimacy of the accounting information to the stakeholders. This finding is also related to Stewart and Munro (2007) who state that women are better communicators. Besides that, Orij (2010) found that women in the board are more oriented towards social issues in comparison to men. Lastly, Halpern (2012) found that the overall firm performance is higher for firms with gender diverse boards and gender diversity will also lead to less corporate failures (Burgess & Tharenou, 2002). Based on these findings I expect that a gender diverse audit committee will have a negative effective on CSR decoupling as a result of better monitoring, oversight, and more ethical behavior of woman on the board. Therefore, hypothesis 3 is stated as follows:
H3: A gender diverse audit committee has a negative effect on CSR decoupling.
Another audit committee characteristic that can have influence on CSR decoupling is director tenure. Director tenure can be measured as the number of years a member of the committee serves on the audit committee. Previous studies mainly agrees that longer tenured audit committee members are better able to monitor the financial reporting because they have more firm-specific expertise (Sharma & Iselin, 2012). Further, the longer the director is serving on the audit committee, the more significant knowledge the director will gain about the company, the company’s environment, processes, procedures, and risk management, which helps him or her to audit correctly (Vafeas, 2003). Based on the organizational behavior theory, longer tenured audit committee members are more committed to the firm (Buchanan, 1974). Besides that, longer tenured directors are better able to challenge the management when needed and have more incentives to protect stakeholders (Sharma & Iselin, 2012). Based on the above, I expect a negative effect of audit committee member tenure on CSR decoupling because longer tenured audit committee members are better able to control the financial reporting and protect stakeholders’ interests. Hypothesis 4 is therefore stated as follows:
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1984). DeZoort (1998) found that older, more experienced audit committee members have better internal control capabilities and are thus better able to function as internal auditor. Furthermore, older audit committee members have more relevant technical knowledge because of previous experiences and training (DeZoort, 1998). According to Hambrick and Mason (1984) older audit committee members are more conservative and according to Qi and Jiaotong (2012) older audit committee members are trying to avoid risky decisions like CSR decoupling. The aforementioned characteristics of older audit committee members will have a positive effect on the monitoring effectiveness. Therefore, I expect that a higher average age of the members of the audit committee will have a negative effect on CSR decoupling. Hypothesis 5 is therefore stated as follows:
H5: Higher average age of the audit committee members has a negative effect on CSR
decoupling.
METHODOLOGY
Sample and Data collection
The sample I used for this study included in total 6,266 firm-year observations for 1,501 different listed firms from 41 different countries worldwide for the years 2006 till 2017. The data was unbalanced because not all the data was available for every year and for every company. The first two digits of the SIC code were used to identify the 9 main industries the companies operate in. For most listed firms, especially in the US because of the Sarbanes-Oxley act from 2004 (Rockness & Rockness, 2005), there is an requirement to have an audit committee. The data for the audit committee characteristics is retrieved from BoardEx. To measure CSR decoupling I followed the method used by Tashman et al. (2019) who calculated CSR decoupling by subtracting CSR performance scores from CSR reporting scores. The data for CSR performance are retrieved from Thomson Reuters ASSET4 while the data for CSR reporting is retrieved from Bloomberg. These databases have already been validated by previous CSR studies (Cheng, Ioannou, & Serafeim, 2014; Hawn & Ioannou, 2016; Ioannou & Serafeim, 2012). According to Hawn and Ioannou (2016, p. 2576), ASSET 4 provides “objective, relevant, auditable, and systematic CSR information”. The control variables are retrieved from Thomson Reuters ASSET4 and BoardEx. All the variables including measurement and data sources can be found in table 1.
Dependent variable
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I followed the method used by Tashman et al. (2019) who measured CSR decoupling by the misalignment between CSR reporting and CSR performance. The CSR performance score is based on ESG ratings which are a combination of environmental, social and governance performance scores. CSR reporting ratings are based on the intensity of CSR reporting by a company. Hawn and Ioannou (2016) used a similar approach but they see CSR performance as internal CSR actions like the use of renewable energy. In addition, they see CSR reporting as external actions like reports and disclosures that show stakeholders what the company is doing in the field of CSR. CSR decoupling is the case when a company is, intentionally, reporting more external CSR actions than they are actually implementing internal CSR actions. This misalignment can be the other way around as well which results in understatement of CSR performance and is called silent green. Silent green companies are performing more internal CSR actions than they actually report about these actions (Delmas & Burbano, 2011). In this research I focus on the overstatement of CSR performance.
