The interaction effect between female board representation and
CSR on the financial performance of firms.
Floor Zanderink* Final version, June 13, 2016.
Master thesis International Financial Management
ABSTRACT
This paper studies the relationship between corporate social responsibility, board gender diversity, and financial performance. Environmental and social pillars of corporate social responsibility are included, and both Tobin’s Q and ROA are used to measure financial performance. Using a sample of 116 listed firms and 812 observations from the US, Germany, France, and the Netherlands covering the period 2008 to 2014, OLS and fixed-effect regressions are used to investigate whether there is evidence of an interaction effect of CSR and female board representation on financial performance. Results confirm that there are individual effects of CSR and female board representation on financial performance, and preliminary evidence of a possible convex relationship between CSR and financial performance is found. Existing literature is complemented by showing that there is no evidence of an interaction effect between female board representation and CSR which influences financial performance. Increasing CSR will not increase the effect of female board representation on financial performance, and vice versa.
*Student number: s1960075, University of Groningen
Faculty of Economics and Business, Supervisor: Prof. dr. L.J.R. Scholtens
Key words: board gender diversity, financial performance, corporate social responsibility, Tobin’s Q, board of directors.
1 1. Introduction
During the last decade, the interest for corporate social responsibility (CSR) increased rapidly. It is considered a necessary topic for firms to report about their social and ethical standards and CSR has become an established umbrella term which embraces both the descriptive and normative aspects of the field, as well as placing an emphasizes on all that firms are achieving or accomplishing in the realm of social responsibility policies, practices, and results (Carroll and Shabana, 2010). Not only firms are attaching more value to CSR, in academic research it has become a topic of interest as well. There has been an increasing amount of studies which investigate the link between CSR and the financial performance of a firm (e.g. McWilliams and Siegel, 2001; Scholtens, 2008). Results show mixed results, with studies explaining a positive connection between CSR and the financial performance of a firm (e.g. Berman et. al, 1999; Jo and Harjoto, 2011) and studies which show a negative or no connection (e.g. Barnea and Rubin, 2010; Friedman, 1962). As the board of directors are collectively both responsible and accountable to a wider range of stakeholders (Rao and Tilt, 2015), they are considered to be key players in firms’ decisions regarding CSR (Krüger, 2009). Hambrick and Mason’s (1984) upper echelon theory, explains that an executives’ experiences, values, and personalities, and therefore also its gender, greatly influence their interpretations of the situations they face and, in turn, affect their choices. According to this theory, strategic decision making is not so much a technical endeavor as an interpretive one, and individualized construal’s of executives shape their choices (Chin, Hambrick, and Treviño, 2013). One would assume that the composition of the board of directors has an indirect influence on the financial performance of firms via CSR. Carter et al. (2005) suggest that gender diversity is among one of the most important board diversity characteristics faced by firms. Therefore, this thesis proposes that executives’ gender, will enter into their managerial decisions, focusing on CSR decisions of firms and the influence on their financial performance.
2 time, Norway, Spain, France, Italy, the Netherlands and Germany have accepted the gender quota law. At first glance, gender laws seems largely motivated by subjects as feminism and gender politics. It is discriminating for women, to be left out of the board of directors on gender-based motives, while opponents argue that board members should not be selected based on their gender, but on their quality. But what is the potential financial importance of more women in top management teams? This is an important question for firms nowadays, as many governments are trying to increase the amount of women on firms’ management teams through quota laws. If there might be no clear economical and financial reasoning behind this, firms have to adopt these gender laws, even though they do not agree with it. Therefore it is important for both firms and governments to examine the relationship between gender diversity on the board, CSR, and financial performance.
There have been a lot of varying definitions used in previous research about CSR. It is a fuzzy concept, whereas the basis dates back to 1953, when Bowen (1953) refers to social responsibility as “the obligations of businessmen to pursue those policies, to make those decisions, or to follow those lines of action which are desirable in terms of the objectives and values of our society”. This paper will use a broader definition of CSR, which assumes that CSR is concerned with how companies handle social and environmental issues. Social issues can involve the ensuring of the wellbeing of communities and environmental issues involve matters as reducing the total amount of waste produced (Krüger, 2009).
3 performance indicate that there is a link between these concepts and increasing attention on both CSR and gender diversity on boards makes it an interesting field to research. Therefore, this paper tries to explain how the number of women on boards influences corporate social reputation (CSR), and how CSR then influences financial performance. The question asked is: Does there exist an interaction effect between CSR and female board representation, which influences financial performance?
This research involves interactions between CSR and female board representation. Intentions of the board of directors might be to maximize financial performance, but on the other hand CSR is also becoming more and more important and therefore this is an interesting field to examine. This study will discuss the results in and between Germany, the Netherlands, France, and the U.S. Three influencing countries from western Europe, where gender quota laws already have been adopted, in comparison with the U.S., where it has been no item on the political agenda. A main OLS regression will be performed of financial performance on CSR and female board representation. Thereby, year and industry fixed effects will be simultaneously added to reduce omitted variables problems and unobservable heterogeneity.
The remainder of the paper is organized as follows. First of all, the existing literature will be critically reviewed and gaps in the literature will be exposed. This paper contributes to the existing literature by giving an up to date critical review and analysis on the link between financial performance, CSR, and board gender diversity and especially by studying the interaction effect between CSR and board gender diversity on financial performance. The next section gives a theoretical background on the aspects of financial performance, CSR, and board gender diversity and the main hypothesis are developed. Thereafter, in section three, the main variables and methodology will be introduced. Section four involves the empirical analysis and finally, in section five, there will be a conclusion and discussion of the results.
2. Background
4 be a link between CSR and boards, this papers’ focus, however, lies on the interaction between gender diversity on a board and CSR, and its influence on financial performance. This section will first examine the link between CSR and financial performance, then the relation between female board representation and financial performance will be discussed. Finally, the interaction effect between CSR and female board representation regarding financial performance will be discussed.
