Thesis for MSc IB&M

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Thesis for MSc IB&M

The Influence of Firms’ CSR Practices on Financial

Performance with the Moderating Effect of

Board Diversity

Date of Submission: 18 June 2018

University of Groningen Faculty of Economic and Business

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Abstract

The relationship between CSR and financial performance is researched several times, however, the outcomes are mixed. Therefore, it might sound logical that there is another influence on this relationship. For this study, CSR is expected to have a positive influence on the financial performance and that board diversity has a moderating effect on this relationship. For this study CSR is cut down into social and environmental-oriented CSR, financial performance is measured in terms of ROA and the board diversity exists of gender, tenure and expertise diversities. To test the hypotheses, an OLS multiple regression is done with information of the Asset4 database. The sample exists of companies operating in the OECD-countries. The regression showed that there is significant positive relation between social-oriented CSR and financial performance, and that there is significant negative moderating effect of tenure diversity on this relationship. Environmental-oriented CSR in relation to financial performance did not show significant results in the analysis. The same counts for gender and expertise diversity.

Key words: Corporate Social Responsibility (CSR), social-oriented CSR, environmental

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Operationalisation variables ... 24 Independent variables ... 24 Dependent variable ... 25 Moderation variables ... 26 Control variables ... 26 Data analysis... 27 Robustness test ... 28 Preliminary analysis ... 29 Results ... 31 Descriptive statistics ... 31 Baseline results ... 32 Robustness test ... 35 Discussion ... 37 Theoretical implications ... 39 Managerial implications ... 40

Limitations and future research ... 40

Conclusion ... 42

References ... 44

Appendices ... 52

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Appendix 2 – Preliminary results ... 53

Appendix 3 – Baseline results ... 55

Appendix 4 – Robustness test ... 62

List of figures Figure 1 Carroll's pyramid ... 8

Figure 2 Schwartz' and Carroll's CSR diagram ... 9

Figure 4 Conceptual Model ... 21

List of tables Table 1 Sample ... 24

Table 2 Categories environmental and social ... 25

Table 3 Descriptive statistics ... 32

Table 4 Baseline results ... 33

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Introduction

Is a business organisation or firm more than an economic entity? One answer is yes, an organisation has more responsibility than its own profits. It must also consider the external environment and its social impact. An entity cannot be reduced to a simple function of purely private economic self-interest because the firm is also a social institution for the common good (Chassagnon, 2014). Besides, Elkington (1997) believes that an organisation is responsible for the social, environmental and economic concerns which goes with operating. Other people do disagree with this statement. For example, Friedman (1970) believes that the business of business is business. Nevertheless, it shows that organizations increasingly realise that Corporate Social Responsibility-practice’s (CSR) benefits the organisation when integrating it in their strategy and in their relationships with various stakeholder groups (Ali et al., 2010). Furthermore, research tells us that CSR has become one of the core components of corporate strategy and a crucial instrument to minimize conflicts with stakeholders (Bauer et al., 2005). However, something what is not known and what will be investigated in this thesis, whether CSR has direct influence on the profitability of the company.

Previous research has already dived into the relationship between CSR and financial performance. Nevertheless, it shows mixed results. Some studies report positive relationships between CSR and financial performance measures. For example, Reverte et al. (2016) researched the relationship and report evidence that CSR practices are positively related to both financial and non-financial organizational outcomes. Nevertheless, there are also studies who prove the opposite. In the past, Cowen et al. (1987) investigated the relationship between CSR and Return on Equity (ROE), and, found that the relationship is negative. In addition, some studies that investigate the relationships between CSR and measures of accounting performance also report insignificant results (e.g., Seifert et al., 2003). A possible explanation of those mixed outcomes could be that there is another influence on this relationship. Previous studies tested therefore a lot of different mediating and moderating variables. For example, Wang & Sarkis (2017) tested the relationship between CSR governance and corporate financial performance with a mediating effect of CSR outcomes. They found that CSR outcomes fully mediate the relationship between CSR governance and financial performance.

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indicates mutual benefits and less conflicts between employees, customers and suppliers. For that reason, CSR can be experienced as advantageous by companies. However, on the contrary, they found that responsible behaviours towards customers, suppliers and the environment appear as replaceable inputs of financial performance, suggesting more conflict between or over-investment towards those stakeholders. However, decisions on CSR activities within a company are made at the management level. To continue, the board of the company decides the strategy and decides whether to cooperate CSR in the business strategy or not. Therefore, it is interesting to see whether this board composition in terms of diversity makes a difference. To use gender diversity as an example, papers show that women may be more adaptable and eﬀective at pursuing company’s CSR than men (e.g. Alonso-Almeida Mdel et al., 2017). Additionally, it might be interesting to see how the different concerns of CSR influence the profitability/financial performance of a company. To give already a small sight note, for this study it is decided to leave the economic concern out, since this is about the financial health of company and profitability is part of the financial health. Therefore, in this study the social and environmental-oriented CSR will be tested on the profitability in this research.

To summarise, there are studies focusing on the CSR practices and CSR financial performance researched in different industries, the influence of board diversity on financial performance, and, the influence of board diversity on CSR practices. Despite, no research is done on whether board diversity has a moderating effect on the social and environmental-oriented CSR practices of a company in relation to the financial performance. For example, the reasoning could be that firm’s social-oriented CSR practices have a positive influence on the financial performance. This relation is influenced by for instance by gender diversity. Papers show that women may be more adaptable and eﬀective at pursuing company’s CSR than men (e.g. Alonso-Almeida Mdel et al., 2017). Therefore, gender diverse boards are better in making decisions with regards to CSR, which will be reflected in financial performance. Moreover, this could be tested for several other board diversities and environmental-oriented CSR, since it is not known how board diversity influences the relationship between social and environmental-oriented CSR and financial performance. This boils down to the following research question: Do a firm’s social and environmental-oriented CSR practices influence its financial performance? And is this relationship moderated by board diversity?

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the CSR practices, distinguished in environmental and social oriented CSR, of a company can influence the financial performance moderated by the effect of board diversity. Besides, this study wants to contribute by giving empirical evidence of the proposed relation. In order to give a conclusion to the above stated research question, a simple random sample is deducted from a list of companies which origin from the OECD-countries. In order to gather data of the sample, the ASSET4 database by Thomson Reuters is used. The analysis of the data is done by an Ordinary Least Square (OLS) multi regression analysis with the use of the statistical program SPSS.

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Literature review

This section of the thesis will give an overview of the theoretical concepts which are used for this research. It will discuss CSR, financial performance and board diversity, and, its relationship towards each other. Based on the discussion of those three concepts, there are stated several hypotheses in order to test the proposed relationships between those three concepts.

