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1 Corporate Governance: An International Review, 2011, ():
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 rm performance? 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 signicantly, we nd that the association between effective corporate governance and both positive and negative CSR depends on satisfaction with rm 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 rm. Previous research has not adequately considered the role of satisfaction with rm performance in studying the impact of corporate governance on managerial decision-making. We show that the association between corporate governance and CSR dimensions depends on differences in decision-making latitude originating from relative rm performance compared to those of peer rms. 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 organizations 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
anagement scholars have been interested in understanding 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 University Avenue, Syracuse University, Syracuse, NY, 13244, USA. Tel: (315) 443-3468; E-mail: punit@syr.edu
performance targets, and therefore, reduce CSR expenditures, given the long-term horizons and uncertain outcomes associated with them (Coffey & Fryxell, 1991). Other scholars argue that institutional investors cannot exit the rm 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 rms social performance because it may
2011 Blackwell Publishing Ltd doi:10.1111/j.1467-8683.2010.00843.x
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impact nancial 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 nd 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 & Greening, 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 rms intent to pay greater attention to its external 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 nancial expertise (Fligstein, 1991), it may be much easier for them to evaluate historical nancial 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 ndings, 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 mechanisms. 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 recommendations of Agrawal and Knoeber (1996) and use four governance variables in our model: independent director representation, concentrated institutional shareholding, managerial ownership, and strength of shareholder rights. Managerial ownership the rst level of governance is expected to provide a direct incentive to managers to undertake value-maximizing behavior (e.g., Amihud & Lev, 1981; Davis, 1991; Denis, Denis, & Sarin, 1997; Gedajlovic & Shapiro, 2002; Morck, Shleifer, & Vishny, 1988). Independent directors, tasked with supervision of managerial decision-making on behalf of shareholders, are the second layer of governance arrangements. Concentrated institutional owners the third layer are assumed to have both the ability and the means to supervise managerial decisionmaking, 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 rms operates as the nal check on the agents, which essentially implies that if the rms 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
(managerial ownership, institutional ownership concentration, 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 continuum 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 positive CSR involves proactive stakeholder relationship management, negative CSR involves reactive compliance with minimum standards, and hence these should not be combined. 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 signicantly advancing the debate on the nature of the relationship between governance and CSR. Finally, previous research (e.g., Waddock & Graves, 1997) suggests that when rms 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 rm (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 rm 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 rm is perceived to be not doing well, managers may not have much decision-making latitude even under relatively weak governance conditions. We make similar arguments about another behavioral theory of the rm (BTOF) factor, the concept of slack and how it relates to decisionmaking 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 corporate governance and CSR, it is important to make a distinction 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 decisionmaking (e.g., violation of environmental regulations). This is important not just from an empirical perspective previous
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CORPORATE GOVERNANCE AND CSR
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 ndings but also from a theoretical viewpoint, which would suggest that effective governance should always curtail negative CSR, while determining the levels of positive CSR based on a cost-benet analysis. Therefore, to the extent that good governance is associated with better monitoring, in general, we expect it to be associated with lower negative CSR, as the failure to comply with rules and regulations 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 prots, etc.) and rarely considered the benets 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 benets for rm performance, these benets are more long-term and uncertain in nature. Thus, mainly those who have a long-term interest in the rm may prefer them. In contrast, if these governance mechanisms focus on the short-term, then the costs of CSR will likely outweigh the benets. For example, institutional owners concerned with meeting their short-term goals and achieving their performance targets may not want managers to invest in CSR due to goal conicts 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 diversied and indexed portfolios (Dharwadkar, Goranova, Brandes, & Khan, 2008). Similarly, since selection of a greater number of independent directors signals a rms intent to pay greater attention to its external environment and legitimacy (Pfeffer & Salancik, 1978), it could lead to higher other hand, because these directors are primarily appointed to protect shareholders interests, independent boards may consider higher positive CSR to be not in the interest of the rm. Baysinger and Hoskisson (1990) and Lorsch and MacIver (1989) support this contention by arguing that a vast majority of independent directors are hired by nancial institutions for their nancial expertise, which means they likely nd it much easier to evaluate historically available nancial information rather than uncertain strategic information. They are primarily the agents of the shareholders, a majority of which are nancial institutions with short-term interests. Thus, they should nd 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 characteristics, greater outsider representation may lead to lower CSR investments.
