Board Diversity and Corporate Social Responsibility

Abstract

This study examines the impact of board diversity on firms’ corporate social responsibility (CSR) performance. Using seven different measures of board diversity across 1,489 U.S. firms from 1999 to 2011, the study finds that board diversity is positively associated with CSR performance. Board diversity is associated with a greater number of areas in which CSR is strong and a fewer number of areas in which CSR is a concern. These findings support the stakeholder theory and are consistent with the view that board diversity enhances firms’ ability to satisfy the needs of their broader groups of stakeholders. We find that gender, tenure, and expertise diversities seem to be the driving factors of firms’ CSR activities. Furthermore, we find that board diversity significantly increases CSR performance by increasing CSR strengths and reducing CSR concerns for firms producing consumer-oriented products and firms operating in more competitive industries. Our results remain robust using different measures of CSR performance, different estimation methods, and different samples.

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Notes

  1. 1.

    See http://www.sec.gov/rules/final/2009/33-9089.pdf and http://www.eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2012:0614:FIN:en:PDF.

  2. 2.

    Prior studies on board diversity have focused on gender diversity and its association with firm performance (e.g., Adams and Ferreira 2009) and board monitoring functions such as overseeing the financial reporting process (e.g., Srinidhi et al. 2011; Abbott et al. 2012).

  3. 3.

    Firms have both explicit and implicit contracts with their stakeholder. Explicit contracts refer to formal contractual agreements between firms and their stakeholders, such as investment contracts with shareholders, loan contracts with creditors, and wage contracts with employees. Implicit contracts refer to promises to stakeholders that are either too vague or too costly to specify in writing. For examples, firms may have implicit contracts to provide customers with quality products and services, to maintain safe workplace for employees, and to protect the environment for local communities and government.

  4. 4.

    One potential explanation for the results is that social pressures (e.g., laws protecting human rights and employees and movements by independent organizations, such as Greenpeace) may have represented the rights of employees.

  5. 5.

    Consumer-oriented firms are firms whose products most likely consumed directly by end consumers, while the industrial firms are firms whose products consumed by other firms.

  6. 6.

    We do not use the RiskMetrics data from 1996 to 1997 due to missing data on gender, race, director tenure, and other directorship positions.

  7. 7.

    We acknowledge that our approach for measuring expertise diversity assumes that each director has only one area of expertise, although many directors may possess expertise in more than one area.

  8. 8.

    The maximum value of a diversity index with four categories is 0.75 (=1 − (0.252 + 0.252 + 0.252 + 0.252).

  9. 9.

    Detail explanations of KLD criteria can be found in existing studies (El Ghoul et al. 2011; Goss and Roberts 2011; Jo and Harjoto 2011).

  10. 10.

    KLD diversity criterion consists of components that are similar to board diversity measures from RiskMetrics, e.g., the representation of women and minorities on corporate boards.

  11. 11.

    The positive correlation between DIV and both CSRSTR and CSRCON is consistent with Kotchen and Moon (2012) that indicate firms with higher CSR concerns tend to have higher CSR strengths to address the concerns. Since CSRSTR and CSRCON are positively related and DIV is positively related to CSRSTR, then DIV is also positively related to CSRCON. We address this endogeneity and causality issue by using instrumental variable approach in our “Robustness Tests” section.

  12. 12.

    We conduct Dickey–Fuller (Dickey and Fuller 1979) and Phillips–Perron  (Phillips and Perron 1988) unit root tests for CSR measures and find that our CSR measures have a unit root. Both tests fail to reject the null hypothesis of having a unit root (i.e., p values are greater than 5 %). Therefore, we include the lagged CSR in our regressions to control for the non-stationary nature of the CSR measures.

  13. 13.

    We only examine the impact of diversity on CSR for firms with non-zero advertising expenditure. We divide firms with non-zero advertising expenditure into above and below median advertising expenditure ratio.

  14. 14.

    Goss and Roberts (2011) and Rubin (2008) find that firms with high CSR rankings tend to be located in the states that vote for Democratic in presidential elections and those with low CSR ratings tend to be located in the states that vote for Republican. To capture the impact of regional differences in political views on firms’ attitudes toward conducting CSR, we include a measure of Republican strength in each state as calculated by the Brookings Institute.

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Acknowledgements

We are grateful for the helpful comments and suggestions of two anonymous referees. Harjoto acknowledges Julian Virtue Professorship endowment and Rothschild awards for financial support and release time for this research. Lee acknowledges Julian Virtue Professorship endowment for financial support and release time for this research.

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Correspondence to Maretno Harjoto.

Appendices

Appendix 1

See Appendix in Table 10.

Table 10 Definitions of dependent variables and variables of interest

Appendix 2

See Appendix in Table 11.

Table 11 Control variables definitions

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Harjoto, M., Laksmana, I. & Lee, R. Board Diversity and Corporate Social Responsibility. J Bus Ethics 132, 641–660 (2015). https://doi.org/10.1007/s10551-014-2343-0

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Keywords

  • Diversity
  • Corporate social responsibility
  • Board of Directors
  • Stakeholders

JEL Classifications

  • M14
  • G34
  • G39