Master Thesis Msc International Business and Management

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Master Thesis

Msc International Business and Management

The Effect of Corporate Social Responsibility on Financial

Performances: Moderating Role of Cultural Value and Mediating Role of

Gender Diversity

Supervisor: Melih Astarlioglu

By:

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ABSTRACT

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INTRODUCTION

Today’s world is facing an abundance of social and environmental issues such as global warming, poverty, resource scarcity, starvation, and inadequate drinking water (worldbank.org, 2015). Around the 1970s, debates started to emerge about the role and responsibilities of business to society, particularly in the United States (US) (Henningfeld, Pohl, and Tolhurst, 2006). While these contexts have been an important issue for decades, it is only until recently that they have gained more attention within society (Lougee and Wallace, 2008). What makes some companies neglect the societal and environmental responsibility is they believe that their main orientation is being profitable (Caroll, 2008). But according to Abhdul (2007), nowadays consumers are more environmentally friendly oriented than ever. Therefore, we can expect a rise in the trend of companies engaging in social activity. Corporate Social Responsibility (CSR) is the term referring to the liability of companies beyond being profitable (Rahman, 2011). In other words, how a company can contribute to the society and environment that surrounds its business activity (Dahlsrud, 2008). CSR can be claimed as a product of the twentieth century. Despite the fact that it has gained growth and popularity only recently, we can trace it back to previous centuries for evidence of business concerning about the society (Caroll, 2008). Also, the attention given to CSR in the scope of business activity, governmental policies and society in general has expanded in research studies (Diez, Gago, and Campino, 2011). This begs the question: what is the role of business in this societal and environmental context and how can actually caring about CSR influences business practices?

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know whether engaging in social activity would make firms score better on the financial side. It is Waddock and Graves (1997) who started to study the relationship between CSR and a firm’s financial performances. They come up with three effects of CSR on a firm’s profitability; it could be positive, negative and neutral. According to Jiao (2010), research about the effect of CSR has resulted in mixed findings. He believes that investing in CSR is like investing into intangible assets such as reputation that lead to a higher competitiveness. On the other hand, Brammer et al. (2006) found that firms with higher social performances score lower in profitability. The simple reasoning might be that because of firms that score higher in social performances will have higher cost than those that choose not to engage. But it is more than just that, further discussions are presented in literature review section

A cross-cultural difference of how CSR has developed among countries also gained the interest of researchers. Edmondson and Caroll (1999) studied the importance of culture in US. They studied why the black-owned business in the states are prioritizing more on philanthropy and ethical justifications in business than the majority of native-owned business. The following year, another study tried to compare dissimilarities in CSR concept among students from different countries that have contrasting cultures. Burton, Farh and Hegarty (2000) found that Hong Kong students emphasized more on the economical aspect than the students from United States. But they found no difference in the legal and ethical aspects of CSR. Halabar (2007) also argues that we should focus more on cultural aspects since it can influence investor’s perspective on how they perceive CSR.

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2001; Marz, et al., 2003; Elias, 2004; Gill, 2010). Gender diversity also has its implications on firm’s financial performances. Several studies tried to prove the link between the two and this often resulted in positive relationships (Erhardt, Werbel, and Shrader, 2003). The link between female managers and better performance in a corporation has been commonly studied but the studies show mixed results (Desvaux, Devillard-Hoellinger, and Baumgarten, 2007). So it would be interesting to include gender diversity in this research as the mediator to see the influence and how it affects the relationship between CSR and financial performance of the firm.

With previous researches having focused on how CSR affects business, this study will examine the relationship between CSR and firms’ performances and will include cultural aspects and gender diversity. This hopefully will contribute to the field of cross-cultural study as Triandis (1995) claims that CSR and social behavior are valuable resources to get a more profound understanding of the value and insight in different cultures. This research also helps to contribute some understanding regarding the relationship of CSR and financial performance and how it may differ from one country to another and as well as to look into the relationship between all the interconnected variables.

Therefore, this thesis studied whether there are relationships between CSR and firms’ financial performances, how the relationship between the two constructs is and whether cultural values might influences the relationship as the moderator between the two and how gender diversity mediated this relationship. The next section is the literature review of previous studies regarding CSR, how CSR influences firms financial performances and how cultures play a role between the CSR and firm’s financial performances. The methodology section follows this on how to conduct the research and followed results section respectively. The last two sections are the discussion of the findings and conclusions of this research.

LITERATURE REVIEW

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discussed in the literature review is the development of CSR throughout the years followed by recent studies regarding how CSR impacts a firm’s financial profitability. The last two topics of the literature review are about how cultural values might help to explain the differences in CSR that occur among countries and how gender diversity might be able to mediate the relationship between CSR and financial performances.

CORPORATE SOCIAL RESPONSIBILITY

According to Hay, Stavins and Vietor, the definition of CSR remains vague and unclear. The World Business Council for Sustainable Development has itself recognized that no definition of CSR exists; the closest consensus within organizations is a commitment to reasonable improvement, which is unspecific and unquantifiable. Furthermore, societal expectations of organizations have adopted a new standard: organizations expect to accomplish more than simply expanding shareholder value (2005). Moreover, Dahlsrud (2008) studied the meaning of CSR and reasoned that there are 37 definitions that are generally used as a part of the current literature. He broke down these definitions and concluded that five measurements are used in most assessments: environmental, social, economic, stakeholder, and voluntariness. Furthermore, many studies use the Commission of European communities' definition of CSR which is the idea whereby organizations incorporate social and environmental concerns in their business operations and cooperate on such matters with stakeholders on a voluntary basis (2008).

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are desirable in terms of the objective and values of society" (Bowen, 1953: 6). Despite the fact that CSR later emerged as a field of research, there is very little proof that businesses actually met society's expectations regarding CSR during those years. This is due to the fact that partnerships of that time did not have numerous CSR initiatives aside from philanthropic activities (Carroll, 1991). The next stage in the academic debate over social responsibility focused on clarifying and quantifying the benefits of CSR. Empirical analyses of the relationship between CSR and profitability began to appear in the mid-1970s but did not result in consensus (Ullman, 1985; Wood and Jones 1994).