Corporate Social Responsibility

Many people with different backgrounds tried to find a working definition of Corporate Social Responsibility (CSR). However, there is no overarching definition yet. On one hand, we have Friedman who believes that there is only one social responsibility of businesses: to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud (Friedman, 1970). On the other hand, Elkington believes that companies should integrate the economic, social and environmental concerns in its business strategy. Carrol believes that the social responsibility of businesses goes much further than that, Carroll says that the social responsibility exists of philanthropic, ethical, legal and economic aspects reviewed in a pyramid, called Carroll’s pyramid reviewed in figure 1 (Carroll, 1991).

Based on Carroll’s pyramid of CSR, Schwartz and Carroll devised the three-domain approach, shown in figure 2. The domains are developed more completely both in terms of what each means or implies and in terms of the overlapping categories that are identified. The approach is reviewed in a Venn diagram, since they found that all three domains are equally important when talking in terms of CSR (Schwartz & Carroll, 2003).

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To continue on this insight of CSR, firms are a social and economic emergent entity. It cannot be reduced to a simple function of purely private economic self-interest because the firm is also a social institution for the common good (Chassagnon, 2014). Researchers use the stakeholder theory as a basis to evaluate the overall CSR practices of organizations according to their fulfilment of different stakeholders’ demands. The stakeholder theory basically stresses the need for organizations to consider not only shareholders’, but all existing different stakeholder groups’ demands. The stakeholder theory makes a difference between internal and external stakeholders. Internal stakeholders are considered as employees and external is considered by the three above named concerns suggested by Elkington (social, environmental and economic) (Mory et al., 2017). Nowadays, CSR practices are highly valued. Organizations increasingly realise CSR-practice’s diversity of benefits when integrating it in their strategy and subsequently implementing it in their relationships with various stakeholder groups (Ali et al., 2010). Research shows that the better CSR performers may have a tendency of positive influence on firm profitability in the same and later periods, whereas, CSR influences firm profitability negatively in the lower CSR performers groups (Chang & Kuo, 2008).

Companies invest in CSR activities for different purposes. First of all, as discussed in many papers, CSR influences the financial performance of companies (Simpson & Kohers, 2002; Saeidi et al., 2015), and it allows for improvements in the relationship between the different stakeholders (Lai et al., 2010). As an example, regarding the employees, research reveals that CSR enhance workers’ commitment in an organization which eventually results in the company becoming more productive as employees tend to identify with their employer and are less likely to leave their job (Lin et al., 2012). The employees are influenced by the

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so-called social identity theory, which implies that they recognize their values with those of their employer (Berrone et al., 2007).

Another theory with regards to CSR is the Resource Based View. Firms can achieve a higher competitive advantage by using their own capabilities and transforming them into resources able to increase their monetary gains. Furthermore, by gaining intangible assets which are not imitable by others, a company is able to keep a better performance for a longer period due to their competitive advantage. Examples of those intangible assets are increasing their corporate reputation, culture and skills. A company should invest in CSR practices in order to improve the company reputation while using internal resources (Branco & Rodrigues, 2006). Moreover, if a company is able to acquire trust and building loyalty among consumers through investments in CSR, consumers are going to focus more on the reasons why a company has implemented a certain choice rather than what the company is actually doing. Therefore, CSR removes negative considerations that customers could have about a company. CSR activities might also be an instrument which is used when introducing a new/improved/innovated product in order to receive more interest among its stakeholders. For instance, Luo and Du (2012) state that companies which present high level of CSR investments show a higher advantage when they commercialise a new good with respect to those who are not involved in social activities. Furthermore, CSR can be a good choice also in the case in which the company plans to expand abroad. Firms could do huge investments in CSR activities in their host countries as a way to receive legitimacy (Du & Vieira, 2012). By following a signalling theory, managers could make use of CSR investments to reduce the uncertainty of buyers, provide a positive indication to customers, gain trust and achieve financial efficiency (Schmid and Dauth, 2014). One of the researches finds a relationship between CSR and financial performance in terms of investment and greenwashing the concept. Kim et al. (2012) summarise theoretical proposals in the literature. They conclude that, CSR firms are committed to environmentally and socially ethical behaviour and consumes significant resources to implement CSR governance for the broader social good. Therefore, these firms are likely to generate beneficial and positive outcomes on CSR-related issues, and thus achieve enhanced business results and greater social legitimacy.

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concern will be left out, since this research is basically about the financial performance of the company or in other terms the financial health of a company. The economic concern is more or less about the way a firm operates in the market. It is about on how it has integrated action on economic responsibility concerns into its core business activities and decision-making processes. The aim of such integration is seen as going beyond short-term profit maximising issues to emphasise long-term economic performance issues, and the effective exploitation of market opportunities, as well as contribute to the improvement of the standard of living across the whole economy (e.g. Bansal 2005; Russell et al. 2007; Willard, 2005). To conclude, financial performance of a firm is part of the economic concern. It basically does not make sense to test the economic concern on the financial performance, since there is a big overlap between those two concepts. To give an overview of what the social and environmental-oriented CSR entails, the following paragraphs are written.

Social-oriented CSR

The focus of the social concern is on the internal and external stakeholders, such as the employees, the society in the region and as a whole, shareholders, suppliers, customer etc. Socially responsible behaviour focuses more on anthropocentric social issues that range from poor working conditions (Alamgir et al., 2013), employee rights and fair labour practices (Zhu and Zhang, 2015), to inequities (Huffman, 2013). In order to make evaluations upon the social-oriented CSR, the following is traditionally taken in consideration: health and safety initiatives, diversity of workforce and employee turnover percentages. External social evaluations have also been viewed as important social corporate initiatives and may include philanthropic activities and community support activities (Labuschagne and Brent, 2008). Matten and Moon (2008) developed an implicit-explicit framework of social-oriented CSR. Implicit CSR suggests that companies integrate corporate norms and values into CSR, thus, “walk the talk” to pursue greater good for the broader society. Alternatively, explicit CSR refers to corporate symbolic CSR governance policies and regulations that spread a signal that companies are doing CSR activities.

Environmental-oriented CSR

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because of its unique non-anthropocentric and eco-centric perspectives (Shrivastava, 1995). Organizations can develop competitive advantages by engaging in a number of environmental related CSR governance mechanisms (Porter & Van der Linde, 1995; Reinhardt, 1999; Sarkis, 2009). Environmental-oriented CSR governance may include governance policies and regulations that range from strategic practices such as including environmental experts on boards and top executives (Cordeiro and Sarkis, 2008; Lewis et al., 2014; Walls and Hoffman, 2013), to operational issues such as integrating environmental accounting and management systems and green supply chain activities (Darnall et al., 2009; Henri and Journeault, 2010; Wolf, 2014). Organizations may implement these governance mechanisms for a number of reasons including meeting environmental regulatory requirements, beating competitive benchmarks, and enhancing corporate reputation (Archel et al., 2011; Contrafatto, 2014).

