Complementary or Substitutive Effects? Corporate Governance Mechanisms and Corporate Social Responsibility

Governance Mechanisms and CSR

There have been a vast number of studies (e.g., Arora & Dharwadkar, 2011; Graves & Waddock, 1994; Johnson & Greening, 1999; Kock et al., 2012) that examine the relationship between corporate governance and CSR. On the basis of agency theory (Eisenhardt, 1989; Jensen & Meckling, 1976), most studies emphasize the monitoring roles by large shareholders and independent boards or the incentive alignment by managerial stock ownership and compensation structure. Agency theory assumes that corporate executives will pursue self-interest without considering the interests of various stakeholders, unless they are properly monitored or provided with appropriate incentives (Shleifer & Vishny, 1997).

Although agency theory (Eisenhardt, 1989; Jensen & Meckling, 1976) proposes that effective corporate governance leads to better financial outcomes, it is not clear whether effective corporate governance mechanisms also improve nonfinancial social outcomes, such as CSR. In fact, the inconsistencies in the empirical findings on the relationship between CSR and financial performance add to this lack of clarity. Previous studies reported inconclusive, and in some cases even contradictory, results for the relationship between CSR and financial performance, pointing in different causal directions (e.g., Marom, 2006; McWilliams & Siegel, 2000; Waddock & Graves, 1997; H. Wang, Choi, & Li, 2008). If governance entities (e.g., large shareholders, boards of directors) assume that socially responsible decisions enhance a firm’s financial performance (i.e., positive relationship), effective governance mechanisms may promote CSR. In contrast, if governance entities assume that CSR engagement does not improve a firm’s financial outcomes (i.e., negative relationship), effective governance mechanisms may discourage CSR since they may perceive CSR as an overinvestment or a waste of valuable resources.

As such, it is not surprising that the relationships between corporate governance mechanisms and CSR have been found to be inconclusive. Several researchers (e.g., Coffey & Fryxell, 1991; Graves & Waddock, 1994; Sethi, 2005) found that effective monitoring by large shareholders and independent boards had a positive impact on CSR. If a strong monitoring mechanism leads top managers to make decisions aligned with the shareholders’ long-term interests (Shleifer & Vishny, 1997), a high level of monitoring by large shareholders and independent boards may encourage firms to actively engage in CSR. However, others (e.g., Arora & Dharwadkar, 2011) found that monitoring mechanisms had a negative impact on CSR because large shareholders and boards of directors could be more shortsighted with respect to the firm’s financial performance (Guthrie & Sokolowsky, 2010; Oh, Chang, & Cheng, 2016). If CSR investment pays off over the long term, ¹ as a few studies (e.g., Burke & Logsdon, 1996; T. Wang & Bansal, 2012) claim, large shareholders and boards of directors who might focus on short-term economic gains may hinder a firm from proactively seeking CSR engagement.

Similarly, the empirical findings on the effects of incentive alignment on CSR are also mixed. Some studies (e.g., Deckop, Merriman, & Gupta, 2006; Johnson & Greening, 1999; Kock et al., 2012) found that incentive alignment was positively associated with CSR. Executives’ and shareholders’ interests may converge through effective incentive alignment mechanisms (e.g., executive shareholdings and long-term incentive pay) that are designed to result in better social performance, if CSR is expected to enhance the firm’s long-term value (Waddock & Graves, 1997; T. Wang & Bansal, 2012). In contrast, other studies (e.g., Arora & Dharwadkar, 2011; Oh et al., 2011) found a negative relationship between incentive alignment and CSR.

These mixed findings on the relationships between “effective” governance mechanisms and CSR call for a reorientation of research to enhance our understanding of the complex mechanisms of corporate governance as antecedents of CSR. We assume that one of the major pitfalls in the previous studies is an oversimplified view of governance mechanisms based on an assumption of independence and a lack of understanding of the possible joint effects of various governance mechanisms on CSR. In order to address these limitations, we rely on a “bundle of governance mechanisms” perspective (Rediker & Seth, 1995: 87).

