136

Corporate Governance: An International Review, 2011, 19(2): 136–152

Corporate Governance and Corporate Social

Responsibility (CSR): The Moderating Roles of
Attainment Discrepancy and Organization Slack
Punit Arora* and Ravi Dharwadkar

ABSTRACT

Manuscript Type: Empirical

Research Question: Is the relationship between corporate governance mechanisms and corporate social responsibility
(CSR) contingent on satisfaction with firm performance? corg_843 136..152

Research Findings/Insights: Our results suggest that while effective corporate governance discourages both positive
(proactive stakeholder relationship management) and negative (violation of regulations and standards) CSR, higher slack
and positive attainment discrepancy lead to higher positive and lower negative CSR, respectively. More significantly, we
find that the association between effective corporate governance and both positive and negative CSR depends on satisfaction
with firm performance as indicated by the levels of slack and attainment discrepancy. Put simply, the impact of corporate
governance on positive CSR is more pronounced under low slack/negative attainment discrepancy conditions, and that on
negative CSR is more pronounced under high slack/positive attainment discrepancy conditions.
Theoretical/Academic Implications: Our study provides robust support for the behavioral theory of the firm. Previous
research has not adequately considered the role of satisfaction with firm performance in studying the impact of corporate
governance on managerial decision-making. We show that the association between corporate governance and CSR dimen-
sions depends on differences in decision-making latitude originating from relative firm performance compared to those of
peer firms.
Practitioner/Policy Implications: First, to understand how effective corporate governance can constrain positive CSR and
more importantly reduce negative CSR. Second, to appreciate that the effectiveness of an organization’s governance
mechanisms is contingent on slack and performance and the marginal returns from improving governance mechanisms
when things are going well may be low.

Keywords: Corporate Governance, Corporate Social Responsibility (CSR), Behavioral Theory of the Firm (BTOF),
Attainment Discrepancy, Organizational Slack

INTRODUCTION performance targets, and therefore, reduce CSR expendi-

tures, given the long-term horizons and uncertain outcomes

M anagement scholars have been interested in under-

standing the impact of corporate governance
mechanisms such as ownership and boards of directors
on corporate social responsibility (CSR) ratings (Coffey &
Fryxell, 1991; Johnson & Greening, 1999; Waddock &
Graves, 1997). Scholars examining ownership implications
argue that institutional owners, the dominant class
of owners, are myopic and concerned with quarterly
*Address for correspondence: Martin J. Whitman School of Management, 721 Univer-
sity Avenue, Syracuse University, Syracuse, NY, 13244, USA. Tel: (315) 443-3468;
E-mail: punit@syr.edu
associated with them (Coffey & Fryxell, 1991). Other schol-
ars argue that institutional investors cannot exit the firm
very easily, therefore undertake more CSR to mitigate the
risk of adverse regulatory action, higher compliance costs,
consumer retaliation, and so on (Neubaum & Zahra, 2006;
Spicer, 1978). To resolve this paradox, scholars posit that
different types of institutional owners may have different
interests in CSR. For example, Johnson and Greening (1999:
564) argue that “some categories of institutional investors act
more as traders concerned predominantly with quarterly
earnings and that others act as long-term investors . . . more
concerned with a firms social performance because it may