What CSR means for this research

To continue on the working definition used for this thesis, a combination of the stakeholder theory and the three concerns of Elkington (1997) is used, which are the social, environmental, and economic concerns. The internal stakeholders named by the stakeholder theory will be added to the social concern of Elkington’s concerns. Nevertheless, since there is a big overlap between the economic concern and the dependent variable, financial performance, set for this research, the economic concern will also be left out in the working definition of this thesis. The following understanding of CSR is used: the voluntary integration of social and environmental concerns into daily business practices. It is about going beyond the law and implement social and environmental-oriented CSR in such a way that the least negative impact is made on the internal and external stakeholders of a company.

Financial Performance

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Moreover, Return on Assets (ROA) and return on equity (ROE) are two measurements which are common accounting measures used by the investment community to assess firm performance and are among the most widely used variables to measure firm performance in empirical research (Capon et al., 1996; Davis et al., 2000). In order to evaluate the financial performance of a company, Bertonèche (2001) suggests that there could be assessed based on financial ratios which are categorised as profitability, efficiency, financial (leverage) and liquidity ratios. Nevertheless, those ratios indicate short term performance. In order to evaluate the long term financial performance of a company, the ROE is measured. ROE is the amount of net income returned as a percentage of shareholders equity. ROE measures a corporation’s profitability by revealing how much profit a company generates with the money shareholders have invested (de Wet & du Toit, 2007).

To elaborate further on the ROA, it measures how much money was generated for each penny invested in assets. In other words, ROA is a measure of the success of a firm in using assets to generate earnings independent of the financing (debt versus equity) of those assets (Selling & Stickney, 1989).Also, for ROA counts that the implications of a given ROA are affected by other considerations. ROA will be high in an industry that requires only minimal investment to operate, such as real estate sales companies. On the other hand, industries that require large investments in plant and machinery, such as the car industry, are likely to have a lower ROA. ROA gives a manager, investor, or analyst an idea as to how efficient a company's management is at using its assets to generate earnings. ROA is displayed as a percentage (Edmonds et al., 2017).

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Board diversity

The board of directors is the most important decision-making body in a corporation. Boards are responsible for approving major strategic and financial decisions, such as mergers and acquisitions (M&As) and changes in capital structure, and also for the most important task of all, which is to hire and fire top executives. People from different backgrounds, sex and ages bring in different opinions, norms and values within a board, which can have very advantageous and disadvantageous consequences. The term used for these differences within boards is called board diversity. Examples of board diversity characteristics are educational background, functional background, industry experience, social connectedness, insider status, gender, nationality and ethnicity (Baker & Anderson, 2010).

Arguments in favour of board diversity are seen from two main points: ethical and economic (Van der Walt & Ingley, 2003). Ethical arguments regard board diversity as a desirable end in itself and emphasise that it is inequitable to exclude people due to their gender, race, or other non-performance related characteristics from the corporate elite (Singh et al. 2001). Existing literature on ethical aspects discuss that this underrepresentation of certain groups raises ethical considerations that derive from an imperative to enfranchise those constituencies historically excluded from positions of economic power. Such research begs firms to increase the diversity of boards because it achieves for society an outcome that is more equitable (Carver, 2002; Keasey et al., 1997). Moreover, in some sense, economic benefits rest on the underlying assumption that the board's composition affects the way the board performs its functions, which partially determines firm performance (Dalton et al., 1999; Kiel & Nicholson, 2003).

Boards are increasingly seen as responsible for matters relating to CSR and sustainability (Ingley 2008) which is reflected quite often in many studies (Elkington 2006; Jamali et al. 2008; Kakabadse 2007). These studies indicate that CSR is a critical item on boards’ agendas (Kakabadse 2007), and boards have major responsibility in achieving these objectives (Elkington 2006). Therefore, they are of significant importance in order to make decisions on CSR strategies and the way carrying forward the message in- and outside the company.

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diversity is positively associated with CSR components in the community, environment, product, and corporate governance areas. Examining the impact of each diversity component, it is found that gender diversity increases CSR strengths and reduces CSR concerns, while both tenure and expertise diversities reduce CSR concerns (Harjoto et al., 2015).

Additionally, it needs to be taken in consideration that the study of Harjoto et al. (2015) only focused on the relationship between board diversity and CSR, and, has no interaction with financial performance. So, as already mentioned, the contribution of this study will be the interaction with financial performance, so to check whether social and environmental-oriented CSR activities are found to increase financial performance moderated by board diversity.

Hypothesis development

In order to investigate whether there is a moderating effect of board diversity, based on the data used for this study, there needs to be seen if there is a relationship between company’s CSR practices and financial performance. For that reason, the relationship between social and environmental-oriented CSR, and financial performance are first argued and later the moderating effect per board diversity is argued.

CSR and Financial Performance

The theory review gives a general overview of the three different concepts within this research. As already mentioned, the relationship between a firm’s CSR practices and financial performance has different outcomes per study. Reasons for this difference is mostly due to different measurement tools used for the financial performance and it could be explained by the fact that there is an influence on this direct effect. Therefore, it is wise to test whether or not, there is found a relationship between the two concepts based on the data used.

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a company. Another argument is regarding the customers and the community, the external stakeholders of a firm. Research shows that when companies are perceived as adhering to social norms through their CSR actions, they gain legitimacy and support from the consumers within the community (Kim et al., 2014). With this legitimacy and support from the consumers, a logical cause is that the company’s reputation will improve, which is classified as an intangible asset and might be a non-imitable competitive advantage (Louisot, 2004). As explained in the literature review, by gaining intangible assets which are not imitable by others, a company is able to keep a better performance for a longer period due to their competitive advantage (Branco & Rodrigues, 2006). Due to above named arguments it is expected that social-oriented CSR practices have a positive influence on the financial performance. This leads to the following hypothesis:

H1A: The greater the amount social-oriented CSR practices of a firm results in a

greater financial performance of a firm.

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really investing in environmental-oriented CSR. To conclude this paragraph, the following hypothesis is stated:

H1B: The greater the amount environmental-oriented CSR practices of a firm results in

a greater financial performance of a firm.

Board diversity as a moderating effect

In order to explain and test which types of board diversity moderates the effect between firm’s CSR practices and financial performance, there are hypotheses generated. For the board diversity related hypotheses is a distinction made between information-related diversity and person-related diversity. Information-related (tenure and expertise) diversity impacts the firm in the longer term, in an area such as CSR practices that is inherently about bringing together knowledge from different domains, information-based diversity should be expected to contribute positively (Oldham and Cummings, 1996). Person-related (gender) diversity is also found to be important to look at, since those are mostly found to emphasize to the conflicts and disagreements that diversity can induce (Barker and Mueller, 2002).