2.1. CSR and financial performance
Firms are engaging in CSR activities and therefore, one might suggest that engaging in CSR is positively associated with the financial performance of a firm (e.g. Berman et. al, 1999; Jo and Harjoto, 2011; Siltaoja, 2006). However, there is also empirical evidence which shows a negative relationship between CSR and financial performance (e.g. Barnea and Rubin, 2010; Friedman, 1962). Margolis and Walsh (2003), published a study which gives an overview of most of the empirical literature on the relationship between CSR and financial performance between 1971 and 2001. They find that, of the 107 studies they examined where CSR is treated as an independent variable, 54 find a positive relationship between CSR and financial performance, in contrast to only seven studies which found a negative relationship. The other 48 studies reported non-significant relationships or a set of mixed findings. This section will give an overview of the main theoretical arguments for a positive or negative relationship between CSR and financial performance. To this extent, table 1 gives an overview of the main arguments this relationship.
Table 1. Main arguments supporting and opposing the relationship between CSR and financial performance
A positive relationship A negative relationship
Society has certain expectations, and if a firm decides not to give into these expectations, this could bolster their financial performance (Bear, Rahman, and Post, 2010)
Serving the implicit claims of major stakeholders enhances a company’s reputation and this positively impact its financial performance (1987)
Engaging in CSR will increase costs, which can lead to a poorer market position and a decreasing financial performance (Friedman, 1970; Vance, 1975)
Over-investment problems due to CSR can lead to a negative influence on financial performance (Jo and Harjota, 2011)
5 For many years now, it has been a task of scholars to investigate whether there might be a significant relationship between CSR and financial performance. Firms are allocating additional limited resources to social welfare as an almost universal practice (Barnett, 2007). It might be said that nowadays society expects companies to invest in CSR. If a company decides to not give into society’s expectations, this could bolster their corporate and financial reputation (Bear, Rahman, and Post, 2010) and, hence, their financial performance. Another argument for a positive relationship between financial performance and CSR origins from the stakeholder theory (Freeman, 1984), which suggests that firms have relationships with many constituent groups and that these stakeholders both affect and are affected by the actions of the firm (McWilliams and Siegel, 2001). According to the analysis of Cornell and Shapiro (1987), serving the implicit claims of major stakeholders enhances a company’s reputation and this positively impact its financial performance. It seems that doing business goes beyond just making profits and companies have certain responsibilities to society.
Hypothesis 1a. CSR is positively related with financial performance.
The main argument against firms engaging in CSR dates back to 1962, when Friedman wrote his famous ‘Capitalism and Freedom’. In his book, he argues that ‘there is one and only one social responsibility of doing business’ for firms, and that is to use its resources and engage in activities designed to maximize the profits of its owners or shareholders. Also, engaging in corporate social responsibilities activities will increase costs and this can lead to a worse market position and, consequently, a decreasing financial performance (Friedman, 1970; Vance, 1975). Jo and Harjoto (2011) argue that as society expects companies to invest in CSR, there might emerge over-investment problems. As long as their reputation increases through engaging in CSR, the CEO and other board members could have the intention and motivation to over-invest in CSR activities and, hence, a firms financial performance will be negatively influenced by CSR (Barnea and Rubin, 2010). Margolis and Walsh (2003) say that the point of tension between those who are supportive of CSR and those who are not, can be divided into two central concerns. Firstly, managers might misappropriate corporate resources by taking money and resources that otherwise would go to shareholders, employees, and customers. Managers can also misallocate resources by not making optimal use of the resources due to allocating these to purposes which might not be suited for this, which could lead to a decrease in financial performance.
6 2.2. Board gender diversity and financial performance
While the number of women on boards has been slowly increasing in recent years, it is still low in comparison with the amount of male directors. According to the Catalyst (2015), women currently hold 4,6% of CEO positions at S&P 500 companies and 19,2% of board seats. As there is a still increasing interest of governments, society, and other social groups in increasing the number of women on boards, there is a great amount of literature on the reason why there should me more women on boards. First of all, governments, society, and other social groups have ethical arguments for increasing the number of women on boards. It is immoral to exclude women from boards, just because they are women. For society, firms should increase the number of boards to achieve a more fair outcome. However, this paper will focus on the economic arguments behind increasing the number of women on boards, and not the ethical arguments. Therefore, in this part the influence of board gender diversity on the financial performance will be discussed. Table 2 gives an overview of arguments for a positive relationship and arguments for a negative relationship between board gender diversity and financial performance.
One of the most used arguments in favor of gender diversity in the board room, is that a greater diversity promotes a better understanding of the market (e.g. Campbell and Minguez-Table 2. Main arguments supporting and opposing the relationship between board gender diversity and financial performance
A positive relationship A negative relationship
Gender diversity promotes a better understanding of the marketplace, thereby increasing the ability of firms to penetrate markets, which could increase the financial performance of the firm (Campbell and Minguez-Vera, 2007; Carter, Simkins, and Simpson, 2003; Robinson and Dechant, 1997) Gender diversity can improve a firm’s image, which could increase a financial performance (Smith, Smith, and Verner, 2006)
Diversity positively influences communication, social categorization and informational diversity (van Knippenberg, de Dreu, and Homan, 2004), which gives the board a broader perspective in making decisions, which ultimately leads to an improvement of the firms’ financial performance.
Heterogeneous teams tend to communicate less frequently, and experience more conflicts, which could negatively influence financial performance (Erhardt, Werbel, and Schrader, 2003; Smith, Smith, and Verner, 2006)
7 Vera, 2007; Carter, Simkins, and Simpson, 2003; Robinson and Dechant, 1997). The main reasoning behind this is that the marketplace for goods and services is extremely diverse. To keep up with this diversity, it is important to have directors which match this diversity of the potential customer. Robinson and Dechant (1997) argue that this ‘matching process’ increases the ability of firms to penetrate markets, and this could increase the financial performance of the firm. A second argument in favor of increasing gender diversity in the boardroom, is that if firms have a more gender diverse board, this could improve the firms’ image, and this, in turn, may increase a firms’ financial performance if these effects of the more positive image have effects on the behavior of the customers (Smith, Smith, and Verner, 2006). Also, as women have been underutilized in management positions, firms are foregoing potential talent (Shrader, Blackburn, and Iles, 1997). Furthermore, a more gender diverse board may have more diverse alternatives in making important decisions compared to a more homogenous board (Smith, Smith, and Verner, 2006). Singh and Vinnicombe (2004) say that as women directors may have a better understanding on certain parts of the market place and decision making, this can lead to an improvement of the creativity and the quality of the decision making process. The increased diversity, also positively influences communication, social categorization and informational diversity (van Knippenberg, de Dreu, and Homan, 2004), which gives the board a broader perspective in making decisions, which ultimately leads to an improvement of the firms’ financial performance.
