When Corporate Boards Make a Difference: The Case of Corporate Social Irresponsibility
Tessa Kuipers 13003003
June 2021, Final Master Thesis
MSc Business Administration – International Business Track Amsterdam Business School, University of Amsterdam
EBEC 20210614050615 Supervisor Federica Nieri
Statement of Originality
This document is written by Tessa Kuipers who declares to take full responsibility for the contents of this document.
I declare that the text and the work presented in this document are original and that no sources other than those mentioned in the text and its references have been used in creating it.
The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.
Table of Contents
Introduction ... 5
Literature Review... 9
Board of Directors ...9
Corporate Social Irresponsibility... 12
Board of Directors and CSIR ... 19
Research Question ... 25
Theoretical Framework ... 27
Size and CSIR ... 27
Gender Diversity and CSIR ... 30
Independent Directors and CSIR ... 32
Subcommittee and CSIR ... 34
CEO-Chairman Duality and CSIR ... 36
Data and Methodology ... 39
Sample ... 39
Data Collection ... 40
Variables ... 42
Data Cleaning Procedure ... 46
Empirical Analysis ... 47
Results ... 48
Descriptive Statistics ... 48
Hypothesis Testing ... 50
Discussion ... 54
Limitations and Future Research ... 61
Conclusion ... 62
References ... 64
Despite the abundance of studies on the relationship between corporate governance and corporate social responsibility, the field is almost devoid of research on the board of directors and its implications for corporate social irresponsibility (CSIR). Recent studies on corporate governance have called for more research from a micro-level perspective, particularly board characteristics, on the topic of CSIR. The aim of this paper was to investigate how the board of directors, specifically its size, gender diversity, independence, presence of a subcommittee, and CEO-chairman duality influence CSIR. Drawing upon insights from agency and resource dependence theory, hypotheses were developed and tested using panel data from 130 publicly traded firms in the United States between 2010 and 2020. The results from the regression analysis showed that a large board, greater gender diversity and the existence of a board subcommittee that is responsible for social, ethical, or sustainable matters are significant elements that can reduce CSIR incidents of a firm. A majority independent board and the presence of CEO-chairman duality did not have a significant effect. These findings provide in- depth insights into the association between corporate governance and CSIR and has important implications for managers and practitioners who want to avoid irresponsible business practices.
Board of Directors and Corporate Social Irresponsibility
Over the past decades, corporations have ramped up their focus on responsibility and are increasingly motivated to integrate tenets of social and environmental responsibilities into their values and strategies (Swanson, 2008). This comes largely because of greater levels of
supervision and pressure to operate in socially responsible ways from firm stakeholders, including shareholders, consumers, employees, and governments (Orazalin, 2019). Firms are being held more accountable for their behavior than ever before, both by internal and external parties, and it is no longer tolerated to behave irresponsibly (Stabler & Fischer, 2020).
Prior research has extensively acknowledged the role of the board of directors in developing and adopting strategies to address corporate environmental and social performance (Orazalin, 2019; Kassinis & Vafeas, 2002; Baysinger & Hoskisson, 1990; Dalton et al., 1998).
The board, as a collective body of decision makers, is one of the most important units in terms of giving advice, direction and supervision to top management and oversees whether the company fulfills their legal, social, and economic responsibilities (Buckholtz et al., 2008; Godos-Díez et al., 2018; Ibrahim et al., 2003). The rapid proliferation of corporate scandals over the past 20 years, such as BP, Volkswagen, and Walmart, each scandal receiving international attention, have ramped up explorations in academia to gain a deeper understanding of the association between corporate governance and responsibility (Harjoto et al., 2015; Nadeem et al., 2017;
Neville et al., 2019; Orazalin & Baydauletov, 2020; García‐Sánchez, 2019). Scholars have been particularly interested in corporate social responsibility (CSR), which has provided valuable and rich insights into how governance structures influence CSR strategies (Ormiston & Wong, 2013;
Ibrahim et al., 2013; Orazalin, 2019; Galbreath, 2017). Gender diversity (Galbreath, 2011), independence (Kassinis & Vafeas, 2002), a large board size (Orazalin & Baydauletov, 2019),
educational background and tenure (Harjoto et al., 2015) have been found to positively influence CSR initiatives, such as CSR-related spending and the creation of CSR committees (Chang et al., 2015). However, the relative importance of certain board characteristics in the literature on corporate governance is still debated. Empirical evidence is mixed, as some studies showed a negative association between the above-mentioned characteristics and CSR initiatives, and others found no association (Salehi et al., 2017; Chang et al., 2015; Naciti, 2019).
Despite the abundance of studies on the relationship between corporate governance and social responsibility, the field is almost devoid of research on the board of directors and its implications for corporate social irresponsibility (CSIR) (Fu et al., 2019). CSIR occurs when a company focuses predominantly on its own interests and profitability and acts at the expense of those it affects, be that the community, suppliers, employees, or environment. The focus of irresponsibility is on corporations that disregard their legal obligations, ethical commitments, and economic and social responsibilities (Jones, 2013). While there have been a handful of
investigations into the relationship between corporate governance and CSIR, these have studied the influence of the macro environment, such as institutional pressure (Surroca et al., 2013, Keig et al., 2015) or the meso environment, such as internationalization and organizational culture on irresponsibility (Mishina et al., 2010; Palazzo et al., 2012; Strike et al., 2006; Zhang & Zhang, 2020). These ‘rules of the game’ incentivize or restrict irresponsible behavior of organizational actors (Aguilera & Jackson, 2003; Neville et al., 2019; Surroca et al., 2013). Micro-level
research on corporate governance and CSIR has investigated the behaviors and characteristics of CEOs, such as education, values, age, and political orientation. Up to now, discussions along this line have largely overlooked the role of the board in relation to CSIR. From a micro-level
perspective, corporate governance focuses on the roles, structures and set up of management that
is in place to optimally control and monitor the behavior of organizational actors. What is not yet clear is the influence of board characteristics on CSIR, and scholars have acknowledged the need for academia to bring this field further (Schnatterly et al., 2018; Sun & Ding, 2020; Antonetti &
Maklan, 2016; Seto-Pamies, 2015; Orazalin, 2019; Jain & Zaman, 2020).
Given the limited findings in prior literature, the question as to whether structural features of the board influences CSIR remains open. This thesis addresses the scarcity of empirical
evidence on CSIR, particularly through the influence of board elements that have been studied in existing literature, namely board size, gender diversity, independence, and the presence of a subcommittee, from a micro level perspective. Finally, the moderating role of CEO-chairman duality is examined. The purpose of this study is to fill the research gap by exploring the influence of the board of directors on CSIR by posing the following question:
To what extent does the board of directors influence corporate social irresponsibility?