Gender diversity

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CSR practices wherethrough the financial performance will increase. For that reason, the following hypothesis is tested in this thesis:

H2A: The higher the gender diversity in a board, the stronger the relationship between

company’s social-oriented CSR practices and financial performance.

To continue on the environmental-oriented CSR in relation to the financial performance, the argument in favour might be slightly different. Several papers show that women may be more adaptable and eﬀective at pursuing company sustainability than men (e.g. Alonso-Almeida Mdel et al., 2017), which relates to environmental-oriented CSR. So, more women in a board might lead to better decisions with regards to environmental-oriented CSR which results in a higher financial performance. However, the same counter argument as with the social-oriented CSR could be used for environmental-oriented CSR relating to financial performance. Gender diversity is person-related diversity, which is most often seen to emphasize to the conflicts and disagreements that diversity can bring (Barker & Mueller, 2002). However, here again, the major advantage is that having a variety of opinions from different stakeholders who have been previously underrepresented gives a ﬁrm a broader range of knowledge and professional contacts than were available earlier. For that reason, this thesis argues that gender diversity leads to better decisions with regards to environmental-oriented CSR practices wherethrough the financial performance will increase. For that reason, the following hypothesis is tested in this thesis:

H2B: The higher the gender diversity in a board, the stronger the relationship between

company’s environmental-oriented CSR practices and financial performance.

Tenure diversity

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influences the social and environmental-oriented CSR, and business results positively. The reasoning is as follows: the higher the tenure diversity in a board, the more ideas are generated from the combination of ‘old’ and ‘young’ members of the board in order to improve financial performance. The ‘young’ members have fresh and innovative ideas, and the ‘old’ members know what is possible within the company and what is done previously on those matters. Via that way, board members can make the right decisions with regards to social-oriented CSR which results in higher profits. Therefore, the following hypothesis is developed:

H3A: The higher tenure diversity in a board, the stronger the relationship between

company’s social-oriented CSR practices and financial performance.

For the environmental-oriented CSR counts actually the same. Therefore, is the

previous reasoning also used for this hypothesis: the higher the tenure diversity in a board, the more ideas are generated from the combination of ‘old’ and ‘young’ members of the board in order to improve financial performance. The ‘young’ members have fresh and innovative ideas, and the ‘old’ members know what is possible within the company and what is done previously on those matters. Via that way, board members can make the right decisions with regards to environmental-oriented CSR which results in higher profits. Therefore, the

following hypothesis is developed:

H3B: The higher tenure diversity in a board, the stronger the relationship between

company’s environmental-oriented CSR practices and financial performance.

Expertise diversity

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expertise diversity might have a positive influence on the relation between social-oriented CSR practices and the financial performance of a company. The argument is as follows, due to the difference in expertise between the board member, the more the board will learn from each other. And the better the decisions will be in terms of social-oriented CSR which is related to higher financial performance. Therefore, the following hypothesis is developed for this thesis:

H4A: The higher expertise diversity in a board, the stronger the relationship between

social-oriented CSR and financial performance.

To elaborate further on the expertise diversity, it is proposed to have a positive influence on the relation between environmental-oriented CSR practices and the financial performance of a company. The argument is as follows, due to the difference in expertise between the board member, the more the board will learn from each other and the better the team performance will be. This lead to better the decisions will be in terms of environmental-oriented CSR which results in higher financial performance. Therefore, the following hypothesis is developed for this thesis:

H4B: The higher expertise diversity in a board, the stronger the relationship between

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Conceptual model

In order to summarise the above proposed relationships a conceptual model is drawn up. This visualises the proposed relationships and will help to understand the research even better. The conceptual model can be found in figure 4.

Tenure (H2) Expertise (H3) Gender (H4)

Board diversity Social-oriented CSR (H1A) Environmental-oriented CSR (H1B) Financial performance

+

Figure 3 Conceptual Model

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Methodology

This section proposes an empirical strategy to answer the research question at hand and test the proposed hypotheses.

Research design and setting

The research will be on a quantitative basis. Quantitative study designs differ from qualitative study designs in terms that, quantitative study designs are specific, well structured, have been tested for their validity and reliability and can be explicitly defined and recognised (Kumar, 2011). Since a qualitative study design is more of an exploring nature and quantitative has more the nature to quantify data and generalize results from a sample to the population of interest. Therefore the latter named study design fits better the purpose of this study. In order to obtain the data, secondary data is used, which means that it is collected by a different party and recorded and stored in the form of accessible databases (Blumberg et al., 2014). The dataset used, is the Thomson Reuters ASSET 4, which includes environmental, social, governance and economic data (ESG database). The comprehensive ESG database contains information on over 7,000+ global companies and over 400 metrics, including all exclusion (ethical screening) criteria and all aspects of sustainability performance. The data is gathered from publicly available information sources and is manually collected to ensure that the information is standardized, comparable and reliable. All the ESG data collected is quality controlled and verified in a rigorous process by experienced analysts and robust automated checks (Thomson Reuters, 2018).

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The opinions on a sufficient sample size differ considerably within the research literature. Bailey (1994) suggests the minimum sample span of thirty to a hundred units for analysis to be reliable, while some others argue for larger samples, preferably around 200 units (Thomas, 2004). Insufficient sample size is also associated with major problems of regression results. A sample size corresponding to 10 individual units per variable ought to mitigate such problems and produce reliable results (Peduzzi et al., 1996). As our study focuses on two independent, one dependent, three moderating and three control variables, the desired sample size should consist of at least 90 companies. Nevertheless, as already mentioned, the sample exists of 1531 companies, so there are (more than) enough companies included in order to run a proper regression analysis which show reliable results.

Countries

Frequency Percent Valid Percent Cumulative Percent

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United Kingdom 204 13,3 13,3 60,7

United States 602 39,3 39,3 100,0

Total 1531 100,0 100,0

Table 1 Sample

To continue on the research setting, a time lag is used in order to be able to conclude whether there is a positive relation between CSR practices and financial performance. Research has shown that CSR investment will pay out on the long-term, so for that reason a time lag of five years will be used. To elaborate further on this time lag, according to Fang and Yang (2011), a crisis can damage the companies. Therefore, it is necessary to not focus on the period, 2007-2008, where the financial crisis was experienced worldwide. Firms are less willing to invest money on CSR activities and consumers are less influenced by the quality and visibility of a company. Therefore, a period after the financial crisis will be used in order to give a good impression on the relation proposed. Since the data from 2017 is not completely processed at the moment, the decision is made to look at the data for the independent variables based on 2011 and the data for the dependent variable is based on the year 2016. For the control data is also data from 2016 used since those variables control on the influence of the dependent variable. Lastly, the data for the moderating effect is from 2011, since the hypotheses in this thesis reason that diverse boards cause CSR to have a stronger effect on Financial Performance. For that reason, it makes sense to use the same time for the moderating variables.