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 shareholder 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 rm, and short-term horizons on part of managers and owners will reduce CSR. Our arguments at the rm level can also be augmented using Mackey, Mackey, and Barney (2007), who propose that the relationship between CSR and rm value may depend on demand for and supply of socially responsible investments, and only when its demand exceeds supply the rm may benet 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 rms future cash ows is problematic. After all, the essential point of many business and society scholars is that . . . the rms should sometimes engage in activities that benet employees, suppliers, customers, and society at large, even if those activities reduce the present value of the cash ows generated by the rm (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 management 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 governance and negative CSR is clear-cut as the downside costs will encroach on rm value. Similarly, the benets-costs tradeoffs at the rm level along with the broader implications 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 conict 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 negotiations across coalitions of stakeholders. Most resource allocation decisions that lead to corporate social programs can be viewed in this light, yet research has not accorded due
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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 managers ability to allocate resources for CSR. This is an important issue because the benets from CSR, like benets from any other strategic action such as innovation activity, are uncertain and unclear. If such is the case, shareholders should be more inclined to trust their agents to make the right decisions when they are satised than when they are not. When a rm has abundant discretionary resources and its actual performance exceeds aspirations, managers will have signicant 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 shortterm concerns for cost cutting in reaction to weak performance. Therefore, it is important to consider these two key factors from BTOF attainment discrepancy and organizational slack that have implications not only for corporate governance (i.e., balance of power between owners and managers) but also provide insight into why rms may engage differently in positive and negative CSR. Attainment Discrepancy and CSR. BTOF highlights the importance of rms as systems with aspirations and performance expectations (Cyert & March, 1963). The rms relative performance with respect to its past performance or industry peers has important and well-documented implications for resource allocation decisions (Lant, 1992). Specically, rms performing below the industry average aspire to reach the industry average, and rms performing above the mean for their industry aspire to improve on their past performance (Bromiley, 1991; Fiegenbaum & Thomas, 1988). Lant (1992: 624) developed and labeled this concept as attainment discrepancy, which simply reects the difference between actual and aspired performance. If actual performance 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, shareholders should repose greater trust in managers and allow them higher discretion in resource allocations. However, in the case of negative attainment discrepancy, managerial discretion may be limited (Bromiley, Miller, & Rau, 2001) as shareholders are less trusting of managerial decision-making and more prone to pressuring them towards meeting shareholders goals. For example, if a rm aspired towards a return on asset of 3 per cent and its actual prots 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 prots 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.
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, signies the existence of a cushion of actual or potential resources that enables the rm to adapt to internal or external necessities for strategic change (Bourgeois, 1981: 30). The availability of resources not only provides rms 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 nancial 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 nancial 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 nancial performance as a measure of slack is that unlike recent studies on the role of slack in determining various organizational 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 rst step, research should use only highdiscretion 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 rms capacity to quickly raise cash resources, if required. Navarro (1988) studied the impact of potential slack (measured by debt/equity ratio) only. Therefore, an improved research design should include both available 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 contingent on the resource endowment situation of the rm, and these are best understood with the help of a visual depiction. While Figure 1 shows that the relationship between governance and CSR is moderated by satisfaction with rm per-
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FIGURE 1 Satisfaction with Firm Performance as a Moderator in the Relationship Between Corporate Governance and CSR
Corporate Governance Managerial ownership Independent Directors Institutional Ownership Shareholder rights (GIM Governance index) Corporate Social Responsibility
Positive CSR Negative CSR
Satisfaction with Firm Performance Slack Attainment Discrepancy
FIGURE 2 Specic Relationships Between Corporate Governance, Satisfaction with Firm Performance, and Positive and Negative CSR
Satisfaction with firm performance Corporate governance
