THE CORPORATE WORLD IS FACING THE NOTION OF CORPORATE SOCIAL RESPONSIBILITY (CSR) whenever it turns these days. On a wide range of issues corporations are encouraged to behave socially responsibly (Wellford and Frost, 2006; Engle, 2006). However, in both the corporate and he academic world there is uncertainty as to how CSR should be defined. Some go as far as saying 'We have looked for a definition and basically there isn't one' (Jackson and Hawker, 2001). This s not quite true; the problem is rather that there is an abundance of definitions, which are, according o Van Marrewijk (2003), often biased toward specific interests and thus prevent the development and implementations of the concept. However, the claimed biases are not supported by empirical evidence. The definitional confusion surrounding CSR might potentially be a significant problem. If competing definitions have diverging biases, people will talk about CSR differently and thus prevent productive engagements. Unfortunately, any attempt to develop an unbiased definition is challenging, because there is no methodology to verify whether it is indeed unbiased or not. Even if an unbiased definition were to be developed, it still would require people engaged in CSR to actually apply it for the confusion to be solved.
Board of directors pays attention to the company's stakeholder interests when making Board decisions. Usually, adoption of internal control devices, such as non-executive directors, and separation of the roles of Chairman and Chief Executive, may enhance monitoring quality in critical decisions about stakeholder responsiveness Likewise; the concept of pluralism is increasingly used in corporate governance because diverse Boards of Directors are better suited to improve CSR than managerial-dominated Boards (Wang and Dewiest, 1992). Thus, a inverse or plural Board is what many view as the governance answer to improving social responsibility and awareness f stakeholders' interests in the corporation because it would be more sensitive to some specific c social policies or practices (Johnson and Greening, 1999). Therefore, it would be possible to account for a measure of the SSCG account of the degree of independency and diversity of a firm's Board.1 The concept of corporate social responsibility (CSR) has been developed over a number of years; many different notions or terms related to itha been introduced, such as social performance, social responsiveness, social issues management, etc., until arriving at what is today known as corporate social behavior. In this work, this last concept is used because it integrates all those former terms.
The Relationship Between Corporate Governance and Corporate Social Behavior
Although business researchers have studied corporate governance issues quite extensively from different theoretical perspectives (i.e. resource dependence, institutional, or agency theory), they fail to recognize the importance of stakeholder theory and incorporate the framework into the study of corporate governance.
Following the stakeholder theory, organizations are viewed as social institutions which have responsibilities, not
only to their shareholders, but also to other constituents or stakeholders who can have legitimate claims upon the
organization and be in a position to affect organizational outcomes (Carroll, 1979).Although the academic literature on the link between corporate governance and CSR is limited, some during
the last two decades authors have analyzed the relationship between corporate governance and CSR obtaining
unclear results so far. Among the studies that have not found a clear relationship between both variables are the
following:
- Coffey and Fryxell's (1991) research found a mixed relationship between the amount of institutional ownership
of corporate stock and a company's social behavior.
- Molz's (1995) study tests if pluralistic control improves social performance of the firm and his results do not
support this proposition.
- Coffey and Wang's (1998) research shows a positive relationship between managerial control and corporate
Philanthropy and not with Board diversity, putting some doubts on the merits of having outsiders on the Board.
On the other hand, studies that have found clear positive evidence about this relationship include:
- Simerly and Bass's (1998) work which reports the results of an exploratory study of the impact of different
equity holders on corporate social performance. This study analyzes the linkages between a firm's corporate social performance and the proportion of stock equity owned by insiders, top management, institutions, and
CEOs, founding a significant negative relationship between those variables.
- Johnson and Greening's (1999) research examined the effects of institutional investor types and governance devices on different dimensions of corporate social performance, obtaining that pension fund equity is positively related to corporate social performance, but mutual and investment bank funds exhibited no direct relationship with this variable. Besides, outside director representation was positively related to corporate social
performance.
Other Factors Affecting Corporate Social Behavior
In addition to the social sensibility variable, social behavior can be likely affected by other factors:
- Size of the firm. The positive incidence of size in the firm's social behavior is justified by the greater availability of resources that can be invested in the firm's social strategy (Orlitzky, 2001). Moreover, large firms are likely to be more subject to the demands of social responsiveness from stakeholders because these firms have higher visibility to outside groups and are more commercially vulnerable to adverse reactions among these stakeholders
- Type of activity or sector in which the firm operates. The existence of a close relationship between some economic
activities and certain important social or environmental factors serves to increase the pressure of the
different stakeholders so that firms respond by developing a stronger or more active social strategy in the dimensions related to these external factors in accordance with their expectations
- Financial performance. Financial performance determines the relative weight of the social demand and the attention it receives from the firm's main decision-makers. Thus, less profit table firms may be less willing to
undertake socially responsible actions (Ullmann, 1985; Adams and Hardwick, 1998).
