the influence of executive board national culture …1077895/...the influence of executive board...

The influence of executive board national culture and board nationality diversity on corporate social performance in Western European non-financial firms

M.C. Huijsmans1

Supervisor: prof. dr. C.L.M. Hermes

January 13th, 2017

Abstract This paper examines the effect of executive board-level national culture and board nationality diversity on corporate social performance (CSP). The sample constitutes of 130 executive boards of non-financial firms from Germany, France, the Netherlands, Sweden, Switzerland and the UK over the time period 2010-2014. Based on the upper echelon theory and the notion of national culture, board-level national culture is determined across Hofstede’s dimensions of power distance, individualism, masculinity and power distance. In this paper, no evidence is provided of a significant relationship between board-level national culture and the corporate social performance of the firm. In addition, nationality diversity as a double-edged sword could both enhance and hamper CSP. In this research, no significant relationship between board nationality diversity and CSP is found. In conclusion, alterations of the board composition in terms of nationality in order to foster CSP seem unjustified based on the results of this paper. Key words: National culture, board culture, board diversity, nationality diversity, corporate social performance, upper echelon theory JEL classification: F66, M12, M14.

1Address: Abeelstraat 57, 9741 ED Groningen, the Netherlands. E-mail: [email protected]. Student number: s2154692 (UoG) and 930731 – T218 (UU).

M.C. Huijsmans | Thesis MSc IFM DD (2016) | 1-42

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1. Introduction

In recent times, two wide-ranging developments are changing the manner in which global business is

conducted. First, corporate board compositions once exemplary of ‘the old boys network’ rapidly change

to encompass more diversity, especially with regard to gender (e.g. Carter, Simkins, and Simpson, 2003;

Bear, Rahman, and Post, 2010; Post, Rahman, and Rubow, 2011; Harjoto, Laksmana, and Lee, 2015).

Furthermore, boards increasingly include directors from different nationalities as a resemblance of the

highly globalized economy. In addition to greater diversity in terms of nationality, the executive directors

from different countries bring the different norms and values of their national cultures into the firm. As

such, the cultural influences on decision making processes are subject to change due to an increased

number of foreign executives. Second, recent research in Nature indicates human-induced climate

change started from the beginning of the industrial revolution and has continued from the year 1830

onwards (Abram et al., 2016). Therefore, globalization prompts discussions regarding the sustainability

of current global supply chains for the provision of food, water, clean energy and other goods for

consumption. According to the OECD, adverse consequences arise due to the rapid pace of production,

trade and consumption of material goods in unprecedented quantities (Verdier and Huwart, 2013). As a

result, globalization is indirectly responsible for the increase in greenhouse gas emissions, deforestation

and impoverishing of biodiversity. Consequently, the manner in which corporations address these issues

and thus the extent of their corporate social performance (CSP) becomes progressively important. Both

academics and practitioners are interested in discovering the determinants of corporate social

performance and the area of board composition and diversity could be a fruitful and partly unexplored

avenue. In this paper, the aim is therefore to investigate whether executive board national culture and

board nationality diversity affect CSP.

In their seminal paper, Hambrick and Mason (1984) find executive’s individual characteristics affect

organizational outcomes. In the upper echelons theory, both strategic decisions and organizational

effectiveness are reflections of executives’ backgrounds, experiences, values and personalities (Hambrick

and Mason, 1984; Hambrick, 2007). As executives increasingly originate from different countries, these

backgrounds, experiences, values and personalities tend to become more varied. Consequently, the

board members bring together different national cultures into the firm. As national culture is widely

recognized as a critical factor in determining individual’s value and belief systems (Hofstede, 1991;

Thanetsunthorn, 2015), the national culture of directors is advocated to significantly affect decision

making processes and organizational outcomes. Previous literature indicates national cultural values on a


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country-level affect the corporate social performance of firms in the particular countries (Waldman, Sully

de Luque, Washburn, and House, 2006; Ringov and Zollo, 2007; Ho, Wang, and Vitell, 2012; Peng,

Dashdeleg, and Chih, 2012; Thanetsunthorn, 2015; Cai, Pan, and Statman, 2016). This paper is to the best

of our knowledge the first to combine the upper echelon theory and the notion of national culture to

examine whether board-level national culture affects the CSP of companies in a similar vein as at the

country-level. In this research, the focus is on board executive board members rather than non-

executives, as the former determine the strategic course for the company and implement the decisions

concerning CSP. The executive board is defined as the executive board, management board or

management team as stated in the annual report or on the corporate website of the company. In

general, boards whose directors’ nationalities exhibit national cultures that are on average more

oriented towards power distance, individualism and masculinity are expected to adversely affect CSP and

those avoiding uncertainty to positively impact CSP. However, the results implicate there is no significant

relationship between board national culture and CSP.