© 2011 Blackwell Publishing Ltd

doi:10.1111/j.1467-8683.2010.00843.x
CORPORATE GOVERNANCE AND CSR
impact financial performance over time.” Nonetheless,
the empirical evidence continues to be mixed (Coffey &
Fryxell, 1991; Coffey & Wang, 1998; Graves & Waddock,
1994; Johnson & Greening, 1999; Kassinis & Vafeas, 2002;
Neubaum & Zahra, 2006).
Similarly, scholars examining board implications find that
the proportion of independent directors on the board has a
diametrically opposite impact on CSR depending on the
studies considered (Coffey & Wang, 1998; Johnson & Green-
ing, 1999; Kassinis & Vafeas, 2002; Kesner & Johnson, 1990;
Wang & Coffey, 1992). Some scholars argue that since the
selection of a greater number of independent directors
signals the firm’s intent to pay greater attention to its exter-
nal environment and legitimacy (Pfeffer & Salancik, 1978), it
should be associated with increased CSR expenditures
(Johnson & Greening, 1999). Others argue that as directors
are hired primarily to protect shareholders’ interests: “an
effective board may actually serve to screen and eliminate
philanthropic intentions” (Coffey & Wang, 1998: 1598).
Further, because a vast majority of these directors are hired
for their financial expertise (Fligstein, 1991), it may be much
easier for them to evaluate historical financial information
than to make uncertain strategic decisions such as on R&D,
internal innovation, entrepreneurship, and CSR (e.g.,
Baysinger & Hoskisson, 1990; Deutsch, 2005; Lorsch &
MacIver, 1989). In summary, as further encapsulated in
Appendix 1, the relationship between various governance
mechanisms and CSR is still far from clear.
To resolve the ambiguity surrounding these findings, this
study makes three distinctive advances. First, we theorize
that one of the reasons for lack of clarity on the relationship
between corporate governance and CSR could relate to the
substitution effect (e.g., Rediker & Seth, 1995), which refers
to the interdependence among various governance mecha-
nisms. Unlike previous research that usually assesses the
implications of various corporate governance mechanisms
in isolation (Coffey & Wang, 1998; Johnson & Greening,
1999; Kesner & Johnson, 1990), we adapt the recommenda-
tions of Agrawal and Knoeber (1996) and use four gover-
nance variables in our model: independent director
representation, concentrated institutional shareholding,
managerial ownership, and strength of shareholder rights.
Managerial ownership – the first level of governance – is
expected to provide a direct incentive to managers to under-
take value-maximizing behavior (e.g., Amihud & Lev, 1981;
Davis, 1991; Denis, Denis, & Sarin, 1997; Gedajlovic &
Shapiro, 2002; Morck, Shleifer, & Vishny, 1988). Indepen-
dent directors, tasked with supervision of managerial
decision-making on behalf of shareholders, are the second
layer of governance arrangements. Concentrated institu-
tional owners – the third layer – are assumed to have both
the ability and the means to supervise managerial decision-
making, and thus are expected to act as a secondary means
of securing principals’ (owners’) tighter control over their
agents (managers). Lastly, the threat of takeover by other
firms operates as the final check on the agents, which essen-
tially implies that if the firms are not well managed they
would be good candidates for takeover by those who
believe they can manage them better. Our choice of these
governance mechanisms not only addresses substitution
possibilities within the internal governance mechanisms
© 2011 Blackwell Publishing Ltd
137
(managerial ownership, institutional ownership concentra-
tion, outsiders on boards) but also considers the potential
effects of strong shareholder rights (or the lack thereof) for
CSR.
Second, previous research has come under increasing
criticism for combining positive and negative dimensions of
CSR (Chiu & Sharfman, 2009; Godfrey, Merrill, & Hansen,
2009; Kacperczyk, 2009; Mattingly & Berman, 2006; Strike,
Gao, & Bansal, 2006). This literature suggests that positive
CSR acts such as sustainable practices, commitment-based
employment practices, corporate philanthropy and effective
relations with local community are not on the same con-
tinuum as avoiding negative CSR acts such as violations of
regulatory guidelines on environment or equal employment
opportunities, health and safety concerns, or controversial
actions such as on human or employment rights. While posi-
tive CSR involves proactive stakeholder relationship man-
agement, negative CSR involves reactive compliance with
minimum standards, and hence these should not be com-
bined. In deference to these studies, we make two separate
composite ratings – positive and negative CSR – and run
separate regressions models for each of them. We believe
this helps us in significantly advancing the debate on the
nature of the relationship between governance and CSR.
Finally, previous research (e.g., Waddock & Graves, 1997)
suggests that when firms perform well, they are more likely
to invest in CSR. We formally incorporate this idea by using
theoretical concepts based in the behavioral theory of the
firm (Cyert & March, 1963) and examine how the concept of
attainment discrepancy – the difference between actual and
aspired performance – determines levels of CSR. We suggest
that when a firm is perceived to be doing well, independent
directors or concentrated owners may: 1) not feel the need
for close monitoring; and 2) place greater trust in managers’
judgment, giving them greater latitude in decision-making.
Moreover, in such situations, managers are also likely to deal
with their monitors from a position of strength. Conversely,
if the firm is perceived to be not doing well, managers may
not have much decision-making latitude even under rela-
tively weak governance conditions. We make similar argu-
ments about another behavioral theory of the firm (BTOF)
factor, the concept of slack and how it relates to decision-
making about CSR. Thus, we theorize that under identical
governance conditions, managers could have vastly different
decision-making latitude based on the two BTOF factors,
namely, attainment discrepancy and slack.
THEORY AND HYPOTHESES
DEVELOPMENT
Corporate Governance and CSR
In order to clarify the nature of relationship between corpo-
rate governance and CSR, it is important to make a distinc-
tion between positive and negative CSR so that we can
separately examine the implications of corporate governance
for both enabling effective decision-making (e.g., proactive
sustainability practices) and preventing poor decision-
making (e.g., violation of environmental regulations). This is
important not just from an empirical perspective – previous
Volume 19 Number 2 March 2011
138
research (e.g., Mattingly & Berman, 2006) highlights that
these two dimensions of CSR do not load together in factor
analysis, which may be one of the reasons for inconsistent
findings – but also from a theoretical viewpoint, which
would suggest that effective governance should always
curtail negative CSR, while determining the levels of posi-
tive CSR based on a cost-benefit analysis. Therefore, to the
extent that good governance is associated with better moni-
toring, in general, we expect it to be associated with lower
negative CSR, as the failure to comply with rules and regu-
lations can lead to penalties and bad publicity that effective
monitors would consider avoidable. This insight is valuable
as previous governance research has predominantly focused
on the upsides of effective governance (i.e., value creation,
accounting profits, etc.) and rarely considered the benefits of
preventing potential downside losses and associated costs.
However, the relationship between effective governance
and positive CSR is a little more complex because while
positive CSR has potential benefits for firm performance,
these benefits are more long-term and uncertain in nature.
Thus, mainly those who have a long-term interest in the
firm may prefer them. In contrast, if these governance
mechanisms focus on the short-term, then the costs of CSR
will likely outweigh the benefits. For example, institutional
owners concerned with meeting their short-term goals and
achieving their performance targets may not want manag-
ers to invest in CSR due to goal conflicts relating to time
horizons and uncertainty of outcomes (e.g., Bushee, 1998).
This may result in a pressure on the managers to reduce
positive CSR, which would be especially true for those
institutional investors who are primarily short-term,
momentum traders (Neubaum & Zahra, 2006), those who
prefer to remain passive (Edwards & Hubbard, 2000;
Pound, 1992; Wahal, 1996), or those who have fairly diver-
sified and indexed portfolios (Dharwadkar, Goranova,
Brandes, & Khan, 2008).
Similarly, since selection of a greater number of indepen-
dent directors signals a firm’s intent to pay greater atten-
tion to its external environment and legitimacy (Pfeffer &
Salancik, 1978), it could lead to higher other hand, because
these directors are primarily appointed to protect share-
holders’ interests, independent boards may consider higher
positive CSR to be not in the interest of the firm. Baysinger
and Hoskisson (1990) and Lorsch and MacIver (1989)
support this contention by arguing that a vast majority of
independent directors are hired by financial institutions for
their financial expertise, which means they likely find it
much easier to evaluate historically available financial infor-
mation rather than uncertain strategic information. They
are primarily the agents of the shareholders, a majority of
which are financial institutions with short-term interests.
Thus, they should find it much easier to justify short-term
gains than long-term uncertain investments. In turn,
investment in R&D, internal innovation, entrepreneurship,
and other functions with uncertain returns tends to display
a negative relationship with greater outsider representation
on boards (Baysinger, Kosnik, & Turk, 1991; Deutsch, 2005;
Hill & Snell, 1988; Hoskisson, Hitt, Johnson, & Grossman,
2002; Zahra, 1996). Because CSR shares these characteris-
tics, greater outsider representation may lead to lower CSR
investments.
Volume 19 Number 2 March 2011
CORPORATE GOVERNANCE
While some attention has been paid to boards and
owners in this domain, limited research has examined the
implications of managerial ownership and shareholder
rights for CSR. In both cases, the effects on negative CSR
are clear. High managerial ownership and greater share-
holder rights that allow for market interventions should
reduce negative CSR. Similar to our earlier arguments, their
effect on positive CSR would depend on the time horizons
of the CEO as well as the type of owners of the firm, and
short-term horizons on part of managers and owners will
reduce CSR.
Our arguments at the firm level can also be augmented
using Mackey, Mackey, and Barney (2007), who propose that
the relationship between CSR and firm value may depend on
demand for and supply of socially responsible investments,
and only when its demand exceeds supply the firm may
benefit from it. They further argue that “from a broader
theoretical perspective, the entire effort to discover how
socially responsible activities can increase the present value
of a firm’s future cash flows is problematic. After all, the
essential point of many business and society scholars is
that . . . the firms should sometimes engage in activities that
benefit employees, suppliers, customers, and society at
large, even if those activities reduce the present value of the
cash flows generated by the firm” (2007: 818). While this
value-reducing behavior may be acceptable to socially
responsible investors, it may not be acceptable to other
investors. As the Social Investment Forum (2010) suggests
that about one in eight dollars under professional manage-
ment in the United States today uses some form of socially
responsible investing (SRI) (Geczy, Stambaugh, & Levin,
2003), we argue that given the current levels of SRI, the
demand for SRI is likely to be lower than the supply of SRI
and therefore effective governance structures will ensure
that managers act in the interest of their principals. In
summary, overall the relationship between effective gover-
nance and negative CSR is clear-cut as the downside costs
will encroach on firm value. Similarly, the benefits-costs
tradeoffs at the firm level along with the broader implica-
tions of demand and supply of SRI would suggest that
under the current circumstances, effective governance
should also reduce positive CSR.
Hypothesis 1a. Effective corporate governance is negatively
associated with positive CSR.
Hypothesis 1b. Effective corporate governance is negatively
associated with negative CSR.
Behavioral Theory of the Firm (BTOF) and CSR
Ever since Cyert and March (1963) developed the view of
organizations as coalitions of stakeholders, management
scholars have been cognizant that unresolved conflict is an
important feature of organizations and the coalitions within
them. Most types of resource allocation decisions within
organizations are therefore an outcome of the coalition
bargaining processes, which may either depend on the
primacy of certain stakeholders or be subject to negotia-
tions across coalitions of stakeholders. Most resource allo-
cation decisions that lead to corporate social programs can
be viewed in this light, yet research has not accorded due
© 2011 Blackwell Publishing Ltd
CORPORATE GOVERNANCE AND CSR
importance to such processes (Barnett, 2007; Scherer &
Palazzo, 2007).
In particular, research has not considered the role of
shareholder satisfaction, and how that might affect manag-
ers’ ability to allocate resources for CSR. This is an important
issue because the benefits from CSR, like benefits from any
other strategic action such as innovation activity, are uncer-
tain and unclear. If such is the case, shareholders should be
more inclined to trust their agents to make the “right” deci-
sions when they are satisfied than when they are not. When
a firm has abundant discretionary resources and its actual
performance exceeds aspirations, managers will have sig-
nificant discretionary powers, from a coalitional perspective,
even under strong governance conditions. However, when
the converse is true, decision-making latitude for managers
will be far more constrained and possibly driven by short-
term concerns for cost cutting in reaction to weak perfor-
mance. Therefore, it is important to consider these two key
factors from BTOF – attainment discrepancy and organiza-
tional slack – that have implications not only for corporate
governance (i.e., balance of power between owners and
managers) but also provide insight into why firms may
engage differently in positive and negative CSR.
Attainment Discrepancy and CSR. BTOF highlights the
importance of firms as systems with aspirations and perfor-
mance expectations (Cyert & March, 1963). The firm’s rela-
tive performance with respect to its past performance or
industry peers has important and well-documented impli-
cations for resource allocation decisions (Lant, 1992). Specifi-
cally, firms performing below the industry average aspire to
reach the industry average, and firms performing above the
mean for their industry aspire to improve on their past per-
formance (Bromiley, 1991; Fiegenbaum & Thomas, 1988).
Lant (1992: 624) developed and labeled this concept as
“attainment discrepancy,” which simply reflects the differ-
ence between actual and aspired performance. If actual per-
formance is better than aspired performance, a positive
attainment discrepancy results; and if it is lower, a negative
attainment discrepancy occurs.
In the case of positive attainment discrepancy, sharehold-
ers should repose greater trust in managers and allow them
higher discretion in resource allocations. However, in the
case of negative attainment discrepancy, managerial discre-
tion may be limited (Bromiley, Miller, & Rau, 2001) as share-
holders are less trusting of managerial decision-making and
more prone to pressuring them towards meeting sharehold-
ers’ goals. For example, if a firm aspired towards a return on
asset of 3 per cent and its actual profits turn out to be 5 per
cent, shareholders would be more willing to allow managers
to invest a portion of the higher earnings on CSR than if its
actual profits turn out to be 1 per cent, in which shareholders
may want to reduce CSR allocations to a bare minimum.
Thus, managers probably have higher discretion in paying
attention to social domains in the case of positive attainment
discrepancy than in case of negative attainment discrepancy.
Alternatively, poor performance on this BTOF dimension
may pressure managers into cutting corners in order to
improve performance, a condition likely to be associated
with increased negative CSR.
© 2011 Blackwell Publishing Ltd
139
Hypothesis 2a. Positive attainment discrepancy is positively
associated with positive CSR.
Hypothesis 2b. Positive attainment discrepancy is negatively
associated with negative CSR.
Organization Slack and CSR. Organization slack, an
important behavioral theory construct, signifies the exist-
ence of a “cushion of actual or potential resources” that
enables the firm to adapt to internal or external necessities
for strategic change (Bourgeois, 1981: 30). The availability of
resources not only provides firms with the opportunities to
commit resources to social causes (e.g., Waddock & Graves,
1997), but also makes them less resistant to stakeholders’
demands.
While a few recent studies have examined the role of slack
on determining levels of CSR, they generally used financial
performance as a proxy for slack (e.g., Amato & Amato,
2007; Waddock & Graves, 1997). The use of this proxy is
problematic because the relationship between slack and
financial performance itself is not very clear; some previous
research indicates a positive relationship and others reveal a
curvilinear relationship such that there must be a point
beyond which slack becomes a wasted resource (e.g., Nohria
& Gulati, 1996). The other problem with the use of financial
performance as a measure of slack is that unlike recent
studies on the role of slack in determining various organi-
zational outcomes (e.g., George, 2005), it does not really
distinguish between high discretion (uncommitted liquid
resources) and low discretion (absorbed costs) components
of slack, which is important because the latter is hard to
recover and may provide little discretion to management.
Therefore, as a first step, research should use only high-
discretion slack measures in studying the CSR (Arora, 2008),
which with the exceptions of Navarro (1988) and Seifert,
Morris, and Bartkus (2004), studies have not done.
Second, high discretion slack itself can be divided into
two categories – available slack and potential slack, where
potential slack refers to firm’s capacity to quickly raise cash
resources, if required. Navarro (1988) studied the impact of
potential slack (measured by debt/equity ratio) only. There-
fore, an improved research design should include both avail-
able and potential slack. Along the lines of our previous
arguments regarding attainment discrepancy, we expect
higher slack to enable higher positive CSR and lower slack
to induce increased negative CSR.
Hypothesis 3a. High discretion slack is positively associated
with positive CSR.
Hypothesis 3b. High discretion slack is negatively associated
with negative CSR.
Integrating Corporate Governance, Behavioral
Theory of the Firm, and CSR
The implications of governance for CSR should be contin-
gent on the resource endowment situation of the firm, and
these are best understood with the help of a visual depiction.
While Figure 1 shows that the relationship between gover-
nance and CSR is moderated by satisfaction with firm per-
Volume 19 Number 2 March 2011
140 CORPORATE GOVERNANCE