Corporate Governance Mechanisms as a Bundle

A number of researchers (e.g., Hoskisson et al., 2009; Schepker & Oh, 2013; Yoshikawa, Zhu, & Wang, 2014) suggest that it may not be reasonable to assume that each governance mechanism functions independently. In particular, not all governance practices are the same even though they may share a common goal (i.e., minimizing agency costs); rather, each governance practice has distinct characteristics, roles, and functions. For example, the degree to which the economic wealth of a governance entity is directly tied to a firm’s financial outcome varies. Blockholders’ ownership directly ties the value of their investment to a firm’s stock market performance, whereas nominating a greater number of outside directors has no bearing on a governance entity’s investment. In this sense, even though blockholders and independent boards both serve as monitoring mechanisms, they may have different strategic implications. Likewise, although both executives’ shareholdings and long-term variable pay serve as incentive alignment mechanisms, the two practices are different. Executives’ shareholding requires their capital commitment and gives them voting rights for the firm control, but long-term variable pay does not have such characteristics; rather, it merely serves as a contract aiming to increase the firm’s long-term profits. Given these subtle differences in the characteristics, roles, and functions of each governance practice, it is feasible that firms are likely to use different configurations of governance mechanisms depending on their own circumstances.

Departing from the simplistic “independence” assumption, we contend that organizational outcomes can be “dependent on the effectiveness of the bundle of governance mechanisms” (Aguilera et al., 2012: 381). Since multiple corporate governance mechanisms coexist within an organization, they “collectively constitute the context of governance environments” (Yoshikawa et al., 2014: 253) and influence subsequent organizational decisions and outcomes. Thus, in order to better explain the effect of certain governance practices on organizational outcomes, it is necessary to consider a set of other interrelated governance mechanisms (Desender, García-Cestona, Crespi, & Aguilera, 2013). Following this “bundle of governance mechanisms” notion, we propose that corporate governance mechanisms will be more or less effective only in certain combinations, depending on how firms use different configurations of them. A number of studies have confirmed this so-called bundle approach. For example, Desender et al. (2013) showed that a board’s monitoring function is contingent on ownership characteristics, such as the type of controlling shareholder. Ward et al. (2009) also noted that firm performance is determined by the conditions under which various monitoring functions and incentive alignments interact with each other.

Regarding the interactive effects of governance bundles on organizational outcomes, there are two competing perspectives—governance mechanisms as complements and as substitutes. In other words, various governance mechanisms can either complement or substitute for each other in affecting organizational outcomes. Two mechanisms interact as “complements (substitutes) if the marginal benefit of each activity increases (decreases) in the level of the other activity” (Siggelkow, 2002: 901). In the corporate governance and CSR context, when complementary effects exist, if one governance practice is strengthened, the marginal benefit of the other governance mechanism on CSR increases. For example, if the positive effect of an independent board on CSR becomes stronger (i.e., has a greater marginal benefit) when there is a high level of TMT’s long-term incentive pay (compared to when there is a low level of incentive pay), there is a complementary effect between board independence and the TMT’s long-term incentive pay. On the contrary, when substitutive effects exist, if one governance practice is enhanced, the marginal benefit of the other governance mechanism on CSR decreases. For instance, if the positive effect of an independent board on CSR becomes weaker (i.e., has a smaller marginal benefit) when there is a high level of blockholder ownership (compared to when there is a low level of blockholder ownership), there is a substitutive effect between board independence and blockholder ownership.

The complementary perspective suggests that multiple governance mechanisms together increase shareholders’ wealth in a synergistic fashion (Hoskisson et al., 2009; Schepker & Oh, 2013; Schmidt & Spindler, 2002). That is, firms can maximize shareholders’ long-term value when both effective monitoring and incentive alignment schemes are exercised simultaneously. For example, Hoskisson et al. (2009) reported a complementary relationship between monitoring and bonding. Schepker and Oh (2013) also found that firms with both effective monitoring and incentive alignment were more likely to repeal poison pills in a pattern of strong corporate governance. Furthermore, Misangyi and Acharya (2014) found that high profits are obtained when CEO incentive alignment and monitoring mechanisms work together as complements.

In contrast, the substitutive perspective suggests that shareholders’ value maximization does not require the presence of as many governance mechanisms as possible. This perspective assumes that using multiple governance mechanisms is costly and may not be efficient in terms of cost-benefit analysis (Rediker & Seth, 1995). Indeed, the heavy use of governance mechanisms results in higher costs for firms (e.g., providing executives with sizeable stocks and long-term incentive plans, simultaneously). In addition, it has been argued that there may be “diminishing behavioral returns” (Zajac & Westphal, 1994: 122) associated with adopting multiple governance mechanisms. In this paper, we adopt both complementary and substitutive frameworks to examine the interactive effects of multiple governance mechanisms on CSR.