In the 1980's and 1990's, CSR was subject to a series definition as the motivation behind the idea kept inciting enthusiasm among governments, NGOs and other organizations (Hack et al., 2014). Somewhere between 1980 and 1990, the definition of CSR gained specificity in its meaning. For example, corporate social responsiveness, corporate social performances and business ethics all became a focus of the realm of CSR (Carroll, 1999). Several researchers even went on to express that enterprises cannot be moral agents and along these lines, the power given to organizations, in choosing which social issues they want to address, should be scrutinized (Hack et al., 2014). This was, according to Friedman (1970), a benefit boost.

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citizen", Carroll attempted to clarify that a firm's goals should be making a profit, complying with the law and being a good citizen (Carroll, 1999).

CORPORATE SOCIAL RESPONSIBILITY AND FINANCIAL PERFORMANCES

Recently, more attention has ben paid by researchers and scholars to the strategic implications of CSR (McWilliams, Siegel and Wright, 2006). Hence, the impacts from and / or on financial perspectives are not to be missed from the discussion. There have been debates regarding this matter, for example whether CSR influences a firm’s financial performance and if so, whether it is positively or negatively correlated. As previously mentioned, Waddock and Graves (1997) argue that there are three relationships between CSR and firms’ financial performances; these are positive, negative and neutral. Neutral refers to no relationship; this is, according to Ullman (1985), because there are many intervening variables between corporates’ social performances and financial performances, thus there is simply no reason to expect a relationship between the two. But the vague measurement of social responsibility is the reason that may hinder the link (Waddock and Graves, 1997). The results of the study conducted by Waddcok and Graves (1997) confirms that social performances do influence the profitability of the firm.

Researchers who contend that CSR has a negative relationship with financial aspects of a firm, may construct their contentions in light of the way that organizations that are occupied with CSR activities have higher expenses than those who are not (Aupperle, Caroll, and Hatfield, 1985). They claim that the cost should have been assigned to the government instead or the consumers. In addition, neoclassical economists claim that there are only few measurable benefits of being socially responsible where the costs are easily accounted (Friedman, 1970).

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workers. Therefore, this will prompt a lower turnover rate of employees and also recruitment and training costs will be lower in the long run. Moreover, study also contends that socially responsible firms can improve their profitability by expanding their sales to socially aware shoppers (Waddock and Graves, 1997). This strategy can be accomplished by charging a higher cost for socially and environmentally friendly items. In addition, earlier research by Lech (2013) has demonstrated that firms who embrace better social responsiveness will improve the transparency of their firm. More transparency will allow a firm to have less insider trading and more transparent compensation approaches. This will thus improve the financial performances of companies. Likewise, firms who embrace stricter environmental controls to comply with better CSR could counteract large fines that can cost the firm tremendous amounts of money (Starks, 2009). These overwhelming fines can largely diminish the profitability of the companies.

Additionally, several studies claim that a firm that is perceived as socially responsible is also perceived to be less risky than a firm that is seen as socially irresponsible (Boutin-Dufresne and savaria, 2004; Frederick, 1995). Less risky firms are likely to attract more investors, thus it will help firms to increase sales and grow economically (Orlitzky and Benjamin, 2001). As a result, there will be slack resources for companies to help them finance their business (McGuire, Sundgren, and Schneeweiss, 1990). When discussing financial performances of a firm, there is no way to neglect the role of the investor (Mathuva, 2015). Nowadays, investors are not just interested in the less risky firms but they also prefer firms that pursue socially responsible activities (Guesnter et al., 2010). Some investors even decide whether or not to invest in companies based on their involvement in CSR (Heinkel, Kraus, and Zechner, 2001). A research also found a model with which investors can transform a socially irresponsible firms into more profitable firms after engaging CSR activities (Gollier and Pouget, 2012).

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reputable companies (David, Kline and Dai, 2005). Hence, investing in CSR will consequently improve the reputation of a firm (Jiao, 2010). According to Jiao (2010), CSR investment is the equivalent of an investment in intangible assets. This is because it is not only the reputation that will be improved but also the human capital that leads companies to a higher level of competitiveness. In addition, there are several studies that reveal a positive relationship between social initiatives and a positive behavioral response by consumers (Brown and Dacin, 1997; Creyer and Ross, 1997; Ellen, Mohr and Webb, 2000; Folkes and Kamins, 1999; Murray and Vogel, 1997; Sen and Bhattacharya, 2001). With a similar situation, a positive relationship between CSR and financial performances has been supported by numerous studies (McGuire, Sundgren, and Schneeweis, 1998; Pava and Krause, 1996; Stanwick and Stanwick, 1998)

Overall, studies have highlighted a positive connection between CSR and financial performances to a great extent (Minoja, Zollo, and Coda, 2010). Thereby, this study would propose its first Hypothesis as:

H1a: Companies that score high in CSR ratings perform better financially compared to those that score low.

Some also argue that if CSR is managed badly, the effect is much greater than what positive CSR does for the financial performances of the firm (Yoon, Gurhan, and Scwharz, 2006). That is in line with the fact that customers may decide not to do a transaction with firms that have a bad reputation in social contexts (Becker-Olsen, Cudmore, and Hill, 2006). According to Purohit and Srivastava (2001), clients who leave because they do not affirm the organization's reputation will be harder to regain. Losing customers is just one of the consequences of having a badly managed CSR. As mentioned earlier, firms that score low on CSR also face the risks of getting charged a fine and penalties by the government (Starks, 2009). This might be due to the lack of regulatory compliances and failing to meet the standard safety regulations for working conditions.