FIGURE 1 ernance in conjunction with high slack and high attainment

Satisfaction with Firm Performance as a Moderator in discrepancy should enable managers to undertake a high
the Relationship Between Corporate Governance level of positive CSR, while reducing their need to be
and CSR involved in negative CSR. This quadrant reflects a situation
of high managerial discretion with respect to CSR activities.
Corporate Governance
Corporate Social Therefore, we expect behavioral theory factors to dominate
Responsibility
corporate governance factors.
Managerial ownership In contrast to these two situations (wherein one factor
Independent Directors
Positive CSR
dominates the other), firms in the top right quadrant
Institutional Ownership
Negative CSR have both strong corporate governance and high satisfac-
Shareholder rights (GIM tion with firm performance. Under these circumstances,
Governance index)
the managerial tendency to engage in positive CSR is likely
to be curtailed in the face of effective governance, given
our earlier arguments. Moreover, the implications for nega-
Satisfaction with Firm tive CSR are very clear in this quadrant – both resource
Performance and governance factors in combination should reduce
Slack
Attainment Discrepancy negative CSR. Finally, firms in the bottom left quadrant
have weak governance and a weak resource situation.
While the resource situation may constrain positive CSR
(despite the weak governance context), the combination of
FIGURE 2 ineffective governance and a weak resource situation may
Specific Relationships Between Corporate Governance, provide the enabling condition for very high levels of
Satisfaction with Firm Performance, and Positive and negative CSR.
Negative CSR
Hypothesis 4a. Effective corporate governance is less negatively
Satisfaction with firm Low High associated with positive CSR under conditions of high slack and
performance
(Low slack, negative (High slack, positive positive attainment discrepancy.
Corporate governance attainment discrepancy) attainment discrepancy)
Hypothesis 4b. Effective corporate governance is more nega-
Strong
Low positive CSR, Targeted positive CSR, tively associated with negative CSR under conditions of high
Low negative CSR Low negative CSR slack and positive attainment discrepancy.
Low positive CSR, Highest positive CSR,
Weak
High negative CSR Low negative CSR METHODS
Study Sample
We draw our sample from the S&P 500 and KLD Domini 400
formance, Figure 2 provides more specific details on the Universe. First, we collect social performance ratings for all
nature of the hypothesized relationships. In Figure 2, along the firms, included in these two indices, during the period of
the horizontal axis, we consider managerial decision- 2001–2005 by the firm Kinder, Lyndenberg, and Domini
making latitude about CSR based on satisfaction with firm (KLD). Second, we obtain information about institutional
performance as determined by availability of slack resources ownership, corporate governance, and financial perfor-
and achievement of financial aspirations. Along the vertical mance for these firms. The information about institutional
axis, we consider corporate governance effectiveness as ownership comes from the CDA/Spectrum Thomson Finan-
determined by levels of managerial ownership, independent cial’s 13F database; corporate governance is based on the
director representation, concentrated institutional owner- RiskMetrics (IRCC) database; and financial performance
ship, and shareholder rights. While considering the relation- comes from the Compustat North America database. We
ships portrayed in Figure 2, it is important to keep in mind lead the dependent variable by a year to ensure that the
that we are talking about general trends and not specific firm independent variables predate the dependent variable. Thus,
strategies. Some firms may – and indeed do – defy these the information about the independent variables pertains to
expectations, but in general, we expect these relationships to the years 2000 to 2004. Missing data brought the final sample
hold. down to 1522 observations for 518 firms. Appendix 2 details
We theorize that effective corporate governance and low these firms by type of industry.
slack and negative attainment discrepancy represent a situ-
ation of least managerial discretion regarding positive CSR
expenditures. Also, while low slack and negative attainment
Dependent Variables
discrepancy may provide the enabling conditions for Corporate Social Responsibility. We use archival ratings
involvement in negative CSR, effective governance should of CSR as the dependent variable, obtained from the firm
curtail that tendency. Overall, we expect effective gover- KLD Inc. The use of KLD ratings of corporate social respon-
nance factors to dominate behavioral theory factors in influ- sibility is fairly standard in the literature; the ratings con-
encing managerial discretion regarding CSR expenditures. sider all firms in Standard & Poor 500 or KLD Domini 400
In sharp contrast, we theorize that ineffective corporate gov- Universe for the period 2001–2005 on 82 indicators in eight

