Corporate Governance and Corporate Social Responsibility Disclosure: Evidence from the US Banking Sector

Corporate Governance and Corporate Social Responsibility
Disclosure: Evidence from the US Banking Sector
Mohammad Issam Jizi • Aly Salama •
Robert Dixon • Rebecca Stratling
Received: 4 February 2013 / Accepted: 14 October 2013
Ó Springer Science+Business Media Dordrecht 2013
Abstract There is a distinct lack of research into the
relationship between corporate governance and corporate
social responsibility (CSR) in the banking sector. This
paper fills the gap in the literature by examining the impact
of corporate governance, with particular reference to the
role of board of directors, on the quality of CSR disclosure
in US listed banks’ annual reports after the US sub-prime
mortgage crisis. Using a sample of large US commercial
banks for the period 2009–2011 and controlling for audit
committee characteristics, board meeting frequency, and
banks’ profitability, size and risk, we find evidence that
board independence and board size, the two board char-
acteristics usually associated with the protection of share-
holder interests, are positively related to CSR disclosure.
This indicates that, with regard to CSR disclosure, more
independent boards of directors and larger boards are the
internal corporate governance mechanisms which promote
both shareholders’ and other stakeholders’ interests. Con-
trary to our expectations, CEO duality also impacts posi-
tively on CSR disclosure. From an agency-theoretical
viewpoint, this suggests that powerful CEOs may promote
transparency about banks’ CSR activities for their private
benefits. While this could indicate that powerful CEOs are
under particular pressure to appease stakeholders’ concerns
that they might abuse their power by providing a high
degree of CSR disclosure, it could also be a sign of man-
agerial risk aversion or managers’ private reputational
concerns.
Keywords Corporate governance  CSR disclosure 
US Banks  Content analysis  Financial crisis
Introduction
Financial institutions, in particular banks, have come under
increasing pressure, since the sub-prime mortgage crisis
and the following credit crunch to take a more long-term
view of their investors’ business interests and to
acknowledge and respond to their obligations to society
(Matten 2006; Money and Schepers 2007; Gill 2008; Grove
et al. 2011). Due to the extensive negative external effects
poorly managed and controlled banks can impose on
society, the perception of the firms’ corporate social
responsibility (CSR) activities is important not only for
investors’ and customers’ risk assessment, but also for
regulators’ good-will and for the public’s confidence in the
financial system.
Extensive prior research suggests that CSR reporting
can impact positively on stakeholders’ perceptions of firm
performance, firm value and firm risk, and thereby on
firms’ profitability, cost of capital and share price (Gray
et al. 1995b; Simpson and Kohers 2002; Scholtens 2008;
Godfrey et al. 2009; Salama et al. 2011; Ghoul et al. 2011;
Cormier et al. 2011; Lourenco et al. 2012). Moreover, as
CSR reporting contributes to the reduction of information
asymmetry between managers and investors as well as
other stakeholders, comprehensive CSR reporting aids the
M. I. Jizi (&)
Lebanese American University, Business School, Beirut,
Lebanon
e-mail: [e-mail]
A. Salama  R. Dixon  R. Stratling
Durham University, Durham Business School, Durham, UK
e-mail: [e-mail]
R. Dixon
e-mail: [e-mail]
R. Stratling
e-mail: [e-mail]
123
J Bus Ethics
DOI 10.1007/s10551-013-1929-2

supervision and control of managers. Effective boards of
directors are therefore expected to promote CSR reporting
(Jamali et al. 2008).
Given the potential impact of CSR reporting on firms’
sustainability, there is a surprising dearth of research into
the impact of corporate governance on CSR disclosure.
Existing research mainly concentrates on the influence of
CSR committees on CSR disclosure (Gill 2008; Spitzeck
2009; Li et al. 2010; Kolk and Pinkse 2010) and largely
neglects investigating whether key characteristics of the
board of directors impact on the reporting of CSR-related
issues. As the board of directors is responsible for the
development of sustainable business strategies and the
supervision of the responsible use of the firms’ assets, it is
the board which takes the crucial decisions in relation to a
firm’s CSR policies. If firms engage in CSR activities and
reporting not merely as a temporary fad or to appease
managers’ personal moral concerns (Porter and Kramer
2006; Hennigfeld et al. 2006), but to acknowledge societal
concerns and maintain positive relationships with key
stakeholders in order to improve the sustainability of the
business, one would expect that firms with more effective
boards structures will be particularly diligent in providing
information on CSR-related issues. Accordingly, and in
light of increasing public, customer and investor pressures,
corporate governance features, such as board characteris-
tics, which were originally designed mainly to protect
shareholder interests (Fama 1980; Hermalin and Weisbach
1998, 2003), might be effective in encouraging managerial
stewardship for the benefit of a wide range of stakeholders.