Operationalisation variables

In order to test the hypothesis independent, dependent, moderating and control variables needs to be set. In the coming section, those variables will be reviewed and discussed.

Independent variables

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The scores are determined per variable by a methodology developed by Thomson Reuters. The Percentile Rank scoring methodology is adopted to calculate the seven category scores for the social and environmental-oriented CSR. It is based on three questions:

- How many companies are worse than the current one? - How many companies have the same value?

- How many companies have a value at all?

Percentile rank score is based on the rank, and therefore it is not very sensitive to outliers. The distribution of the scores generated with percentile rank score is almost flat; for this reason, average and standard deviation of the scores generated with percentile rank score are not overly useful. The score on social and environmental-oriented CSR per company are calculated via the following percentile rank formula:

Score = 𝑁. 𝑜𝑓 𝑐𝑜𝑚𝑝𝑎𝑛𝑖𝑒𝑠 𝑤𝑖𝑡ℎ 𝑤𝑜𝑟𝑠𝑡 𝑣𝑎𝑙𝑢𝑒+

𝑁. 𝑜𝑓 𝑐𝑜𝑚𝑝𝑎𝑛𝑖𝑒𝑠 𝑤𝑖𝑡ℎ 𝑡ℎ𝑒 𝑠𝑎𝑚𝑒 𝑣𝑎𝑙𝑢𝑒 𝑎𝑠 𝑡ℎ𝑒 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑜𝑛𝑒 2

N. of companies with a value

Each category score is the equally weighted sum of all relevant indicators for each industry used to create it. The normalised weights are calculated excluding quantitative indicators with no data available in the public domain as it would be highly inaccurate to assign a default value. To calculate the social and environmental category scores, TRBC Industry Group is used as the benchmark as these topics are relevant and similar to companies within the same industries. In the table below the pillars environmental and social are reviewed, with the measured categories and the number of indicators in the rating (Thomson Reuters, 2018).

Pillar Category Indicators in Rating

Environmental Resource use 19

Emissions 22 Innovation 20 Social Workforce 29 Human Rights 8 Community 14 Product Responsibility 12 Table 2 Categories environmental and social

Dependent variable

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accounting based financial performance indicator, which can say something about the financial performance in the long run. Besides, several other studies have also used the ROA for the financial performance to test whether CSR practices influence the financial performance (e.g. Galbreath, 2006; Cowen et al., 1987). It is calculated by net income divided by total assets of a company.

Moderation variables

The moderating variable found for this research is board diversity. The boards are assessed on the gender, tenure, and expertise diversities. This data is also gathered from the Thomson Reuters Asset 4 database since this also gives information about the governance of a company. The variables are determined as follows:

- Gender diversity: the score is calculated with the percentile rank formula based on the percentage female in the board.

- Tenure diversity: the score is calculated with the percentile rank formula based on the average number of years each board member has been on the board. - Expertise diversity: the score is calculated with the percentile rank formula

based on the percentage of board members who have either an industry specific background or a strong financial background.

The percentile rank formula mentioned above is the same percentile rank formula as reviewed for the social and environmental-oriented CSR. To be noted is that, not available quantitative measures have no impact on the score as the percentile rank considers only companies with numeric values (Thomson Reuters, 2018).

Control variables

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Second, there is also controlled for firms’ financial risk using the Debt to Equity (D/E) (leverage ratio) because previous studies (e.g., Opler and Titman, 1994) suggest that a higher leverage ratio might indicate higher financial risk, and thus, worse financial performance. As used in this ratio, equity means stakeholders’ equity. The debt to equity ratio compares creditor financing to owner financing. The ratio is calculated by total liabilities divided by total stockholders’ equity (Edmonds et al., 2017).

The third control variable is liquidity because the level of liquidity may influence business risk and the ability of generating earnings raised by companies’ ability of paying off short debt. Liquidity may also influence corporate governance, which in turn affect companies’ profitability and firm value evaluation (Li et al., 2012). Liquidity ratios indicate a company’s ability to pay short-term debts. They focus on current assets and current liabilities (Edmonds et al., 2017). The data on liquidity is based on a score which is again calculated with the percentile rank formula. This is the same percentile rank formula as used for the social and environmental-oriented CSR, and board diversity.

Data analysis

The aim of this thesis is to explore the causal relationship between variables, therefore multiple linear regression analysis is applied, to be more specific the Ordinary Least Square (OLS) method adjusted for panel dataset. This is consistent with other studies (i.e. Marimuthu & Kolandaisamy, 2009). Regression model used can therefore be transcribed as indicated by the following regression line:

Y = b0 + b1X1 + b2X2 + b3X3 + b4X4 + b5X5 + e Y = dependent variable

X = independent variable b0 = constant

b = slope coefficient related to independent variables e = error term

This regression model is operationalized to reflect the specificities of the data sample and the simple regression equation is as follows:

ROA = Constant + b1*Social + b2*Environmental + b3*Debt_to_equity + b4*Liquidity + b5*Industry + e

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ROA = Constant + b1*Social + b2*Environmental + b3*Debt_to_equity + b4*Liquidity + b5*Industry + b6*(Social*Gender) + b7*(Environmental*Gender) + b8*(Social*Tenure) + b9*(Environmental*Tenure) + b10*(Social*Expertise) + b11*(Environmental*Expertise) + e

According to Pallant (2013), there are three major types of multiple regression in SPSS, namely standard multiple regresssion, hierarchical multiple regression and stepwise regression. The standard multiple regression enters all the independent (or predictor) variables into the equatation simultaneously. Each independent variable is evaluated in terms of its predictive power, over and above that offered by all the other independent variables. This is the most commonly used multiple regression analysis. The hierarchical multiple regression method enters all the independent variables into the equation in the order specified by the research based on theoretical grounds. Variables or sets of variables are entered in steps, with each independent variable being assessed in terms of what it adds to the prediction of the dependent varaible after the previous variables have been controlled for. The stepwise multiple regression is the method whereby the researcher provides a list of independent variables and then allows the program to select which variables it will enter and in which order they go into the equation, based on a set of statistical criteria.

With the above stated, the decision is made to go for the standard multiple regression, because this study contains a set of variables (independent, control and moderating) and the aim is to find out how much variance in a dependent variable (financial performance) they were able to explain as a group or block. Besides, this method tells also how much unique variance in the dependent vraiable echt of the independent variables explained.