Adler (2001), Carter, Simkins, and Simpson (2003), and Erhardt, Werbel, and Schrader (2003), have found a positive relationship between the proportion of women on the board and corporate value, measured by Tobin’s Q, concluding that diversity is positively associated with higher financial performance and this leads to the following hypothesis:
Hypothesis 2a. Board gender diversity is positively related with financial performance
On the other hand, a more diverse board, means that there are more opinions, and this could lead to time-consuming decision-making, which may not be as effective in comparison to a more homogenous board of directors (Smith, Smith, and Verner, 2006), or heterogeneous teams tend to communicate less frequently and therefore more conflicts appear and a more slow decision-making process. In the end, this may outweigh the positive effects of having a gender diverse board, especially if the firms’ market demands quick responses (Hambrick, Sueng Cho, and Chen, 1996). This leads to the following hypothesis:
8 2.3. CSR and board gender diversity.
Even though there is an increasing interest in both CSR and board gender diversity, empirical evidence which links these two is still quite limited. The few existing research suggest that board diversity can influence CSR (Bear, Rahman, and Post, 2010; Post, Rahman, and Rubow, 2011; Rao and Tilt, 2015). Ibrahim and Angelidis (1994) show, through an empirical analysis of survey data from 398 corporate directors, that if there are more women on a board, there is a ‘stronger orientation toward the discretionary component of corporate responsibility’. The reasoning could also be seen from a male perspective, men tend to focus more on money and quantifiable issues than women do, and as a consequence focus less on the social aspects of business and CSR (Huse and Solberg, 2006). Thus, women tend to be more socially oriented than men, and therefore seem to be more interested and focused on discussions on CSR control issues (Huse, Nielsen, and Hage, 2009). This is also in line with findings by Tacheva and Huse (2006). They find that female members of the board are more likely to engage in qualitative board tasks, such as CSR.
Williams (2003) examines the relation between the proportion of women on boards and charitable giving activities. He suggests that firms with more gender diverse boards invest more in social behavior such as charitable giving. The reason behind this is that women show more altruism and are more concerned with equity. The higher the proportion of women on boards, the greater the extent to which boards engage in charitable giving. As said before, more women on a board gives the firm a broader perspective, and this broader perspective may help the board to better assess the needs of diverse stakeholders, which eventually may result in a more effective approach to use CSR (Bear, Rahman, and Post, 2010).
The results of a recent study by Bear, Rahman, and Post (2010), found a positive relationship between the number of women on the board and CSR. They explain this relationship by identifying two strengths of women which are important for CSR rating, namely increased sensitivity and participative decision making styles (Rao and Tilt, 2015). In a similar aspect, Krüger (2009) find that firms with a higher fraction of women on the board show more pro-social behavior. In contrast to men, women pay more attention to the welfare of a firm’s natural stakeholder, and if there is a higher fraction of women this results into corporate behavior benefiting communities and the workforce, and thus CSR (Krüger, 2009).
9 available on this matter which are used in this study. Relying on table 3 and on the given empirical evidence, this leads to the third hypothesis:
Hypothesis 3. Higher female board representation is positively related with CSR.
Table 3. Empirical studies on the effects of gender diversity on corporate social responsibility (CSR)
Author Aim Dependent
variable
Board variables Findings* Method**
Bear, Rahman, and Post (2010)
Relationship between board resources, female directors and CSR ratings
CSR Gender diversity Resource diversity + n.s. Quantitative Regression Post, Rahman, and Rubow (2011) Relationship between boards of directors’ composition and environmental CSR Environmental component of CSR Outside directors Gender diversity Age Cultural Background Education + + n.s. + + Quantitative Regression Ibrahim and Angelidis (1991) Relationship between board members’ gender and their corporate social responsiveness orientation
CSR Female directors + Quantitative
Survey
Huse and Solberg (2006)
How can women make contributions on corporate boards?
Board room dynamics, including CSR
Female directors + Quantitative
Survey
Huse, Nielsen, and Hage (2009)
Relationship between women and employee-elected board members and their contribution to board effectiveness. CSR Employee-elected board members Female board members + n.s. Quantitative Regression Williams (2003)
Relationship between the proportion of women on a firms’ board and charitable giving activities
Charitable contributions
Female directors + Quantitative
Regression
Krüger (2009) Relationship between CSR and board characteristics
CSR Female directors Inside directors Director experience Director tenure + + + + Quantitative Regression
Braun (2010) Exploring whether women entrepreneurs may be more engaged with green issues than their male
10 Table 3. Continued
Author Aim Dependent
variable
Board variables Findings* Method**
Bernardi and Threadgill (2010)
Examining whether firms with a higher proportion of women on a board, are more socially responsible
CSR Female directors + Quantitative
Regression
* Indicates whether the relationship is positive (+), negative (-), or not significant (n.s.) ** Indicates whether the study is qualitative/quantitative
In this paper, it has been hypothesized that a higher female board representation is positively related with CSR. Furthermore, it has been argued that CSR and female board representation both are positively or negatively related to financial performance. Taking together these former hypotheses, the following predictions are made:
Hypothesis 4a. The positive interaction between CSR and female board representation leads to increasing levels of financial performance.
Hypothesis 4b. The positive interaction between CSR and female board representation leads to decreasing levels of financial performance.
As many empirical literature admits that there is a relation between CSR and female board representation, the impact they have together on financial performance has not been widely investigated. If it is true that CSR and female board representation together influence financial performance, it can be important for firms to engage in both as this will improve the financial performance of the firm. In the next section, the data and methodology will be introduced.