The misalignment between CSR performance and CSR reporting is measured by subtracting the standardized data for CSR performance from the standardized CSR reporting scores. A higher score indicates a larger gap between CSR performance and CSR reporting, which implies more CSR decoupling. This measurement has originally been developed by Marquis, Toffel & Zhou (2016) and has been improved by Tashman et al. (2019).
Independent variables
The audit committee is seen as the most important governance mechanism which makes sure that the firm is transparent and credible for its activities (Appuhami & Tashakor, 2017). In some countries an audit committee is mandatory, like in the US. All listed firms in the US have to appoint an audit committee according to the Sarbanes-Oxley Act of 2004 (Rockness & Rockness, 2005). The characteristics of the audit committee I look at in this research are: size, independence, gender diversity, tenure and age.
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Control variables
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Empirical model
To test whether to use a random or fixed effect model for my panel data, I applied a Hausman specification test (Hausman, 1978). Based on the results of this Hausman specification test, I used a fixed effect regression to measure the effect of audit committee characteristics on CSR decoupling. In this analysis I included firm, year and industry fixed effects. By using this method I can see what influence the independent variables have on CSR decoupling and I can see how much of the variance is explained by this model as a whole. To address non-normality issues I standardized the continuous variables and I checked for multicollinearity problems analysing the variance inflation factor and the bivariate correlations.
Table 1: Variables and data sources
Variable name Measurement Value Source
CSR decoupling CSR reporting score minus CSR performance score
Continuous Asset 4, Bloomberg AC size Logarithm of number of members on the AC Continuous BoardEx AC independence Proportion of independent members on the AC Continuous BoardEx AC gender Proportion of female directors on the AC Continuous BoardEx AC tenure Logarithm of the average tenure of AC members Continuous BoardEx AC age Logarithm of average age of AC members Continuous BoardEx
Firm size Logarithm of the total assets Continuous Asset 4
Firm performance Measured as Return On Assets (ROA) Continuous Asset 4 Leverage Ratio of total liabilities to total assets Continuous Asset 4 Board independence Proportion of independent directors on the board Continuous BoardEx Board size Logarithm of number of members on the AC Continuous BoardEx R&D intensity Logarithm of the ratio of R&D expenses to sales Continuous Asset 4 Capital intensity Logarithm of the ratio of total assets to sales Continuous Asset 4 CEO duality 1 when CEO is also chairman of board, 0
otherwise
0 or 1 BoardEx Organizational slack Ratio of current assets to current liabilities Continuous Asset 4
Analyst coverage Number of analysts Continuous Asset 4
RESULTS
Descriptive statistics and correlations
Table 2 presents the descriptive statistics of all the variables used in this research. The mean CSR
decoupling gap is negative, indicating that the majority of observations in our sample have higher CSR
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committee members in our sample are relative older directors with a minimum age of 39 and a maximum age of 79.33. Lastly, the Analyst coverage of the firms in my sample have a mean of 13.98 which indicates that the firms are highly visible and are relatively large, which is consistent with the sample of Hawn and Ioannou (2016). The Variance Inflation Factor (VIF) values of al the independent variables are not higher than 2, which is well below the threshold value of 10 and suggests that multicollinearity is not a problem in this study (Belsley, Kuh, & Welsch, 1980).