ernance in conjunction with high slack and high attainment discrepancy should enable managers to undertake a high level of positive CSR, while reducing their need to be involved in negative CSR. This quadrant reects a situation of high managerial discretion with respect to CSR activities. Therefore, we expect behavioral theory factors to dominate corporate governance factors. In contrast to these two situations (wherein one factor dominates the other), rms in the top right quadrant have both strong corporate governance and high satisfaction with rm performance. Under these circumstances, 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 negative CSR are very clear in this quadrant both resource and governance factors in combination should reduce negative CSR. Finally, rms 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 ineffective governance and a weak resource situation may provide the enabling condition for very high levels of negative CSR. Hypothesis 4a. Effective corporate governance is less negatively associated with positive CSR under conditions of high slack and positive attainment discrepancy. Hypothesis 4b. Effective corporate governance is more negatively associated with negative CSR under conditions of high slack and positive attainment discrepancy.
Low (Low slack, negative attainment discrepancy) Low positive CSR, Low negative CSR Low positive CSR, High negative CSR
High (High slack, positive attainment discrepancy) Targeted positive CSR, Low negative CSR Highest positive CSR, Low negative CSR
Strong
Weak
METHODS
Study Sample
We draw our sample from the S&P 500 and KLD Domini 400 Universe. First, we collect social performance ratings for all the rms, included in these two indices, during the period of 20012005 by the rm Kinder, Lyndenberg, and Domini (KLD). Second, we obtain information about institutional ownership, corporate governance, and nancial performance for these rms. The information about institutional ownership comes from the CDA/Spectrum Thomson Financials 13F database; corporate governance is based on the RiskMetrics (IRCC) database; and nancial performance comes from the Compustat North America database. We lead the dependent variable by a year to ensure that the independent variables predate the dependent variable. Thus, the information about the independent variables pertains to the years 2000 to 2004. Missing data brought the nal sample down to 1522 observations for 518 rms. Appendix 2 details these rms by type of industry.
formance, Figure 2 provides more specic details on the nature of the hypothesized relationships. In Figure 2, along the horizontal axis, we consider managerial decisionmaking latitude about CSR based on satisfaction with rm performance as determined by availability of slack resources and achievement of nancial aspirations. Along the vertical axis, we consider corporate governance effectiveness as determined by levels of managerial ownership, independent director representation, concentrated institutional ownership, and shareholder rights. While considering the relationships portrayed in Figure 2, it is important to keep in mind that we are talking about general trends and not specic rm strategies. Some rms may and indeed do defy these expectations, but in general, we expect these relationships to hold. We theorize that effective corporate governance and low slack and negative attainment discrepancy represent a situation of least managerial discretion regarding positive CSR expenditures. Also, while low slack and negative attainment discrepancy may provide the enabling conditions for involvement in negative CSR, effective governance should curtail that tendency. Overall, we expect effective governance factors to dominate behavioral theory factors in inuencing managerial discretion regarding CSR expenditures. In sharp contrast, we theorize that ineffective corporate gov-
Dependent Variables
Corporate Social Responsibility. We use archival ratings of CSR as the dependent variable, obtained from the rm KLD Inc. The use of KLD ratings of corporate social responsibility is fairly standard in the literature; the ratings consider all rms in Standard & Poor 500 or KLD Domini 400 Universe for the period 20012005 on 82 indicators in eight
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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 positive 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 frameworks set by agencies such as Equal Employment Opportunity 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 ndings, we make two separate composite ratings positive and negative CSR ratings and run separate regressions models for each of them.
rights at different corporations and is fairly common in research on corporate governance (e.g., Bebchuk & Cohen, 2005). All information about the corporate governance 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 nancial performance. First, we calculate the return on assets (ROA) and market to book ratio (MBR). The ROA serves as an accounting measure of performance and is fairly standard in past research (e.g., Waddock & Graves, 1997). The MBR is a modied version of Tobins Q, as commonly used in existing literature (e.g., Dutta, Narasimhan, & Rajiv, 2005; Richard, Murthi, & Ismail, 2007), which we adopt because it is difcult to assess the replacement cost of assets, which provides the denominator in the Tobins Q equation. Furthermore, MBR captures the relative success of rms in maximizing shareholder value through the efcient allocation and management of scarce resources. After calculating the ROA and MBR, we measure attainment discrepancy using the same method as Bromiley (1991) we code industry average as the aspired performance for rms that perform below the industry average, whereas for rms performing above this average, we multiply their past performance by 1.05, which signies 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.
Independent Variables
Corporate Governance. To code for corporate governance in different rms, we use four approaches. First, concentrated 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 nancial institutions 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 institutions that own 5 per cent or more shares in a rm 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 ownership 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 phenomena from opportunistic behavior to executive compensation (Finkelstein & Boyd, 1998). Third, greater independent director representation provides an important characteristic of a corporations interest in both improving governance and seeking external legitimacy (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 dene independent directors as those directors who were neither employed by nor afliated in any other way to the rm. Fourth, we borrow Gompers, Ishii, and Metricks (2003) governance index (GIM), which measures shareholder