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CORPORATE GOVERNANCE AND CSR
major social performance categories: community relations,
employee relations, diversity, environment, product quality,
governance and transparency, human rights, and other
concerns.
While previous research has tended to transform all these
dimensions into a composite index or rating (e.g., David,
Bloom, & Hillman, 2007; Hillman & Keim, 2001; Waddock
& Graves, 1997), there is growing consensus now that posi-
tive and negative CSP are different constructs that should
not be combined (Chiu & Sharfman, 2009; Godfrey et al.,
2009; Kacperczyk, 2009; Mattingly & Berman, 2006; Strike et
al., 2006). Recent research suggests that KLD Strengths that
primarily relate to corporate philanthropy, gender and
racial diversity, good union relations, green products or
processes, innovation, and the like is not on a continuum
with concerns that relate to violations of regulatory frame-
works set by agencies such as Equal Employment Oppor-
tunity Commission (EEO), Occupational Safety and Health
Administration (OSHA), Environment Protection Agency
(EPA), and/ or Fair Trade Commission (FTC), and hence
should not be combined. Given these findings, we make
two separate composite ratings – positive and negative CSR
ratings – and run separate regressions models for each
of them.
Independent Variables
Corporate Governance. To code for corporate gover-
nance in different firms, we use four approaches. First, con-
centrated ownership may be the most effective mechanism
to reduce agency problems (e.g., Hoskisson et al., 2002; Kang
& Sorensen, 1999; Morck et al., 1988), and financial institu-
tions have both better incentives and better means to
monitor mangers. While previous research has generally
used total institutional ownership, following Laidroo (2009),
we sum up institutional ownership for only those institu-
tions that own 5 per cent or more shares in a firm as they are
more likely to have incentives to monitor.
Second, managerial ownership provides the managers
with incentives to undertake value-maximizing and not
value-destroying behavior (e.g., Amihud & Lev, 1981; Davis,
1991; Denis, Denis, & Sarin, 1997; Gedajlovic & Shapiro,
2002; Morck et al., 1988). Thus, we include managerial own-
ership in our empirical model, and following Chen (2008)
we measure it as the percentage of total equity owned by the
CEO. This is also in line with the research that has shown
CEO power as a predictor of number of organizational phe-
nomena from opportunistic behavior to executive compen-
sation (Finkelstein & Boyd, 1998).
Third, greater independent director representation pro-
vides an important characteristic of a corporation’s interest
in both improving governance and seeking external legiti-
macy (Ahmed & Duellman, 2007; Johnson & Greening,
1999). Therefore, we include the proportion of independent
directors as a corporate governance variable in our model.
Following Chhaochharia and Grinstein (2007) and Chen
(2008), we define independent directors as those directors
who were neither employed by nor affiliated in any other
way to the firm.
Fourth, we borrow Gompers, Ishii, and Metrick’s (2003)
governance index (GIM), which measures shareholder
© 2011 Blackwell Publishing Ltd
141
rights at different corporations and is fairly common
in research on corporate governance (e.g., Bebchuk &
Cohen, 2005). All information about the corporate gover-
nance variables comes from RiskMetrics (formerly, IRCC)
database.
Attainment Discrepancy in Financial Performance. We
use two measures, one accounting and one market-based, to
calculate the attainment discrepancy in financial perfor-
mance. First, we calculate the return on assets (ROA) and
market to book ratio (MBR). The ROA serves as an account-
ing measure of performance and is fairly standard in past
research (e.g., Waddock & Graves, 1997). The MBR is a modi-
fied version of Tobin’s Q, as commonly used in existing
literature (e.g., Dutta, Narasimhan, & Rajiv, 2005; Richard,
Murthi, & Ismail, 2007), which we adopt because it is diffi-
cult to assess the replacement cost of assets, which provides
the denominator in the Tobin’s Q equation. Furthermore,
MBR captures the relative success of firms in maximizing
shareholder value through the efficient allocation and man-
agement of scarce resources.
After calculating the ROA and MBR, we measure attain-
ment discrepancy using the same method as Bromiley (1991)
– we code industry average as the aspired performance for
firms that perform below the industry average, whereas for
firms performing above this average, we multiply their past
performance by 1.05, which signifies a 5 per cent increase.1
Finally, attainment discrepancy is the difference between
aspired and actual performance. Thus, a positive attainment
discrepancy indicates that actual performance exceeded
aspired performance and a negative attainment discrepancy
its converse.
Organization Slack. We use two measures – cash and
account receivables; and debt-to-equity ratio – to compute
slack. Cash and accounts receivables (available slack) and
low debt-equity ratio (potential slack) are widely used
measures of high-discretion slack (e.g., Navarro, 1988).
We log transform cash and accounts receivables as this
variable is often skewed and may violate assumption of
normality.
Control Variables
We control for industry, firm size, research and develop-
ment intensity, product differentiation, market growth,
demand instability, and industry structure concentration,
capital intensity, dividend payouts, and CEO age and CEO
tenure.
Industry. To control for differences in industrial munifi-
cence, we use the 13-industry classification of Waddock and
Graves (1997). The sample provides a fairly representative
cross-section of the US economy: approximately 19.6 per
cent of the firms belong to the computers, autos, and aero-
space industries; 11.5 per cent come from the telephone and
utilities; and another 11.5 per cent from the bank and finan-
cial services industries, and the rest are spread across the
spectrum of remaining industries quite evenly.
Volume 19 Number 2 March 2011
142
Firm Size. Larger firms tend to attract more attention and
pressure to respond to stakeholders’ demands (Burke,
Logsdon, Mitchell, Reiner, & Vogel, 1986). Whereas most
previous research measures size according to total sales and
assets of the corporation, we prefer to measure it as the
number of employees. Because we use measures like ROA
and R&D intensity, which involve total assets and sales in
their denominator, a size measure based on assets or sales
could cause multicollinearity. The use of the number of
employees avoids this problem without any loss of informa-
tion. Further, we log transform this variable as firm size is
often skewed and may violate assumption of normality.
Research and Development Intensity. McWilliams and
Siegel (2000) demonstrate that research and development
intensity offers other important variable with a bearing on
the relationship between CSR and financial performance.
They also argue that a model of the relationship between
CSR and financial performance that fails to include R&D
intensity will be misspecified and fundamentally flawed,
because such a relationship could reflect simply the impact
of R&D on firm performance. Therefore, we control for
R&D intensity, defined as R&D expenditure divided by
sales.2
Product Differentiation. Previous research (e.g., Finkel-
stein & Boyd, 1998; McWilliams & Siegel, 2000) has also
highlighted the need to control for product differentiation
in studying CSR. It is because those firms that invest in CSR
are also likely to invest on advertising and branding for
product differentiation. Because Compustat data on adver-
tisement expenditure is sparse and unreliable, we use SGA
intensity ratio – measured as ratio of selling, general and
administrative expenses to sales ratio – to proxy for product
differentiation.
Industry-Level Managerial Discretion. We also control
for certain important differences in industry structures that
limit or advance managerial discretion. For this purpose,
we use market growth, demand instability, and industry
structure concentration suggested by Finkelstein and Boyd
(1998). We use the same methodology as Finkelstein and
Boyd (1998) to capture these three constructs: Market
growth or industry munificence is captured by the regres-
sion slope coefficient divided by mean sales, where the
coefficient is based on regression of time against value of
total sales, while estimates for any given year are based on
the five preceding years, i.e., estimate for year 2001 is
based on data from 1996–2000. Demand instability is mea-
sured similarly by dividing the standard error of the
regression slope coefficient by mean sales for the industry.
Industry concentration is measured using the Herfindahl
Index, computed by using all the firms for that industry in
the sample.
Capital Intensity. Capital intensity tends to place limita-
tions on managerial discretion. Finkelstein and Boyd (1998)
believe that by creating rigidity in organizations, capital
intensity makes it difficult for firms to accommodate
Volume 19 Number 2 March 2011
CORPORATE GOVERNANCE
changes in strategy. Thus, it is important to control for
capital intensity, which is measured as value of total plant,
property and equipment divided by number of employees.
Cash Dividend. Since Jensen (1986) first developed the
argument for returning free cash (cash in excess of a firm’s
requirements or that would be invested in low-return
projects) as dividends to the shareholders, it has become
axiomatic in agency theory to control for cash dividends
paid out before detecting agency losses. Because we argue
that CSR might signify agency losses in some circumstances,
it is important to control for cash dividends paid out in our
empirical model.
CEO Age and Tenure. Finally, we also control for CEO
age and tenure because these factors have been shown to
be significant in determining CEO power, which is an
important predictor of a CEO’s owning responsibility for
strategic change, especially in a high discretion environment
(Finkelstein & Hambrick, 1990; Haleblian & Finkelstein,
1993; Hambrick, Geletkanycz, & Fredrickson, 1993).
Analyses
We employ time-series, cross-sectional regression analysis
(random effects model), because cross-sectional studies can
lead to biased or misleading estimates (Finkelstein & Boyd,
1998). The use of a longitudinal methodology enables us to
isolate the effects of specific actions and treatments over time
and across sections (Hill & Phan, 1991). By including tem-
poral lags and controls for prior states of variables, it also
helps us in empirically establishing the causality mecha-
nisms (Hambrick, 2007). Moreover, the use of a random-
effects model is preferable from the perspective of
generalizing the findings beyond the sample under study
(Maddala, 2002).
Additionally, since corporate governance, CSR and firm
performance may be endogenously related, we perform sen-
sitivity analysis using the Hausman-Taylor panel data
regression for endogenous covariates. The estimators, origi-
nally proposed by Hausman and Taylor (1981) are based on
instrumental variables models, and assume that some of the
explanatory variables may be correlated with the individual-
level random effects, but that none of the explanatory vari-
ables are correlated with the idiosyncratic error. On
reviewing the performance of various panel data models
using Monte Carlo simulation experiments, prominent
econometricians like Baltagi, Bresson, and Pirotte (2003)
highly recommend this model, and this technique has been
used in studies like Palia (2001) to perform endogeniety
tests. For the purpose of this modeling, we assumed that all
governance and social responsibility variables might be
endogenously related to each other. The results from this
analysis are available on request.
RESULTS
We report the means, standard deviations, and correlations
in Table 1. The mean value for positive CSR ratings is 2.53
© 2011 Blackwell Publishing Ltd
 © 2011 Blackwell Publishing Ltd
TABLE 1
Descriptive Statistics and Correlation Matrix