3. Data and Methodology
In this section, I will first shortly introduce the model to give an interpretation of the used variables. Later, this model will be expanded and explained. According to Ozer-Balli and Sorensen (2010) applied econometricians have typically allowed for interaction effects between two independent variables, X1 and X2 by estimating a simple multiple regression model of the form:
Y = β0 + β1X1 + β2X2 + β3X1X2 + θi + γt + ɛ, (1) where Y is the dependent variable, X1 and X2 refer to the independent variables, θi are cross-section fixed effects, γt are period fixed effects and ɛ is an error term. X1X2 refers to a variable
11 interaction term. An interaction effect occurs when the relation between two variables is modified by another variable (Hill and Lewicki, 2007). In terms of this paper, a significant positive coefficient of β3 implies that the higher X1, the greater the effect of X2 on Y.
In the remains of this section, I will explain the data sample, the variables of interest and thereafter the empirical methodology of the research is given. This section will end with an impression of the data sample by presenting descriptive statistics and a correlation matrix.
3.1. The Sample
The focus lies on three countries in western Europe and the USA which are listed in the DAX30, the CAC40, the AEX, and the S&P500 index.The data period follows from 2008 up to and including 2014, which is the most recent year for which data is available. Accounting data and data on firm size are obtained from ORBIS, which contains data over the last 10 years over 79 million public and private companies worldwide. Other data is mainly obtained from Datastream, and both CSR and female board representation1 are computed from the
ASSET4 Environmental, Social and Governance (ESG) research data base, which is a part of Datastream. As the ASSET4 ESG data is quite new, data on these variables are not available for many years. Therefore data is used from 2008, because most data points start in this year. Also, as the ASSET4 ESG database is not complete, firms without available data will be removed. Furthermore, firms which miss data on women managers for only one or two years, will be complemented with numbers taken from the annual reports of the firms. All the data on women managers for the Netherlands are hand collected from ‘The Dutch Female Board Index’ from The Erasmus Instituut Toezicht & Compliance. The Dutch Female Board Index is an annual list of female directors in Dutch listed companies. This index is used, because of the great amount of missing data for the Netherlands in the ASSET4 database. The final sample consists of 116 firms and 812 observations. Appendix 1 shows an overview of all the firms involved and some main characteristics.
3.2. Variables
As the sample is a mixture of time series and cross-sectional data, it is most efficient to use panel data analysis. The reason behind this, is that data is collected over time (2008 up to and including 2014) and over the same individuals. Hypotheses one, two, and four will be tested with a main OLS regression of financial performance on CSR and female board
1For data on female board representation, DataStream code CGBSO17V ‘value – board structure/board gender
12 representation including control variables. Unobserved characteristics are likely to have an effect on the financial performance of the firms and this creates omitted variable problems. One of the disadvantages of performing an normal OLS regression, is that it does not take into account these omitted variable problems. Hausman and Taylor (1981) explain that, especially for a panel data set, the fixed-effects framework represents a common, unbiased method of controlling for these omitted variables. Cross-section fixed effects control for omitted variables that vary across the firms, but do not change over time and period fixed effects control for any omitted variables which are the same for each firm, but vary over time. Therefore, industry fixed effects and year fixed effects will be added.
Three regression equations are presented. Equation (2) is the model without interaction effect, and equation (3) is the model with an interaction term. Equation (4) shows the regression which is used to test hypothesis three.
FINP = β0 + β1WOM + β2CSR + β4FSIZE + β5BSIZE + β6AGE + β7ACT +
β8DBOARD + θi + γt + ɛ, (2)
FINP = β0 + β1WOM + β2CSR + β3WOM*CSR + β4FSIZE + β5BSIZE + β6AGE +
β7ACT + β8DBOARD + θi + γt + ɛ, (3)
CSR = β0 + β1WOM + β4FSIZE + β5BSIZE + β6AGE + β7ACT + β8DBOARD +
β8FINP + θi + γt + ɛ, (4)2
where FINP is financial performance, measured by ROA and Tobin’s Q, WOM is the female board representation, CSR is the corporate social responsibility of the firm, FSIZE is the natural logarithm of total assets as a proxy for firm size, BSIZE is the natural logarithm of the number of management board members, AGE is the number of years since a firm is founded, ACT is board activity, measured as the natural logarithm of the number of annual board meetings, DBOARD is a dummy variable which equals 1 if the firm has an one-tier board and zero otherwise, θi are two-digit SIC code dummies, , γt are year fixed effects and ɛ is an error term.
3.2.1. Dependent variable
The dependent variable is the financial performance of firms. Following the approach used by e.g. Adams, Almeida, and Ferreira (2009), Darmadi (2013), and Hannifa and Hudaib (2006),
2 Equation (4) is not the main regression used in this paper. It explains the effect of female board representation
13 financial firm performance will be measured through two different variables, namely Return On Assets (ROA) and Tobin’s q. These are the two main possibilities for a proxy for financial performance in the literature, but are not identical and measure both a different aspect of financial performance (Carter et al., 2010) According to Montgomery and Wernerfelt (1998) Tobin’s Q is a good proxy for financial performance and competitive advantage, because it reflects the market’s expectation of future performance and it accounts for risk. In its original formulation, provided by Lindenberg and Ross (1981), Tobin’s Q is the market value of the firm’s assets divided by the replacement value of the firm’s assets. Nowadays, Chung and Pruitt’s (1994) approximation is often used (e.g. Bebchuk, Cohen, and Ferrell, 2009; Carter et al., 2010; Coles, Daniel, and Naveen, 2008), which is basically the market value of the securities issued by the firm divided by the book value of the assets. Whereas it is better to not rely on one indicator, ROA will also be used, which gives a basic sense of the overall profitability of the firms (Shrader, Blackburn, and Iles, 1997). Carter et al. (2010) conclude by saying that in general, Tobin’s Q measures wealth, while ROA measures income. The data for Tobin’s Q is taken from Datastream, it is measured as the market capitalization plus total liabilities, divided by common equity plus total liabilities. Data on ROA is taken from ORBIS.
3.2.2. Independent variables
In this paper, there are two independent variables next to the control variables, namely CSR and female board representation.