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earlier, investors play a major role as sources of capital and support for the growth of the company (Hockerts and Moir, 2004). Nowadays, investors consider ethical and social activities of companies before investing extensive amounts of capital to the firm. Thus, low CSR scores might impact a firm’s working capital negatively and lead to lower financial performance. Therefore, the second hypothesis for this paper is:

H1b: Companies that score low on social and environmental activities perform less well in financial contexts compared with those who score higher.

CORPORATE SOCIAL RESPONSIBILITY AND CULTURES

Different societies will emphasize distinctive beliefs; what is imperative to one culture at one time may not be essential to another culture, or even to that same culture in the near future (Burton, Farh and Hegarty, 2000). Today's business condition is progressively becoming multicultural. Effective associations of any size regularly work with individuals and firms from different parts of the world, frequently with greatly differing societies. Culture has been characterized from numerous points of view, yet it is basically seen ultimately as the systems of beliefs that are shared by associates of a particular society (Hoecklin, 1995). Hofstede (1984) initiated the investigation of different national cultures,, in an effort to discover where cultures remained on a few dimensions. These dimensions include power distance, individualism-collectivism, uncertainty-avoidance and masculinity-femininity.

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culture values work objectives and empathy versus individual objectives and nurturance. The final construct on which this research focuses on is individualism vs collectivism. This construct tries to explain how much a particular culture values sympathy toward themselves versus sympathy toward the societies to which they belong.

Very few studies have attempted to compare orientation towards CSR from different cultures. In 1987, Orpan conducted a research on how managers from United States and South Africa perceive their orientation towards CSR. The results show that a United States manager is more favorable towards agreeing on a statement regarding CSR than a fellow South African manager. They are also less likely to agree on a statement against CSR and having more desire to engage in CSR activity. Further research in fact did not find any difference among countries. Pinkston and Caroll (1994) observed more than a hundred managers from different countries working in the United States chemical industry. They did not find any significant difference between managers from different states but that might be because of the small number of samples that were being used per country.

The reason why this research uses cultural value as a moderator is because, when it comes to social initiatives, managers or whoever is in charge of the decision making will be influenced by their personal values (Agle, Mithcell, and Sonnenfeld, 1999) supporting the insight that cultures correlate strongly as influencers on an individual’s personal values (Gudykunst et al., 1996). Another study also supports the fact that personal values are solid influencers that shape a manager’s action (Triandis, 1995). Research conducted by Hemingway and Maclagan (2004) claims that outcomes of CSR by corporations can be interpreted as from the manager’s personal values. This is because social values are closely linked with personal values (Kahle, Poulos, and Sukhdial, 1988). Since values are associated with social change, and values are an individual portrayal of societal objectives, if there are societal goal differences, different personal values will sometimes lead to and reflect of this phenomenon.

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Moon (2009), they claim that this difference between countries might have impact on how an investor portrays CSR within that country. Another study that supports the notion that there is difference of CSR approach between cultures is Wu and Shen (2013). They found that companies from southern Europe are less willing to get involved in social activities than their northern and western counterparts. They also imply that this might be due to different values of the shareholders between those areas, where the north and west Europe are more concerned with CSR than the south.

This research uses a country’s cultural values as the moderator because national culture can act as social foundation for creating and shaping interaction between institutional, organizational and personal factors (Stajkovic and Lutans, 1997). The three factors that have been mentioned, all combined, shapes how the business-ethical standards of particular countries are determined. Later, this business-ethical standard is used to decide which activity is ethical or unethical. The institutional factors consist of ethics and legislation, while organizations use a code of ethics as their element. Personal factors are the biggest determinant and consist of values and beliefs, moral development and self-regulation. This is in line with the study of Shafer, Fukukawa and Lee (2007) where personal values and beliefs will be the priority of guidance in the social and ethical context.

Another example of dissimilarity regarding CSR across cultures can be found in the study of Waldman et al. (2007). They investigate cultural and leadership variables that are associated with CSR values when managers apply their decision-making. Their research uses collectivism and power-distance to forecast CSR outcomes of CEO. They found that demographic, economic and cultural aspects are critical elements of the CSR value of managers. Results of their study show that high collectivism and low power distances will have stronger CSR values. On the other hand, countries with low institutionalism and high power distance will have weaker CSR values.

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collectivist or individualist. Collectivist is characterized by favoring group goals over personal ones and they emphasize conformity and in-group harmony (Triandis, 1995). McCarty and Shrum (2001) also argue in their study that since collectivism is more focused on group goals and sharing, they will likely favor recycling over individualistic environment ideas. Furthermore, recycling is one of the most common activities that businesses do for being socially responsible (Christmann, 2000; Muller and Kolk, 2009).

A collectivist person also considers the impact of every action and relates that to society (Fischer, et al., 2009), whereas, an individualist tends not to stress what the effect of a particular action on the community is. As long as their personal objectives are not affected by an activity, an individualist will choose to neglect the importance of it. Continuing using recycling as an example from the study of McCarty and Shrum (2001), it is expected that collectivists will favor CSR activity more than individualists. Since collectivists have a more attached feeling to their in-groups from which they also draw social identity, they are therefore more concerned regarding the image and prestige of their in-groups than individualists (Epitropake and Martin, 2005). Where CSR is very relevant for the image, prestige and social status of an organization, societies will be more concerned with the CSR activity on their business platform (Farooq, Farooq, and Jasimuddin, 2014).

Thereby, if CSR arguably has a positive relationship with financial performances, companies that operate in collectivist societies will benefit from a greater impact from CSR on their financial performances because CSR will be much more appreciated in the market. This is in comparison with a company that performs in individualist societies. So, the third hypothesis, regarding culture as a moderator is as follows:

H2a: A collectivist environment will strengthen the positive relationship of CSR towards financial performances

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GENDER DIVERSITY, CSR, AND FINANCIAL PERFROMANCES

Throughout the years, the issue of gender diversification in business associations has been attracting growing attention in both scholarly research and the popular press (Francoeur, Labelle, and Sinclair-Desagne, 2008). One of the reasons that gender diversity is gaining interest is because, according to Farrel and Hersch (2001), there is a “glass ceiling effect” for female managers in corporations. This is referring to the fact that females face an implicit barrier in climbing the corporate ladder in the workplace (Li and Wearing, 2004). Moreover, female managers tend to have fewer absences than their male counterparts (Adams and Ferreira, 2009) and evidence shows they tend to lead to more efficient decision-making in the workplace.