This study uses a quantitative approach, primarily through utilizing secondary data on publicly traded American firms, to perform empirical research. We draw on information from three databases, namely Violation Tracker, BoardEx and Compustat Global, and run a negative binomial regression to refine the understanding on the association between the board of directors and CSIR. By analyzing board characteristics that have been previously studied in corporate governance and responsibility literature, we provide a useful comparison point. As both Orazalin and Baydauletov (2020) and Chiu and Sharfman (2018) have pointed out, a detailed examination of board structures and its effect on irresponsible activities can provide greater insight into the relationship, making it a critical contribution to both academia and practice.
This thesis contributes to the growing literature by exploring ways in which corporate governance shapes a firm's involvement in CSIR, drawing upon insights from resource
dependence and agency theory. We advance the literature and offer a more precise understanding by testing a complex model that includes board characteristics and the potential interacting influence of CEO-chairman duality on CSIR. The directions of the relationships are clarified and through this the association between two relevant concepts in management is uncovered.
Furthermore, by shedding light on board characteristics that limit CSIR, this study adds nuance to the growing list of antecedents of CSIR, an understudied yet highly relevant
phenomenon in business. At the same time, this thesis will fill the void from previous academic literature and provide new insights from a micro-level perspective. The specific focus on the micro-level perspective on the board of directors is an important addition to the recent body of scholarly research on corporate governance and firm outcomes. Evidence shows that the board brings key resources and advice that systematically influences an organization’s irresponsible behavior. This will encourage scholars to explore the relationship between the board of directors and CSIR in future research.
From a practical point of view, these findings reinforce the idea that corporate
governance, particularly through the board of directors, can be a beneficial tool for restricting CSIR in firms. Management should be aware that the creation of specific corporate governance procedures can be a potential way of curbing CSIR practices. This means that practitioners should make efforts to foster an effective board of directors, through size, gender diversity and subcommittee presence. Firms should reevaluate their boards if they want to reduce irresponsible business practices. A particular implication is that the evidence emphasizes the vital resources women bring to the board of directors and highlights to policy makers the real business value
that comes from gender diversity. In general, companies should better understand how the composition of the board of directors influences them, whether it is in relation to monitoring management or the consideration of stakeholders’ and shareholders’ concerns.
The rest of the thesis is organized in the following way. In section 2, a synopsis of the prior contributing literature on the board of directions, CSIR and their interaction is given.
Section 3 formulates the theoretical framework along with the hypotheses. Then, in section 4, the data and methodology are outlined. After this, section 5 presents the main results. This is
followed by section 6, which discusses the findings, contributions and implications for theory and practice and suggestions for future research. Section 7 offers concluding remarks.
Literature Review Board of Directors
The field of corporate governance has been examined by different disciplinary
approaches and theoretical lenses which is why corporate governance can be defined in a broad or specific manner (Jones et al., 2009). Defined broadly, corporate governance is “the study of relationships between parties with a stake in the firm and how their influence on strategic corporate decision making is shaped by institutions in different countries” (Aguilera & Jackson, 2003, p. 447). Simply put, corporate governance establishes guidelines for the structure of firms in the context of the social, regulatory, and market environments. These structures are necessary because of conflicts of interests between key stakeholders, be that shareholders, upper
management, or society (Chang et al., 2015; Godos-Díez et al., 2018; Aguilera & Jackson, 2003). Despite the fact that business objectives are largely universal, corporate governance and structures can vary in a substantive way. The Anglo-Saxon corporate governance model defines the corporate structure and environment in the United States, Canada, and New Zealand. At the
center of this model are the supervision and control functions of the board of directors, who are considered as strong and controlling parties (Baysinger & Butler, 1985). The board of directors, a group of people who are elected by shareholders to oversee, protect, and represent the interests of shareholders, is one of the primary vehicles for corporate governance because it involves ensuring appropriate processes of strategic decisions in corporate affairs.
Most of the literature on the function of the board of directors draws upon agency theory (Boivie et al., 2016). Dating back to 1932, Berle and Means (1932) described for the first time the structure of corporate governance and the issue of separation of ownership and control. Their publication has had a large impact on how corporate ownership in the United States is viewed today. Nowadays, agency theory is commonly used by scholars as a foundation to describe the dynamic between ownership and control. Jensen and Meckling (1976) described the agency relationship as “a contract under which one or more persons (the principals) engage another person (the agent) to perform some service on their behalf that involves delegating some decision-making authority to the agent”. Managers and principles have divergent interests, capacities, and access to information. In such a relationship, conflicts arise between the principal and the agent due to information asymmetry, resulting in a situation where one-party acts in favor of their own interests at the expense of the other (Hillman & Dalziel, 2003; Fama & Jensen 1983). Opportunistic and ego-centric managers who are motivated by self-interest will overlook the interest of shareholders at the expense of a range of stakeholders. They are willing to
sacrifice long-term goals for short-term personal gain, even if it means jeopardizing the interests of the broader corporate environment, such as firm reputation and external stakeholders. In the United States, board structures are unitary, also known as one-tiered. This means that the managerial and supervisory powers are not separated, as they are unified in one board of
directors. This gives managers a degree of power over the direction of a company (Baysinger &
Hoskisson, 1990). The governance system is also characterized by high dispersion of ownership and weak owners, often leaving shareholders with a limited ability to control the decisions taken by top management (Nguyen & Thanh, 2021). This particular control and ownership structure exhibits weaknesses as a result of powerful managers, and it is clear that the corporate board, as a supervising body, plays a critical role in aligning the interests of shareholders (Banerjee, 2014).
Thus, the monitoring function of the board of directors to oversee top management’s execution serves to limit opportunistic behavior and solves problematic manager-shareholder interactions (Fama & Jensen, 1983; Jensen & Meckling, 1976; García‐Sánchez, 2019; Boivie et al., 2016;
Harjoto et al., 2015).
In addition to monitoring top management’s execution and initiatives, the board is responsible for giving advice, supporting decision making and developing strategies (Naciti, 2019). Being at the apex of decision making and approving of major strategic decisions,
successes and failures of firms are often placed in the hands of the directors (Kassinis & Vafeas, 2002). They are involved in defining and selecting corporate strategies, ranging from financial decisions to corporate sustainability practices (Seto-Pamies, 2015). In Dalton et al.'s (1998) meta-analysis, board structure, which was conceptualized as independence and CEO duality, positively influenced financial performance. Along the same lines is the study of Chou et al.
(2013), who found that high meeting attendance and active participation of directors can enhance a firm’s performance. This empirical evidence is in line with Hillman and Dalziel’s (2003) idea that the two main functions of the board of directors are monitoring top management and resource provision in terms of expertise and knowledge (Endrikat et al., 2020).
Corporate Social Irresponsibility
While introduced nearly 45 years ago by Armstrong (1977), CSIR remains relatively new as a concept and has only recently attracted the interest of scholars (Riera & Iborra, 2017). More recently, there has been a growing interest and focus on irresponsibility, both in academia and practice. It is not surprising that companies engage in irresponsible business practices, given how extensively such large scandals are covered in the media. Well-known scandals that serve as clear examples of irresponsible business behavior range from accounting scandals, such as that of Waste Management, to environmental scandals, such as that of Occidental Petroleum (Corporate Finance Institute, 2021; Mattera & Puchalsky, 2021).