Table 2: Descriptive statistics
Variable name Mean SD Min Max VIF
1. CSR decoupling - 28.60 22.91 - 92.53 47.57 - 2. AC size 4.22 1.28 1 14 1.25 3. AC independence 0.99 0.04 0 1 1.04 4. AC gender 0.26 0.30 0 1 1.08 5. AC tenure 4.25 2.40 0 16.25 1.27 6. AC age 61.19 5.05 39.00 79.33 1.19 7. Firm size 6.94 0.89 4.07 11.41 1.67 8. Firm performance 6.13 11.42 -338.50 132.58 1.15 9. Leverage 0.48 0.19 0.01 2.45 1.11 10. Board independence 0.68 0.23 0 1 1.27 11. Board size 10.28 3.04 2 35 1.45 12. R&D intensity - 1.39 0.88 - 3.30 4.06 1.11 13. Capital intensity 0.14 0.32 - 0.72 4.45 1.20 14. CEO duality 0.52 0.50 0 1 1.11 15. Organizational slack 1.22 0.78 -1.28 4.93 1.16 16. Analyst coverage 13.98 10.10 0 56 1.33
n = 6,266 observations for 1,501 firms. Unstandardized data.
Multicollinearity is also tested using a Pearson bivariate correlation test with the unstandardized data as presented in table 3. All the correlations are well below the threshold of 0.8 which indicates that also based on the correlations results, together with the low VIF values, multicollinearity is not a problem in this study (Greene, 1999). A significant negative relation is found between AC size (- 0.177),
AC tenure (- 0.095) and AC age (- 0.037) on CSR decoupling. AC independence (- 0.018) and AC gender
(- 0.013) have a negative insignificant relation with CSR decoupling. Further, the table shows that for the control variables, Firm size (- 0.144), Firm performance (- 0.147), Leverage (- 0.055), Board
independence (- 0.164), Board size (- 0.180), CEO duality (- 0.044), and Analyst coverage (- 0.198)
13 Table 3: Pearson bivariate correlation matrix
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Regression results
Table 4 presents the results of the fixed effect multiple regression analysis including firm, year and industry fixed effects. The basic model with only the control variables is tested in model 1. In model 2 all the independent and control variables are added to test the hypotheses. In both models the continuous variables are standardized to control for non-normality problems. Both models have significant explanatory power to predict the effect on CSR decoupling because both P-values of the model are below the 0.01 level. The adjusted R² of both models are respectively 0.032 and 0.044 indicating that the independent variables are appropriate to measure CSR decoupling.
Model 1 presents a basic model with only control variables. The results of this multiple regression show a significant negative effect of Firm size (β = - 0.886, p = 0.000), Firm performance (β = - 0.006, p = 0.000), Board independence (β = - 0.003, p = 0.000), and Organizational slack (β = - 0.039, p = 0.008) on CSR decoupling. Further, Capital intensity (β = 0.296, p = 0.000) and Analyst
coverage (β = 0.006, p = 0.003) have a significant positive effect on CSR decoupling. This indicates that
firms with a higher amount of capital and firms that are more visible have more CSR decoupling. On the other hand, larger firms who are performing well, have more resources unused, and being supervised by an independent board have lower CSR decoupling.
Model 2 shows that AC size has a significant negative effect (β = - 0.209, p = 0.041) on CSR
decoupling which means that the predicted negative effect of AC size on CSR decoupling in hypothesis
1 is supported. The predicted negative effect of AC independence has an insignificant positive effect (β = 0.011, p = 0.190) on CSR decoupling and thus is hypothesis 2 unsupported. Model 1 also represents the results for hypothesis 3 that predicts that a higher percentage of females on the audit committee results in less CSR decoupling. As predicted, AC gender has a significant negative effect (β = - 0.149, p = 0.006) on CSR decoupling providing support for hypothesis 3. Further, model 1 finds a significant negative effect (β = 0.389, p = 0.000) of AC tenure on CSR decoupling which supports the predicted negative relation in hypothesis 4. Lastly, hypothesis 5 is supported as well because the negative coefficient (β = 1.407, p = 0.007) of AC age and CSR decoupling is significant. The implications and conclusions about the above results are discussed in the next chapter.