Understanding the link between corporate governance,
in particular board characteristics, and CSR reporting is
important for banks, because of their potential significant
negative external effects on society. Since the credit crunch
of 2007–2008, stakeholders’ perceptions of firms’ risk and
performance have become particularly important to banks’
sustainability, since they rely on depositors and govern-
ment agencies as key sources for funding and liquidity
(Grove et al. 2011; Veronesi and Zingales 2010), and as
investors have become increasingly risk averse (Gemmill
and Keswani 2011). However, there is a distinct lack of
empirical research into the relationship between corporate
governance and CSR in the banking sector. This paper fills
the gap in the literature by investigating whether corporate
governance characteristics, in particular key features of the
board of directors, impact on CSR disclosure in US com-
mercial banks’ annual reports, for the period after the credit
crunch of 2007–2008. We use banks’ annual reports, rather
than CSR or corporate sustainability reports, because
annual reports are the key documents scrutinised by a wide
range of stakeholders (e.g. Toms 2002; Campbell and
Slack 2008). Additionally disclosure of CSR-related
information in annual reports allows boards to signal their
balance between financial and social objectives (Gray et al.
1995a). Unlike previous research into CSR disclosure,
which relied on counting relevant words or sentences (e.g.
Li et al. 2008; Kothari et al. 2009; Haniffa and Cooke
2005), we use content analysis to measure the compre-
hensiveness and quality of disclosed information in banks’
annual reports. The rationale for this is that the quality of
disclosure is more essential than the quantity (Hasseldine
et al. 2005; Toms 2002). In line with definitions, frame-
works and methods employed in the mainstream CSR lit-
erature (Gray et al. 1995a, b; Haniffa and Cooke 2005;
Branco and Rodrigues 2006; Scholtens 2008; Holder-Webb
et al. 2009), we develop a CSR disclosure measure based
on the content of four CSR categories—community
involvement, environment, employees, and product and
customer service quality—and score the content of infor-
mation in each of the categories based on the existence and
comprehensiveness of information disclosed.
Our findings suggest that board independence and board
size positively affect CSR disclosure by large US banks.
This indicates that, possibly due to the increasing realisation
of the long-term benefits of CSR, corporate governance
mechanisms that were chiefly designed to protect minority
shareholder interests might also encourage managerial
stewardship for the benefit of all stakeholders. However,
contrary to our expectations, Chief Executive Officer (CEO)
duality, also, appears to be positively related to CSR dis-
closure. We are unable to identify whether stakeholders
benefit from the ability of powerful CEOs to pursue private
interests by engaging in CSR activities and CSR reporting,
or whether the market pressures and public scrutiny force
powerful CEOs to engage in CSR disclosure as a means of
allaying fears that they might exploit their position.
The remainder of this paper proceeds as follows. The
next section provides a discussion of the relationship
between corporate governance and CSR disclosure. This is
followed by the hypotheses development. Afterwards, we
discuss our research design, in terms of sample data,
measurement of variables and the model, before we present
the results and their analysis. The conclusion is given in the
final section.
Corporate Governance and CSR
According to the World Bank, ‘CSR is the commitment of
businesses to contribute to sustainable economic develop-
ment by working with employees, their families, the local
community and society at large to improve their lives in
ways that are good for business and for development’
(Starks 2009, p. 465).
CSR can have both financial and strategic advantages
for firms. By engaging in social activities and reporting on
M. I. Jizi et al.
123

CSR, firms develop the trust and goodwill of stakeholders,
which can provide them with competitive advantages
(Aguilera et al. 2006; Money and Schepers 2007; Gill
2008; Kolk and Pinkse 2010). Research suggests that CSR
reporting promotes firms’ image and enhances their repu-
tation, (Gray et al. 1995b; Li et al. 2010; Vanhamme et al.
