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Do board monitoring and audit committee quality help risky firms reduce CSR controversies?

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Abstract

This study focuses on potential inhibiting and driving factors of corporate social responsibility (CSR) controversies including board monitoring intensity and audit committee quality with a particular focus on risky firms. We draw on agency, resource dependence, and slack financial resources theories to explain this association. Using an international sample between 2002–2019 and executing fixed-effects regression and Hayes’s moderation analysis methodology, we find that risky firms tend to commit more CSR controversies. Furthermore, CSR performance, firm complexity, and indebtedness exacerbate CSR controversies, whereas larger boards mitigate them. Moreover, while board monitoring intensity and audit committee quality do not prevent committing CSR controversies in absolute terms, they alleviate risky firms' CSR controversies tendency. The findings confirm agency theory and the monitoring function of the board in mitigating CSR controversies. In line with the resource dependence theory, audit committees’ independent members and members with different skills and expertise provide critical resources that help prevent CSR controversies.

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Notes

  1. The BP oil spill in 2010 was the biggest manufactured ecological disaster in US history and represented a failure of corporate governance and CSR policies. The company pleaded guilty and agreed to pay more than $18.7 billion in fines and penalties (Cherry and Sneirson 2010; Robertson et al. 2015). Moreover, the VW emissions scandal was one of the costliest scandals. The legal penalties and fines for VW have amounted to approximately USD30 billion (Schwartz and Bryan 2017) causing damages to the company's shareholders, reputation, employees, and dealers.

  2. We use CSR controversies and corporate social irresponsibility interchangeably throughout the text.

  3. Please see the Section 3.1 and Table 12 for more detailed definitions of AC quality and board monitoring proxies.

  4. The index includes audit, nomination, compensation, and corporate governance committees.

  5. Supporting our argument, Vafeas (1999) found that board meeting frequency has a negative effect on firm value, whereas Chou et al. (2013) found that board meeting attendance has a positive effect on firm performance.

  6. Indeed, this positive relationship between CSR performance and CSR controversies was proven by Ormiston and Wong (2013).

  7. The preliminary summary statistics for the missing values show that ESGconts had 0.03%, AudcomQ has 2.30%, ZFS has 1.28%, Bsize has 0.40%, Fsize has 0.18%, CurrentR has 1.26%, Leverage has 0.18%, and FFP has 0.94% missing observations.

  8. Based on the frequency analysis results, 13.1% of the observations are from basic materials, 18.94% are from consumer cyclical, 8.93% are from consumer non-cyclical, 8.76% are from energy, 9.13% are from healthcare, 21.01% are from industrial, 11.32% are from technology, 3.39% are from telecommunication service, and 5.43% are from utility sectors. Moreover, the observations range between 0.71% in 2002 and 12.87% in 2019 based on the years.

  9. Rolling standard deviation of return on assets over three years.

  10. RSE denotes the strength of the regulation of securities exchanges in countries scaling between 1–7 (best) (WEF 2018).

  11. Intangibility refers to the ratio of intangible assets scaled by total assets on the balance sheet.

  12. CFO_Dummy is coded as 1 when the Cash flow from operations is positive and coded as 0 otherwise.

  13. ZFS_IndMean is the industry & year average of ZFS excluding focal firms.

  14. RD_Dummy takes 1 if research and development expenditure is positive, and 0 otherwise.

  15. Ln_ESGconts_raw is based on the raw ESG controversies score. Unlike ESGconts variable used in the baseline analysis which is calculated by multiplying raw ESG scores with (-1), we took raw ESG scores in the calculation of Ln_ESGconts_raw to be able to take natural logarithm. Hence, higher Ln_ESGconts_raw value indicates committing less controversies.

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Authors and Affiliations

  1. Arthur J. Bauernfeind College of Business, Murray State University, Murray, KY, USA

    Cemil Kuzey

  2. Stirling Management School, University of Stirling, Stirling, Scotland, FK9 4LA, UK

    Habiba Al-Shaer

  3. Excelia Business School, CERIIM, La Rochelle, France

    Ali Uyar

  4. College of Engineering and Technology, American University of the Middle East, Egaila, Kuwait

    Abdullah S. Karaman

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  1. Cemil Kuzey
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Appendix

Appendix

Table 12 Definitions of the variables
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Table 13 Country-level sample distribution
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Kuzey, C., Al-Shaer, H., Uyar, A. et al. Do board monitoring and audit committee quality help risky firms reduce CSR controversies?. Rev Quant Finan Acc (2024). https://doi.org/10.1007/s11156-024-01280-6

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