Scholars define, conceptualize and measure irresponsible behavior in a variety of ways (Schnatterly et al., 2018) and a consensus regarding its definition has yet to be reached (Riera &
Iborra, 2017). This is not surprising, given the complex nature of CSIR and the fact that it serves as an umbrella term for a variety of related concepts (Murphy & Schlegelmilch, 2013). A pioneer in the field of CSIR, Armstrong (1977, p. 185) first defined social irresponsibility as “the
decision to accept an alternative that is thought by the decision-maker to be inferior to another alternative when the effects upon all parties are considered”. In most cases, this “involves a gain by one party at the expense of a total system” (Armstrong, 1977 p. 185). Lange and Washburn (2012) viewed social irresponsibility through a psychological and subjective lens. They built on the foundation of Armstrong (1977) and highlighted the importance of the perceptions of individuals. Irresponsibility is of great interest to the firm because it “arouses the firm’s observer” (Lange & Washburn, 2012, p. 301). In other words, individual observers will search for information after being exposed to the irresponsible actions of a firm, which forms their judgments, perceptions, and understanding. Thus, the subjective natures of these individual
interpretations are highly influential and help explain the extent of public disdain directed towards certain CSIR incidents (Lange & Washburn, 2012). Public perception is particularly relevant to the firm because it affects the firm's ability to obtain support and resources from its environment. Pearce and Manz (2011) and Lin-Hi and Müller (2013) defined CSIR from a behavioral intentionality perspective and made a distinction between intentional and
unintentional CSIR. Intentional CSIR refers to deliberate actions used to increase profits while disregarding the damages and costs to stakeholders. Unintentional CSIR occurs when companies have no greater objective to their actions and do not deliberately intend to inflict harm on
stakeholders, rather they cause harm as a by-product of their activities. Lin-Hi and Müller (2013) highlighted that even when CSIR is the result of accidental external forces, it does not imply that the firm should be exempt from total responsibility of the event. They concluded that CSIR should be considered as an intentional business action, as opposed to failed responsible behavior (Pearce & Manz, 2011; Riera & Iborra, 2017; Keig et al., 2015). CSIR reflects a firm’s “bad deeds”, irrespective of intentionality.
The definition of CSIR used in this research is naturally broad since irresponsible behavior can take several forms, whether it is in relation to human rights, finance, the environment, competition, or consumers. Following the reasoning of Armstrong (1977) and Lange and Washburn (2012), CSIR occurs when a company focuses predominantly on its own interests and profitability as a result of a failure of control and acts at the expense of those it affects, be that the community, suppliers, employees, or environment (Jones, 2013). By
conceptualizing it this way, irresponsible behavior as it relates to a broad array of stakeholders is captured more comprehensively (Neville et al., 2019).
Firms that engage in CSIR often face considerable consequences (Chiu & Sharfman, 2018). As investors’ expectations decrease and share prices drop, firms could experience significant risks in financial profitability that erode overall competitive advantages (Zhang &
Zhang, 2020). Perhaps what is more troublesome than the short-term financial damages are the deterioration of trust and growing skepticism among stakeholders after irresponsible behavior (Riera & Iborra, 2017; Wang & Li, 2019). The damage on firm reputation, notoriety and brand image threatens to break down the legitimacy of the company, and, in worst-case scenarios, also the overall survival of the company. In some cases, firms face legal action from governmental agencies and may be demanded to pay a penalty to rectify the damages. Large CSIR scandals attract long-term attention from the media and consumers and puts the firm in a position to be on its best behavior. Given that the board act as a decision-making body (Nadeem et al., 2017), represent shareholders, and oversee the creation and execution of strategies (Harjoto et al., 2015), it is imperative to gain more insight into a board composition that limits irresponsible behaviors (Chiu & Sharman, 2018).
Macro, Meso and Micro Approaches to CSIR
Investigations into CSIR have been approached from a macro-, meso- and micro-level lens. Studies using the macro-level perspective have investigated factors from the external business environment and incorporated the wider social, political, and economic dimensions that may encourage or prevent CSIR (Zhang & Zhang, 2020). Surroca et al. (2013) and Keig et al.
(2015) used a macro-level lens to examine potential triggers and incentives for CSIR. In particular, institutional forces, such as country level corruption, governmental regulation, enforcement, vigilance, and stakeholder pressure are influential for the reason that they provide the ‘rules of the game’ (Aguilera & Jackson, 2003). These rules set incentives or restrictions for
behavior of organizational actors (Neville et al., 2019; Keig et al., 2015; Surroca et al., 2013).
Keig et al. (2015) showed that firms operating in highly corruptive environments have higher levels of CSIR incidents, which is most commonly the payment of bribes to public officials. In corruptive environments, firms have more incentive and opportunity to engage in corrupt practices, due to the fact that the formal institutions are absent to mitigate such behavior. This also increasing the risk of CSIR (Campbell, 2007). The association between linkage between the institutional environment and CSIR behavior of firms was also observed in the study of Walker et al. (2019). Coordinated market economies (CME), such as Sweden, Germany, and Japan, rely on non-market relationships, collaboration, and strong networks among firms. Firms in this environment are more likely to face high pressures for CSR because of strict regulation and the norm to build and develop strong relationships. In contrast, liberal market economies (LME), such as the United States, United Kingdom and Canada, are less likely to experience pressures for CSR initiatives as this market economy is characterized by management-driven, reliance on markets, and low collaboration. Walker et al. (2019) concluded that there is significantly lower CSIR behavior in CME’s compared to LMEs, primarily because market economies are built on strong relationships and upholding reputation.
An additional stream of macro-level research found that widespread attention from stakeholders in the external environment is a force that restricts irresponsible behavior of firms (Surroca et al., 2013; Zhang & Zhang, 2020). Specifically, recognition from investors, exposure from the media and awareness of the public, especially consumers, act as supervising entities and carry out restricting effects. This is due to the firm's efforts to uphold its reputation and fulfill its responsibilities. However, Surroca et al. (2013) determined that if stakeholder pressure is too high, it can encourage irresponsibility. Mounting pressure from stakeholders, coming from a
public call for responsibility and consumer activism, works to incentivize MNEs to transfer socially irresponsible business practices to subsidiaries located overseas as a way of escaping the area where pressure for compliance is too high.