# Variable Name Mean S.D. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

CORPORATE GOVERNANCE AND CSR

1 CSR positive ratings 2.53 2.49

2 CSR negative ratings 2.62 2.37 .31
3 Firm size 9.54 1.48 .34 .39
4 Dividend per share .56 .6 .17 .33 .14
5 R&D intensity .07 .09 .03 -.05 -.31 -.15
6 Market growth .05 .04 .01 .09 .08 .13 -.17
7 Demand instability .07 .03 -.02 .02 .05 -.24 .01 -.22
8 Capital intensity 4.97 1.28 0 .31 -.24 .31 .09 .15 -.16
9 Industry concentration .11 .14 -.01 .07 .08 -.12 -.02 -.07 .93 -.07
10 Cash & accounts receivables 7.25 1.74 .47 .35 .5 .25 .12 .08 -.12 0 -.05
11 Debt equity ratio 1.01 2.08 .11 .13 .05 .12 -.06 .04 -.12 .06 -.07 .23
12 SGA expenses .26 .15 .12 -.24 -.3 -.16 .52 -.2 .12 -.23 0 -.04 -.16
13 CEO Age (years) 59.94 8.5 .08 .13 .15 .13 -.05 .04 -.01 .08 .02 .17 .01 -.1
14 CEO Tenure (years) 11.78 8.32 -.09 -.1 .01 0 0 .05 0 -.01 .03 .03 -.05 0 .39
15 CEO ownership .02 .07 -.08 -.14 -.08 -.09 .01 0 .1 -.08 .08 -.14 -.06 .04 .07 .36
16 Percent independent directors .61 .19 -.03 .04 .04 .04 -.13 .04 -.02 .02 .02 .03 -.01 -.02 .01 -.01 .02
17 Governance index 9.76 2.51 -.09 -.05 .05 .14 -.15 .02 -.03 .01 .01 -.1 -.08 -.14 .05 -.04 -.13 .08
18 Block institutional ownerships .15 .12 -.16 -.1 -.11 -.17 -.06 -.05 .08 -.1 .06 -.24 .06 -.05 -.02 -.01 .05 -.02 -.01
19 MBR Attainment discrepancy -1.02 3.87 -.01 .02 .02 .09 -.09 .04 -.06 .08 -.02 0 .29 -.08 0 .02 -.05 .05 .04 -.02
20 ROA Attainment discrepancy -.03 .07 .05 -.02 .07 .17 -.24 .09 -.09 .07 -.01 .06 -.01 -.16 .07 .07 -.03 .05 .08 -.11 .09

Notes:

Volume 19
1. Table reports descriptive information for all variables, if applicable, after Winsorization (at .01 level) but before standardization [normalization to (0,1)] for regression models.
2. Firm size and cash are represented by logged values of number of employees and cash and account receivables, respectively.
3. Correlation values higher than .06 are significant at p < .01, between .04 and .06 at p < .05, and between .03 to .04 at <.1.

Number 2
143

March 2011
144 CORPORATE GOVERNANCE

TABLE 2
Attainment Discrepancy, Slack, Governance, and Positive CSR Ratings:
Random-Effects Panel Data Regression Results