Males and females are two elements that function differently in their own nature, especially in the context of moral development and that is because of the socialization amongst their own gender (Crow, Fok, and Hartman, 1991). According to some researchers women might also bring different views and values to the workplace that led to the different approaches towards decision making (Freeman, 1990; Helgeson, 1990; Lunneborg, 1990). Those different views might include the difference of male and female tendencies when it comes to risk-taking, social preferences and how one reacts to competition (Croson and Gneezy, 2004).

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Stereotypes also play an important role in affecting how women react or make decisions in the workplace (DeArmond, et. al., 2006). The stereotypes will eventually put more pressure on female managers to comply with such ideas (Boulouta, 2013). According to several studies, stereotypes of female workers include traits such as caring, empathy and great concern for others (Dobbins, 1995; Eagly and Karau, 1991; Fox et al., 1995; Hanson and Mullis, 1995 A further study has also found that women have better intentions to implement their value in reality/real life. Even the vaues are derived from stereotype (Fondas, 1997).

A study from Zelechowski and Bilimoria (2006) discovered that the stereotypical beliefs about a female’s social sensitivity have been the major reason that they are elected to the board of a company. Hence, it is reasonable to expect that female employees have a solid impact on CSR because they need to comply with the stereotypes (Boulouta, 2013). Women who violate the gender stereotypes are evaluated far more negatively than men who behave similarly (Heilman and Chen, 2005). Therefore, if there are any issues or concerns regarding CSR, women are chosen as the person to deal with. This is because CSR appeals to so-called “soft issues” (Burgess and Tharenou, 2002). Thus, it is expected that there are more male managers in compensation and finance committees, whereas more female managers are found in public affairs or CSR areas (Williams, 2003).

According to Atakan, et al. (2008), gender diversity and business ethics literal relationships have received most attention and are widely studied. Although the results always tend to favor females for being more ethical than men, there is a few that also shows no difference between male and female. For instance, a study found that females give more attention to corporate ethical responsibilities than males (Smith, et al., 2001). Also women possess higher levels of social orientation and portray CSR as being more effective before and after bankruptcies than men (Marz, Powers, and Queisser, 2003). Consequently, we can expect that the more CSR a company have, the greater the female percentage on the board of directors.

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Gender diversity does not only affect CSR activity, but also other aspects of the firm such as financial performances (Erhardt, Werbel, and Shrader, 2003). Diversity on the board of directors affects group dynamics adversely but enhances better group decision-making where it leads to better overall performances (Mattis, 2000). Mattis (2000) also argues that women accelerate their competitive advantage by dealing better in product and market selection. Product and market selection is one of the crucial elements that decide when firms want to generate high sales and in turn high profit (Trudgen and Freeman, 2014).

From the perspective of the agency theory, it is argued that gender diversity will perform better in monitoring the management (Carter, Simkins, and Simpson, 2003). Anastasopoulos, Brown and Brown (2002) argue that female managers can change the functioning and deliberative style of the board to very consistent and clear. While Fondas and Sassalos (2000) reveal that more female representatives in boardroom would lead to an improved board governance and top management control, Heinfeldt (2005) claims that there is a positive relationship between the percentage of females in the board of directors and the added market value. A couple of other studies also found positive relationships between gender diversity and financial performances (Campbell and Minguez, 2008; Erhardt, Werbel, and Shrader, 2003).

Performance of the board is improved in light of the fact that few elements of the board are enhanced if the board has a more diverse gender membership, according to the theory of economic case (Carter, et al, 2007). Economic case theory argues that board diversity improves the effectiveness and efficiency of board action, which increases the productivity and the performances of companies, which in turn results in a higher profitability and shareholder value (Walt and Ingley, 2003; Stephenson, 2004; and Catalyst, 2004). Therefore, the hypotheses regarding gender diversity and financial performance is as follows:

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This study therefore constructs a conceptual model to visualize all the inter-connecting theory for the research; the figure will be shown below on Figure 1.

Figure 1

Sources: Author

METHODOLOGY

In this section, it will briefly explain the intended design to conduct this research by explaining what sample and which analysis this research would use. SAMPLE

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the selection of the country on how they score on the Individualism or collectivism values. This study will not use the data from the early 20’s because many companies still did not have the ratings. It might due to them not met the specifications to be published on ESG ratings yet, or they just simply have not involved in any CSR activity by that time. Hence this research will also exclude the data from last year (2016) because many of the ratings are not published yet. So the timeline of this research is from 2010 to 2015. Another reasoning to choose this timeline is because the plummeting amount of CSR activity by business happen during this period (Singh, B. J. R, 2016) and choosing five of previous years by excluding the latest year is always handy to keep the research up to date and relevant with recent studies (Creswell, J.W, 2012).

MEASUREMENT

The variables that will be measured in this research is Individualism – Collectivism of the selected counries and CSRratings, ROA – ROE, and GenderDiversity of the selected company. Below the explanation of the measurement will be explained.

CSRratings

These CSR ratings are obtained from Environmental, Social and Governmental (ESG) databases from ASSET4. The data is availavle from 2003 where Thomson Reuters’s experts’ team starts to gather it. The ESG ratings have been widely used in CSR research by several studies, because ASSET4 really specializing to provides objectives, relevant, systematic and auditable ESG information (Schafer, 2009; Attig, et al., 2014; Cavaco and Crivo, 2013; Cheng, Ioannou, and Serafeim, 2014).

ROA and ROE

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is shown as a rate. The rate is calculated by dividing NetIncome with TotalAsets times 100%. While ROE is to explain how much profit that the firm able to generate by the amount that invested by shareholders. This measures is counted by dividing NetIncome with ShareholderEquity times 100%.