Moving away from the macro-level approach, scholarly literature on CSIR also employs a meso-level perspective, focusing on organizational and firm-level factors. One avenue of meso- level research has been the debate on whether and how the internationalization and
diversification of a firm influence CSIR behavior. Strike et al. (2006) viewed CSIR as the result of internationalization because international expansion complicates organizational structures and hinders the control of proper management. This view is in contrast with Nieri and Ciravegna (2019) who suggested that being highly internationalized comes with the supervision of a large group of global stakeholders and concluded that this acts as an incentive for firms to behave as good corporate citizens and avoid CSIR (Surroca et al., 2013). Furthermore, resources, firm size and culture are organizational factors that influence the CSIR behavior of firms. Zhang & Zhang (2020) maintained that young and smaller firms have less resources at their disposal and are more likely to engage in irresponsible business practices to reduce costs as a means of achieving performance goals. This relates to an additional commonly investigated firm-specific variable, which is firm size. As firm size increases, the firm has greater availability of resources and visibility which reduce the incentive to engage in CSIR for financial gains (Brammer &
Millington, 2006). On the other hand, firm size is a determinant of power (Aguinis & Glavas, 2012), and larger firms may have more leeway to act in a certain way that is denied for smaller, less powerful organizations. In their investigation into conditions that trigger illegal acts,
Mishina et al. (2010) claimed that firms who fail to meet high market performance have a greater incentive to take unusually high risks in an effort to meet financial goals. This could be in terms
of illegal or unethical business practices, as judged by internal and external stakeholders. When determining the effects of organizational culture on firm outcomes, Palazzo et al. (2012)
discovered that company culture was associated with CSIR behavior. For instance, in an
organization that is embedded in a culture where aggressive competition is the norm and there is great reliance on profit-maximizing, there is a higher chance of engaging in CSIR (Palazzo et al., 2012; Alcadipani & Oliveira Medeiros, 2019). These environments face high pressure to achieve financial goals and irresponsible behavior is more likely to be condoned.
Lastly, the micro-level perspective on CSIR involves the psychological bases of
individuals. Studies in this domain have largely asserted that irresponsible behavior is done at the hands of top management or the board. An emergent stream of literature, largely grounded in the upper echelon’s theory (Hambrick & Mason, 1984), showed that CEO characteristics – hubris (Tang et al., 2015), ability (Yuan et al., 2019), narcissism (Tang et al., 2018) – influence a firm’s participation in CSIR. This theory puts forward that executives’ decisions are formed by
personality traits and previous experiences, and that outcomes reflect executives themselves. For instance, Tang et al. (2018) found empirical support for the notion that highly confident and ego- centric CEOs will engage in more socially irresponsible ways than responsible ways. This stems from the fact that hubristic CEOs do not consider the importance of stakeholders and ignore their interests due to their belief in their own capabilities (Hayward & Hambrick, 1997). Similarly, the power motivation of leaders plays a significant role in corruptive behavior according to Pearce and Manz (2011). Executives who have a strong desire for personal power are often self-
absorbed with an inflated picture of self-importance (Sajko et al., 2020). They are more likely to use their power in a corruptive way and strive for personal benefit rather than the benefit of the larger community, be that the firm or society.
Scholars have also examined how personal characteristics of top management, such as demographics, values, tenure, and educational background can impact irresponsible business practices. Zhang and Zhang (2020) examined how the age of managers can influence the likelihood of unlawful activities. They found that young CEOs are more likely to rationalize fraud and have a higher tendency to engage in illegal acts. This is similar to the results of Ramdani and Van Witteloostuijn (2012), who concluded that female CEOs are less likely than their male counterparts to engage in misconduct. Insights from the general theory of crime (Gottfredson & Hirschi, 1990) make clear that this is because of the differences in self-control of men and women. They found that men have a lower self-control than women and thereby imply a dissimilarity in their willingness to act irresponsibly (Gottfredson & Kirschi, 1990). Women also more readily uphold ethical standards (Endrikat et al., 2020). The works of Galbreath (2011) and Bear et al. (2010) revealed that, given women’s social and relational orientation, they are better at representing a broad array of stakeholders than men. Furthermore, a handful of studies set forth that business or finance related backgrounds may be related to irresponsible business practices (Simpson & Koper, 1997; Kutzschbach et al., 2020). For instance, in the study of Simpson & Koper (1997), companies with a CEO who had a finance background were found to have higher offending levels than firms with CEOs with other backgrounds, arguing that the educational background of a CEO shapes their orientation and organizational outlook (Sun et al., 2021). Business and finance education stresses maximum growth and a profit-first mentality, which enable CEOs with a finance education to emphasize short term returns, high levels of compensation and wealth as the highest value (Kutzschbach et al., 2020).
Executives’ values, which Chin et al. (2013, p. 1999) defined as “a broad tendency to prefer certain states of affairs over others”, are partly determined by their political orientation
and ideology. Their findings showed that values can shape executives’ organizational choices after a process of weighing alternatives against each other and choosing the action that best suits their values and perceptions. Similarly, Jeong and Kim (2019) put forward that political
orientation, as a reflection of an individual's values, influences corporate social performance.
Liberal CEOs are less likely to engage in socially irresponsible business practices compared to more conservative CEOs because they are more likely to prioritize specific issues such as diversity, environment, and human rights (Jeong & Kim, 2019; Chin et al., 2013). Their values are similar to those that undermine socially responsible activities. Even when the financial
situation of the firm is turbulent, CEOs with higher political liberalism will avoid CSIR (Jeong &
Kim, 2019). Liberal CEOs are less likely to engage in socially irresponsible activities and, in fact, also support corporate efforts to reduce such activities.
While there is micro-level research that focuses on the attributes and characteristics of top management, most studies investigate the role and behavior of the CEO. Discussions have largely overlooked the role of the board in relation to CSIR. At a micro-level, corporate governance focuses on the roles, structures, and set up of management that are in place to optimally control and monitor the behavior of organizational actors. The roles and set up of corporate governance have important implications for CSIR and offers a fruitful avenue of research to fill the gap between the corporate board and irresponsibility.
Board of Directors and CSIR
This thesis examines the relationship between the board of directors and CSIR. While prior empirical literature has examined this relationship from a range of theoretical foundations, insights from two existing theoretical views to lead the literature discussion regarding the
relationship between the board of directors and irresponsible behavior are used. These are agency
theory (Fama & Jensen, 1983; Jensen & Meckling, 1976) and resource dependence theory (Pfeffer & Salancik, 1978). Our reliance on these theories is in line with the recent stream of literature that recognizes the significance of the board in ensuring the appropriate development of strategic decisions. An agency relationship is “a contract under which one or more persons (the principals) engage another person (the agent) to perform some service on their behalf that involves delegating some decision-making authority to the agent” (Jensen & Meckling, 1976, p.
308). From this perspective, corporate behavior is a result of strategic decisions made by
managers on their own. Managers and principles have divergent interests, capacities, and access to information. In such a relationship, conflicts arise between the principals and the agent due to information asymmetry. Opportunistic and ego-centric managers who are motivated by self- interest will disregard outside investors at the expense of shareholders. Within the context of agency theory, the board of directors, as representatives of shareholders, is an important governance mechanism set in place to reduce agency costs. Boards rely crucially on outside directors and on their subjective supervisory function to oversee top management’s executions.
In other words, this control mechanism limits opportunistic behavior and solves the problematic manager-shareholder interactions by separating roles and balancing the interests of multiple stakeholders.