Control Variables
We control for industry, rm size, research and development 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 municence, we use the 13-industry classication of Waddock and Graves (1997). The sample provides a fairly representative cross-section of the US economy: approximately 19.6 per cent of the rms belong to the computers, autos, and aerospace industries; 11.5 per cent come from the telephone and utilities; and another 11.5 per cent from the bank and nancial services industries, and the rest are spread across the spectrum of remaining industries quite evenly.
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Firm Size. Larger rms 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 information. Further, we log transform this variable as rm 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 nancial performance. They also argue that a model of the relationship between CSR and nancial performance that fails to include R&D intensity will be misspecied and fundamentally awed, because such a relationship could reect simply the impact of R&D on rm performance. Therefore, we control for R&D intensity, dened as R&D expenditure divided by sales.2 Product Differentiation. Previous research (e.g., Finkelstein & Boyd, 1998; McWilliams & Siegel, 2000) has also highlighted the need to control for product differentiation in studying CSR. It is because those rms that invest in CSR are also likely to invest on advertising and branding for product differentiation. Because Compustat data on advertisement 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 municence is captured by the regression slope coefcient divided by mean sales, where the coefcient is based on regression of time against value of total sales, while estimates for any given year are based on the ve preceding years, i.e., estimate for year 2001 is based on data from 19962000. Demand instability is measured similarly by dividing the standard error of the regression slope coefcient by mean sales for the industry. Industry concentration is measured using the Herndahl Index, computed by using all the rms for that industry in the sample. Capital Intensity. Capital intensity tends to place limitations on managerial discretion. Finkelstein and Boyd (1998) believe that by creating rigidity in organizations, capital intensity makes it difcult for rms to accommodate
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) rst developed the argument for returning free cash (cash in excess of a rms 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 signicant in determining CEO power, which is an important predictor of a CEOs 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 specic actions and treatments over time and across sections (Hill & Phan, 1991). By including temporal lags and controls for prior states of variables, it also helps us in empirically establishing the causality mechanisms (Hambrick, 2007). Moreover, the use of a randomeffects model is preferable from the perspective of generalizing the ndings beyond the sample under study (Maddala, 2002). Additionally, since corporate governance, CSR and rm performance may be endogenously related, we perform sensitivity analysis using the Hausman-Taylor panel data regression for endogenous covariates. The estimators, originally 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 individuallevel random effects, but that none of the explanatory variables 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
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TABLE 1 Descriptive Statistics and Correlation Matrix
Mean 2.53 2.62 9.54 .56 .07 .05 .07 4.97 .11 7.25 1.01 .26 59.94 11.78 .02 .61 9.76 .15 -1.02 -.03 .31 .34 .17 .03 .01 -.02 0 -.01 .47 .11 .12 .08 -.09 -.08 -.03 -.09 -.16 -.01 .05 .39 .33 -.05 .09 .02 .31 .07 .35 .13 -.24 .13 -.1 -.14 .04 -.05 -.1 .02 -.02 .14 -.31 .08 .05 -.24 .08 .5 .05 -.3 .15 .01 -.08 .04 .05 -.11 .02 .07 -.15 .13 -.24 .31 -.12 .25 .12 -.16 .13 0 -.09 .04 .14 -.17 .09 .17 -.17 .01 .09 -.02 .12 -.06 .52 -.05 0 .01 -.13 -.15 -.06 -.09 -.24 -.22 .15 -.07 .08 .04 -.2 .04 .05 0 .04 .02 -.05 .04 .09 -.16 .93 -.12 -.12 .12 -.01 0 .1 -.02 -.03 .08 -.06 -.09 -.07 0 .06 -.23 .08 -.01 -.08 .02 .01 -.1 .08 .07 -.05 -.07 0 .02 .03 .08 .02 .01 .06 -.02 -.01 .23 -.04 .17 .03 -.14 .03 -.1 -.24 0 .06 -.16 .01 -.05 -.06 -.01 -.08 .06 .29 -.01 -.1 0 .04 -.02 -.14 -.05 -.08 -.16 .39 .07 .01 .05 -.02 0 .07 S.D. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2.49 2.37 1.48 .6 .09 .04 .03 1.28 .14 1.74 2.08 .15 8.5 8.32 .07 .19 2.51 .12 3.87 .07 .36 -.01 -.04 -.01 .02 .07 .02 -.13 .05 -.05 -.03 .08 -.02 .05 .05 -.01 .04 .08 -.02 -.11 .09
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Variable Name
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
CSR positive ratings CSR negative ratings Firm size Dividend per share R&D intensity Market growth Demand instability Capital intensity Industry concentration Cash & accounts receivables Debt equity ratio SGA expenses CEO Age (years) CEO Tenure (years) CEO ownership Percent independent directors Governance index Block institutional ownerships MBR Attainment discrepancy ROA Attainment discrepancy
Notes: 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 signicant at p < .01, between .04 and .06 at p < .05, and between .03 to .04 at <.1.
TABLE 2 Attainment Discrepancy, Slack, Governance, and Positive CSR Ratings: Random-Effects Panel Data Regression Results DV: Positive CSR Ratings Constant Industry dummy coefcients Firm size R&D intensity Product differentiation Cash dividends paid-out Market growth Demand instability Capital intensity Industry concentration CEO Age CEO Tenure Percent independent directors (ID) Governance index (GIM) Block institutional ownership (ALL5) CEO ownership (CEO_OWN) Cash & accounts receivables (CASH) Debt equity ratio (DE) MBR Attainment discrepancy (MBRD) ROA Attainment discrepancy (ROAD) ID CASH GIM CASH ALL5 CASH CEO_OWN CASH ID DE GIM DE ALL5 DE CEO_OWN DE ID MBRD GIM MBRD ALL5 MBRD CEO_OWN MBRD ID ROAD GIM ROAD ALL5 ROAD CEO_OWN ROAD R2 Change in R2 N Model 1 .64 .36** -.01 .13** .05 .07** -.20* .16** .28* .02 -.04* Model 2 1.17 .18** -.06 .12* .09* .08** -.21* .15** .24 .01 -.03 -.13* -.02 -.04* -.12** .34*** .00 .05* Model 3 1.12 .19** -.06 .12* .07 .08** -.22* .15** .24 .01 -.02 -.13* -.02 -.06* -.12** .34*** .01 .07* .07* -.08* .05* -.10* .01 .02 .01 .02 .00 -.02 -.12* .07* Model 4 1.17 .18** -.06 .12* .09** .08** -.21 .15** .24 .01 -.03 -.11* -.02 -.04* -.12** .34*** .00 .02 Model 5 1.01 .20** -.04 .12* .08 .08** -.19 .15** .24 .01 -.02 -.10* -.03 -.06** -.14** .33*** .01 .03 .07* -.07 .06* -.10* .00 .01 -.01 .02