Complementary Effect Hypothesis

A number of previous studies found that effective monitoring (e.g., Graves & Waddock, 1994; Sethi, 2005) and incentive alignment (e.g., Johnson & Greening, 1999; Kock et al., 2012) had a positive impact on CSR. This is because corporate managers would likely pursue immediate self-interest, and thus avoid investments that pay off over the longer term (e.g., CSR) unless they are properly monitored or provided with appropriate incentives (Shleifer & Vishny, 1997). Thus, a number of previous studies (e.g., Deckop et al., 2006; Johnson & Greening) argued that strong governance tends to encourage managers to engage in CSR.

One group of researchers (e.g., Rediker & Seth, 1995; Zajac & Westphal, 1994) used the concept of cost and benefit analysis in explaining the effects of multiple governance mechanisms, as a bundle, on organizational outcomes. They argue that multiple governance mechanisms can act as complements when they “mutually increase their benefits . . . and/or mutually reduce their disadvantages or costs” (Schmidt & Spindler, 2002: 319). In our research context, this implies that if the marginal benefit of one governance practice on CSR increases when another practice exists, both mechanisms can be complementary. The idea of complementarities suggests that governance mechanisms become more effective through “mutual enhancement” when they are combined (Aguilera et al., 2008). Thus, the simultaneous operation of specific combinations of governance practices is necessary to maximize corporate social outcomes. An effective governance structure that promotes CSR is characterized by more cumulative mechanisms for monitoring and incentive alignment, thereby inducing synergistic effects among governance practices.

For example, an independent board can be more effective in enhancing CSR when it is complemented with a long-term incentive plan for executives. When executives are compensated by long-term incentives that motivate them to pay more attention to CSR (Deckop et al., 2006), the agency problem is less severe; thus, the need for monitoring by another governance entity becomes less necessary. Independent boards play both monitoring and resource provision roles (Hillman & Dalziel, 2003); therefore, when such long-term incentives for executives are in place, outside directors are more likely to be devoted to providing resources that are valuable in managing various stakeholders (Johnson & Greening, 1999), instead of focusing on monitoring roles to reduce managerial opportunism. Their resource provision contributes not only to the firm’s financial goals but also to nonfinancial social goals because outside directors are “very conscious about the needs and expectations of the various constituencies of their firms” (J. Wang & Dewhirst, 1992: 120). Likewise, when executives are already properly monitored by blockholders, the agency problem is less likely to occur. In this case, outside directors have room to leverage more resources to manage external constituencies and improve a firm’s social reputation. In contrast, if there are no other governance practices that can reduce the agency problem, outside directors have to pay greater attention to monitoring roles (Walsh & Seward, 1990), thus diminishing their effectiveness in providing resources for dealing with a firm’s relationships with a variety of stakeholders.

The empirical findings based on the complementary view (Rutherford, Buchholtz, & Brown, 2007; Schepker & Oh, 2013) showed that the prevalence of one governance mechanism (e.g., effective monitoring) was positively associated with the other governance mechanism (e.g., incentive alignment), inducing synergistic effects among governance practices. For example, Rutherford et al. (2007) found that a board’s information-gathering behavior is positively associated with CEO pay tied to firm performance, suggesting information and managerial control mechanisms act as complements. Schepker and Oh (2013) also reported that firms with both effective monitoring and incentive alignment tend to repeal poison pills in a pattern of strong corporate governance. Taken together, we propose that multiple governance mechanisms could work as complements to promote CSR.

Substitutive Effect Hypothesis

An alternative to Hypothesis 1 is that the governance mechanisms substitute for each other in promoting CSR. Given that governance decisions involve resource allocation, there should be costs associated with the use of governance instruments for monitoring and incentive alignment. As such, there are possible cost-benefit trade-offs between using monitoring mechanisms and using incentive alignment to control managerial behavior (Beatty & Zajac, 1994). In general, since using multiple governance mechanisms may incur substantial costs that may overweigh the potential benefits, the use of multiple mechanisms is not always ideal (Schepker & Oh, 2013). Rather, “systematic balance between governance devices” (Hoskisson et al., 2009: 58) can be more desirable to the firm. In addition, there may be “diminishing behavioral returns” (Zajac & Westphal, 1994: 122) in strengthening the effects of governance mechanisms on CSR when adopting multiple governance mechanisms. All arguments above indicate that governance mechanisms could act as substitutes rather than complements for organizational outcomes.