While agency theory emphasizes the board’s monitoring function, resource dependency theory emphasizes the board's resource provision function (Chang et al., 2015). From a resource dependence theory perspective, the board’s contributions stem from their role in creating
direction, offering guidance and expertise, enhancing decision-making, and creating building relationships with stakeholders (Godos-Díez et al., 2018; Chang et al., 2015). They are a critical channel to valuable resources in terms of knowledge, advice, networks, experience, and
legitimacy. Effective stakeholder management is critical in the context of CSIR, and given the complexity of the phenomenon, a thorough understanding of stakeholders is required. Thus, a broad range of qualities and connections of directors enhances problem-solving capacity and the breadth of perspective in restricting CSIR. A greater pool of resources improves expertise and advice given to executives for strategic directions and has the potential to curb irresponsible behavior (Chang et al., 2015; Orazalin, 2019; Godos-Díez et al., 2018).
Board of Directors and Social Responsibility
A bulk of prior literature has investigated the relationship between corporate governance and CSR. Much of this research is also grounded in agency and resource dependence theory.
Scholars recognize the pivotal role that the board of directors plays in a firm’s corporate social responsibility strategies (Walls et al., 2012; Chang et al., 2015; Godos-Díez et al., 2018). The board, as a collective body of decision makers, is one of the main units in terms of providing advice, directions and supervision for socially responsible decisions and ensures the company fulfills their economic, legal, ethical, and social responsibilities (Buckholtz et al., 2008; Godos- Díez et al., 2018). This becomes especially significant given the importance of creating and maintaining stakeholder management when it comes to maximizing shareholder values (Harjoto et al., 2015).
Evidence is not unanimous regarding the influence of corporate governance on CSR practices and a large debate, specifically on the specific composition of the board, still exists (García‐Sánchez, 2019). Chang et al. (2015) found that companies with boards made up of majority independent directors, greater diversity and strong social ties can affect CSR outcomes.
These boards have greater involvement in critical strategic decisions, influencing not only CSR spending, but also the creation of separate standing committees dealing with CSR related matters
(Chang et al., 2015). As the number of members on the board grows, directors get better at overseeing and supervising top management initiatives, allowing for a more effective control structure (Kassinis & Vafeas, 2002; Neville et al., 2019). Thus, the study of Kassinis and Vafeas (2002) demonstrated that a larger board improves the core decision-making function of the board and advances initiatives and development of corporate social policies, positively affecting CSR.
Furthermore, a vast majority of scholars have put forward the notion that diversity in the board has a positive effect on performance. The results of Orazalin and Baydauletov (2019) and
Galbreath (2011) suggest that gender diversity significantly increases CSR performance owing to the fact that women have better relational abilities and meaningful engagement with multi-
stakeholders. Furthermore, diversity in terms of educational background, tenure and experience significantly impacts the accomplishment of CSR policies, since the board can draw on a large pool of resources, specifically knowledge and expertise (Harjoto et al., 2015). Drawing upon agency theory, Galbreath (2017) concluded that a larger portion of inside directors has a negative effect on CSR. This is because inside directors have short-term temporal orientations and biases that outside directors do not have. More recently, Endrikat et al. (2020) combined several characteristics of the board namely size, independence and gender diversity and concluded that they are interrelated and jointly increase a firm's CSR engagements. This bulk of research suggests that specific attributes and features of board members are driving factors for a firm’s CSR engagements and accomplishments.
On the contrary, some studies found a negative or insignificant relationship between the board and CSR (Ruigrok et al., 2006; Naciti, 2019; Salehi et al., 2017). In particular, Naciti (2019) revealed that a larger presence of independent directors leads to lower sustainability performance and attributed this to the fact that independent directors are more likely to focus on
their prestige and reputation rather than sustainability efforts. They are also more easily manipulated by CEO manipulation tactics and more likely to comply with top management’s direction. The findings of Salehi et al. (2017) on state-owned Iranian companies showed that no significant relationship was found between independence and social responsibility level of a firm. Similarly, a study conducted in Korean firms highlighted that independent directors may not function properly unless they make up more than two thirds of the board. These findings imply that, while most previous studies have been conducted in Western countries, independent directors might not have a meaningful role in promoting CSR in non-Western locations like Iran and Korea (Chang et al., 2015).
To conclude, previous literature has investigated the role of the board of directors in relation to CSR. The majority of these studies have emphasized the importance of the board of directors and have established that this corporate governance mechanism is plays a pivotal role in the social responsibility of firms. To broaden our understanding of the board of directors and responsibility, a logical avenue of research is an investigation into the board of directors and CSIR, a concept that has been previously largely overlooked with regards to its relation to the board.
The Difference Between CSR and CSIR
Considering the repeated incidents of corporate scandals across the United States and growing interest in CSIR, investigations into the relationship between firms and society have, surprisingly, remained focused on CSR (Alcadipani & Oliveira Medeiros, 2019; Chiu &
Sharman, 2018). For this reason, it is important to clarify the difference between the constructs of CSR and CSIR. CSR is the “doing good” of corporations and posits that corporations should be attentive to the needs of stakeholders (Keig et al., 2015; Lin-Hi Müller, 2013). Research on
CSR centers on the perceived duties of firms to pursue policies specifically related to social and environmental outcomes that are desirable to the interests of the larger society, rather than just the interests of internal stakeholders of the business (Alcadipani & Oliveira Medeiros, 2019;
Murphy & Schlegelmilch, 2013). Generally, these initiatives involve a large array of actors to minimize their negative impact upon the environment and society and usually go beyond what is required by law (Chiu & Sharfman, 2018; Orazalin & Baydauletov, 2020; Nunn, 2012).
A recent stream of literature has examined the association between CSR and CSIR. While some studies conceptualize the two on the same scale that follows a continuum, others
conceptualize CSR and CSIR as distinct concepts. For instance, Jones et al. (2009) put forward a perspective of continuity and contended that CSR and CSIR lie on the same continuum at
opposite ends. On the continuum, firms move between two extremes in a two directional way, depending on factors of the external environment such as legislation, politics, technology, and culture driving the issues. Alternatively, scholars view CSIR as a distinctive construct that goes far beyond being the counterpart of CSR (Sun & Ding, 2020; Ormiston & Wong, 2013; Strike et al., 2006). In this vein, because CSIR may take many forms, it is possible for firms to adopt both CSR and CSIR behaviors in the same period. For instance, a firm may act responsibly in its headquarters location country, but engage in irresponsible business practices in another country, such as through a subsidiary in a foreign country (Alcadipani & Oliveira Medeiros, 2019). Firms can therefore declare themselves to be strongly committed to social responsibility in one area while simultaneously engaging in irresponsible activities in other areas of work (Riera & Iborra, 2017; Jones, 2013). Take HP Inc, headquartered in the United States, as an example. The
company was named America’s “Most Responsible Company” in 2020, a ranking based on information retrieved from the company’s corporate annual reports, CSR reports, sustainability
reports, and corporate citizenship reports (Cooper, 2020). Interestingly, the federal government of the United States also convicted HP Inc for employment discrimination and wage-hour violations and ordered it to pay millions of dollars in fines in the same year (Cooper, 2020). It becomes evident that firms can engage in both CSR and CSIR simultaneously. This thesis takes the latter approach and does not consider CSIR on the same continuum as CSR, but rather that CSIR has distinct causes and mechanisms and should be studied separately.