14 I will shortly cite the definition of the four pillars, which are given by the ASSET4 data glossary provided by Thomson Reuters:
• Economic Performance: The economic pillar measures a company’s capacity to generate sustainable growth and a high return on investment through the efficient use of all its resources. It is reflection of a company’s overall financial health and its ability to generate long term shareholder value through its use of best management practices.
• Environmental Performance: The environmental pillar measures a company's impact on living and non-living natural systems, including the air, land and water, as well as complete ecosystems. It reflects how well a company uses best management practices to avoid environmental risks and capitalize on environmental opportunities in order to generate long term shareholder value.
• Social Performance: The social pillar measures a company's capacity to generate trust and loyalty with its workforce, customers and society, through its use of best management practices. It is a reflection of the company's reputation and the health of its license to operate, which are key factors in determining its ability to generate long term shareholder value.
• Corporate Governance Performance: The corporate governance pillar measures a company's systems and processes, which ensure that its board members and executives act in the best interests of its long term shareholders. It reflects a company's capacity, through its use of best management practices, to direct and control its rights and responsibilities through the creation of incentives, as well as checks and balances in order to generate long term shareholder value.
Not all four pillars will be used for the measurement of CSR. The pillars for economic performance and corporate governance will not be included in the analysis. The reason for this, is that the definition of CSR used in this paper, based on Krüger (2009), states that CSR is concerned with how companies handle social and environmental issues. As can be seen from the definition of the pillars above, economic performance and corporate governance are Table 4. The four pillars and 18 categories of the ASSET4 ESG database
Overall Performance Economic Performance Environmental Performance Social performance Corporate Governance Performance • Client loyalty • Performance • Shareholders loyalty • Resource reduction • Emission reduction • Product innovation • Employment quality • Health & safety
• training & Development • Diversity • Human rights • Community • Product responsibility • Board structure • Compensation policy • Board functions • Shareholders rights • Vision and strategy
15 not included in this definition by Krüger and therefore, CSR will be measured only by the social performance pillar and the environmental performance pillar. As environmental performance and social performance are seen as both of equal importance to the calculation of CSR, the CSR score for a firm is calculated as the average of the scores on environmental performance and social performance.
The second independent variable is female board representation. Data for Germany, France, and the USA, are computed from the ASSET4 Environmental, Social and Governance (ESG) research database. The pillar Corporate Governance Performance contains the category board structure, which again contains the individual point Value – Board Structure/ Board Gender Diversity. All the data on women managers for the Netherlands are hand collected from ‘The Dutch Female Board Index’ from The Erasmus Instituut Toezicht & Compliance. Female board representation is calculated as the percentage of women on the board. To account for differences in types of boards in the four countries, one-tier vs. two-tier boards, a dummy variable is included which will be addressed in the following section.
As seen in other analysis, some researches are also tend to use a dichotomous variable to see whether firms that have at least one women on the management board perform better than firms that have no women on the management board at all (e.g. Carter, Simkins, and Simpson, 2003; Darmadi, 2010). However, for this analysis the dichotomous variable will not be used. The reason behind this, is that for most firms in the sample, except for two firms in the Netherlands, there is already at least one women on the board.
3.2.3. Control variables
16 decision making, and, for example, to arrange meetings. Previous studies (e.g. Guest, 2009; Yermack, 1996) show that the relationship between board size and financial performance is convex rather than linear, and therefore board size is measured by taking the logarithm of the total number of directors. Furthermore, firm age is included as control variable. This is simply calculated as the number of years since the company is founded. Older firms might have an advantage in comparison to younger firms, as they have more experience in the market and have lower capital costs (Lipczinsky and Wilson, 2011). Board activity is also included as a control variable, and is measured by taking the natural logarithm of the number of annual board meetings. Both Vafeas (1999) and Carter, Simkins, and Simpson (2003) find a negative relationship between board activity and financial performance.
17 Appendix 2 shows the different categories of industries and their codes. Year fixed effects are also added to account for any omitted variables which are the same for each firm and industry, but vary over time.
Table 5 represents an overview of all the variables used in this paper, table 6 provides descriptive statistics for the sample as a whole, and table 7 shows the correlation matrix for the sample.
Table 5. Variable Description
This table represents an overview of the variables used in the paper.
Variable Description Sign*
FINP Financial performance: measured by ROA and Tobin’s Q n.a.
TOBIN Tobin’s Q: ratio measured by the market capitalization plus total liabilities divided
by common equity plus total liabilities
n.a.
ROA Return on Assets n.a.
WOM Female board representation: the percentage of women on the board of directors +/-
CSR Corporate social responsibility: measured by the average of ENV and SOC +/-
ENV Environmental pillar score +/-
SOC Social pillar score +/-
FSIZE Firm size: measured by taking the natural logarithm of total assets of the firm +/-
BSIZE Board size: measured by taking the natural logarithm of total number of board members
+/-
AGE Firm age: the number of years since the firm is founded. +
ACT Board activity: measured by taking the natural logarithm of the number of annual board meetings
-
DBOARD Board structure: dummy variable that is equal to 1 if there is a one tier board, and zero if it there is a two tier board.
+/-
* Indicates whether the relation with financial performance is expected to be positive (+), or negative (-), both
(+/-), or not applicable (n.a.)
18 5.88, respectively. The ROA also reveals significant variation, with a mean of 3.90 percent, a minimum of -15.23 percent and a maximum of 46.8 percent. The average female board representation is 26.74 percent, indicating that about one-fourth of the boards of the firms in the sample is a female. The average CSR rating is 85.74 percent (100=100%), where firms are performing a bit better on the social pillar (=86.71%) than on the environmental pillar (=84.76%). Appendix 3 shows the descriptive statistics per country. The tables show that, on average, firms from the USA and the Netherlands have the highest Tobin’s Q and ROA. Also, firms from the USA have the highest female board representation, while firms from France score the highest on CSR. Firm size is lowest in the Netherlands, board size and firm age is the highest in Germany, and France and the USA score highest on board activity.
Table 6. Descriptive statistics
This table presents descriptive statistics for the sample, in the period ranging from 2008 to 2014.