Additional test: Dimensional decoupling
15 Table 4: Multiple regression results on CSR, Environmental and Social decoupling
(1) (2) (3) (4)
Variables CSR decoupling CSR decoupling Environmental decoupling Social decoupling
AC size - 0.209** (0.041) - 0.128 (0.244) - 0.080 (0.491) AC independence - 0.187 (0.557) - 0.203 (0.556) - 0.033 (0.927) AC gender - 0.149*** (0.006) - 0.109* (0.062) - 0.050 (0.410) AC tenure - 0.389*** (0.000) - 0.235*** (0.000) - 0.151** (0.012) AC age - 1.407*** (0.007) - 1.698*** (0.002) - 1.963*** (0.001) Firm size - 0.886*** (0.000) - 0.909*** (0.000) - 0.784*** (0.000) - 0.506*** (0.000) Firm performance - 0.006*** (0.000) - 0.007*** (0.000) 0.000 (0.980) - 0.003* (0.068) Leverage 0.001 (0.989) 0.002 (0.984) - 0.144 (0.181) - 0.257** (0.022) Board independence - 0.003*** (0.000) - 0.003*** (0.000) - 0.003*** (0.000) 0.000 (0.828) Board size 0.160 (0.214) 0.413** (0.012) 0.530** (0.003) 0.259 (0.164) R&D intensity - 0.004 (0.820) - 0.009 (0.709) - 0.028 (0.272) 0.018 (0.512) Capital intensity 0.296*** (0.000) 0.474*** (0.000) 0.335** (0.002) 0.149 (0.199) CEO duality 0.011 (0.690) 0.021 (0.514) 0.026 (0.455) - 0.053 (0.153) Organizational slack - 0.039*** (0.008) - 0.050*** (0.003) - 0.021 (0.241) - 0.014 (0.470) Analyst coverage 0.006*** (0.003) 0.009*** (0.000) 0.005** (0.043) 0.006** (0.023)
Firm, year & industry fixed effects Yes Yes Yes Yes
Adjusted R² 0.032 0.044 0.042 0.066
n 6266 6266 6266 6266
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regression I tested whether these audit committee characteristics have an effect on environmental and social decoupling separately, measured as the gap between environmental performance and reporting and the gap between social performance and reporting. Whereas the environmental dimensions focuses more on waste, emission, sustainable energy and environmental rules, the social dimension focuses more on human rights, labour and society (Hussain et al., 2018). The economic dimension is not tested in this additional analysis because this dimension is fundamental for a company and is already well reported and checked in the financial statements (GRI, 2006).
The results of the additional analysis are shown in model 3 and 4 in table 4. Model 3 shows the results of the effect of audit committee characteristics on environmental decoupling. AC tenure (β = - 0.235, p = 0.000) has a significant negative effect on Environmental decoupling and AC age (β = - 1.198, p = 0.002) has a significant negative effect on Environmental decoupling as well. I was unable to find a significant effect of AC size (β = - 0.128, p = 0.244), AC independence (β = - 0.203, p = 0.556), and Ac gender (β = - 0.109, p = 0.062) on Environmental decoupling. The results of the effect of the audit committee characteristics on social decoupling are shown in model 4. AC tenure (β = - 0.151, p = 0.012) and AC age (β = - 1.963, p = 0.001) both have a significant negative effect on Social
decoupling. I did not find a significant relation between AC size (β = - 0.080, p = 0.491), AC
independence (β = - 0.033, p = 0.927), AC gender (β = - 0.050, p = 0.410), and Social decoupling. In
the next section I will discuss the above results for the original test and the additional tests.
DISCUSSION
In this study I investigated whether audit committee characteristics have an impact on CSR
decoupling. Building on the agency theory I proposed that monitoring by the audit committee could take away the information asymmetry that makes CSR decoupling possible (Spence, 2002). My analysis shows interesting results about the relationship between audit committee characteristics and CSR decoupling. I found significant support for 4 out of 5 hypotheses building on agency theory. Against my expectations I couldn’t find a significant relation between independence of the audit committee and CSR decoupling (H2). A possible reason for this can be that the mean independence ratio of the audit committee was 99%. This indicates that almost all of the observations had a highly independent audit committee which makes it hard to predict if a high independence ratio has a negative influence on CSR decoupling, compared to a low independence ratio.