Relatively limited studies have been done to understand the influence of corporate governance, specifically the board of directors on CSIR (Orazalin, 2019; Naciti, 2019). A board- level approach to understanding a firm’s irresponsible behavior remains relatively scarce, and to date, a limited number of studies have attempted to investigate the relationship. A bulk of research conceptualizes CSIR in terms of financial fraud, such as accounting fraud and earnings management (Chen et al., 2018; Neville, et al., 2019). Taking the study of Xie et al. (2013) as an example, the board’s activity and audit committee’s role were found to be important factors in restricting managers from engaging in earnings management. Different studies explore other forms of irresponsible company behaviors, such as those relating to the environment and social domain, as a consequence of corporate governance. For instance, McKendall et al. (1999) investigated elements of corporate boards such as outsider dominance, CEO-chairman duality, and presence of subcommittees on irresponsibility. However, they focus on the environmental aspect of corporate violations, such as air quality, noise pollution and waste disposal. Similarly, while Kassinis and Vafeas (2002) focused entirely on the presence of independent directors and effective management, they measured irresponsible behavior through environmental
performance. Recognizing the importance of the board in shaping environmental policies and
performance, they found that firms with a larger fraction of insiders on the board engaged more in environmental wrongdoing than firms without. In contrast to the previously mentioned scholars, Neville et al. (2019) took a comprehensive approach to CSIR, which they consider an umbrella term for many concepts. Their empirical results suggested that a majority independent board results in less corporate misconduct because independent directors are more vigilant in their efforts to recognize misconduct and are more inclined to hold executives accountable when compared to insider directors. Nonetheless, their research is solely focused on board
independence, rather than several characteristics of the corporate board that determine their effectiveness (Neville et al., 2019). Academia has yet to examine a bundle of characteristics of the board and simultaneously examine a holistic measure of irresponsible behavior. This research incorporates all aspects of CSIR, rather than only one element such as environmental, financial, or social, in order to not restrict the understanding of CSIR (Neville et al., 2019).
To further fill this gap and considering the involvement of the board in major strategic decisions and responsibility for giving advice to management, we focus on several attributes of the board of directors that could influence their effectiveness (Naciti, 2019; Kassinis & Vafeas, 2002; Harjoto et al., 2015). Prior research has examined an array of board characteristics. For this study, several board attributes are selected based on existing literature, which have shown evidence of influencing the monitoring and advisory function of the board. These are size, gender diversity, independence and the existence of a subcommittee and CEO-chairman duality.
Below is described how these factors are likely to reduce the likelihood of a firm engaging in CSIR. These board attributes have been researched in prior literature, mainly in CSR-related research, which means this research can serve as a useful benchmark for comparison (Chang et al., 2015).
Addressing this gap is important because it will shed light on the role of corporate governance and the key functions of the board that could restrict CSIR behavior. As both Orazalin and Baydauletov (2020) and Chiu and Sharfman (2018) have pointed out, a more detailed examination of board elements and the effect on an array of irresponsible practices provides a more nuanced understanding of irresponsible behavior. To better understand this relationship, this study focuses on size, gender diversity, independence, and a subcommittee as board elements and CEO-chairman duality as moderating effect on corporate irresponsible behavior by posing the following question:
To what extent does the board of directors influence corporate social irresponsibility?
To investigate the influence of the board of directors on CSIR, this thesis focuses on the following board elements: size, gender diversity, independence, and presence of a specialized subcommittee. The condition of CEO-chairman duality is added to the conceptual model as an outside influence that influences the strength of the main relationships. These factors are crucial in determining the effectiveness of the boards’ advisory and monitoring functions when
exercising corporate governance responsibilities (Godos-Díez et al., 2018).
Size and CSIR
The issue of the optimal size of the board of directors has captured great attention in academia and practice. However, evidence on the most effective size of the board remains inconclusive. A company’s board size has been linked to improved performance in previous research (Dalton et al., 1998). Board size has also been positively related to a company’s
internationalization, size, and CSR (Sanders & Carpenter, 1998). A handful of other studies have
found board size to be negatively related to strategic involvement (Ruigrok et al., 2006) and environmental litigation (Kassinis & Vafeas, 2002).
The mechanism that explains the improvement in the effectiveness of the board through size is grounded in the resource dependence theory (Jain & Zaman, 2020; Williams et al., 2005).
Proponents of this theory posit that the additional skills and resources coming from a larger board give the firm better communication channels that enhance the firm's link with the
environment and business partners (Pfeffer & Salancik, 1978; Kassinis & Vafeas, 2002; Jain &
Zaman, 2020; Ruigrok et al., 2006). Such links would help with integrating multiple perspectives and incorporating elements into the leadership structure of a firm and are able to develop holistic solutions (Ruigrok et al., 2006). With more members on the board, the board is better able to process a large amount of information about the firm and external organizations and parties (Williams et al., 2005). In other words, it becomes easier to incorporate and represent the interests of multiple stakeholders and provide effective advice and monitoring management regarding irresponsible behavior (Jain & Zaman, 2020). Given the importance of understanding CSIR, larger boards use the input required by more directors to restrict CSIR. Furthermore, as the number of directors rises, the board can draw upon a broader range of experience as the pool of resources, expertise, advice, and perspectives, allowing the board to become better obtained to process information about the firm and strategy development (Orazalin & Baydauletov, 2020).
Greater collective information of the board is valuable to their advisory function as they are better able to provide expertise through access to critical information and resources (Guest, 2009;
Dalton et al., 1998). The presence of a greater number of directors increases the pool of resources available to the firm, improves stakeholder-management and advice given to executives, all of which can be used to restrict CSIR behaviors (Ruigrok et al., 2006).
The opposing perspective puts forward that excessively large boards hinder the
effectiveness of monitoring and advising top management (Williams et al., 2005). Following this line of thinking, larger boards are less cohesive, subject to debate and encumbered with
bureaucratic problems (Xie et al., 2003). Board cohesiveness is undermined with too much diversity and could result in members being less likely to communicate with each other and have genuine debates. This could lead to subgroup conflicts, low motivation, and a sense of distrust (Guest, 2009). Furthermore, coordination costs are high and free rider problems are common, which slows down the decision-making process and hinders the board's contributions to policies and strategic development (Ruigrok et al., 2006). Ruigrok et al. (2006) found that board
members on larger boards are easily controlled by the CEO through tactics like coalition building and are more subject to manipulation than smaller boards. A smaller, more concise board size results in more active directors who can effectively discuss strategies and remain focused. Based on the above-mentioned factors, they concluded that size negatively influences strategic
involvement. Smaller boards are more likely to remain focused and pay attention to their activities. This stems largely from the fact that there is more director participation and more frequently attended board meetings, as these are easier to organize when the board is smaller.