In the specific context of CSR, for example, if large blockholders properly monitor executives to reduce their self-serving behavior, additional monitoring by another governance entity may be redundant and therefore not necessary. Blockholders may put pressure on executives to generate financial outcomes over social outcomes (Oh et al., 2016), especially if they assume that CSR does not always lead to better financial performance. In this situation, additional monitoring by an independent board to achieve the firm’s profit goals would not significantly affect that firm’s CSR investment decision because executives would be warned not to overinvest in CSR. Likewise, even though a long-term compensation structure encourages CSR to a certain degree (e.g., Deckop et al., 2006), executives are likely to avoid excessive CSR engagement if there is strong pressure from blockholders, making the impacts on CSR of long-term incentives for top managers less significant.

In a similar vein, if top managers are granted substantial shares through stock options or stock reward plans, in many cases, they are not allowed to vest in their stocks in the short term. For example, many U.S. firms allow executives to vest in their stocks after a substantial period of time (see Westreich, 1999). As such, top managers are likely to pursue the firm’s long-term success through strategic investments that can be realized over a longer period of time. If executives believe that investing in CSR pays off over the long term (Burke & Logsdon, 1996; T. Wang & Bansal, 2012), firms will be more likely to promote CSR. In this case, firms may not need to implement long-term incentives for top managers (e.g., Deckop et al., 2006), which can play a similar role as stock options in promoting CSR.

Hence, if firms increase any governance mechanism—either monitoring or incentive alignment—for CSR when other governance practices are present, the costs of exercising additional governance instruments may outweigh the benefits, as the substitutive view suggests. In such cases, adopting multiple governance mechanisms at the same time is not likely to lead to proactive CSR; thus, the marginal effect of each governance mechanism will not increase (or may even become negative). Some empirical studies support this substitutive view (e.g., Randøya & Goel, 2003; Rediker & Seth, 1995; Zajac & Westphal, 1994) by showing that prevalence of one governance mechanism leads to the lack of other governance mechanisms. For instance, Zajac and Westphal (1994) found that when monitoring processes are in place, firms are less likely to use long-term incentive plans for CEOs. Rediker and Seth (1995) also found substitutive relationships between the monitoring potential of the board of directors and alternative governance mechanisms, including the incentive effects of managerial equity ownership. Furthermore, Randøya and Goel (2003) argued that many governance mechanisms in family firms are not efficient. They noted that since family firms do not have principal-agent problems, increasing the monitoring function or providing incentive alignment is not likely to improve organizational outcomes. Taken together, we propose that multiple governance mechanisms could work as substitutes to promote CSR.

Data and Sample

The sample for this study was initially derived from GMI Ratings (formerly titled Corporate Library), a specialized corporate governance database, for the years of 2004 to 2010. All our sample firms are publicly traded firms in the United States and have CSR data in the subsequent year (i.e., 2005–2011) assessed by Kinder, Lydenberg, Domini Research and Analytics (KLD). We also used a number of archival sources, including Standard and Poor’s Compustat for firm-level data and ExecuComp for executive compensation data. As a result of the lack of full data availability, our final sample size was 8,072 firm-year observations from 1,559 firms.

Measurement of Variables

Statistical Analysis

Our dataset has both cross-sectional and time-series components, which violates the assumptions of independence across observations and prevents us from using ordinary least squares regressions. In addition, governance mechanisms and CSR may be endogenously related. Thus, we used the Hausman–Taylor estimation (Hausman & Taylor, 1981), which allows us to eliminate the bias in parameter estimates stemming from endogenous unobserved effects by specifying different subsets of variables that were assumed to be endogenous. This method provides an improvement over the fixed-effects and random-effects models. Unlike the fixed-effects model, it allows for the estimation of regressors that are invariant over time (Greene, 2003), such as industry effects. Compared to the random-effects models, it addresses the endogeneity problem by using both the between-variation and within-variation of the exogenous variables as instruments for the specified endogenous variables (Baltagi, Bresson, & Pirotte, 2003). We also evaluated the multicollinearity by using variance inflation factors (VIFs). The mean VIF value is 1.97, and they ranged from 1.01 to 5.30. The range of VIFs falls below the conventional threshold of 10 (Neter, Wasserman, & Kutner, 1985), suggesting that our data do not have multicollinearity issues.