.27*** 1773
.36*** .09*** 1522
.40*** .05*** 1522
.34*** .07*** 1522
.00 -.03* .00 -.01 .40*** .06*** 1522
Signicance levels: p < .10; *p < .05; **p < .01; ***p < .001. Coefcients 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 rm 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 statistics, 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 randomeffects panel data regression models on standardized (nor-
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TABLE 3 Attainment Discrepancy, Slack, Governance, and Negative CSR Ratings: Random-Effects Panel Data Regression Results DV: Negative CSR Ratings Constant Industry dummy coefcients Firm size R&D intensity Product differentiation Cash dividends paid-out Market growth Demand instability Capital intensity Industry concentration CEO Age CEO Tenure Percent independent directors (ID) Governance index (GIM) Block institutional ownership (ALL5) CEO ownership (CEO_OWN) Cash & accounts receivables (CASH) Debt equity ratio (DE) MBR Attainment discrepancy (MBRD) ROA Attainment discrepancy (ROAD) ID CASH GIM CASH ALL5 CASH CEO_OWN CASH ID DE GIM DE ALL5 DE CEO_OWN DE ID MBRD GIM MBRD ALL5 MBRD CEO_OWN MBRD ID ROAD GIM ROAD ALL5 ROAD CEO_OWN ROAD R2 Change in R2 N Model 6 .13 .42** .04 .04 .13** .14** .10 .24** .19 .03* -.04* Model 7 -.81 .34** .03 .00 .10* .14** .15 .08 .32 .02 -.02 -.02 -.03 -.05* -.05 -.21*** .06* -.02 Model 8 -1.07 .33** .03 .00 .10* .15** .15 .08 .34 .02 -.01 -.02* -.04 -.05* -.06* -.21*** .08* -.04* .04 -.11** .00 -.06 .02 .03 .03 -.02 -.03* -.05* .00 .01 Model 9 -.73 .33** .01 -.02 .11* .14** .11 .08 .33 .02 -.02 -.02 -.03 -.05* -.04 -.23*** .04* -.04** Model 10 -.90 .31** .01 -.03 .10* .14** .10 .07 .35 .02 -.01 -.02* -.03 -.06* -.05* -.24*** .05 -.05** .04 -.11** .00 -.05 .01 .01 .03 -.01
.38*** 1773
.42*** .03*** 1522
.44*** .03*** 1522
.43*** .04*** 1522
.02 .00 .02 -.06* .46*** .03*** 1522
Signicance levels: p < .10; *p < .05; **p < .01; ***p < .001. Coefcients for dummy industry variables not reported for the sake of brevity.
malized) variables for the period 20012005.4 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.
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The table shows that rms that are larger in size, have high capital intensity, emphasize greater product differentiation, operate in high growth markets, or more concentrated industries are more likely to invest in positive CSR. On the other hand, rms that operate in conditions of greater demand instability or whose CEOs have longer tenure are less likely to invest in positive CSR. These are interesting ndings that future research may like to explore in greater detail. More interestingly, however, Tables 2 and 3 provide strong support for our predictions. Hypothesis 1a predicted that effective monitoring would reduce positive CSR. Table 2 reveals that high independent director representation (b = -.132 in Model 3 and b = -.103 in Model 5, p < .05 in both models), concentrated institutional ownership (b = -.056 in Model 3 and b = -.058 in Model 5, p < .05 in both models), and managerial ownership (b = -.118 in Model 3 and b = -.137 in model 5, p < .01 in both models) all have a signicant negative impact on the levels of positive CSR. However, GIM (shareholder rights) did not reveal statistically signicant result. Overall, these results conrmed agency theory predictions that expect tighter monitoring to lead to declines in positive CSR, supporting Hypothesis 1a. Similarly, Hypothesis 1b predicted that effective monitoring would reduce negative CSR. Table 3 reveals that high independent director representation (b = -.024 in Model 8 and b = -.023 in Model 10, p < .05 in both models), concentrated institutional ownership (b = -.052 in Model 3 and b = -.056 in Model 5, p < .05 in both models), and managerial ownership (b = -.059 in Model 3 and b = -.053 in Model 5, p < .05 in both models) all have a signicant negative impact on the levels of negative CSR. However, GIM (shareholder rights) once again did not reveal a statistically signicant result. These results conrmed that tighter monitoring also leads to declines in negative CSR, supporting Hypothesis 1b. In Hypothesis 2a, we predict that positive attainment discrepancy 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 associated with negative CSR (b = -.037, p < .05 in Model 8 and b = -.045, p < .01 in Model 10). These results indicate 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 signicantly 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 signicantly related to positive CSR. Overall, we nd 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 signi-
cantly related to negative CSR (b = -.214 in Model 8 (MBRD) and -.237 in Model 10 (ROAD), p < .001 in both). Similarly, the potential slack debt-to-equity ratio , which represents the opposite of the cash and accounts receivables interpretation, is positively related to negative CSR (b = .076, p < .05 in Model 8 (MBRD) and .046, p < .10 in Model 10 (ROAD). Thus, we nd strong support for Hypothesis 3b as well. Hypotheses 4a and 4b integrate corporate governance and behavioral theories, and test for the interaction effects. We provide a wide array of interaction plots to illustrate these interactions (Figures 3, 4, and 5), and this is where the really interesting ndings emerge. These plots clearly depict that the impact of governance on positive CSR is minimal when rms perform well as indicated by the relatively atter slopes of lines for high performance under weak and strong governance. Note also the signicance of the interaction is the t-test for difference in slopes (Aiken & West, 1991). In plotting these interactions, we plotted only those interactions that had statistically signicant differences in slopes. There is a sharp decline in positive CSR for rms who have not performed up to satisfaction and operate under strong governance. That is, the following combinations: 1) low cash and higher proportions of independent directors (Figure 3); 2) low cash and higher proportion of concentrated institutional owners (Figure 4); and