2012) as relationships with stakeholders are based on a
positive exchange of benefits (Bear et al. 2010). Socially
responsible firms tend to experience greater brand loyalty
(Mackenzie 2007), customer satisfaction and employee
commitment (Matten 2006). CSR engagement also reduces
the risk that firms’ performance is negatively affected by
labour disputes, product safety scandals and consumer
fraud (Waddock and Graves 1997). Accordingly, firms
which are perceived to have high CSR standards are sub-
ject to lower firm specific risks due to lower cash flow
variability (Salama et al. 2011).
As CSR engagement and CSR reporting can impact on
firms’ risks and profitability, investors increasingly con-
sider firms’ social behaviour in their investment decisions
(Simpson and Kohers 2002; Aguilera et al. 2006; Matten
2006). Research by Ghoul et al. (2011) on US firms indi-
cates that investment in employee relations, environmental
policies and CSR product strategies helps lower firms’
costs of capital. Investors, therefore, increasingly require
boards and managers to engage in CSR and report on this
engagement (Scholtens 2008; Kolk and Pinkse 2010).
However, firms’ engagement in CSR is not merely of
interest to long-term profit maximising shareholders.
Firms’ dependence on other stakeholders and on the
frameworks and resources provided by civil society means
that there is a reciprocal expectation that firms ‘balance the
multiplicity of stakeholder interests’ and ‘are responsible to
society as a whole’ (van Marrewijk 2003, pp. 96–97).
Expectations about firms’ social responsibilities are,
therefore, affected by their potential impact on stakehold-
ers and civic society. This is one of the reasons why
industries, which can impose significant negative external
effects on society, such as the financial service sector, tend
to be comparatively tightly regulated and scrutinised. The
huge negative external effects failing banks in the US and
Europe recently imposed on society are the driving force
behind attempts by national and international regulators to
improve banking standards and explain why the CSR
activities of banks have come under increased public
scrutiny (Grove et al. 2011).
While governments have the responsibility to set regu-
latory frameworks for the operation of firms at national and
international level, it is the board of directors, which is
ultimately responsible for the development of sustainable
business strategies and the oversight of managers’ use of
the firms’ resources (OECD 1999). Both at national and at
firm-level, ‘good corporate governance’ is expected ‘to
ensure that corporations take into account the interests of a
wide range of constituencies, as well as of the communities
within which they operate, and that their boards are
accountable to the company and the shareholders’ (OECD
1999, p. 5). However, with regard to firms’ engagement in
CSR, there is so far little research into whether ‘good’
corporate governance at board level has any impact (e.g. Jo
and Harjoto 2011). This is of particular concern, given the
potential conflicts of interest among shareholders, other
stakeholders and the public at large. As most firm-level
corporate governance mechanisms were originally devel-
oped to protect shareholder interests (Fama 1980), it is by
no means a foregone conclusion that ‘good’ corporate
governance is also beneficial to the interests of other
stakeholders and civic society.
Hypotheses Development
In situations where goods, labour and capital markets are
not perfectly competitive, agency theory suggests that
managers might be able and willing to abuse their power to
exploit the firms’ shareholders as well as other stakeholders
(Hermalin and Weisbach 1998; Haniffa and Cooke 2002).
In such circumstances, when external corporate governance
fails, internal corporate governance mechanisms, in par-
ticular boards of directors, are expected to play a key role
in supervising managers and holding them to account
(Fama 1980; Hermalin and Weisbach 2003; Li et al. 2008;
Guest 2009). While directors in non-financial companies
are usually expected to oversee managers predominantly in
the interest of shareholders, financial services regulation
extends the fiduciary duties of directors of banks to
depositors and regulators (Pathan and Skully 2010),
although the election of the directors remains the purview
of shareholders.
The way that boards discharge their duty of supervision
and control depends not only on their fiduciary duties, but
also on their membership and organisation. For example,
Pathan’s (2009) research on large US bank holding com-
panies indicates that between 1997 and 2004, CEO power
and board structure were related to banks’ risk taking. The
findings do not only show that board characteristics, such
as board independence and CEO duality, can impact on
firm behaviour; but they also demonstrate the importance
of differences in stakeholder interests. The pre-credit
crunch study indicates that strong, independent boards of
directors successfully put pressure on banks’ management
to increase risk taking for the short-term benefit of share-
holders and the detriment of depositors, bondholders and
risk-averse CEOs. By contrast, banks with strong CEOs
tended to have a lower risk profile, as managers were able
to accommodate their personal inclination for risk-
Evidence from the US Banking Sector
123

aversion, which incidentally also benefitted other stake-
holders such as depositors and bondholders.
