The dynamic impact of board composition on CSR practices and their mutual effect on organizational returns

DOIhttps://doi.org/10.1108/JABS-07-2019-0214
Pages463-479
Published date20 December 2019
Date20 December 2019
AuthorSitara Karim,Norlida Abdul Manab,Rusmawati Binti Ismail
Subject MatterStrategy,International business
The dynamic impact of board composition
on CSR practices and their mutual effect
on organizational returns
Sitara Karim, Norlida Abdul Manab and Rusmawati Binti Ismail
Abstract
Purpose The purpose of this paperis twofold. First, it aims to investigate the dynamic impact of board
composition (board size, board independence and board diversity) on independent corporate social
responsibility (CSR)practices (marketplace, environment, community and workplace). Second,it tends
to examine the mutualeffect of board composition and CSR practiceson organizational returns (return on
assetsand Tobin’s Q) of 631 Malaysian PLCs listedon Bursa Malaysia during 2006-2017.
Design/methodology/approach The dynamic model (systemGMM) provided by Arellano and Bond
(1991) and Arellano and Bover (1995) is used for estimations that control for potential dynamic
endogeneity,reverse causality, unobservedheterogeneity and simultaneityproblems.
Findings Findings reveal weak linkage between board composition and CSR practices where only
board diversity is found to be positively linked to marketplace practices of CSR. Further, the mutual
impact of board composition and CSR practices on organizational returns suggests board size be
positive and board independence to be negative with Tobin’s Q. Board diversity is negative with ROA
and positive with Tobin’s Q. Conversely,CSR practices indicate marketplace practices are positiveand
community practices are negative with Tobin’s Q, environment practices are insignificant with
performance,whereas workplace practices arepositive with ROA and negative with Tobin’s Q.
Practical implications This research is practically considerable for Bursa Malaysia, Securities
Commission Malaysia, policymakers, stakeholders, investors and managers. For academia, the
theoretical linkages between agency theory, resource dependence theory, resource-based view and
stakeholder theory are highlighted. Moreover, methodological underpinnings are also novel for
academiciansas well as for practitioners.
Originality/value The paper uncovers multiple aspects: first, it elaborates the dynamic relationship
between board composition and CSR practices; second, it examines the combined effect of board
compositionand CSR practices on company’s accountingand market gains; finally, the study controls for
dynamicendogeneity that is the main econometricproblem for CG-CSR-performance relationships.
Keywords Corporate social responsibility, Board composition, System GMM, Endogeneity,
Organizational returns
Paper type Research paper
1. Introduction
Previous literature agrees in presenting corporate social responsibility (CSR) as an
emerging alternative model of management, which defines the company as a set of
relationships, involving not only owners and managers but also the stakeholders interested
in the evolution of the company (Morsing and Schultz, 2006). In this stance, as part of
corporate strategy, the board of directors play preliminary role in determining the socially
responsible behavior of an organization (Esaand Ghazali, 2012;Rao and Tilt, 2016;Ashfaq
and Rui, 2018), being relevant to this role of the fulfillment of social and environmental
conscientiousness (Rashid,2018;Issa and Fang, 2019). Given this situation, several studies
Sitara Karim is PhD Scholar
at School of Economics,
Finance and Banking,
College of Business,
Universiti Utara Malaysia,
Sintok, Malaysia.
Norlida Abdul Manab is
Associate Professor at
School of Economics,
Finance, and Banking,
College of Business,
Universiti Utara Malaysia,
Sintok, Malaysia.
Rusmawati Binti Ismail is
Senior Lecturer at School of
Economics, Finance and
Banking, College of
Business, Universiti Utara
Malaysia, Sintok, Malaysia.