Variables Obs. Mean Median Std. Dev. Min. Max
TOBIN1 812 1.16 0.99 0.73 0.05 5.02 ROA 812 5.47 4.58 5.97 -15.23 46.8 WOM 812 26.74 23.8 13.95 0 73 CSR 812 86.30 89.97 10.49 33.61 96.02 SOC 812 87.30 90.53 9.95 23.4 97.82 ENV 812 85.29 91.19 14.07 11.41 95 FSIZE 812 17.36 17.41 1.17 12.90 19.92 BSIZE 812 13.30 12 3.57 6 31 AGE 812 84.32 89.50 52.90 5 210 ACT 812 2.04 2.08 0.34 1.39 3.53
Table 7. Correlation matrix
This table presents the correlation matrix for the sample, in the period ranging from 2008 to 2014. TOBIN1 ROA WOM CSR SOC ENV FSIZE BSIZE AGE ACT
19 Table 7 shows that the two measures for Tobin’s Q and ROA are highly correlated, which is as expected as both are measures for the financial performance of a firm. Table 7 also shows a high correlation between CSR, ENV, and SOC. As CSR consists of ENV and SOC, this makes perfect sense. Also, ENV and SOC show a correlation of 0.62, which shows that if a firm has a high score on the environmental pillar of CSR, it could also have a high score on the social pillar of CSR.
4. Results
This section will present, analyze and discuss the empirical results for the relationship between female board representation, CSR, and financial performance. First, the hypotheses will be tested with use of an OLS regression of financial performance on female board representation and CSR. Secondly, the results will be presented using cross-sectional and period fixed effects.
4.1. OLS regressions
The main regression of financial performance on female board representation and CSR is composed of an Ordinary Least Squares (OLS) regression. Guest (2009) shows in a summary of previous studies that this is the most general used econometric model when analyzing board characteristics and financial performance. First, hypotheses one and two will be tested using equation (2), thereafter the effect of female board representation on CSR will be tested using equation (4), and at last hypothesis four will be tested using equation (3).
20 Table 8. OLS regression of financial performance on female board representation and CSR
Model A shows the effect of female board representation and CSR on financial performance, and model B includes control variables for firm size, board size, age, firm activity, and board
structure Tobin’s Q A Tobin’s Q B ROA A ROA B Constant 0.578** (0.231) 4.846*** (0.396) 4.892** (1.900) 33.059*** (3.391) Female board representation 0.011*** (0.002) 0.008*** (0.002) 0.070*** (0.015) 0.040*** (0.015) CSR 0.003 (0.002) 0.010*** (0.002) -0.015 (0.020) 0.018 (0.020) Firm size -0.225*** (0.023) -1.354*** (0.199) Board size -0.261*** (0.108) -1.296* (0.924) Age 0.000 (0.000) 0.002 (0.004) Firm activity -0.204*** (0.071) -2.681*** (0.612) Board structure 0.304*** (0.054) 2.828*** (0.465) Observations 812 812 812 812 R2 0.450 0.243 0.029 0.164 F-statistic 19.054 36.881 12.139 22.596 * p < 0.10 ** p < 0.05 *** p < 0.01
21 Vafeas (1999) and Carter, Simkins, and Simpson (2003). Board structure is a dummy variable which equals one if there is an one-tier board and zero if there is a two-tier board, and table 8 shows that the effect of an one-tier board positively influences financial performance in both models. For now, hypothesis 1a can be accepted if Tobin’s Q is used as a measure for financial performance. By increasing CSR activities, firms can increase their financial performance. Hypothesis 2a can also be accepted, meaning that by increasing the percentage of women on a board, firms can increase their financial performance as measured by both Tobin’s Q and ROA.
Table 9 shows the OLS regression of female board representation on CSR as shown in equation (4).
Table 9. OLS regression of CSR on female board representation
Model A shows the effect of female board representation on CSR, and model B includes control variables with two different measures for financial performance (firm size, board size, age, firm activity, board structure, Tobin’s Q, ROA)
CSR A CSR B1 CSR B2 Constant 90.913*** (0.775) 34.201*** (8.217) 47.331*** (7.832)
22 It shows that in all models, female board representation is significant and negative, meaning that more women on the board, negatively influences the use of CSR. The negative effect of female board representation on CSR is not what was expected in hypothesis three and previous literature on CSR and board gender diversity. Firm size has a significant and positive effect on CSR, this can be due to the fact that larger firms have more resources to devote to social activities (Veronica Siregar and Bachtiar, 2010) and they can spread the cost of CSR over many different products and services, and therefore they will have lower average costs for providing CSR (McWilliams and Siegel, 2001). Board size has a very large significant and positive effect on CSR. Veronica Siregar and Bachtiar (2010) say that a larger board will be able to monitor CSR better , even though a too large a board can make this monitoring ineffective. Also, a larger board could mean that there may be a certain board member appointed to focus entirely on CSR-related activities. This might be not the case with smaller boards.
Even though hypothesis three cannot be accepted, R-squared is very low, which could be a sign that the model does not fit the data correctly. In the next section, cross-section and period fixed effects will be added to account for this.
23 Table 10. OLS regression of financial performance on the interaction effect between female
board representation and CSR
Model A shows the interaction effect of female board representation and CSR on financial performance, and model B includes control variables for firm size, board size, age, firm activity, and board structure.
Tobin’s Q A Tobin’s Q B ROA A ROA B Constant 1.885*** (0.467) 7.053*** (0.596) 9.964*** (3.856) 43.747*** (5.117) Female board representation -0.023** (0.01) -0.011 (0.001) -0.064 (0.090) 0.000 (0.085) CSR -0.012** (0.005) 0.000 (0.005) -0.075* (0.045) -0.001 (0.043) Interaction term 0.001** (0.001) 0.001** (0.001) 0.002* (0.001) 0.000 (0.001) Firm size -0.222*** (0.023) -1.350*** (0.200) Board size -0.252** (0.107) -1.278 (0.926) Age 0.000 (0.000) 0.003 (0.004) Firm activity -0.199*** (0.071) -2.671*** (0.613) Board structure 0.301*** (0.054) 2.823*** (0.465) Observations 812 812 812 812 R2 0.054 0.247 0.032 0.165 F-statistic 16.291 32.902 8.866 19.781 * p < 0.10 ** p < 0.05 *** p < 0.01
4.2. OLS regression with year and industry fixed-effects
24 period fixed-effects also shows no significant relation between age and financial performance, it should be no problem to not include age in the regression.