Robustness test

A common method in empirical studies to examine more in depth the regression analysis is to proceed with a robustness check. A researcher might examine whether by adding, removing or modifying a regressor in analysis, creates different results for the undergoing study or if it enhances the validity of previous outcomes. Leamer (1983) advocated investigations of this sort, arguing that ‘‘fragility’’ of regression coefficient estimates is indicative of a specification error, and that sensitivity analyses (i.e., robustness checks) should be routinely conducted to help diagnose mis specification.

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measure within diversity research (e.g. Wiersema & Bantel 1993; Richard et al., 2004). The Blau Index diversity equation (for coding see Appendix 4A) is as follows:

𝐵𝑙𝑎𝑢 𝐼𝑛𝑑𝑒𝑥 = 1 − ∑ 𝑃

_𝑖2

𝐾

𝑖=1

where K represents number of categories, which are 5 different categories per variable, and Pi

stands for the proportion of individual units within a category (Blau, 1977; Richard et al., 2004).

Preliminary analysis

An Ordinary Least Squares (OLS) multi-regression analysis will be conducted through the use of SPSS. With this type of analysis, the previous named predictions can be tested and examined if those correlation are significant. However, before the OLS regression model can be build, a check need to be done on the correlation. Moreover, prior to the analysis, it is essential to control for some errors that might occur. For that reason, the presence of normality, multicollinearity, linearity, and heteroscedasticity is checked before the analysis.

The correlation is determined with help of a correlation matrix. The correlation matrix is shown in appendix 2A and the results are observed with regards to the level of correlation between the variables.

With regards to normality distribution, according to the central limit theorem, the means of random samples from any distribution will themselves have a normal distribution. Therefore, when the sample has hundreds of observations, the distribution of data can be ignored (Altman & Bland, 1995). The linearity of the data is checked by plotting the independent and the dependent variables. The resulting scatter plot diagram is linear and therefore it can be assumed that there is linearity found in the data.

In statistics, multicollinearity is present when two or more independent variables in the regression is highly correlated among each other. On SPSS, this phenomenon can be checked through the use of the tolerance statistics or the variance inflation factor (VIF). The latest statistical method is used for this thesis. If the value of the VIF is higher than 10, then there is an evidence of multicollinearity (Graham, 2003). After calculation, the average VIF found is lower than 10, therefore the conclusion is that the predictor variables are not affected by multicollinearity (the results of the test are represented in appendix 2B).

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Results

After the control for the OLS assumption is done in the previous chapter, the regression results are analyses in this section. The first step is to look at the descriptive statistics, which show all the variables identified for the analysis. Afterwards, the significance of the results will be checked.

Descriptive statistics

When looking to the descriptive statistics in the table below, we see that there is a big variance in the data on ROA. This is explainable since there are a lot of different companies taken in this sample and the industries vary a lot from each other. When looking to the data on social and environmental, the measures are between 0 and 100, which is logical since 100 is the highest reachable score and 0 the lowest. Also, the conclusion can be made that all the companies in this sample are investing in CSR, at least on the social and environmental side of CSR. Besides, the numbers of the moderating variables are also measures between 0 and 100. So, there is found at least a little diversity with regards to the gender, tenure and expertise diversity in boards Lastly, within the sample there are found 21 different industries which are reviewed as a dummy variable, explained earlier. For this dummy variable are the following values incorporated: 0= false and 1=true.

Descriptive Statistics

N Minimum Maximum Mean Std. Deviation

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32 Sector_10 1531 0 1 ,01 ,081 Sector_11 1531 0 1 ,02 ,143 Sector_12 1531 0 1 ,09 ,283 Sector_13 1531 0 1 ,11 ,309 Sector_14 1531 0 1 ,07 ,260 Sector_15 1531 0 1 ,05 ,227 Sector_16 1531 0 1 ,05 ,223 Sector_17 1531 0 1 ,11 ,308 Sector_18 1531 0 1 ,02 ,143 Sector_19 1531 0 1 ,07 ,262 Sector_20 1531 0 1 ,05 ,227 Sector_21 1531 0 1 ,00 ,051 Valid N (listwise) 1531 Table 3 Descriptive statistics

With the variables above, the model is tested whether there is relation between CSR and financial performance. The first model will include only the dependent, independent and control variables. In the second model, the first moderating effect, gender diversity will be added. The third will include the moderating effect tenure and the fourth will include the moderating variable expertise.

Baseline results

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33 Variables Model 1 ROA Model 2 ROA Model 3 ROA Model 4 ROA Social ,047** (,022) ,043* (,023) ,054** (,022) ,046** (,0203) Environmental -,001 (,022) -,002 (,022) -,008 (,022) -,003 (,022) D/E ,156 (,160) ,165 (,160) ,141 (,159) ,155 (,160) Liquidity ,067 (,044) ,072 (,044) ,062 (,044) ,070 (,044) Sector_1 11,524*** (2,958) 11,328*** (2,964) 10,677*** (2,940) 11,398*** (2,970) Sector_2 9,229*** (1,898) 8,861*** (1,920) 8,393*** (1,896) 9,036*** (1,908) Sector_3 16,797*** (3,101) 16,549*** (3,108) 15,976*** (3,095) 16,626*** (3,108) Sector_4 19,300*** (3,522) 18,637*** (3,560) 17,687*** (3,509) 18,895*** (3,549) Sector_5 15,793*** (2,188) 15,446*** (2,205) 14,618*** (2,184) 15,423*** (2,216) Sector_6 15,148*** (2,340) 14,826*** (2,354) 14,190*** (2,330) 14,924*** (2,360) Sector_7 15,280*** (1,856) 14,977*** (1,872) 13,965*** (1,865) 15,045*** (1,873) Sector_8 12,323*** (2,549) 11,906*** (2,572) 11,836*** (2,535) 12,125*** (2,559) Sector_9 18,606*** (1,760) 18,173*** (1,794) 17,352*** (1,767) 18,419*** (1,777) Sector_10 12,890** (4,623) 12,595** (4,631) 10,858** (4,603) 12,694** (4,630) Sector_11 8,226** (2,774) 7,825** (2,793) 6,828** (2,774) 7,972** (2,786) Sector_12 13,209*** (1,705) 12,953*** (1,718) 11,936*** (1,716) 12,944*** (1,723) Sector_14 16,574*** (1,741) 16,094*** (1,779) 15,213*** (1,755) 16,419*** (1,752) Sector_15 14,418*** (1,970) 14,108*** (1,985) 13,429*** (1,964) 14,063*** (1,997) Sector_16 12,929*** (1,979) 12,482*** (2,009) 11,834*** (1,976) 12,622*** (2,000) Sector_17 ,930 (1,596) ,737 (1,604) -,175 (1,601) ,815 (1,604) Sector_18 23,959*** (2,742) 23,376*** (2,783) 22,608*** (2,740) 23,702*** (2,757) Sector_19 14,496*** (1,744) 14,153*** (1,764) 13,239*** (1,754) 14,388*** (1,764) Sector_20 14,229*** (1,944) 13,942*** (1,957) 13,045*** (1,945) 13,934*** (1,973) Sector_21 28,923*** (7,139) 28,705*** (7,144) 27,681*** (7,089) 28,557*** (7,151) Gender ,015 (,014) SOCxGEN -,143 (,677) ENVIRxGEN -,133 (,682) Tenure ,044** (,014) SOCxTEN -2,056** (,639) ENVIRxTEN 1,091* (,649) Expertise -,015 (,014) SOCxEXP -,126 (,676) ENVIRxEXP ,208 (,675) Constant 26,171** (8,475) 25,347** (8,505) 25,934** (8,412) 27,152** (8,529) Observations 1530 1530 1530 1530 R-squared ,188 ,189 ,202 ,189