- Indebtedness. Some authors (Adams and Hardwick, 1998; Brammer and Pavelin, 2006b) suggest that firms with
greater levels of debt have limited resources for investment in CSR policies since they need funds available to attend their liabilities with bond and loan creditors.
Model Proposed and Hypotheses to Test
Since it is not possible to observe SSCG directly, it is necessary to develop an instrument that can measure objectively this latent variable. This instrument is a second-order factor model. According to this model), the
measurement of SSCG is made through the measurement of two other latent variables), such as the independence and pluralism of the Board of Directors and the power of stockholders. Then, these two no observable Variables are inferred from the relationships with a group of observed variables or indicators (drawn with rectangles). The following attributes, described in the theoretical and empirical literature as indicators of independence and pluralism of Boards of Directors, have been used in this research: the proportion of outside (non-executive) and independent directors on a company's Board, the number of Board meetings held in the period,
and the proportion of stock owned by non-directors. On the other hand, ownership power can be measured using two different indicators: capital concentration and institutional investment.
Additionally, a group of control variables, such as size, type of activity, financial performance, and relative level of debt, must be included in the structural model to control for the influence of these variables on corporate social behavior in order to isolate the contribution due to the SSCG variable.
Thus, according to this theoretical framework, this research will test the following main hypotheses (1 and 2) as well as the following hypotheses of control (3, 4, 5 and 6):
Hypothesis 1 (H1): SSCG is a higher-order construct composed of two dimensions: (a) independence and pluralism of the
Board of Directors and (b) ownership power.
Hypothesis 2 (H2): SSCG is positively related to the fi rm's social behavior.
Hypothesis 3 (H3): The firm's size is positively related to the fi rm's social behavior.
Hypothesis 4 (H4): The firm's industry or sector, measured by the environmental impact of its activity, is positively related
to the firm's social behavior.
Hypothesis 5 (H5): The firm's financial performance is positively related to the firm's social behavior.
Hypothesis 6 (H6): The firm's indebtedness is negatively related to the fi rm's social behavior.
MODEL MEASUREMENT MODEL
Model proposed in this research to test hypotheses.
2 Problems with small samples, non-multivariate normality of explicative variables and outliers can STRUCTURAL will prevent proper analysis of structural Equation models, specially using the maximum likelihood method. However, Bayesian method is more appropriated to estimate models with
these problems without transforming data. Structural equation modelling software was used to make the analysis. Corporate social behavior was measured using an indicator of a company's commitment to social responsibility, reposed by Fernandez Sanchez and Luna Sotorrío (2007) due to the absence of data already elaborated for all mpanies used in this study. This measure, which allows the establishment of a classify caution of the attitude or of the companies toward social responsibility, has been made by means of an analysis of contents 12 its) from the Web pages and reports on sustainability of the companies analyzed in this research. The items used to build the CSR commitment indicator are: exposure of the viewpoint and the strategy of the company regarding sustainable development, specific commitment in social matters (Global Compact), existence of quality management systems (ISO 9000), existence of environmental management systems (ISO14000 or EMAS), and existence f social management systems (SA8000), external social certification and/or verification, department or
person responsible for CSR, evidence of communication mechanism and/or relationship with stakeholders, promotion
of responsible practices among employees, promotion of responsible practices in the chain of value, specific
CSR memory, and memory according to GRI. Content methodology serves to calculate this measure giving a value
of 1 if the company possesses and informs on each element of the indicator, and 0 if it does not (all values are
normalized to a 0-1 scale). The information used to calculate the indicator was collected from financial, corporate
governance, sustainability, social responsibility, corporate citizenship, or similar reports, as well as from the Web
pages of the companies analyzed.
Tables 1 and 2 report main descriptive statistics (mean, standard deviation, etc.) and correlations between all
variables used in the measurement and structural models.
In Table 2, analysis of the correlation matrix shows that
there is a positive, but not very strong, relationship between size and SSCG as well as size and indebtedness.