The complementary or substitutive effects of governance mechanisms on CSR can be tested by specifying interaction terms and examining the marginal benefit of one governance mechanism on CSR depending on the levels of the other governance mechanisms (Poppo & Zenger, 2002; Siggelkow, 2002). Our tests based on interactive effects rely on one of the most commonly used complements/substitutes assessment models in the field of economics (for details, see Topkis, 1998; Vives, 1990). Below are the conditions under which complementary or substitutive matching occurs:

X and Y denote any given corporate governance mechanisms, whereas H and L denote high levels and low levels of mechanisms in use, respectively. The gain from any match can be represented by an increasing, positive-valued function f, which gives the match output f (X, Y) for any pair of variables X and Y. For example, suppose f (X, Y) is the PO (X) and TO (Y). Then X__H (vs. X__L) indicates a high (vs. low) level of PO, while Y__H (vs. Y__L) indicates a high (vs. low) level of TO. If the PO and TO levels interact as complements, the marginal gain between the high level of outside directors and the low level of outside directors should be greater when they work under a higher TO, that is, f (X__H, Y__H) – f (X__L, Y__H), rather than under a lower TO, that is, f (X__H, Y__L) – f (X__L, Y__L). On the contrary, if the PO and TO levels interact as substitutes, the marginal gain between the high level of outside directors and the low level of outside directors should be greater when they work under a lower TO rather than under a higher TO. Empirically, comparison of these conditions is conducted by creating interaction terms and comparing the marginal returns (i.e., examining slopes in the graph) for each combination. To examine significant interaction effects more closely, we plotted the simple slopes of one governance mechanism–CSR regression at 1 SD below the mean and 1 SD above the mean of another governance mechanism, consistent with Aiken and West’s (1991) recommendation.

Supplemental Analyses

We conducted a number of alternative analyses to examine the robustness of our results. First, we ran alternative models, assuming that firm performance and organizational slack variables (ROA, market-to-book ratio, current ratio, and debt-to-asset ratio) are also endogenous. The results of this alternative analysis remained the same. Second, we used industry dummy variables based on the two-digit SIC code as an alternative way to control for industry effects. The results are similar to what we reported in this study. Third, we conducted sensitivity analyses using fixed-effects panel regression models ² because the Hausman test (p < .001) suggests that the fixed-effects model is more appropriate than the random-effects model. We also conducted population average models, based on the generalized estimating equation approach. Our empirical findings are all confirmed across these alternative models with slightly different coefficients and levels of significance. ³

Theoretical and Practical Implications

Our findings point to some important theoretical implications for corporate governance and CSR research and suggest a number of opportunities for future research. First, our findings suggest that the independence assumption for corporate governance mechanisms should be revisited; instead, researchers need to consider the interdependence among multiple governance mechanisms, as delineated clearly in the notion of “bundle of governance mechanisms.” For instance, firms may want to reinforce long-term incentive compensation for top managers as a way to promote CSR. This decision may not be as effective as expected if top managers already own a significant amount of equity (see Model 3 results displayed in Fig. 2) or if blockholders own a considerable amount of shareholdings (see Model 5 results shown in Figure 3). However, this decision can become more effective in promoting CSR if more outside directors are assigned to the board (see Model 7 results displayed in Figure 5). As such, this study theoretically extends the validity of corporate governance’s “bundle approach” to the context of a firm’s social responsibility and offers important implications for organizations in designing their corporate governance instruments.

Second, our findings can provide some insights into why previous findings on the relationship between governance mechanisms and CSR have been mixed. For instance, previous studies that reported a nonsignificant relationship between board independence and CSR might have been conducted under conditions of top managers owning high levels of shareholding (as shown with a solid line in Figure 4), whereas those reporting a positive relationship might have been conducted under conditions of top managers owning low levels of shareholding (as shown with a dotted line in Figure 4). Similarly, previous research might have reported a nonsignificant effect of TMT incentive on CSR because it had been tested unobtrusively under conditions of a low level of board independence (as shown with a dotted line in Figure 5), whereas a positive effect might have been reported when tested under conditions of a high level of board independence (as shown with a solid line in Figure 5). Therefore, future research should investigate various “interactions” between governance mechanisms associated with organizational outcomes in order to generate more accurate interpretations and implications.

Third, our results provide overall support for the substitutive view of governance mechanisms. For instance, if blockholders own substantial shares, additional board independence has a limited marginal benefit to encouraging CSR engagement (see Model 2 results displayed in Figure 1). Similarly, if an effective incentive alignment for TMTs already exists, then another incentive mechanism may not be necessary (see Model 3 results shown in Figure 2). These results suggest that for firms to promote CSR, they do not necessarily have to adopt as many monitoring mechanisms or incentive alignments as possible.