Standard error in parentheses ***p<0.001, **p<0.05, *p<0.1

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Based on the regression model some interesting results shown up. For the first model, the social and environmental-oriented CSR are tested on the ROA. The regression has a significance level of ,000 and the R-squared of the model is ,188. The first result discussed is the relationship between social-oriented CSR and financial performance. The model shows a significant relationship between social-oriented CSR and financial performance. As expected and discussed in the literature review, the social-oriented CSR has a positive relationship on the financial performance. This implies that the more invested in the social-oriented CSR of a firm, the higher the financial performance of the firm will be. This model suggests that there is significance evidence for hypothesis 1A. The second result discussed is the relationship

between environmental-oriented CSR and financial performance. The first model shows that there is no significant evidence for the relationship between environmental-oriented CSR and financial performance, so hypothesis 1B is rejected.

To continue on the second model, the moderating effect of gender diversity is added to the relationship between CSR and financial performance. The overall regression has a significant level of ,000 and the R-squared is ,189, so slightly higher than the previous tested model in the analysis. When zooming into the predictors of this regression, it can be said that there is no significant evidence of the moderating effect of gender diversity on the relationship between social and environmental-oriented CSR, and financial performance. To conclude, hypothesis 2A and 2B are rejected.

Model 3 shows some interesting results. The moderating effect of tenure was added to the main relationship. The regression has significance level of ,000 and the R-squared is ,202, the highest in this analysis. The model reveals that there is a significant moderating effect of tenure on the main relationship. To be more detailed, tenure has a significant moderating effect on the relationship between social-oriented CSR and financial performance. Besides, tenure has a negative impact on this relationship. This implies, the more tenure diverse board, the poorer decisions will be made on social-oriented CSR issues and eventually the financial performance will be lower. For the moderating effect of tenure on the relationship between environmental-oriented CSR and financial performance, the results suggest that there is significant moderation. However, the main model does not suggest a significant relation between environmental-oriented CSR and financial performance, so therefore also no moderating effect can be reported. For that reason, the conclusion is that both hypotheses 3A

and 3B are rejected.

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the relationship between social and environmental-oriented CSR, and financial performance. The model suggests that there is no moderating effect of tenure on the proposed main relationships. This implies that both hypothesis 4A and 4B are rejected.

Robustness test

A robustness test is conducted for the previous analysis in which the moderating variables are modified. As explained earlier, the board diversity scores are replaced and recalculated into Blau indices. The re-examination of the analysis is reviewed in the table below, table 5. This time only the last three models of the main analysis are redone, because those represent the moderating effect of board diversity. The details of the analysis are found in Appendix 4. BlauGEN stands for the Blau index of gender, BlauTEN stands for the Blau index of tenure and BlauEXP stands for the Blau index of expertise.

The first model of the robustness test has an overall significance level of ,000 and the R-squared is ,190. The model tests the moderating effect of gender on social and environmental-oriented CSR, and ROA. It shows that there is no significant evidence for the moderating effect and therefore hypotheses 2A and 2B are rejected, again. While including the

Blau index for gender diversity, the control variable liquidity becomes significant in the analysis, which is different than in the baseline results.

The second model of this test shows the results for the moderating effect of tenure diversity. The overall significance is ,000 and a R-squared of ,189. In the main analysis, there was reported that tenure diversity had a negative effect on the relation between social-oriented CSR and financial performance. However, this model does not suggest that there is a significant moderating effect of tenure diversity on the relationship between social-oriented CSR and financial performance. Therefore, based on this analysis hypotheses 3A and 3B are

rejected.

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36 Variables Model 1 ROA Model 2 ROA Model 3 ROA Social ,046* (,023) ,049** (,023) ,046** (,022) Environmental -,003 (,022) ,000 (,022) -,005 (,022) D/E ,155 (,160) ,155 (,160) ,151 (,160) Liquidity ,070* (,044) ,066 (,044) ,075* (,044) Sector_1 11,398*** (2,972) 11,396*** (2,962) 11,024*** (2,961) Sector_2 9,036*** (1,909) 9,091*** (1,902) 8,865*** (1,904) Sector_3 16,626*** (3,106) 16,693*** (3,104) 16,203*** (3,103) Sector_4 18,895** (3,551) 19,244*** (3,527) 18,344*** (3,544) Sector_5 15,423*** (2,192) 15,668*** (2,190) 15,152*** (2,200) Sector_6 14,924*** (2,351) 15,227*** (2,343) 14,640*** (2,353) Sector_7 15,045*** (1,862) 15,175*** (1,859) 14,734*** (1,868) Sector_8 12,125*** (2,557) 12,553*** (2,555) 11,931*** (2,551) Sector_9 18,419*** (1,772) 18,584*** (1,762) 18,094*** (1,774) Sector_10 12,694** (4,628) 13,100** (4,630) 12,189** (4,623) Sector_11 7,972** (2,783) 8,157** (2,775) 7,672** (2,780) Sector_12 12,944*** (1,713) 13,134*** (1,706) 12,628*** (1,717) Sector_14 16,419*** (1,764) 16,569*** (1,742) 16,122*** (1,751) Sector_15 14,063*** (1,980) 14,437*** (1,975) 13,655*** (1,989) Sector_16 12,622*** (2,003) 12,874*** (1,980) 12,441*** (1,988) Sector_17 ,815 (1,599) ,882 (1,599) ,602 (1,603) Sector_18 23,702*** (2,752) 23,765*** (2,752) 23,420*** (2,753) Sector_19 14,388*** (1,752) 14,382*** (1,749) 14,227*** (1,759) Sector_20 13,934*** (1,954) 14,287*** (1,945) 13,688*** (1,963) Sector_21 28,557*** (7,148) 28,830*** (7,143) 28,125*** (7,137) BlauGEN -,015 (20,233) SOCxBlauGEN -,126 (,636) ENVIRxBlauGEN ,208 (,638) BlauTEN 25,650 (21,341) SOCxBlauTEN -,517 (,673) ENVIRxBlauTEN ,618 (,690) BlauEXP -133,365** (50,499) SOCxBlauEXP ,212 (,685) ENVIRxBlauEXP -,147 (,696) Constant ,863 (20,843) 1,084 (22,017) 154,604*** (49,372) Observations 1530 1530 1530 R-squared ,190 ,189 ,192