Table 11. Fixed-effects regression of financial performance on female board representation and CSR Model D shows the effect of female board representation and CSR on both measures of financial performance (Tobin’s Q and ROA) including year fixed effects. Model E includes industry fixed effects and model F includes both year fixed effects and industry fixed effects.
Tobin’s Q D Tobin’s Q E Tobin’s Q F ROA D ROA E ROA F Constant 6.425*** (0.494) 3.417*** (0.416) 4.530*** (0.497) 42.272*** (4.294) 26.937*** (3.846) 34.544*** (4.675) Female board representation 0.008*** (0.002) 0.013*** (0.013) 0.012*** (0.002) 0.040*** (0.015) 0.042** (0.017) 0.040** (0.017) CSR 0.010*** (0.002) 0.006*** (0.002) 0.006*** (0.002) 0.019 (0.020) -0.010 (0.020) -0.010 (0.021) Firm size -0.229*** (0.023) -0.157*** (0.022) -0.164*** (0.021) -1.339*** (0.020) -1.069*** (0.200) -1.080*** (0.198) Board size -0.237** (0.106) -0.244** (0.099) -0.218** (0.097) -1.333 (0.925) -0.927 (0.911) -0.911 (0.913) Firm activity -0.206*** (0.070) -0.102* (0.065) -0.101 (0.064) -2.709*** (0.611) -2.195*** (0.600) -2.179*** (0.599) Board structure 0.309*** (0.054) 0.177*** (0.053) 0.186*** (0.052) 2.825*** (0.465) 2.601*** (0.490) 2.616*** (0.490) Year fixed effects yes no yes yes no yes Industry fixed
effects
no yes yes no yes yes
Observations 812 812 812 812 812 812 R2 0.272 0.390 0.417 0.170 0.215 0.222
F-statistic 24.833 39.270 31.477 13.674 16.859 12.564 * p < 0.10 ** p < 0.05 *** p < 0.01
25 fixed effects which may affect financial performance. The effect of female board representation on financial performance is somewhat larger and the effect of CSR has decreased a bit in comparison with the model without any fixed effects. This shows that there seems to be some unobserved variation at the industry level in the model. There are no surprises in the coefficients of the control variables.
Model F controls for both industry fixed effects and year fixed effects. The effect of female board representation and CSR on Tobin’s Q decrease a bit in comparison with not using fixed effects, but is still positive and significant. Firm size and board size still have a significant negative effect on Tobin’s Q and board structure a negative effect. When including both year fixed effects and industry fixed effects, the coefficient for board activity becomes statistically not significant. Using ROA as a measure for financial performance, the effect of female board representation on financial performance is still positively significant. Furthermore, there have been not much changes in the coefficients in comparison with using no fixed effects. In conclusion it can be said that there seems to be some unobserved variation on the year and the industry level and omitted variables are taken care of. Table 11 shows that female board representation is still positively related to financial performance when fixed effects are included and therefore, hypothesis 2a is accepted. Hypothesis 1a is accepted only when Tobin’s Q is used as a measure for financial performance.
26 The regression results with year and industry fixed-effects of equation (3) are shown in table 13. The interaction effect of CSR and female board representation on financial performance is equal to zero for all regressions, which means that there is no interaction between CSR and female board representation which influences financial performance. Hypothesis 4 cannot be accepted, which means that increasing CSR will not induce a greater effect of FBR on financial performance, and vice versa. Furthermore, firm size is again significantly negative for all regressions, and board size and firm activity are also both negatively related to financial performance. Board structure is positively related to financial performance and statistically significant.
Table 12. Fixed-effects regression of CSR on female board representation
Model D shows the effect of female board representation on CSR including year fixed effects, model E includes industry fixed effects and model F includes both year fixed effects and industry fixed effects. For all three models, the control variable ‘financial performance’ is measured by both Tobin’s Q and ROA.
CSR D1 CSR D2 CSR E1 CSR E2 CSR F1 CSR F2 Constant 33.236*** (8.229) 47.551*** (7.918) 44.167*** (8.309) 52.389*** (8.160) 44.127*** (8.283) 53.329*** (8.116) Female board representation -0.196*** (0.026) -0.184*** (0.026) -0.129*** (0.030) -0.110*** (0.03) -0.136*** (0.030) -0.115*** (0.029) Firm size 1.864*** (0.363) 1.418*** (0.358) 1.557*** (0.352) 1.301*** (0.350) 1.567*** (0.348) 1.273*** (0.345) Board size 6.196*** (1.617) 5.838*** (1.636) 5.517*** (1.567) 5.168*** (1.582) 5.649*** (1.558) 5.312*** (1.563) Firm activity -2.903*** (1.075) -3.326*** (1.094) -1.891* (1.035) -2.127* (1.046) -2.029** (1.027) -2.287** (1.038) Board structure 0.549 (0.835) 1.164 (0.846) -0.665 (0.851) -0.326 (0.864) -0.592 (0.847) -0.204 (0.860) Tobin’s Q 2.435*** (0.534) 1.499*** (0.562) 1.681*** (0.570) ROA 0.060 (0.062) -0.030 (0.061) -0.030 (0.061) Year fixed effects yes yes no no yes yes Industry fixed
effects
no no yes yes yes yes
Observations 812 812 812 812 812 812 R2 0.168 0.148 0.242 0.235 0.257 0.250
27 Table 13. Fixed effects regression of financial performance on the interaction effect between female board representation and CSR
Model D shows the interaction effect of female board representation and CSR on financial performance (as measured by Tobin’s Q and ROA) including year fixed effects, model E includes industry fixed effects, and model F includes both.