DV: Positive CSR Ratings Model 1 Model 2 Model 3 Model 4 Model 5

Constant .64 1.17 1.12 1.17 1.01

Industry dummy coefficients
Firm size .36** .18** .19** .18** .20**
R&D intensity -.01 -.06 -.06 -.06 -.04
Product differentiation .13** .12* .12* .12* .12*
Cash dividends paid-out .05 .09* .07† .09** .08†
Market growth .07** .08** .08** .08** .08**
Demand instability -.20* -.21* -.22* -.21† -.19
Capital intensity .16** .15** .15** .15** .15**
Industry concentration .28* .24† .24† .24 .24
CEO Age .02 .01 .01 .01 .01
CEO Tenure -.04* -.03† -.02† -.03 -.02
Percent independent directors (ID) -.13* -.13* -.11* -.10*
Governance index (GIM) -.02 -.02 -.02 -.03
Block institutional ownership (ALL5) -.04* -.06* -.04* -.06**
CEO ownership (CEO_OWN) -.12** -.12** -.12** -.14**
Cash & accounts receivables (CASH) .34*** .34*** .34*** .33***
Debt equity ratio (DE) .00 .01 .00 .01
MBR Attainment discrepancy (MBRD) .05* .07*
ROA Attainment discrepancy (ROAD) .02† .03†
ID ¥ CASH .07* .07*
GIM ¥ CASH -.08* -.07†
ALL5 ¥ CASH .05* .06*
CEO_OWN ¥ CASH -.10* -.10*
ID ¥ DE .01 .00
GIM ¥ DE .02 .01
ALL5 ¥ DE .01 -.01
CEO_OWN ¥ DE .02 .02
ID ¥ MBRD .00
GIM ¥ MBRD -.02
ALL5 ¥ MBRD -.12*
CEO_OWN ¥ MBRD .07*
ID ¥ ROAD .00
GIM ¥ ROAD -.03*
ALL5 ¥ ROAD .00
CEO_OWN ¥ ROAD -.01
R2 .27*** .36*** .40*** .34*** .40***
Change in R2 .09*** .05*** .07*** .06***
N 1773 1522 1522 1522 1522

Significance levels: †p < .10; *p < .05; **p < .01; ***p < .001.
Coefficients for dummy industry variables not reported for the sake of brevity.

with a standard deviation of 2.49, and the mean value for
negative CSR ratings is 2.62 with a standard deviation of
2.27; the correlation between the two dimensions is .31
(p < .01). Both these dimensions are correlated with firm
size, dividends paid out, cash and accounts receivables,
debt-equity ratio, SGA expenses, CEO age, CEO tenure,
CEO ownership, governance index, institutional ownership,
and attainment discrepancy in ROA. The descriptive statis-
tics, including the correlation matrix, with respect to the
other measures also appear in the table.3
In Tables 2 and 3, we provide the results of the random-
effects panel data regression models on standardized (nor-

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CORPORATE GOVERNANCE AND CSR 145

TABLE 3
Attainment Discrepancy, Slack, Governance, and Negative CSR Ratings:
Random-Effects Panel Data Regression Results

DV: Negative CSR Ratings Model 6 Model 7 Model 8 Model 9 Model 10

Constant .13 -.81 -1.07 -.73 -.90

Industry dummy coefficients
Firm size .42** .34** .33** .33** .31**
R&D intensity .04 .03 .03 .01 .01
Product differentiation .04 .00 .00 -.02 -.03
Cash dividends paid-out .13** .10* .10* .11* .10*
Market growth .14** .14** .15** .14** .14**
Demand instability .10 .15 .15 .11 .10
Capital intensity .24** .08† .08† .08 .07
Industry concentration .19 .32† .34† .33† .35†
CEO Age .03* .02 .02 .02 .02
CEO Tenure -.04* -.02† -.01 -.02 -.01
Percent independent directors (ID) -.02† -.02* -.02† -.02*
Governance index (GIM) -.03 -.04 -.03 -.03
Block institutional ownership (ALL5) -.05* -.05* -.05* -.06*
CEO ownership (CEO_OWN) -.05 -.06* -.04 -.05*
Cash & accounts receivables (CASH) -.21*** -.21*** -.23*** -.24***
Debt equity ratio (DE) .06* .08* .04* .05†
MBR Attainment discrepancy (MBRD) -.02† -.04*
ROA Attainment discrepancy (ROAD) -.04** -.05**
ID ¥ CASH .04 .04
GIM ¥ CASH -.11** -.11**
ALL5 ¥ CASH .00 .00
CEO_OWN ¥ CASH -.06 -.05
ID ¥ DE .02 .01
GIM ¥ DE .03 .01
ALL5 ¥ DE .03† .03†
CEO_OWN ¥ DE -.02 -.01
ID ¥ MBRD -.03*
GIM ¥ MBRD -.05*
ALL5 ¥ MBRD .00
CEO_OWN ¥ MBRD .01
ID ¥ ROAD .02
GIM ¥ ROAD .00
ALL5 ¥ ROAD .02
CEO_OWN ¥ ROAD -.06*
R2 .38*** .42*** .44*** .43*** .46***
Change in R2 .03*** .03*** .04*** .03***
N 1773 1522 1522 1522 1522

Significance levels: †p < .10; *p < .05; **p < .01; ***p < .001.
Coefficients for dummy industry variables not reported for the sake of brevity.

malized) variables for the period 2001–2005.4 While Table 2
reports results for positive CSR ratings as the dependent
variable, Table 3 reports results with negative CSR ratings as
the dependent variable.
In Table 2, Model 1 shows the results for the regression
with control variables alone, whereas Model 2 includes
the results for main effects with attainment discrepancy
in MBR, and Model 4 shows that with attainment
discrepancy in ROA. Models 3 and 5 represent the
complete regression models, including the interaction
terms with attainment discrepancy in MBR and ROA,
respectively.

© 2011 Blackwell Publishing Ltd Volume 19 Number 2 March 2011

146 CORPORATE GOVERNANCE

The table shows that firms that are larger in size, have high cantly related to negative CSR (b = -.214 in Model 8
capital intensity, emphasize greater product differentiation, (MBRD) and -.237 in Model 10 (ROAD), p < .001 in both).
operate in high growth markets, or more concentrated Similarly, the potential slack – debt-to-equity ratio –, which
industries are more likely to invest in positive CSR. On the represents the opposite of the cash and accounts receivables
other hand, firms that operate in conditions of greater interpretation, is positively related to negative CSR
demand instability or whose CEOs have longer tenure are (b = .076, p < .05 in Model 8 (MBRD) and .046, p < .10 in
less likely to invest in positive CSR. These are interesting Model 10 (ROAD). Thus, we find strong support for
findings that future research may like to explore in greater Hypothesis 3b as well.
detail. Hypotheses 4a and 4b integrate corporate governance
More interestingly, however, Tables 2 and 3 provide and behavioral theories, and test for the interaction effects.
strong support for our predictions. Hypothesis 1a pre- We provide a wide array of interaction plots to illustrate
dicted that effective monitoring would reduce positive these interactions (Figures 3, 4, and 5), and this is where the
CSR. Table 2 reveals that high independent director repre- really interesting findings emerge. These plots clearly
sentation (b = -.132 in Model 3 and b = -.103 in Model 5, depict that the impact of governance on positive CSR is
p < .05 in both models), concentrated institutional owner- minimal when firms perform well – as indicated by the
ship (b = -.056 in Model 3 and b = -.058 in Model 5, p < .05 relatively flatter slopes of lines for high performance under
in both models), and managerial ownership (b = -.118 in weak and strong governance. Note also the significance of
Model 3 and b = -.137 in model 5, p < .01 in both models) the interaction is the t-test for difference in slopes (Aiken &
all have a significant negative impact on the levels of posi- West, 1991). In plotting these interactions, we plotted only
tive CSR. However, GIM (shareholder rights) did not those interactions that had statistically significant differ-
reveal statistically significant result. Overall, these results ences in slopes. There is a sharp decline in positive CSR for
confirmed agency theory predictions that expect tighter firms who have not performed up to satisfaction and
monitoring to lead to declines in positive CSR, supporting operate under strong governance. That is, the following
Hypothesis 1a. combinations: 1) low cash and higher proportions of inde-
Similarly, Hypothesis 1b predicted that effective monitor- pendent directors (Figure 3); 2) low cash and higher pro-
ing would reduce negative CSR. portion of concentrated institutional owners (Figure 4); and
Table 3 reveals that high independent director represen-
tation (b = -.024 in Model 8 and b = -.023 in Model 10,
p < .05 in both models), concentrated institutional owner-
ship (b = -.052 in Model 3 and b = -.056 in Model 5, p < .05 FIGURE 3
in both models), and managerial ownership (b = -.059 in Interaction Effect of Independent Director
Model 3 and b = -.053 in Model 5, p < .05 in both models) all Representation and CASH on Positive CSR Ratings
have a significant negative impact on the levels of negative
CSR. However, GIM (shareholder rights) once again did not
reveal a statistically significant result. These results con-
firmed that tighter monitoring also leads to declines in nega-
tive CSR, supporting Hypothesis 1b.
In Hypothesis 2a, we predict that positive attainment dis-
crepancy is associated with higher positive CSR. Table 2
shows that, according to both market-based and accounting
measures, attainment discrepancy is positively associated
with positive CSR (b = .066, p < .05 in Model 3 and b = .026,
p < 10 in Model 5).
Similarly, in Hypothesis 2b, we predict that positive
attainment discrepancy is associated with lower negative
CSR. Table 3 shows that attainment discrepancy is negatively FIGURE 4
associated with negative CSR (b = -.037, p < .05 in Model 8 Interaction Effect of Institutional Ownership
and b = -.045, p < .01 in Model 10). These results indicate and CASH on Positive CSR Ratings
strong support for Hypothesis 2b.
In Hypothesis 3a, we predict that high-discretion slack is
associated with higher positive CSR. Table 2 shows that
available slack – cash and accounts receivables – is signifi-
cantly related to positive CSR (b = .341 in Model 3 (MBRD)
and .333 in Model 5 (ROAD), p < .001 in both). The potential
slack – debt-to-equity ratio –, which represents the opposite
of the cash and accounts receivables interpretation, is not
significantly related to positive CSR. Overall, we find
support for Hypothesis 3a as well.
In Hypothesis 3b, we predict that high-discretion slack is
associated with lower negative CSR. Table 3 shows that
available slack – cash and accounts receivables – is signifi-