In the context of CSR disclosure, differences in interests
of managers, shareholders and other stakeholders are also
likely to play a role in how corporate governance structures
affect firm behaviour. However, in this case, as discussed
earlier, it appears that shareholders’ and other stakeholders’
interests might be more closely aligned.
Board Independence
From an agency theoretical perspective, boards with a
high proportion of independent directors are presumed to
be more effective in monitoring and controlling man-
agement. They are, therefore, expected to be more
successful in directing management towards long-term
firm value enhancing activities and a high degree of
transparency. Independent directors are supposed to be
able to assess management performance more objectively
than executive directors, as they are less closely
involved in the development of firm strategies and
business policies. In addition, independent directors are
less dependent on the CEO’s goodwill than executive
directors and affiliated non-executive directors with
business links to the firm. Therefore, a higher proportion
of independent directors on the board is expected to lead
to better monitoring and control of management (John
and Senbet 1998; Ahmed et al. 2006; Cheng and
Courtenay 2006).
Moreover, independent non-executive directors’ remu-
neration is not tied to the firm’s financial performance and
growth, unlike the remuneration of top executives and the
business prospects of affiliated non-executive directors.
Consequently, independent directors are expected to be less
focussed on short-term financial performance targets and
more interested in measures which enhance firms’ long-
term sustainability, such as engaging in and reporting on
CSR (Ibrahim et al. 2003). Banks with independent boards
are, therefore, expected to display a greater engagement in
CSR and CSR reporting (Jamali et al. 2008; Arora and
Dharwadkar 2011).
Indeed, empirical research suggests that independent
directors are more supportive of firms’ investment in CSR
activities (Johnson and Greening 1999) and pay more
attention to the perception of the firm’s social impact than
executive or affiliated non-executive directors. Moreover,
prior studies indicate that boards of directors with a high
proportion of independent directors tend to facilitate a
comparatively high degree of transparency and voluntary
disclosure (Cheng and Courtenay 2006; Patelli and Pren-
cipe 2007; Donnelly and Mulcahy 2008; Li et al. 2008;
Chau and Gray 2010). This suggests that independent
directors are likely to support the disclosure of CSR
activities to reduce information asymmetry between
insiders and outsiders. This leads to our first hypothesis.
H1 A higher degree of board independence is positively
related to CSR disclosure.
Board Size
Considering group dynamics, smaller boards are often
expected to be more effective at monitoring and controlling
management than larger boards. Due to their limited size,
they are expected to benefit from more efficient commu-
nication and coordination, as well as higher levels of
commitment and accountability of individual board mem-
bers (Ahmed et al. 2006; Dey 2008).
However, the drawback of small boards is that the
workload of individual members tends to be high, which
might limit the monitoring ability of the board (John and
Senbet 1998). Moreover, smaller boards can draw on a less
diversified range of expertise than larger boards, which can
impact on the quality of the advice and monitoring offered
(Guest 2009).
Empirical research suggests that board size is deter-
mined by a variety of factors including industry, firm size
and the complexity of the firm’s business (Krishnan and
Visvanathan 2009; Pathan 2009). As commercial banks
are complex organisations that are subject to wide-ranging
regulation (Grove et al. 2011), we expect that in this
context, workload considerations are of ultimate impor-
tance. Hence, we expect that larger boards will be better
able to direct management to engage in CSR activities
and to effectively communicate their social performance
to the bank’s stakeholders. This leads to our second
hypothesis.
H2 Board size is positively related to CSR disclosure.
CEO Duality
Agency theory suggests that managers’ private interests
are likely to impact on the degree to which they engage in
CSR activities and CSR disclosure. In this context, CEO
duality can be seen both as a sign and an instrument of
managerial power. CEOs are more likely to be appointed
as chairs of the boards of directors if they have a suc-
cessful track record or if they control a large proportion
of the firm’s shares (Hermalin and Weisbach 1998).
Moreover, as chairs of boards of directors have the ability
to set the board’s agenda and influence the information
provided to the other board members, CEOs who also act
as chairs can hide crucial information more easily from
other, in particular non-executive, directors (Haniffa and
Cooke 2002; Li et al. 2008; Krishnan and Visvanathan
2009). Being chair might also enable CEOs to influence
M. I. Jizi et al.
123