They may be better able to provide oversight because of this (Xie et al., 2003). To conclude, scholars have yet to reach a consensus on the impact of the board’s size on firm performance, as empirical evidence remains mixed. Following the logic of resource dependence theory, it is expected that larger boards are better able to capitalize on the vital resources that members bring and use their additional resources to restrict CSIR (Frias‐Aceituno et al., 2013; Guest, 2009;
Dalton et al., 1998).
Hypothesis 1: A larger board of directors is negatively associated with CSIR.
Gender Diversity and CSIR
The resource dependence theory puts forward that a firm’s ability to manage resources and its capacity to form relationships and ties with the external environment is crucial for its survival (Valls Martinez et al., 2019). Drawing upon this theory, Valls Martinez et al. (2019) proposed that having more women on the board may enrich the decision-making processes, advisory function, and monitoring function through valuable strategic resources. Valuable strategic resources include the skills and qualities that the corporate board provides in terms of knowledge, values, experience, and decision-making (Orazalin, 2019). Female directors differ from men in their values and knowledge, especially in terms of communication style and personality, thus bringing novel perspectives which helps sensitize the board to responsible actions and positions the board in a better position to avoid missteps regarding irresponsibility (Amorelli & García‐Sánchez, 2020; Galbreath, 2011; Adams & Ferreira, 2009).
Given the complex nature of CSIR, Bear et al. (2010) emphasized the importance of a detailed understanding of the impact of irresponsible business practices on society. Women are more socially oriented than men (Cabeza-García et al., 2018) and are more attentive of others’
needs, and therefore play a significant role in advocating and promoting stakeholders’ interests.
Ultimately, this contributes to sustainability initiatives and strategies (Naciti, 2019; Orazalin, 2019; Adams & Ferreira, 2009). Research from a variety of disciplines shows evidence that women are more concerned with social issues (Elm et al., 2001, Endrikat et al., 2020), and differ in their way of communicating, morals, and ethics from men. According to Seto-Pamies (2015), female directors encourage communication among directors and have a higher participation rate in monitoring committees (Nadeem et al., 2017). This is expected to enhance decision-making as a wider array of issues are covered and a wider variety of opinions are assessed (Seto-Pamies,
2015). Bear et al. (2010) found that women possess certain qualities and traits that encourage focus on topics like socially responsible initiatives. Women have greater moral and ethical standards and a stronger social orientation than men (Amorelli & García‐Sánchez, 2020). They are more willing to ensure codes of ethics than men, which serves as control and protection against misuse of business practices (Galbreath, 2011). Seto-Pamies (2015) found evidence that women are more effective at taking measures against risk and combating conflict and
uncertainty. Similarly, Jain and Zaman (2020) stated that women have higher ethical standards, place a higher value on sustainability practices, and are more likely to form subcommittees to address social issues.
Further, Galbreath (2011), Valls Martinez et al. (2019) and Naciti (2019) argued that gender diversity directly improves the monitoring role of the board because of women’s relational capabilities. Specifically, Valls Martinez et al. (2019) posited that women have a greater concern for stakeholders’ interests and are more inclined to use social reasoning in decision-making processes. Their findings suggest that women favor strategies that integrate the interests of multiple stakeholders and are better at managing stakeholder conflicts. Women are more aware of the needs and interests of various stakeholders, which allows them to establish good relationships with interest groups and restrict top management from decisions that focus on self-interests and profitability (Harjoto et al., 2015; Galbreath, 2011). A broad perspective of all relevant stakeholders and the external environment allows the board to better consider the interests of a broad array of stakeholders, possibly enhancing the board's ability to address CSIR (Bear et al., 2010). Greater gender diversity on the board is expected to increase the board's advisory function by having broader perspectives and knowledge about stakeholders to make decisions on social issues. This is expected to lead to more effective management by exerting
greater control over executives and dissuading irresponsible behavior (Harjoto et al., 2015).
Thus, it is expected that a larger presence of female directors on the board enhances board efficiency and, ultimately, reduces irresponsible business practices.
Hypothesis 2: Greater gender diversity is negatively associated with CSIR.
Independent Directors and CSIR
Independent directors of the board, also known as outsider directors, are a crucial
corporate governance mechanism. Board members are assumed to be independent if they are not a full-time employee of the firm and if they have no material affiliation or relationships with the firm on whose board they sit (Ruigrok et al., 2006; Fogel & Geier, 2007). There is a near
consensus in academia that independent directors are a prerequisite for effective board performance and supervision, a notion largely based on agency theory (Dalton et al., 1998).
From the perspective of agency theory (Jensen & Meckling, 1976), agents and principles have divergent interests, and this can lead to conflicts in which one party acts in favor of their own interests at the expense of the other party. The struggle to bridge the conflict between agents and principles is also observed in practice. The predominant pursuit of solving the agency conflict has been unanimous: independent outsiders should monitor management. In 2002, the United States Congress introduced the Sarbanes-Oxley (SOX) Act, a federal regulation for public companies. The legislation was focused on the reform of the composition of the board of directors, as it required public companies to have a majority independent board (Ashby, 2005;
Fogel & Geier, 2007). Based on the premise that the greater proportion of independent directors, the greater likelihood of the board acting as an effective monitor of executive management, as they are not woven into the company and have no personal stake (Fogel & Geier, 2007). Over
the past two decades, the presence of independent directors on boards has grown exceptionally in response to the Sarbanes-Oxley Act.
Independent directors must make up a majority of the board in order to effectively
monitor the agents’ decisions (Naciti, 2019). To monitor management effectively, the board must have enough independence from top management as this allows them to evaluate management’s initiatives and act against inappropriate situations (McKendall et al., 1999; Naciti, 2019) more freely. They are expected to apply greater objectivity to top management’s behavior, are less likely to be manipulated by the CEO, and are in a better position to hold managers accountable (Fogel & Geier, 2007). All of these elements put the board in a better position to take an independent stance with regards to the direction of the company. In other words, independent directors are more vigilant in their monitoring efforts to recognize CSIR and in a better position to disagree with managements’ initiatives because of their position to be objective and ability to challenge and reprimand management (Ruigrok et al., 2006; Naciti, 2019). Jain and Zaman (2020) found that outside directors are more likely to question and put pressure on managers because they are less self-interested and do not have a primary focus on profitability in comparison to inside directors. Furthermore, rather than being focused on short-term goals, independent directors are more likely to hold a long-term perspective and aim for long term success of the firm (Godos-Díez et al., 2018). This orientation of outsider directors goes hand in hand with serving to protect stakeholders by restricting top management and monitoring
potential irresponsible business practices.