However, there is a stronger and negative relationship between a company's financial performance and indebted. Finally, corporate social behavior is linearly correlated, from stronger to less strong, to size, activity, social
sensibility, and indebtedness respectively
Conclusions
The purpose of this study was to shed light on the relationship between corporate governance and corporate social
behaviour, taking a holistic or integrative point of view. The accomplishment of CSR actions by companies has
been an issue of strong theoretical debate between the shareholder approach, in which a company's activities must
focus only on economic aspects which aim to create financial value for the firm's shareholders, and the stakeholder
approach, in which social actions are directed to reduce the information asymmetry with the stakeholders to create
financial and social value for them. The study of this relationship needs first to realize a theoretical analysis to characterize corporate governance
through which the influential variables are justified (independence and pluralism of Boards, capital concentration,
and institutional participation in the corporate govern). All these variables are grouped in a measurement model to infer a construct named SSCG. To analyze the influence of SSCG on corporate social behavior, structural
model has been proposed in which the variables of control: size, indebtedness, activity, and financial performance
are introduced to monitor their influence on CSR. Both models are estimated by applying the Full Information
Maximum Likelihood (FIML) and Bayesian methods for 125 listed companies in the Constant Spanish Stock
Exchange. A limitation of this study is that the evidence found cannot be generalized because of the reality analyzed
(one country and one year). It will be very important in future studies to contrast all these results using data from
other countries and periods of time.
The conclusions obtained in this research are:
- SSCG is a construct that can be measured properly through two different factors: independence and pluralism of
Boards, with which it has a direct relationship, and ownership power, with which it has an inverse relationship.
The independence variable has a direct and signifi cant relationship with the number of external-independent
directors, the frequency of meetings, and the percentage of capital in the hands of non-managerial directors.
On the other hand, ownership power has a direct and signifi cant relationship with capital concentration and
institutional participation in the corporate government.
- Among all these indicators, however, three of them are most important in inferring the firm's SSCG: the
concentration of capital in the hands of a few shareholders, the proportion of capital owned by non-directors,
and the proportion of outside-independent directors on the Board. Therefore, these results imply the need to
consider a broader scope of corporate governance to analyze its relationship with CSR in future research.
- These results indicate that an increase in SSCG can be promoted by two types of initiatives. The fi rst one is
orientated to promote its independence and pluralism through the participation of external and independent
directors on corporate Boards as well as of directors who do not have managerial responsibilities, giving them
major initiative in increasing the number of Board meetings. The second one is orientated to reduce the concentration
of the decision power by means of a minor concentration of capital and with the entry of institutional
directors on corporate Boards.
- Another conclusion of this study is that the hypotheses of control confirm a positive significant relationship of
the firm's size and the environmental impact of the firm's activity to the firm's social behavior. Nevertheless,
there is not significant relationship between the financial performance and the relative level of debt with the
firm's social behavior.
- There is a direct significant relationship between SSCG and corporate social behavior. Though the structural
model explains a low percentage of the firm's social behavior (R2 = 0.319), this result is conclusive due to its
level of significance and the isolation of the effect so that it is possible to think that the composition of the
corporate government is an important factor when promoting the firm's social responsibility. Consequently,
internal governance mechanisms related to the composition and structure of a company's control and ownership,
which have been studied separately in the past, are in fact related and together have a relative importance
in explaining corporate social behavior.
The results of this research show that some political measures taken in the past decade about the structure and
management of Boards of Directors to enhance a fi rm's transparency and social responsibility as, for example, the
introduction of independent directors on the Boards, are moving in the right direction. However, some adjustments can be introduced to develop a stakeholder model of the fi rm. Thus, the social behavior of the firm can be enhanced by introducing other directors on Boards representing different stakeholders such as employees, customers, or suppliers to voice stakeholders' preferences in firm's decisions. Another practical measure or recommendation to propose, obtained from these findings, is that, at least in the Spanish case, it is necessary to modernize management systems showing the benefits of CSR policies to produce financial and social value in firms in which property is highly concentrated and owners have management responsibilities; this will change managers' perceptions that actions or policies are only a cost for companies. This research, therefore, points out that the measures directed to increase the plurality, independence, and
participation in the decision-making process, as well as the actions orientated to avoid the power concentration of corporate Boards can be used to increase a firm's social behavior and, indirectly, the accountability and transparency
of companies.