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CORPORATE GOVERNANCE AND CSR
FIGURE 5
Interaction Effect of Managerial Ownership and
MBR Attainment discrepancy (MBRD) on
Positive CSR Ratings
FIGURE 6
Interaction Effect of Institutional Ownership and
Debt-Equity Ratio on Negative CSR Ratings
3) low attainment discrepancy and high CEO ownership
(Figure 5), all lead to reduced positive CSR. This indicates
that the effects of strong governance vary over the range of
behavioral theory factors, and are more important under
conditions of weaker performance or lower slack. Also,
there is a sharp decline in negative CSR for firms with high
slack and positive attainment discrepancy and under strong
governance. That is the following combinations: (1) low
debt-equity ratios and high institutional ownership concen-
tration (Figure 6); (2) high positive attainment discrepancy
and high board independence (Figure 7); and (3) high posi-
tive attainment discrepancy and high CEO ownership
(Figure 8) are associated with reduced negative CSR.
The overall trend based on the interactive effects indicates
that strong governance curtails positive CSR in firms that are
not doing well, and reduces negative CSR in high perform-
ing firms with slack. The graphs also reveal that behavioral
theory factors have important implications for both positive
and negative CSR.
LIMITATIONS
Though our research design makes a number of method-
ological improvements, it is not free of limitations. First, our
© 2011 Blackwell Publishing Ltd
147
FIGURE 7
Interaction Effect of Independent Director
Representation and MBR Attainment discrepancy
(MBRD) on Negative CSR Ratings
FIGURE 8
Interaction Effect of Institutional Ownership and
ROA Attainment discrepancy (ROAD) on
Negative CSR Ratings
study relies on KLD ratings for measuring positive and
negative CSR. However, some recent research has high-
lighted issues with using KLD ratings. For example, Chat-
terji, Levine, and Toffel (2009) found that in the case of
environmental ratings, KLD might not be optimally using
publicly available data. This is especially relevant in view of
the fact that the economic leverage that a firm can extract
from its social performance depends on its past perfor-
mance and credibility among key stakeholders. Barnett
(2007) calls this leverage stakeholder influence capacity
(SIC). According to him, “just as a firm’s ability to notice,
assimilate, and exploit new knowledge depends on its prior
knowledge, its ability to notice and profitably exploit oppor-
tunities to improve stakeholder relations through CSR
depends on its prior stakeholder relationships” (Barnett,
2007: 803). If firms are rational actors, as the instrumental
positivist perspective suggests, they likely are aware of both
their business strategies and stakeholder influence capaci-
ties. Thus, beyond financial performance, they may take into
account their stakeholder influence capacities before
making CSR investments. We lack access to any such infor-
mation for this study, but additional research might con-
sider the impact of SIC on CSR. While despite these
imperfections, KLD continues to be the best available option
Volume 19 Number 2 March 2011
148
for researchers interested in studying this important facet of
corporate life; future research should consider looking for
alternative data sources.
Second, our sample consists of only firms from the United
States. For generalizing our results beyond this single
national context, we recommend that researchers explore the
concept of social performance from an institutional theory
perspective and ask whether mimetic and normative pres-
sures encourage firms to follow others in their industry in
allocating higher expenditures to CSR. This line of inquiry
could reveal whether firms, when evaluating CSR expendi-
tures, are engaged in a rational pursuit or mere imitative
behavior.
Lastly, our research design does not reveal why owners
and directors do what they do. Further research should
examine the CSR motives of institutions designed for effec-
tive corporate governance. For the sake of parsimony, we
focus only on the macro effects of institutional ownership,
but for different owners, it may be more useful to study the
motives of each type, such as pension funds, mutual funds,
managerial owners, family owners, and so forth. Similarly,
inside directors may be segregated into subgroups on the
basis of demographics or their attitudinal identifications
(e.g., Hillman, Nicholson, & Shropshire, 2008).
Despite these limitations, our study of the relationship
among organizational slack, attainment discrepancy, and
corporate governance contributes to an improved under-
standing of the factors that lead to CSR. It also provides
theoretical and practical guidelines to researchers and man-
agers alike to help them determine their hierarchy of objec-
tives and the strategies necessary to meet the demands of
various stakeholders.
DISCUSSION AND CONCLUSION
The main intent of this study was to understand if the rela-
tionship between corporate governance mechanisms and
corporate social responsibility dimensions was contingent
on the levels of slack and performance attainment discrep-
ancy. In doing so, the study sought to resolve the ambigu-
ity in previous findings by considering positive and
negative dimensions of CSR, a comprehensive bundle of
governance mechanisms, and two important factors,
namely, attainment discrepancy and slack, based in the
behavioral theory of the firm. The results indicate that
effective governance has a symmetric effect on CSR and
that it reduces both positive and negative CSR. Second, our
results also suggest that greater slack and positive attain-
ment discrepancy lead to higher positive and lower nega-
tive CSR. Finally, we find that the associations between
effective governance and positive and negative CSR
depend on the level of slack and positive attainment dis-
crepancy. That is, the impact of governance on positive CSR
is more pronounced under low slack conditions and the
impact of governance on negative CSR is more pronounced
under high slack conditions.
Our findings highlight the importance of both perfor-
mance and organizational contexts in studying the impact of
governance on managerial decision-making regarding CSR.
Overall, our findings provide strong affirmation of the need
Volume 19 Number 2 March 2011
CORPORATE GOVERNANCE
to integrate behavioral theory insights into corporate gover-
nance theory in predicting CSR investments, as we demon-
strate that organization slack, attainment discrepancy, and
corporate governance jointly determine the levels of CSR.
Our findings support many of the hypotheses and provide
more nuanced insights concerning the governance-CSR rela-
tionship. First, by considering positive and negative CSR as
two distinct activities, we find that effective governance
reduces both activities simultaneously in a symmetric
fashion. It is possible that previous research that used an
all-inclusive CSR measure failed to capture this finding, and
that may have led to mixed results. While the benefits and
costs of CSR are subject to vigorous debates, we expect that
these debates are limited to positive CSR activities. As the
costs of negative CSR activities are obvious, and the benefits
negligible, the relationship between effective governance and
negative CSR should be unequivocally negative and that is
what we find. This also provides credence to our findings
about positive CSR; irrespective of the benefits/costs
tradeoffs, effective governance suppresses positive CSR.
The benefits of dimensionalizing CSR are also obvious
when considering the impact of behavioral theory factors.
When things look good (i.e., high slack and positive attain-
ment discrepancy), there is more positive CSR and less nega-
tive CSR, as one would expect. The significant finding in this
instance is that lower levels of slack may actually be associ-
ated with increased negative CSR. These findings are con-
sistent with the theoretical predictions of BTOF.
Finally, our findings about the interactive effects high-
light the importance of considering the performance and
organizational context in understanding the governance
CSR relationship. Just as dimensionalizing CSR provides us
with unique insights that have not been considered hith-
erto, contextualizing the relationship also adds to our
understanding about the potential mixed results encoun-
tered in past research. Our findings suggest that when
firms are not doing well, at least by shareholders’ expecta-
tions, the impact of governance structures is felt more
strongly. In such circumstances, shareholders do not seem
to trust managers’ judgment or give them much discretion
for investing in CSR. However, when the firms appear to
be doing well, managers seem to possess a significant dis-
cretion in determining CSR activities. In fact, independent
directors are even associated with higher positive CSR
levels. Thus, meeting targets and shareholders’ expectations
seems to provide managers with more degrees of freedom
in terms of resource allocations to corporate social pro-
grams. Thus, our findings about attainment discrepancy are
not only unique but are also important as we begin to
broaden the scope of the agency theory perspective for
understanding CSR.
Our results have important implications for understand-
ing when governance matters both for upsides and down-
sides. While a lot of attention has been paid to the value
creation aspect of governance or reduction of agency costs
aspects of governance, limited research has actually consid-
ered how good governance can prevent managers from
making poor decisions. Our findings that good governance
reduces negative CSR are unique in that respect and focused
on an ignored aspect of governance – preventing bad things
from happening.
© 2011 Blackwell Publishing Ltd
CORPORATE GOVERNANCE AND CSR 149