Individualism and Collectivism

The moderator construct is the cultural value of the countries, where this study uses Hofstede national score on Individualism and Collectivisms. This data are collected from the website of geert-hofstede.com. If society scores high then they are characterized as individualist, it means the individuals will prefer a loose-knit social framework where they only taking care of themselves and not the society. However, if society scores low they will be considered as collectivist and prefer to have a tight-knit social framework where the individual not only look after themselves but also other people in community and they have much loyalty. The hofstede dimension also extensively been used in cross-cultural research (Meeuwesen, Brink-Muinen, and Hofstede, 2009; Soares, Farhangmehr, and Shoham, 2007; Kirkman, Lowe and Gibson, 2006). Several studies claim though it is not accurate at the individual level, but for country level studies Hofstede’s dimension is countable (Ringov and Zollo, 2007; McCoy, Galletta, and King, 2005)

Gender Diversification

The mediator variable of this study is gender diversification, where this research is using data from Asset4. The datasets will provide a percentage of gender diversification on selected companies board of director. The percentage will explain how many males and females managers are in the board of director for a particular company. The Asset4 dataset has been commonly used in several researches

Control Variables

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performances is size of the firms (Margolis and Walsh, 2007; Orlitzky, et al., 2003) and type of industries (Chen, et al., 2015A and Frigant, 2009). Additionally, firm size may relate with the accessibility of firm assets that can be invested into sustainable business practices (Herbohn, et al. 2014). The second control variables is type of Industries, this will be done by filtering the SIC codes of the firm. The Industries will be used as dummy variables. So any industries that have environmental and social influences will be labeled as 1 and the rest is 0. Literature shows that type of industry is a fundamental variable to consider when examining CSR (Chen, et al., 2015A and Sweeney and Coughlaan, 2008). Boutin-Dufresene and Savaria (2004) assert that companies in a different industries may be more responsible than others, as the way of their business activities obliges them to proactively work with CSR. The next control variables is leverage ratio, it measures the amount of debt that company has. This variable is relevant to this context because firm that is having huge debt would less likely to involved in CSR activity (Hoeck, 1997). Working Capital and R&D also included as control variables in this research because it represent the amount of cash hold by the companies and budget of their research department. This will influence the investing priority of the companies, whether or not CSR is within the list (Lee, et al., 2013B).

ANALYSIS

The regression analysis are generated by using STATA as the system to compute the calculation on whether does CSR ratings influence firm’s financial performances, positively or negatively and how cultural values moderate the relationships. The model of the regression for the moderator would be as follows:

𝐶𝐹𝑃 = 𝛼 + 𝛽1𝐶𝑆𝑅𝑟𝑎𝑡𝑖𝑛𝑔𝑠 + 𝛽2𝐶𝑢𝑙𝑡𝑢𝑟𝑎𝑙𝑉𝑎𝑙𝑢𝑒𝑠

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𝐺𝑒𝑛𝑑𝑒𝑟𝐷𝑖𝑣𝑒𝑟𝑠𝑖𝑡𝑦 = 𝛼 + 𝛽1𝐶𝑆𝑅𝑟𝑎𝑡𝑖𝑛𝑔𝑠 + 𝛽2𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒𝑠 + 𝜀 𝐶𝐹𝑃 = 𝛼 + 𝛽𝐶𝑆𝑅𝑟𝑎𝑡𝑖𝑛𝑔𝑠 + 𝛽𝐺𝑒𝑛𝑑𝑒𝑟𝐷𝑖𝑣𝑒𝑟𝑠𝑖𝑡𝑦 + 𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒𝑠𝛽3 + 𝜀 To determine the results of direct effect is to see the results of 𝛽CSRratings, while to see the indirect effect we see the calculation of 𝛽 CSRratings times 𝛽𝐺𝑒𝑛𝑑𝑒𝑟𝐷𝑖𝑣𝑒𝑟𝑠𝑖𝑡𝑦. And all models will use robust standard error to anticipate autocorrelation and hestererocadasticity from the model. Since this study is cross-sectional then the dummy will be the year, Individualism-Collectivism and countries.

RESULTS

In this section, the author will show the results from the stata program that used to process the data for this research. The results section will contain Descriptive statistics, Correlation and Regression amongst all variables.

DESCRIPTIVE AND CORRELATION RESULTS

variable N mean median sd max min

CSR Ratings 12868 51.73979 52.9 30.53015 95.9 3.49 ROA 12868 0.0618927 0.06035 0.0933052 0.3502 -0.4365 ROE 12868 0.119219 0.11745 0.2224385 0.9902 -1.0519 Gender Diversity 12868 0.4634581 0.4537 0.2932686 0.9978 0.131 Leverage Ratio 12868 0.7311978 0.443 1.256241 11.3791 -4.4108 Total Asset 12868 15.23321 15.24717 1.504494 20.08117 10.59119 Board Size 12868 9.870765 9 3.212193 21 4 Working Capital 12868 13.19111 13.31536 1.574608 16.48872 8.185071 R&D 12868 0.4675322 0.0925445 0.4827814 1 0 Cultural Value 12868 66.90325 80 25.88596 91 17

Table.1: Descriptive Statistics of all data

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VARIABLES 1 2 3 4 5 6 7 8 9 10 1 CSR Ratings 1 2 ROA 0.1020* 1 3 ROE 0.1385* 0.8192* 1 4 Gender Diversity 0.3341* 0.0783* 0.0989* 1 5 Leverage Ratio 0.0340* -0.0780* -0.0364* 0.0489* 1 6 Total Asset 0.3635* 0.0186* 0.0665* 0.1532* 0.2740* 1 7 Board Size 0.2628* -0.0018 0.0473* 0.1634* 0.1504* 0.5144* 1 8 Working Capital 0.3428* 0.1513* 0.1262* 0.0519* 0.0538* 0.7742* 0.3487* 1 9 R&D -0.1574* -0.0412* -0.0211* 0.0482* 0.1171* 0.0796* 0.0259* -0.1797* 1 10 Cultural Value 0.2071* -0.0637* -0.0527* 0.3206* -0.0473* -0.2394* -0.1437* -0.2222* 0.0348* 1

2015. The overall mean for the CSR rating is 51.7, it says at least majority of the companies score more than half out of 100%. The ROA is averaging 6,18% while the ROE 11.92%. The gender diversity ratio in the board of directors also scores almost half, which is 46.34%. It means 46.34% of the board director of the selected companies throughout six years is occupied by female managers. Looking from the mean of the CultularValues (66.90), it seems the general population of the companies come from individualistic environment.