FIGURE 3 Interaction Effect of Independent Director Representation and CASH on Positive CSR Ratings
FIGURE 4 Interaction Effect of Institutional Ownership and CASH on Positive CSR Ratings
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FIGURE 5 Interaction Effect of Managerial Ownership and MBR Attainment discrepancy (MBRD) on Positive CSR Ratings
FIGURE 7 Interaction Effect of Independent Director Representation and MBR Attainment discrepancy (MBRD) on Negative CSR Ratings
FIGURE 6 Interaction Effect of Institutional Ownership and Debt-Equity Ratio on Negative CSR Ratings
FIGURE 8 Interaction Effect of Institutional Ownership and ROA Attainment discrepancy (ROAD) 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 rms 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 concentration (Figure 6); (2) high positive attainment discrepancy and high board independence (Figure 7); and (3) high positive 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 rms that are not doing well, and reduces negative CSR in high performing rms 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 methodological improvements, it is not free of limitations. First, our
study relies on KLD ratings for measuring positive and negative CSR. However, some recent research has highlighted issues with using KLD ratings. For example, Chatterji, 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 rm can extract from its social performance depends on its past performance and credibility among key stakeholders. Barnett (2007) calls this leverage stakeholder inuence capacity (SIC). According to him, just as a rms ability to notice, assimilate, and exploit new knowledge depends on its prior knowledge, its ability to notice and protably exploit opportunities to improve stakeholder relations through CSR depends on its prior stakeholder relationships (Barnett, 2007: 803). If rms are rational actors, as the instrumental positivist perspective suggests, they likely are aware of both their business strategies and stakeholder inuence capacities. Thus, beyond nancial performance, they may take into account their stakeholder inuence capacities before making CSR investments. We lack access to any such information for this study, but additional research might consider the impact of SIC on CSR. While despite these imperfections, KLD continues to be the best available option
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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 rms 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 pressures encourage rms to follow others in their industry in allocating higher expenditures to CSR. This line of inquiry could reveal whether rms, when evaluating CSR expenditures, 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 effective 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 identications (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 understanding of the factors that lead to CSR. It also provides theoretical and practical guidelines to researchers and managers alike to help them determine their hierarchy of objectives 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 relationship between corporate governance mechanisms and corporate social responsibility dimensions was contingent on the levels of slack and performance attainment discrepancy. In doing so, the study sought to resolve the ambiguity in previous ndings 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 rm. 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 attainment discrepancy lead to higher positive and lower negative CSR. Finally, we nd that the associations between effective governance and positive and negative CSR depend on the level of slack and positive attainment discrepancy. 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 ndings highlight the importance of both performance and organizational contexts in studying the impact of governance on managerial decision-making regarding CSR. Overall, our ndings provide strong afrmation of the need
to integrate behavioral theory insights into corporate governance theory in predicting CSR investments, as we demonstrate that organization slack, attainment discrepancy, and corporate governance jointly determine the levels of CSR. Our ndings support many of the hypotheses and provide more nuanced insights concerning the governance-CSR relationship. First, by considering positive and negative CSR as two distinct activities, we nd 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 nding, and that may have led to mixed results. While the benets 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 benets negligible, the relationship between effective governance and negative CSR should be unequivocally negative and that is what we nd. This also provides credence to our ndings about positive CSR; irrespective of the benets/costs tradeoffs, effective governance suppresses positive CSR. The benets of dimensionalizing CSR are also obvious when considering the impact of behavioral theory factors. When things look good (i.e., high slack and positive attainment discrepancy), there is more positive CSR and less negative CSR, as one would expect. The signicant nding in this instance is that lower levels of slack may actually be associated with increased negative CSR. These ndings are consistent with the theoretical predictions of BTOF. Finally, our ndings about the interactive effects highlight 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 hitherto, contextualizing the relationship also adds to our understanding about the potential mixed results encountered in past research. Our ndings suggest that when rms are not doing well, at least by shareholders expectations, 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 rms appear to be doing well, managers seem to possess a signicant discretion 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 programs. Thus, our ndings 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 understanding when governance matters both for upsides and downsides. 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 considered how good governance can prevent managers from making poor decisions. Our ndings that good governance reduces negative CSR are unique in that respect and focused on an ignored aspect of governance preventing bad things from happening.