Standard error in parentheses ***p<0.001, **p<0.05, *p<0.1

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Discussion

The aim of this research is to assess whether there exists a correlation between different levels of CSR, social and environmental-oriented, and the financial performance of a company. Moreover, it is researched if a company which invests extensively in socially and/or environmentally activities experiences higher financial performance compared to one who does not. A firm-level approach was conducted evaluating the interaction term board diversity. In order to test the hypotheses an OLS multiple regression analysis was conducted.

In the main analysis is found significant support for hypothesis 1A. This suggests that

there is a direct relationship between social-oriented CSR practices of a company and the financial performance. However, no significant support for hypothesis and 1B was found. This

suggests that there is no direct relationship between environmental-oriented CSR practices of a company and the financial performance. This is in line with other studies, for instance Seifert et al. (2003). Besides, as mentioned in the literature review, this study tested the overall environmental-oriented CSR. Studies that found significant relationships between environmental-oriented CSR and financial performance results (e.g. Orsato, 2006; Chen, 2008; Fraj-Andres et al., 2009), tested environmental-oriented CSR partially on financial performance and therefore might have found significant relationships. The robustness test only tested the moderating variables on the main relationship, since only those were changed for the robustness test.

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Moreover, the third set of hypotheses is built around the idea that tenure diversity in a board moderates the relationship between a firm’s CSR practices and financial performance. From the main analysis, the conclusion is that tenure has a significant moderating effect on the relationship between a firm’s social-oriented CSR practices and financial performance. Tenure diverse boards influences the relationship between social-oriented CSR and financial performance negatively. This means that the more tenure diverse boards make poorer decisions around social-oriented CSR, which leads to poorer financial performance. An explanation could be that CSR is still ‘new’ to boards, however, they do realise that it is important. It could be that difference in years of board members being part of the board have an influence on the decisions regards social-oriented CSR. It might be explainable between the misfit between the ‘new’ and ‘old’ member of the boards. The newer board members are not yet part of the corporate mindset, which is developed by the more tenured board members. The ‘new’ board members recognise the importance of CSR but might not be used to the corporate mindset developed by the other members. This misfit could lead to poorer decision-making and eventually lead to poorer investment on social-oriented CSR and poorer financial performance. To continue on the environmental-oriented CSR, the analysis suggests that there is no significant moderating effect of tenure on the relationship between environmental-oriented CSR practices of a company and the financial performance. According to the robustness test, the moderation of tenure diversity of boards, measured in Blau indices, does not significantly influence the relationship between social-oriented CSR and financial. Also, there was no significant moderating influence of tenure diversity in the relationship between environmental-oriented CSR and financial performance. This first result of the robustness test is in contrast with the main analysis, which is very surprising. It is hard to find one explanation for this result. It might be due to the fact that Blau indices are categorical information, whereas the score from the database is a continuous variable. It could also be, that there is a huge influence from another variable, which is not included as control variable in this research. Or that there is just a too big difference between the Thomson-Reuters score and the Blau indices. Nevertheless, it is interesting point for future research.

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decisions which are made with regard to the CSR practices in relation to the financial benefits. It might be that expertise diversity is not reported as a moderating interaction, because it only influences CSR decisions, as Harjoto et al. (2015) suggests but has simply no influence on the relationship between CSR practices and financial performance.

Theoretical implications

This study has evaluated the moderating effect of board diversity on the relationship between CSR and financial performance. It turned out that there is no direct relationship between environmental-oriented CSR and financial performance based on the data used for this study. This is not very different from what we already knew. A lot of studies showed difference in outcomes. Nevertheless, the study showed that there is a positive relationship between social-oriented CSR and financial performance. Moreover, the result of this study was that partially board diversity moderates the relationship, since there is evidence that tenure diversity influences the relationship between social-oriented CSR and financial performance. It showed that tenure diversity influences the relationship between social-oriented CSR and financial performance negatively. Nevertheless, board diversity in terms of tenure does not moderate the relationship between environmental-oriented CSR and financial performance.

Moreover, this study has several significant theoretical implications underlining the importance of the research. To start, this thesis represents a step towards filling in the research gap within the CSR literature and financial performance by focusing on developed countries. Secondly, it provides support for the findings which report a positive relation between CSR and financial performance (e.g. Reverte et al., 2016). Thirdly, it adds to the board diversity literature by confirming the importance of tenure diversity boards with regards to CSR and financial performance.

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Managerial implications

Practical implications of this thesis for companies operating within developed countries are very much straightforward. While investing in social-oriented CSR, they might expect better financial performance on the long-term. As gender and expertise diversity were not found to have a moderating significant impact on social and environmental-oriented CSR, and financial performance, companies might do better to focus on other types of diversity when composing their executive suites when they want to be successful in CSR and having better financial performance. To achieve the best possible CSR decisions and experience the best possible financial performance, it is advisable to appoint not very tenure diverse executives as they proved to have a significant negative moderating effect on the CSR practices in direct relation to financial performance. This suggestion should hold for the majority of the developed countries.

Limitations and future research

A potential limitation in the conducted analysis is the method used to measure social and environmental-oriented CSR. The scores based on the ESG database, for social and environmental-oriented CSR, are retrieved and constructed by ASSET4 which only takes in consideration information on firms that is publicly available. It would be valuable and of additional advantage to have information on privately owned firms to check the results even more in-depth. In addition, the ESG scores provide only information about a firms’ social and environmental behaviours and not the actual social and environmental impact that they create for their employees, society and other stakeholders. Moreover, error bias could be detected in the analysis. A way to overcome this problem in future research is to focus on a different measure in order to calculate the level of a firm’s CSR investments. There are several indexes that provide scores on CSR activities, from the KLD indicators to consumer reports’ ratings, which can be utilized as alternatives.

Furthermore, all the companies in the sample of this thesis come from the same database. All the companies are very known and from different countries, specifically developed countries. It would be interesting to study a higher number of firms, especially with a focus on companies in developing country, to see if this makes difference in the results.

Thesis for MSc IB&M