The second table above shows the correlation between all variables used in this research, including the dependent, independent, mediator, moderator and all control variables. As can be seen, the highest correlation with .81 here happen to be between ROA and ROE. Both are dependent variables and used in different model, so this correlation will not suffer multicollinearity. The second highest is between WC and TAlog, with the value of .77, both variables is control variables and the author is not really concern with any chance of multicollinearity between the two.

REGRESSION OF THE MODERATOR

This section will present the results of the first model from the regression. The first model is about the relationship of cultural values as the moderator for CSR ratings as independent variables (IV) and financial performances as dependent variables (DV).

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As shown below in the Table.3.1, variables CSR Ratings as the DV is stated positively correlated with .0003 with significance level 3. Thus, for every one percent increases in CSR ratings, there will be 0,0003% increases in ROA. While between CSR Ratings and ROE (shown below at table 3.2) the correlation is positive with .0008 and significance level 3, which means for every one percent increase, the ROE will rise by 0.0008%.

Dependent Variable: ROA Model 1 Model 2 Model 3

Control Variables Leverage Ratio -0.0074*** -0.0071*** -0.0072*** [0.0006] [0.0006] [0.0006] Total Assets -0.0040*** 0.0070*** 0.0076*** [0.0009] [0.0009] [0.0009] Board Sizes -0.0007** -0.0009*** -0.0011*** [0.0003] [0.0003] [0.0003] Working Capital 0.0100*** 0.0097*** 0.0094*** [0.0008] [0.0008] [0.0008] Research Development -0.0009 0.0006 0.0007 [0.0019] [0.0019] [0.0019] Constant -0.0309 0.0150 0.0392 [0.0406] [0.0408] [0.0556] Adjusted R-squ~d 0.1285 0.1342 0.1393 Observations 13330 13330 13317 Independent Variables CSR Ratings 0.0003*** 0.0003*** [0.0000] [0.0001] Moderator Cultural Values 0.0003 [0.0007] Interaction

CSR ratings × Cultural Values 0.0000***

[0.0000]

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The next variable that being positively correlated with significance level 3 is the Interaction. This variable is the results of CSR Ratings times Cultural Values, and the value is .0000 for both ROA and ROE. It means, the Cultural Values strengthens the relationship between CSR Ratings and ROA/ROE but with small values. The variables of Cultural Values it self is has positive relationship with the value of .0003 but have no significance level. The complete Table for the ROE is shown below at table 3.2.

Dependent Variable: ROE Model 1 Model 2 Model 3

Control Variables Leverage Ratio -0.0056*** -0.0037*** -0.0056*** [0.0016] [0.0016] [0.0016] Total Assets 0.0004 0.0099*** 0.0104*** [0.0022] [0.0023] [0.0023] Board Sizes -0.0002 -0.0005 -0.0009 [0.0007] [0.0008] [0.0007] Working Capital 0.0141*** 0.0136*** 0.0127*** [0.0019] [0.0020] [0.0019] Research Development -0.0077 -0.0047 -0.0031 [0.0047] [0.0047] [0.0046] Constant -0.2384* -0.0158 0.0500 [0.1343] [0.0992] [0.1342] Adjusted R-squ~d 0.0855 0.0974 0.1033 Observations 13155 12888 13155 Independent Variables CSR Ratings 0.0009*** 0.0008*** [0.0001] [0.0002] Moderator Cultural Values 0.0003 [0.0018] Interaction

CSR ratings × Cultural Values 0.0000***

[0.0000]

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VARIABLES Gender Diversity CSR Ratings 0.0012*** [0.0001] Cultural Values 0.0130*** [0.0020] Leverage Ratio 0.0015 [0.0016] Total Assets 0.0167*** [0.0026] Board Sizes 0.0070*** [0.0008] Working Capital 0.0035 [0.0022] R&D 0.0072 [0.0052] Constant -0.7826*** [0.1507] Adjusted R Squared 0.3506 Observations 13164

Year Dummies Yes

Industry Dummies Yes

Country Dummies Yes

Number of Firms 6197

Table.4: Regression of CSR Ratings to Gender Diversity

VARIABLES ROA ROE

Gender Diversity 0.0166*** 0.0476*** [0.0032] [0.0079] Cultural Values 0.0009 0.0018 [0.0007] [0.0018] Leverage Ratio -0.0073*** -0.0050*** [0.0006] [0.0016] Total Assets 0.0044*** 0.0011 [0.0009] [0.0022] Board Sizes -0.0008*** 0 [0.0003] [0.0008] Working Capital 0.0100*** 0.0144*** [0.0008] [0.0020] R&D 0.0014 0.0091* [0.0019] [0.0047] Constant -0.0439 -0.1923 [0.0559] [0.1352] Adjusted R Squared 0.1289 0.0884 Observations 13037 12875

Year Dummies Yes

Country Dummies Yes

Table.5: Regression of Gender Diversity to ROA & ROE

REGRESSION OF THE MEDIATOR

The results of the second model of the regression will be shown in this section. The second model is for the mediator variable, where in this study is board diversity. There will be two tables for this model, the first one refer to Table.4 is between the IV which is CSR ratings (ESG) and the Mediator which is board diversity (BD).

As can be seen below, the ESG have positive relationship with the value of .0012 at significance level 3. It means for every one percent increase in CSR ratings there will be 0.0012% increase in board diversity.