Tobin’s Q A Tobin’s Q B Tobin’s Q C ROA A ROA B ROA C Constant 7.010*** (0.585) 4.964*** (0.597) 4.947*** (0.586) 43.341*** (5.102) 35.924*** (5.525) 36.060*** (5.519) Female board representation -0.009 (0.010) 0.000 (0.009) 0.000 (0.009) 0.008 (0.085) -0.004** (0.085) -0.005 (0.085) CSR 0.002 (0.004) 0.000 (0.005) 0.001 (0.005) 0.004 (0.004) -0.031 (0.043) -0.031 (0.043) Interaction term 0.000* (0.001) 0.000* (0.001) 0.000 (0.000) 0.000 (0.001) 0.001 (0.001) 0.001 (0.001) Firm size -0.226*** (0.023) -0.155*** (0.022) -0.162*** (0.021) -1.333*** (0.198) -1.063*** (0.200) -1.073*** (0.199) Board size -0.230** (0.106) -0.239** (0.099) -0.213** (0.097) -1.320 (0.926) -0.909 (0.912) -0.894 (0.914) Firm activity -0.203*** (0.070) -0.098* (0.065) -0.099 (0.063) -2.703*** (0.611) -2.184*** (0.600) -2.169*** (0.599) Board structure 0.307*** (0.053) 0.175*** (0.053) 0.184*** (0.052) 2.820*** (0.466) 2.600*** (0.490) 2.611*** (0.490) Year fixed effects yes no yes yes no yes Industry fixed
effects
no yes yes no yes yes
Observations 812 812 812 812 812 812 R2 0.275 0.392 0.418 0.171 0.215 0.222
F-statistic 23.257 36.666 29.945 12.620 16.859 11.908 * p < 0.10 ** p < 0.05 *** p < 0.01
28 4.3. Country analysis
As this paper includes four different countries, it is interesting to consider differences between these countries. Equation (2) will be tested for the four different countries separately. As the interaction effect seem to have no effect on financial performance, it will not be included in the country analysis. Also, board structure within countries do not differ for the USA and Germany and also do not differ much for the Netherlands and France, and therefore the dummy variable for board structure will be dropped in the analysis to avoid the dummy variable trap. Industry dummies and period fixed effects are included and OLS regression results are shown in appendix 4. First, I will discuss the results where Tobin’s Q is used as a measure for financial performance, thereafter the results will be discussed with ROA as a measure for financial performance.
29 For all countries, firm size has a negative influence on financial performance. For Germany and the Netherlands board size is positively related with financial performance, whereas for the USA and France this is a negative relationship. This could be due to the fact that boards in Germany and the Netherlands follow mainly a two-tier board and boards in the USA and France follow mainly a one-tier board. Results in the previous sections, show that one-tier boards have a positive relationship with financial performance. Results for age are close to zero, which indicates that here is no relationship between the age of a firm and financial performance and results for firm activity are not statistically significant.
Panel B in appendix 4 shows the results when ROA is used as a measure for financial performance. There are not any great surprises in comparison with using Tobin’s Q as a measure for financial performance. The control variable age seems to have a positive relationship with ROA, whereas older firms might have an advantage in comparison to younger firms, as have lower capital costs Lipczinsky and Wilson, 2011) and this decreases net income, and therefore increases ROA.
In conclusion, appendix 4 shows that for all countries it can be beneficial for financial performance to increase the percentage of women on the boards, which in line with the analysis in section 4.1. The argument that gender diversity promotes a better understanding of the marketplace, which increases financial performance (Campbell and Minguez-Vera, 2007) seems to be important and concerns about increasing conflicts, diverse opinions, and less communications are fading away. Furthermore, a concave relationship between CSR and financial performance is found. Investing in CSR increases financial performance until a certain point where over-investment problems exist, and financial performance will decrease after this point.
5. Conclusion
30 between CSR and board gender diversity on the financial performance of firms in the USA, Germany, France, and the Netherlands. Additionally, the individual effects of female board representation and CSR will be examined. Existing literature tend to focus on examining only one country, where this paper contributes by examining more countries and differences between these countries.
A main OLS regression is performed of financial performance on CSR and female board representation. Thereby, control variables, and year and industry fixed effects are simultaneously added to reduce omitted variables. The dependent variable, financial performance, is measured through two different variables, namely Tobin’s Q and Return On Assets (ROA). According to Montgomery and Wernerfelt (1998) Tobin’s Q is a good proxy for financial performance and competitive advantage, because it reflects the market’s expectation of future performance and it accounts for risk, whereas ROA gives a more basic sense of the overall profitability of firms.
31 The last hypotheses try to explain if there is an interaction effect between CSR and female board representation which influences financial performance. Using ROA as a measure for financial performance, gives statistically insignificant results, but when performing the OLS regression without fixed effects, the interaction effect seems to be significantly positive when Tobin’s Q is used as a measure of financial performance. This effect implies that the higher the CSR activities, the greater the effect of FBR on Tobin’s Q. Similarly, the higher FBR, the greater the effect of CSR on financial performance. However, this effect is very close to zero. Also, when industry and year fixed effects are added, the relation between the interaction term and Tobin’s Q is equal to zero for all regressions. It can be concluded, that there is no interaction effect between female board representation and CSR which influences financial performance as measured by Tobin’s Q. By increasing CSR, the effect of female board representation on financial performance will not increase and vice versa.
In addition, differences between countries are investigated. Results show that for all of the four separate countries it is beneficial for financial performance to increase the percentage of women on the boards. Furthermore, findings which could indicate a concave relationship between CSR and financial performance are found. Investing in CSR increases financial performance until a certain point where over-investment problems exist, and financial performance will decrease after this point.
In this research, only four developed countries are involved, which limits the generalizability of the results. Further research could involve less developed countries and countries with emerging economies. Also, the largest firms of each country are used, which could mean that for smaller countries different results appear. Further research could use different sources and indexes, in which smaller firms are also included. Another limitation is the still possible existence of endogeneity, which seems to be a problem in earlier studies which involves board of directors. The fixed-effect model is used to partly control for this endogeneity, but does not account for all the omitted variables. Further research could involve more or different regressions, although it seems to be hard to find an perfect instrument. Moreover, variables such as R&D and advertising intensity might influence financial performance and CSR (Scholtens, 2008), and the model might be miss specified as these variables are not included in the research (McWilliams and Siegel, 2000).
32 female board representation and CSR both increase financial performance, however it does not show in which way and through which factors of CSR and female board representation.
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