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Our study also has other practical signicance for CSR researchers, advocates and managers. From the perspective of CSR advocates, understanding the constraints and concerns of managers is very important. Only by addressing these concerns can rms create enabling conditions for higher CSR. For example, if managers believe they cannot undertake CSR projects because they fear a stock price slide, advocates of CSR could focus on institutional owners instead and convince them that it is in their own best interest to be more proactive. By targeting these owners, advocates would remove an important CSR constraint. Similarly, canvassing boards of directors and recommending they be more aware and responsible toward meeting the needs of all stakeholders, not just shareholders, could provide another effective strategy. Alternatively, if managers provide signals to shareholders about the long-term benets of corporate social investments, they might be in a position to promote such investments. This issue is especially relevant in view of comments by researchers such as Scherer and Palazzo (2007: 1101): In the era of globalization, when the ability of the nationstate to regulate business activities is diminishing. . . . multinational corporations today are able to choose among various legal systems, applying economic criteria to their choice of which set of labor, social, and environmental regulations they will operate under. From this perspective, it is not sufcient to rely on the capacity of the state to regulate rm behavior in the interest of society, such as preventing environmental pollution or other ethically questionable activities not covered or enforced by local laws, nor can rms be trusted to behave completely ethically on their own, because their economic rationale (or competitive pressures) makes them concerned primarily with minimizing costs (or maximizing prots). However, by understanding what prompts or prevents managers from undertaking CSR investments, we take an important step toward getting them (or stopping them, when undesirable) to do so.
2. To avoid unnecessary loss of data, missing values of some variables (e.g., R&D and SGA expenses) were replaced by those in preceding or succeeding years, if available. 3. We also examine the variance ination factors (VIF) to detect multicollinearity and Breusch-Pagan test on OLS regression to detect heterogeneity. All VIF scores are below 2, and the mean VIF score is 1.22, well within the commonly specied rule of thumb of a score of 10 indicating multicollinearity problems (Cohen, 2003). Thus, our results do not appear to suffer from multicollinearity. The Breusch-Pagan test also conrmed the absence of heterogeneity in variance. 4. All variables were standardized [normalized to (0,1)] before running regression models.
APPENDIX 1
Overview of Behavior and Agency Theory Literature on Corporate Social Performance (CSP)
Study domain, authors Corporate governance: Coffey and Fryxell (1991) Coffey and Wang (1998); Wang and Coffey (1992) Graves and Waddock (1994) Johnson and Greening (1999) Primary ndings
Institutional ownership is negatively related with CSP. Outside directors negatively related with CSP. No relationship between institutional ownership and CSP Higher proportion of outside directors is linked with higher CSP because they are more concerned with external legitimacy. Outside directors positively related with CSP. Positive relationship between institutional ownership and CSP. Behavioral theory concept labeled as attainment discrepancy by Lant (1992) has not been applied in CSP literature. Slack as measured by past nancial performance is positively associated with the social performance. Slack as measured by Equity to debt ratio is positively associated with the social performance. Slack as measured by cash ow is positively associated with the social performance.
Kassinis and Vafeas (2002) Neubaum and Zahra (2006) Attainment discrepancy:
ACKNOWLEDGEMENTS
We would like to thank William Judge (the editor), Till Talaulicar (associate editor), and three anonymous referees for their insightful comments and suggestions. This paper also beneted from the comments of the participants in Academy of Management Annual Meeting, 2008. The rst author is also thankful to the Whitman School of Management at Syracuse University for research grant for this project.
NOTES
1. There is no special reason for using 5 per cent. Past research has used this number, as a proxy, to signify that most rms would like, at least moderate improvements, on their past performance. Admittedly, it is a crude measure as industry and macroeconomic conditions and other factors also likely inuence the performance aspiration, nonetheless on an aggregate past research indicates this to be a good proxy for performance aspirations (Bromiley, 1991).
Slack: McGuire, Sundgren, and Schneeweis (1988) Waddock and Graves (1997) Amato and Amato (2007) Navarro (1988)
Seifert et al. (2004)
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APPENDIX 2
Sample by Industry
Firms in Different industries SIC code Number of rms 22 27 36 39 15 30 102 10 60 53 60 43 21 518
Mining and construction Food, textiles and apparel Forest products, paper & publishing Chemicals & pharmaceuticals Rening, rubber & plastic Containers, steel & heavy manufacturing Computers, autos & aerospace Transportation Telephone & utilities Wholesale & retail Bank & nancial services Hotel & entertainment Hospital and others Total
1001999 20002390 23912780 27812890 28913199 32003569 35703990 39914731 47324991 49925990 59916700 67018051 80529999
Industry Classication Adapted from Waddock and Graves (1997).
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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 governance, 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, Organization Science, and Academy of Management Perspective.
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1 Corporate Governance: An International Review, 2011, ():