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relationship with both ROA and ROE. The value for the ROA is .0166 with significance level 3. It means for every one percent increases in board diversity it will rise ROA by 0.016%. While with the ROE, the value is slightly higher at .0476 with significance level 3 as well. In the other word, for every one percent increases in board diversity it will rise the ROE by 0.047%.

To calculate the value of the mediating effect is by multiplying the coefficient of CSR ratings to gender diversity (0.0012) with coefficient of gender diversity to financial performances (ROA is 0.0166 and ROE is 0.0476). So the value of the mediating effect for ROA is 0.00001992 while for the ROE is 0.00005712. As expected, both mediating effect value is smaller compared to the coefficient of CSR ratings to financial performances when including all variables (ROA is 0.0003 and ROE is 0.0007. See table 6 below) because this value is part of the indirect effect in regression model that use all variables.

And to calculate the indirect effect is by dividing the value of mediating effect (ROA is 0.00001992 and ROE is 0.00005712) with the coefficient of CSR ratings to financial performances when including all variables (ROA is 0.0003 and ROE is 0.0007. See table 6 below). Therefore, the indirect effect of CSR ratings through gender diversity for ROA is 6.64% and for ROE is 8.16%.

REGRESSION OF ALL VARIABLES

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Table.6: Regression of all variables

VARIABLES ROA ROE

CSR Ratings 0.0003*** 0.0007*** [0.0001] [0.0002] Board Diversity 0.0086*** 0.0242*** [0.0033] [0.0080] Cultural Values 0.0003 0 [0.0007] [0.0018] INTERACTION 0.0000*** 0.0000*** [0.0000] [0.0000] Leverage Ratio -0.0071*** -0.0035** [0.0006] [0.0016] Total Assets 0.0076*** 0.0111*** [0.0010] [0.0023] Board Sizes -0.0011*** -0.0008 [0.0003] [0.0008] Working Capital 0.0094*** 0.0129*** [0.0008] [0.0020] R&D 0.0001 -0.0046 [0.0019] [0.0047] Constant 0.0441 0.0668 [0.0560] [0.1351] Adjusted R Squared 0.1395 0.1043 Observations 13037 12875

Year Dummies Yes

Country Dummies Yes

Next variables that is positively related and also having significance level at 3 is board diversity, with the value of .0086 for ROA and the .0242 for ROE. It means for every one percent increases in Board diversity it will increases both the ROE and ROE by 0,0085% and 0,024% respectively. Compared to the model on Table.5, the values are higher when the board diversity is compared directly to the financial performances. Because when all the variables included in the regression model, the value for interaction variables that is board diversity is lowered. This is might be because of when regressing all variables, more construct is taken into account therefore the value is lower compared when regressing BD directly to the financial performances.

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ratio and board size is found to have negative relationship with both ROA and ROE. The LR has -.0071 with significance level 3 for ROA and -.0035 with significance level 2. It means for every one percent increases in leverage ratio of the company, it will decrease both ROA and ROE by 0,0071% and 0,0035% respectively. This control variable has relatively consistent coefficient throughout the entire regression model, especially for the ROA as can be seen on Table.3, Table.5, and Table.6. While for the ROE there is only small difference by 0.0005.

Board size is another control variables that have negative relationship with both ROA and ROE, but only for ROA that is significance with the coefficient value of -.0011. Which means every one percent increases in board size will decrease ROA by 0.0011%. The results are also consistent throughout the other regression model, as can be seen Table.3, Table.5, and Table.6. And there is no significance coefficient for the ROE in the entire regression. The other two control variables that have significant coefficient are total assets (TA) and working capital (WC), and both have positive relationship towards ROA and ROE. The coefficient value of TA is .0076 and .0111 for ROA and ROE respectively with both have significance level at 3. It means for every one percent increases in total assets it will increase both the ROA by 0,0076% and the ROE by 0,011%. The result is consistent as compared to the regression model for the moderator as can be seen on Table.3.

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Table.7: Summary of Hypotheses and the results

Hypotheses Result

H1a: Companies that score high in CSR ratings perform better financially

compared to those that score low. Accepted

H1b: Companies that score low on social and environmental activities perform less well in financial contexts compared with those who score

higher. Accepted

H2a: A collectivist environment will strengthen the positive relationship of

CSR towards financial performances Rejected

H2b: An individualist environment will not strengthen or will weaken the

relationship of CSR towards financial performances Rejected

H3a: Companies with more CSR activity imply that they embrace greater

gender diversity on their board of directors Accepted

H3b: The Company with the greater gender diversity rate on its boards will excel better in financial performance than those who are homogenous.

Accepted

DISCUSSIONS

This section is going to discuss the theoretical reasoning behind the outcome or the results of statistical number that was presented on the previous section. All the reasoning will be based on another study or journal that have similar research regarding the matters of CSR, financial performances, cultural differences and gender diversity.

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them less risky that companies with equivalent financial performance but with lesser reputation.

Research by Roberts and Dowling (2002) also confirms that firms who have better reputation experience higher sales number and ROA. According to Cabral (2012), company that has been able to excel their financial performances by depending on the reputation must have been able to maintain and improve their efforts and strategies. And the effective way of doing so is maintaining long-term reputation by increasing satisfaction to all shareholders. Where doing CSR is one of the most popular ways to raise satisfaction of customer (Luo and Bhattacharya, 2006), where thus it leads to a better financial performances. CSR not only provide customer satisfaction, but it also give a company who exercise it a competitive advantage (Lombart and Louis, 2012). By having a good reputation it will help company to have competitive advantage over the other by being able to build a loyal and long-term customer in the present and future (Gllarza, Gilsaura, and Holbrook, 2011).