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1989). Furthermore, the results support the literature that larger audit committees have more diversity in expertise which will result in more qualitative advice and monitoring (Guest, 2009).
In line with the agency theory and existing literature, the empirical results show support for H3. A higher percentage of woman on the audit committee will lead to less CSR decoupling. The monitoring function will be positively influenced by a more gender diverse audit committee because woman are better communicators, more risk averse, ethical, and cautious than man (Stewart & Munro, 2007; Thiruvadi & Huang, 2011). The empirical results show support for H4 as well and are in line with the agency theory and previous literature. The results show support for the negative effect of longer tenured members of the audit committee on CSR decoupling because of more effective monitoring. Longer tenured members are better able to monitor because they have more firm-specific expertise, knowledge, and experience and are better able to challenge the management (Sharma & Iselin, 2012; Vafeas, 2003).
Also consistent with the agency theory and previous literature is H5. The empirical results support the negative effect of a higher average age of the audit committee members on CSR
decoupling. Older audit committee members are more experienced and have gained more knowledge, which improves their monitoring effectiveness (DeZoort, 1998). Furthermore, older audit committee members are more conservative and show less risk taking behavior which has a positive effect on their monitoring activities (Hambrick & Mason, 1984; Qi & Jiaotong, 2012).
In the additional test I tested whether the audit committee characteristics also have an effect on the separate dimensions of CSR decoupling. In this way I am able to see if the audit committee
characteristics only have influence on one dimensions of CSR decoupling or if they have influence on CSR decoupling as a whole. My findings show that only age and tenure of audit committee members have a significant negative effect on Environmental and Social decoupling separately. These results indicate that audit committees consisting of older aged and longer tenured members have a negative effect on environmental and social decoupling. These results are in line with the agency theory because older aged and longer tenured members are better able to monitor which creates transparency and in the end will reduce decoupling behavior. The insignificant results of the relation between the size and gender diversity of audit committees and environmental and social decoupling indicates that these characteristics are only effective in reducing CSR decoupling as a whole.
Taken together, my results show the negative effect of audit committee characteristics on CSR decoupling based on agency theory. Larger audit committees with more females on the audit
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CSR decoupling possible. In addition to this, the size and gender diversity of the audit committee only have a negative effect on CSR decoupling as a whole while the age and tenure of audit committee members also have a negative effect on environmental and social decoupling separately.
CONCLUSION
The purpose of this study was to investigate the effect of audit committee characteristics on CSR decoupling. CSR decoupling leads to lower firm value while the shareholders’ objective is to increase firm value. This agency conflict can be solved by applying effective monitoring mechanisms like the audit committee. Previous literate found that in case of CSR decoupling there is a problem of
information asymmetry between the management and the stakeholders (Spence, 2002). The main tasks of the audit committee are creating transparency and solving information asymmetry and monitoring the financial and non-financial reports. I found that larger audit committees with a higher percentage of female members on the audit committee will have a negative effect on CSR decoupling.
Furthermore, higher average age and tenure of the audit committee will also have a negative effect on CSR decoupling as a whole, as well as on environmental and social decoupling separately. These results imply that effective corporate governance will improve CSR performance and helps to meet the stakeholders’ objectives resulting in increased legitimacy.
This study makes two important contributions to the literature. First, this is the first study that links CSR decoupling to audit committee characteristics, based on a large sample of worldwide listed companies for the years 2006-2017. Both CSR decoupling and audit committee characteristics have been investigated separately, but no study has found a significant link between these two topics, based on the agency theory. Second, according to Graafland & Smid (2019), the determinants of CSR decoupling are underexplored in the literature. In an attempt to fill this gap I draw on the agency theory to see how the audit committee characteristics influence CSR decoupling. This study helps to understand the negative effect of CSR decoupling for stakeholders and how specific audit committee characteristics can decrease CSR decoupling. This understanding of the relation between audit committee characteristics and CSR decoupling can help the board of directors in the formation of the audit committee.
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data. More in-depth data based on interviews could result in more in-depth clarifications for certain outcomes and results and it could also broaden our understanding why managers decouple.
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