The resource dependence theory views independent directors as a key link to the external environment and stakeholders that enhances the resources the board provides (Pfeffer &
Salancik, 1978; Naciti, 2019; Dalton et al., 1998). Here, independent directors play a critical role
in bringing valuable resources to the firm. Outside directors tend to have stronger relationships with and knowledge about a range of stakeholders in the firm's environment, largely due to their independent position and board membership at several companies. It is expected that outside directors bring new insights and increase the breadth and integration of information regarding external stakeholders due to their stakeholder orientation (McKendall et al., 1999; Godos-Díez et al., 2018; Naciti, 2019; Frias‐Aceituno et al., 2013). This means that the board can integrate the interests and demands of stakeholders into policies and restrict irresponsible behavior better than insider directors. In sum, independent directors are expected to be more vigilant and attentive to identify and avoid irresponsible behaviors because they can objectively focus on the firm’s long- term strategies, monitor top management, and increase the pool of resources (Ruigrok et al., 2006; Naciti, 2019; McKendall et al., 1999). Therefore, it is expected that a majority independent board is negatively related to CSIR.
Hypothesis 3: A high proportion of independent directors is negatively associated with CSIR.
Subcommittee and CSIR
The unitary governance model in the United States relies more heavily on subcommittees on the board because it ensures the separation from the main board to discuss topics with a degree of objectivity and independence. From a resource dependence theory perspective, Pfeffer and Salancik (1978) suggested that the key contribution of the corporate board lies in the
provision of resources in terms of their expertise, advice, experience, values, networks and improving legitimacy (Orazalin, 2019). In this sense, the presence of a subcommittee, through the resources provided, may foster the effectiveness of the board. Members that are part of a subcommittee that is concerned the firm’s social, ethical, environmental, public, health or sustainability practices have specific tasks and roles that serve to improve the awareness of the
firm’s environment and external stakeholders (Godos-Díez et al., 2018). MacKenzie (2007, p.
939) posited that the presence of CSR committees results in “activities like establishing policies and standards, monitoring compliance with such policies, reviewing company reporting on CSR, or overseeing philanthropic activity”. Directors on a specific committee can delegate tasks which allows members to optimize their available time and delve into details about specialized topics or issues, ensuring compliance and reviewing the executives’ implementation of social and ethical policies and standards. Topics discussed on the committee are shared with the entire board and are a strategic tool that aids the collective decision making of boards on the formation of
corporate strategy and improves the advisory function of the board toward the executive (Jain &
Zaman, 2020; Godos-Díez et al., 2018).
Moreover, members on the committee can use their expertise to ensure that stakeholders’
interests are factored into the decision making and restricting irresponsible behavior (De Villiers et al., 2011). As also noted by Orazalin (2019), it encourages stricter monitoring and vigilance of compliance to rigorous criteria and increases the chances of stepping in when social decisions are not aligned with the interests of stakeholders (Godos-Díez et al., 2018; Xie et al., 2003). They can also use their networks with external stakeholders to assess the firm's strategies (Endrikat et al., 2020). A specialized subcommittee concerning sustainability, social and ethics matters, public responsibility, policy, environmental and social governance, safety, health, and
environment emphasizes the commitment of the corporate board to specific issues and indicates to stakeholders a firm's orientation towards social and ethics and sustainability related issues (Orazalin, 2019). Subcommittees act as strategic tools that aid the collective decision making of boards on the formation of corporate strategy and direction and enable the board to serve as a high-level control mechanism (Kassinis & Vafeas, 2002). Therefore, it is expected that the
presence of a subcommittee concerning sustainability, social, ethical, environmental, or public policy helps the board restrict CSIR incidents.
Hypothesis 4: The presence of a subcommittee on the board is negatively associated with CSIR.
CEO-Chairman Duality and CSIR
The phenomena ‘CEO-chairman duality’ refers to the scenario in which one person serves as both the CEO and the chairman of the board of directors (Boivie et al., 2016). This formal position is one way for CEOs to accumulate power and have the ability to influence strategic decisions (Combs et al., 2007; Sauerwald & Su, 2019). In one-tiered board structures, such as those in the United States, duality is more frequent because there is no separate board to provide supervision. This also means that most public firms in the United States are particularly influenced by CEO-duality. As the CEO’s influence grows, so does the potential for the CEO to misbehave by overruling the board and ignoring controls (Combs et al., 2007). In fact,
Schnatterly et al. (2018) found that a CEO’s ability to engage in CSIR depends on their opportunity, which is partly a reflection of their power. When the same person occupies both positions, a conflict of interests arises because they enjoy unchallenged leadership (Naciti, 2019).
This is in line with agency theory, which posits that overlapping roles create conflict between the agent and principle and therefore must be separated (Ruigrok et al., 2006; Jensen & Meckling, 1976). The monitoring function of the board is weakened in the presence of CEO-chairman duality, which could result in more CSIR. Jensen and Meckling (1976) reported that powerful CEOs undermine a board’s monitoring ability because they alone are responsible for setting the agenda, organizing meetings, and providing information to the board. With greater discretion, dominance, and power over the board of directors, executives are unchallenged (Simpson &
Koper, 1997). When the board is larger in size, it becomes easier for powerful CEOs to advance
their own agenda due to coalition building and manipulation tactics. CEOs also have a better opportunity to monopolize the direction of board meetings and take unchallenged self-serving actions that are not aligned with shareholder or stakeholders’ interests, hindering the benefits that greater gender diversity brings to the board (Boivie et al., 2016; Endrikat et al., 2020; Davis et al., 2010; Combs et al., 2007). In addition, the board of directors becomes dependent on the CEO for information, which particularly influences the monitoring function of independent directors.
They are placed on the board to objectively monitor management, and information asymmetry and lack of adequate information hinders their effectiveness (Endrikat et al., 2020; Pearce &
Manz, 2011). Lastly, CEO’s are able to stop the creation of specialized board subcommittees, which, in the context of CSIR, could come at the cost of societal and ethical awareness and therefore also responsible behavior (De Villiers et al., 2011). In sum, the board of directors will provide less effective monitoring when executive officers hold joint offices of CEO and
chairman of the board because of absent checks and balances and information asymmetry. It is expected that when the CEO wields too much power, as is the case with CEO-chairman duality, the corporate board's monitoring and advisory functions are expected to be less effective, which will create opportunity for irresponsible business practices.
Hypothesis 5a: CEO-chairman duality positively moderates the relationship between size and CSIR.
Hypothesis 5b: CEO-chairman duality positively moderates the relationship between gender diversity and CSIR.
Hypothesis 5c: CEO-chairman duality positively moderates the relationship between independent directors and CSIR.
Hypothesis 5d: CEO-chairman duality positively moderates the relationship between a subcommittee and CSIR.
Based on the above-outlined hypotheses, it is argued that the relationship between the board of directors and CSIR is shaped by size, gender diversity, independence, the presence of a specialized subcommittee, and CEO-chairman duality, as demonstrated in Figure 1.
Conceptual Model of the Proposed Hypothesis on the Relationship Between the Board of Directors and CSIR