Finally, our findings imply that what economists would call an “equifinality” (Gresov & Drazin, 1997; Rediker & Seth, 1995: 98) of governance bundles exists, such that different combinations of governance practices can yield similar social outcomes. In particular, as a result of the structural constraints and limited resources in organizations, most firms may not be able to adopt as many effective governance practices as possible simultaneously. As such, firms should be strategic in considering trade-offs among different types of governance mechanisms and should take a bundle approach in designing an effective governance mechanism to promote CSR. If the use of specific governance practices is constrained, firms can adjust other governance practices to reach equifinality, which suggests that organizations have strategic choice or flexibility in designing a bundle of governance practices. For example, when there is a lack of blockholders due to a large market cap (i.e., it is difficult for any single investor to own more than 5% of shares of a firm with a large market cap), firms may strategically strengthen the executives’ compensation as an alternative solution to promoting CSR with equal effectiveness.

In addition to its theoretical contributions, our study provides some practical implications. Our findings suggest that key decision makers need to better understand how multiple governance mechanisms interact with one another to enhance a firm’s social performance. For instance, firms can reach their CSR goals by assigning a sufficient number of outside directors without issuing significant stocks to top managers. Increasing the number of outside directors, however, could be effective only when the level of blockholder ownership is low. Likewise, firms do not have to offer higher levels of incentives to top managers if the top managers already own considerable equity. Thus, to better manage all arrangements, firms should conduct a strategic cost-benefit analysis because adopting or changing governance practice is not without cost. Nonetheless, firms need to make efforts to achieve a synergistic effect in implementing governance mechanisms to maximize CSR, even though various stakeholders may have different views on the preferred level of CSR. For example, we found that firms can enhance the effectiveness of TMT incentive pay on CSR by assigning more outside directors. Taken together, in order to maximize CSR, firms should find an “optimal” balance between monitoring and incentives by specifying how each unique bundle of governance mechanisms works for CSR engagement.

Limitations and Future Research

This study has a number of limitations. First, our study used proxy measurements for corporate governance mechanisms. For instance, we assume that the proportion of independent outside directors reflects the level of a board’s vigilance, and the amount of executive equity ownership indicates the degree of incentive alignment, which is a conventional approach in corporate governance research. However, given that the actual agency costs, the degrees of monitoring roles, and incentive alignment are not easily observable (Godfrey & Hill, 1995), future studies could examine the black box of the characteristics that make organizations more effective in monitoring managerial behaviors and incentivizing executives.

Second, we focused on BO and PO as monitoring mechanisms and on TO and TI as incentive alignments. However, future research could examine how other corporate governance mechanisms, such as the existence of certain board committees, board member diversity (e.g., proportion of female directors), shareholder activism, and antitakeover provisions interactively influence CSR activities, thus providing more comprehensive insights into the effects of corporate governance on firms’ social performance. Also, while our results found strong support for the substitutive effect, we acknowledge that specific instruments (or specific ways of demarcating instruments) may deviate from the basic logic that multiple instruments may have similar objectives. For example, incentive alignment mechanisms can be separated for CEOs from TMT members, and TMT incentives can possibly complement the effects of CEO incentives on organizational outcomes (Carpenter & Sanders, 2002). Furthermore, future research should recognize that not all outside blockholders have the same motivation to monitor CSR decisions (Borokhovich, Brunarski, Harman, & Parrino, 2006).

Third, while the KLD data used in our study have been widely employed and accepted in CSR research (Deckop et al., 2006), previous studies (e.g., Chatterji, Levine, & Toffel, 2009; Hart & Sharfman, 2015) have noted that they are not without limitations. We encourage future studies to consider other variables to measure a firm’s social responsibility, such as a survey of executives and pressure group ratings. This could enhance the validity of our findings, as well as strengthen the argument on the relationship between corporate governance and CSR.

Finally, future studies can benefit from considering a broad range of other important factors that drive CSR. For example, by limiting our sample to U.S. firms, we did not consider the role of institutional influence on CSR (Campbell, 2007). In addition, future studies can investigate firms’ stakeholder influence capacity, which may moderate the relationship between governance mechanisms and CSR, as prior studies suggested (e.g., Barnett, 2007). Also, we did not measure satisfaction with a firm’s past performance (Arora & Dharwadkar, 2011), which may be a factor that persuades owners, directors, and top managers that their firm can afford to be more philanthropic. Furthermore, future studies need to consider pressure from various stakeholder groups (Aguilera, Rupp, Williams, & Ganapathi, 2007). Future studies that rule out the roles of these other critical forces in determining CSR may provide a more rigorous test of our model.