2011 Blackwell Publishing Ltd doi:10.1111/j.1467-8683.2010.00843.x

THEORY AND HYPOTHESES DEVELOPMENT

2011 Blackwell Publishing Ltd

CORPORATE GOVERNANCE AND CSR

Behavioral Theory of the Firm (BTOF) and CSR

2011 Blackwell Publishing Ltd

Integrating Corporate Governance, Behavioral Theory of the Firm, and CSR

2011 Blackwell Publishing Ltd

CORPORATE GOVERNANCE AND CSR

Positive CSR Negative CSR

Satisfaction with Firm Performance Slack Attainment Discrepancy

2011 Blackwell Publishing Ltd

2011 Blackwell Publishing Ltd

CORPORATE GOVERNANCE AND CSR

2011 Blackwell Publishing Ltd

2011 Blackwell Publishing Ltd

CORPORATE GOVERNANCE AND CSR

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.40*** .05*** 1522

.34*** .07*** 1522

.00 -.03* .00 -.01 .40*** .06*** 1522

2011 Blackwell Publishing Ltd

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.02 .00 .02 -.06* .46*** .03*** 1522

2011 Blackwell Publishing Ltd

CORPORATE GOVERNANCE AND CSR

2011 Blackwell Publishing Ltd

2011 Blackwell Publishing Ltd

CORPORATE GOVERNANCE AND CSR

DISCUSSION AND CONCLUSION

2011 Blackwell Publishing Ltd

Seifert et al. (2004)

2011 Blackwell Publishing Ltd

CORPORATE GOVERNANCE AND CSR

Industry Classication Adapted from Waddock and Graves (1997).

2011 Blackwell Publishing Ltd

2011 Blackwell Publishing Ltd

CORPORATE GOVERNANCE AND CSR

2011 Blackwell Publishing Ltd

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