Received 4 July 2019
Revised 3 November 2019
Accepted 18 November 2019
DOI 10.1108/JABS-07-2019-0214 VOL. 14 NO. 4 2020,pp. 463-479, ©Emerald Publishing Limited, ISSN 1558-7894 jJOURNAL OF ASIA BUSINESS STUDIES jPAGE 463
affirm that the board’s effectiveness on the promotion of CSR performance is closely
determined by its size, independence and composition (Qa’dan and Suwaidan, 2018).
However, despite extensive analysis of the influence of board size, independence and
diversity on CSR practices (Issa and Fang, 2019;Wellalage et al.,2017;Ibrahim and
Hanefah, 2016;Byron and Post, 2016;Harjoto and Jo, 2011;Bear et al.,2010), the results
are inconclusive.
Although these studies offer significant insights, scholars still have a limited understanding
of the relationship between the composition of board and CSR practices in the following
aspects. Firstly, most studies have been conducted in the context of developed countries
(Zhuang et al.,2018;Wellalage et al.,2017;Rao and Tilt, 2016) and limited research is
available for emerging markets (Esa and Ghazali, 2012;Shamil et al.,2014;Ibrahim and
Hanefah, 2016) with mixed findings on the relationship between board composition and
CSR practices. Therefore, it is unclear from the conclusions of previous studies with
samples from developed countries are still supportive in developing countries and vice
versa. Secondly, it is an important issue because developing countries are facing more
CSR-related issues in terms of both environmental and social aspects when compared to
developed countries (Zhuang et al.,2018). Moreover, in the context of Malaysia, there are
some unique factors related to the boards thatwill influence firms’ CSR practices.
These unique factors constitute larger board size, higher board independence and
negligible women appearance on boards of Malaysian PLCs. As specified by Securities
Commission Malaysia in its recent Code on Corporate Governance (2017) that there must
be more than 50 percent representation of independent board of directors on board and,
for large companies, there must be thirty percent board diversity suggesting at least one
woman on the board for ensuring sustainable firm performance (MCCG, 2017). However,
based on a survey done by Bursa Malaysia to ascertain the level of understanding of the
responsibility by the independentdirectors revealed that the majority of the directors did not
understand their explicit responsibilities. Then, literature shows paucity in the area of board
diversity particularly in Malaysia. Hence, investigating the critical role of board composition
for strengthening corporate social responsibility practices in Malaysian Public Listed
Companies (PLCs) is the prime objective of this study. Furthermore, the combined impact
of board composition and CSR practices has been examined on firm performance. For this
purpose, the earlier empirical researches of Bear et al. (2010),Harjoto and Jo (2011) and
Byron and Post (2016) have been endorsed for empirical investigation of the impact of
board composition and CSR practices on corporateperformance.
Besides, this study is unique in methodology using dynamic panel estimationsbased on the
argument that corporate governance-CSR-performance relationships are encountered with
endogeneity problems (Wellalage et al.,2017;Harjoto and Jo, 2011;Schultz et al.,2010;
Bond, 2002). The main problem is that quite frequently a firm’s variables are endogenously
related to dependent variables (Arellano and Bover, 1995). Cross-sectional data do not
allow for the correction of unobservable heterogeneity. When unobserved firm
characteristics are correlated with exogenous variables, estimated coefficients will be
biased (Bond, 2002). An initial solution to the endogeneity problem is to use panel data.
Estimating fixed-effect modelsor models in differences is an efficient solution. However, it is
only workable when the unobservable characteristics are time-variant. For board
composition, it is quite complicated to know which firm-specific courses of action enhance
CSR practices. In the current study, the sample may contain a firm’s unobserved
characteristics that could be time-varying and the fixed-effect model is insufficient to
eliminate spurious relationships between CSR and board composition. Subsequently, more
model structure is required to improve understanding of how board composition impacts
CSR practices in a firm. As a solution, the study followed Arellano and Bond (1991) and
Arellano and Bover (1995) using a dynamic panel data model approach with lagged
PAGE 464 jJOURNAL OF ASIA BUSINESS STUDIES jVOL. 14 NO. 4 2020

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