Our study also has other practical significance for CSR 2. To avoid unnecessary loss of data, missing values of some vari-
researchers, advocates and managers. From the perspective ables (e.g., R&D and SGA expenses) were replaced by those in
of CSR advocates, understanding the constraints and con- preceding or succeeding years, if available.
cerns of managers is very important. Only by addressing 3. We also examine the variance inflation factors (VIF) to detect
multicollinearity and Breusch-Pagan test on OLS regression to
these concerns can firms create enabling conditions for
detect heterogeneity. All VIF scores are below 2, and the mean
higher CSR. For example, if managers believe they cannot VIF score is 1.22, well within the commonly specified rule of
undertake CSR projects because they fear a stock price slide, thumb of a score of 10 indicating multicollinearity problems
advocates of CSR could focus on institutional owners (Cohen, 2003). Thus, our results do not appear to suffer from
instead and convince them that it is in their own best interest multicollinearity. The Breusch-Pagan test also confirmed the
to be more proactive. By targeting these owners, advocates absence of heterogeneity in variance.
would remove an important CSR constraint. Similarly, can- 4. All variables were standardized [normalized to (0,1)] before
vassing boards of directors and recommending they be more running regression models.
aware and responsible toward meeting the needs of all stake-
holders, not just shareholders, could provide another effec- APPENDIX 1
tive strategy. Alternatively, if managers provide signals to
shareholders about the long-term benefits of corporate Overview of Behavior and Agency Theory
social investments, they might be in a position to promote Literature on Corporate Social Performance (CSP)
such investments.
This issue is especially relevant in view of comments Study domain, authors Primary findings
by researchers such as Scherer and Palazzo (2007: 1101):
“In the era of globalization, when the ability of the nation-
state to regulate business activities is diminishing. . . . mul- Corporate governance:
tinational corporations today are able to choose among Coffey and Fryxell Institutional ownership is
various legal systems, applying economic criteria to their (1991) negatively related with CSP.
choice of which set of labor, social, and environmental Coffey and Wang Outside directors negatively
regulations they will operate under.” From this perspec- (1998); Wang and related with CSP.
tive, it is not sufficient to rely on the capacity of the state to Coffey (1992)
regulate firm behavior in the interest of society, such as Graves and Waddock No relationship between
preventing environmental pollution or other ethically ques- (1994) institutional ownership and
tionable activities not covered or enforced by local laws, CSP
nor can firms be trusted to behave completely ethically on Johnson and Greening Higher proportion of outside
their own, because their economic rationale (or competitive (1999) directors is linked with higher
pressures) makes them concerned primarily with minimiz- CSP because they are more
ing costs (or maximizing profits). However, by under- concerned with external
standing what prompts or prevents managers from legitimacy.
undertaking CSR investments, we take an important step Kassinis and Vafeas Outside directors positively
toward getting them (or stopping them, when undesirable) (2002) related with CSP.
to do so. Neubaum and Zahra Positive relationship between
(2006) institutional ownership and
CSP.
ACKNOWLEDGEMENTS Attainment discrepancy:
– Behavioral theory concept
We would like to thank William Judge (the editor), Till labeled as attainment
Talaulicar (associate editor), and three anonymous referees discrepancy by Lant (1992)
for their insightful comments and suggestions. This paper has not been applied in CSP
also benefited from the comments of the participants in literature.
Academy of Management Annual Meeting, 2008. The first Slack:
author is also thankful to the Whitman School of Manage- McGuire, Sundgren, and Slack as measured by past
ment at Syracuse University for research grant for this Schneeweis (1988) financial performance is
project. Waddock and Graves positively associated with the
(1997) social performance.
Amato and Amato (2007)
NOTES Navarro (1988) Slack as measured by Equity to
1. There is no special reason for using 5 per cent. Past research has debt ratio is positively
used this number, as a proxy, to signify that most firms would associated with the social
like, at least moderate improvements, on their past performance. performance.
Admittedly, it is a crude measure as industry and macroeco- Seifert et al. (2004) Slack as measured by cash flow is
nomic conditions and other factors also likely influence the per- positively associated with the
formance aspiration, nonetheless on an aggregate past research social performance.
indicates this to be a good proxy for performance aspirations
(Bromiley, 1991).

© 2011 Blackwell Publishing Ltd Volume 19 Number 2 March 2011

150 CORPORATE GOVERNANCE

APPENDIX 2 Bromiley, P. 1991. Testing a causal model of corporate risk taking

and performance. The Academy of Management Journal, 34:
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Food, textiles and apparel 2000–2390 27
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Forest products, paper & publishing 2391–2780 36 R&D investment behavior. The Accounting Review, 73: 305–
Chemicals & pharmaceuticals 2781–2890 39 333.
Refining, rubber & plastic 2891–3199 15 Chatterji, A., Levine, D., & Toffel, M. 2009. How well do social
Containers, steel & heavy 3200–3569 30 ratings actually measure corporate social responsibility? Journal
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manufacturing
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Wholesale & retail 4992–5990 53 firm value: The impact of the 2002 governance rules. The Journal
of Finance, 62: 1789–1825.
Bank & financial services 5991–6700 60
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Hotel & entertainment 6701–8051 43 antecedents of corporate social performance: An investigation of
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Volume 19 Number 2 March 2011
CORPORATE GOVERNANCE
Punit Arora is a PhD candidate in strategic management/
business economics at the Whitman School of Management
at Syracuse University. He is interested in corporate gover-
nance, business sustainability, and entrepreneurship.
Ravi Dharwadkar is a Professor of Management at Whitman
School of Management at Syracuse University. He obtained a
Ph.D., in management from the University of Cincinnati. His
research on corporate governance and organization studies
has appeared in the Academy of Management Review, Academy
of Management Journal, Strategic Management Journal, Organi-
zation Science, and Academy of Management Perspective.
© 2011 Blackwell Publishing Ltd