Another study also claims that company who engage in CSR strategy will help support economic growth and prosperity (Torugsa, O’Donohue and Hecker, 2012). According to several studies, engaging in CSR activities will help companies to enhance product differentiation, improve production efficiencies and lower the operation cost. Each of it will contribute to higher financial performances (Mackey, et al., 2007; Castka, et al., 2004; Aragon-Correa, et al., 2008). Hamman, et al. (2009) also found positive link between CSR practices and favorable financial outcomes in the aspects of cost reduction and increase in profit. Overall, though some study found negative or no relationship between CSR and the financial performances (ACCA, 2009; Crisostomo, Freire and Vasconcellos, 2011), the majority confirms and supports the positive and significant results between CSR and financial performances (Van Buerden and Gossling, 2008; Oeyono, Sammy and Bompton, 2011; Abu Bakar and Ameer, 2011).

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value use individualism-collectivism as the measurement. It means that the higher the value is the more individualist a society is. If the score of cultural value is low, it will represent the collectivist side, on the other hand if the score is high then it will represent the individualist side. Therefore, hypotheses 2 both a and b is rejected because from the result it shows the contrary views.

The results from the statistics part imply that a higher cultural value that refers to a more individualistic environment will result in higher CSR ratings or more CSR activity. And also there is no significance value found in the results for this relationship. According to Brewer and Venaik (2014), there are several reasons of the downside Hofstede’s cultural dimension that can be used to explain this phenomenon, first is the so-called ecological fallacy. This is applied in this case because Hofstede’s dimension is derived from individual-level study information collected to, and analyzed at, the national or organizational level. Likewise, in this study, the data is analyzed at the organizational level because the author compared companies throughout countries.

In other word, companies that operate in particular environment that represent more of collectivism may not act according to it. Because Hofstede’s cultural dimension is not representing the each individual that live and work in that particular country. It is not a very accurate measurement to use at organizational level. In addition, national culture and organizational culture often clash (Kattman, 2014). For instances, companies that operate under a transformational leader will have more long-term relationship program with their shareholders than a transactional leader does (Breevart, et al., 2014). Where long-term goal orientation is repeatedly found to have positive relationship with CSR (Kiessling, Isaksson, and Yasar, 2016).

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Moving into the third hypotheses, part a is where this research build from literature and conclude that company who has more CSR activity will correspondingly imply a higher rate of gender diversity in the board. The results also support this view with significance value. According to Grosser and Moon (2006), gender mainstreaming has been gaining awareness in the recent century. On of the issue is how to guarantee females' voices are heard in administration structures, and are hence ready to impact the advancement and assessment of all territories of strategy making in governmental body (Council of Europe, 1998). The aim is to increase gender equality by involving females more in the process of policy making, but later it starts to include reference in business field (Dex, 2004; Vinnicombe, 2004).

Business sectors play significant role in providing opportunities for females than a governmental body, and CSR is act as of the tools (Grosser and Moon, 2006). Accordingly, CSR emerge as the basis in spreading the responsibility of company to support social and gender equality in the system. So it seems that gender equality is starting to be one of the benchmark of CSR. And more of socially responsible investors start to shift their focus on gender equality issues. As a result, if gender equality is starting to get attention it will thus lead to more of gender diversity in the board. Hence, more CSR, which is recently start to include more of gender equality, is accountable of the rising diversity of gender in workplace.

Moving to part b of the third hypotheses, which is about the possibility of gender diversity helping companies to improve their financial performances. As shown the results section, the statistics support and confirmed this hypotheses with significant values. Several studies have claimed similar theory, according to ASX (2010), gender diversity is associated with better financial performances. In businesses, it is very important to have boards that can monitor the system, and females are arguably being better than male in this context (Neilsen and Huse, 2010). Another factor that makes female chief standout is because they are independent of one another, study by Ferreira (2009) claim that male is more dependent on other colleagues when executing a decision-making strategy.

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that females have better ways in delivering information and superior communication skills than male. Thus it helps many projects meeting progress more effectively and efficiently. Adams et al (2011) also claim that board director’s appointments are favoring more female director than male director in the room. One of the most popular benefit of gender diversity is seems to be having a person that have better sense to risk. Female is associated to be more risk averse than men (Booth, Cardona-Sosa, and Nolen, 2014). Another factor that might explain why more female is such advantages for the corporation is because women are a better innovating gender compared to men, a study claims that R&D of a company found to be much more efficient when there is more female working in the department (Garcia, Gonzales, and Martinez, 2013)

CONCLUSIONS

At this section the author will highlight what was the most important findings from this research and how to conduct it. Then followed by the possible limitation of this study and what could have been improved. And finished by recommendations for future research. After building the hypotheses from previous literatures in the context of CSR, financial performances, cultural values, and gender diversity. Thus, this research constructs three hypotheses from all the literature combined. Hence, several datasets are gathered to conduct the research. It includes Hofstede’s cultural dimension for Individualism-Collectivism, ASSET4 for the CRS Ratings, ROA-ROE, and Gender Diversity. And several control variables also using data from ASSET4.

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national culture have little to no effect in practicing CSR. And Hofstede’s cultural dimension is not updated and there is a likelihood of ecological fallacy.

Lastly, the third hypothesis is regarding how gender diversity might mediate the relationship between CSR and financial performances. As expected, the result from statistics confirmed and supports the theory from hypothesis three. Company with more CSR ratings is expected to have more gender diversity in their board of directors, where this helps them to accelerate higher financial performances. More diversity translates to more ideas for knowledge sharing or creation. It also helps to balance the risky action of male managers in the board, because female in nature are more risk averse and more precautious.

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Master Thesis Msc International Business and Management

Master Thesis

Msc International Business and Management

The Effect of Corporate Social Responsibility on Financial

Performances: Moderating Role of Cultural Value and Mediating Role of

Gender Diversity

Supervisor: Melih Astarlioglu

By:

Table of Contents

ABSTRACT

INTRODUCTION

LITERATURE REVIEW

METHODOLOGY

RESULTS

DISCUSSIONS

CONCLUSIONS

REFERENCES

Catalyst Inc., 2004. The bottom line: connecting corporate performance and

gender diversity. New York.