In addition to more cultural diversity, an increase in foreign or non-national directors (thus board

internationalization) is accompanied by an increase in board nationality diversity. The latter type of

diversity entails the effectiveness of group decision-making and cooperative processes based on

heterogeneity within the group based on nationality. Board nationality diversity could both enhance and

hamper CSP as previous literature indicates board diversity in general is a double-edged sword

(Hambrick, Cho, and Chen, 1996). On the one hand, increased nationality diversity entails the board

possesses a broader range of knowledge, information and resources that improves decision making

processes and decreases individual biases and prejudices (Estélyi and Nisar, 2016). As such, decisions

regarding CSR are enhanced and corporate social performance is ultimately increased. On the other

hand, increased nationality diversity results in the formation of sub groups, increased conflicts,

communication challenges and lower group loyalty and commitment which could negatively affect firm

and corporate social performance (Anderson, Reeb, Upadyay, and Wanli, 2011; Rao and Tilt, 2016).

Therefore, both a shortage and abundance of nationality diversity could negatively affect CSP in theory.

Based on the findings of this paper, there is no significant relationship between board nationality

diversity and the corporate social performance of the firm. The results even implicate the expected

inversed curvilinear relationship might be curvilinear (U-shaped). As such, a critical mass of board

nationality diversity would be required to experience an increase in CSP. However, drawing inferences is

hard as the relationship is insignificant at all customary significance levels.


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This paper contributes to the current literature in various ways. First, whilst national culture affects CSP

within certain geographic regions, the board-level effects of national culture remains under researched

(Harjoto et al., 2015; Thanetsunthorn, 2015; Frijns, Dodd, and Cimerova, 2016). As corporate social

responsibility is thriving in terms of relevance and attention, identifying determinants of CSP is of

importance to both academics and practitioners. We advocate this research is to the best of our

knowledge the first to address the relationship between national culture and CSP on board-level.

Second, this paper is among the first to link board nationality diversity to CSP. As board diversity is a

double edged-sword, nationality diversity could both positively and negatively affect CSP. Based on this

research, the theory seems incorrect due to the insignificant relationship and the opposite effects of a

shortage or abundance of board nationality diversity on CSP.

The practical implications of this study are the following. First, based on the upper echelon theory and

cultural research, certain national cultural attributes positively affect the corporate social performance

of the firm. When the corporation intends to foster CSP as a response to requests of its owners,

customers, employees and other stakeholders, executive board members of certain national cultural

backgrounds could be hired in theory. Second, Post et al. (2011) argue board diversification improves

certain aspects of corporate social responsibility and performance. As such, corporations could alter

their recruitment policies to include directors of various nationalities in order to foster board diversity

and hence corporate social performance. Both implications build on a positive notion of CSP that

ultimately leads to higher firm valuations (Bear et al., 2010; El Ghoul, Guedhami, Kwok, and Mishra,

2016), positive announcement returns (Flammer, 2015), lower cost of equity capital (Dhaliwal, Li, Tsang,

and Yang, 2011; El Ghoul, Guedhami, and Kim, 2011) and lower the cost of debt (Goss and Roberts,

2011). However, fostering CSP by altering the board composition to represent different national cultures

or a different level of nationality diversity seems unjustified due to the insignificant relationships in this

study.

The rest of this paper is structured as follows. First, a synthesis of the relevant literature is provided and

hypotheses are formulated in the literature review. Second, the data and methodology are discussed.

Third, the results are elaborated on in the results section. Finally, the paper is concluded with the

discussion and conclusion, a list of references and the appendices.


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2. Literature review

2.1 Board national culture and corporate social performance

Currently, board composition and board characteristics have been extensively researched based on

theoretical perspectives such as the agency theory and resource dependency theory. In their seminal

paper, Hambrick and Mason (1984) formulate an additional theoretical perspective and find that

executive’s individual characteristics affect organizational outcomes. In the upper echelons theory, both

strategic decisions and organizational effectiveness are reflections of executives’ backgrounds,

experiences, values and personalities (Hambrick and Mason, 1984; Hambrick, 2007). Based on extensive

cultural research, national culture is “widely recognized as the critical factor determining differences

between individuals’ and organizations’ values and belief systems, traditions, and customs from different

cultural backgrounds (Hofstede, 1980; Thanetsunthorn, 2015, p.39).” Hofstede (1980) describes culture

as homogeneous norms and values that are different between groups of humans and influence human

behavior. Cultural values are argued to be imposed onto a human being since birth and provide

restrictions and benefits (Luna and Gupta, 2001). Additionally, a culture is maintained and transferred

within the members of the group and affects decision making and behaviour at a later age (Arnould and

Thompson, 2005). Nonetheless, Frijns et al. (2016) state board nationality has been largely ignored

within board diversity research, whilst culture is one of the bases of decision-making and even

executives are not immune to cultural biases. In line with the upper echelon theory, Chin, Hambrick, and

Trevino (2013) observe values could enter into executive’s choices in two manners. First, the values

could directly influence the choice when the executive selects a course of action that suits his or her

values after evaluating the available options. Second, an executive unintentionally searches for

information and alternatives that suit his or her values and consequently perceives and interprets the

specific information in a value-congruent way. As a result, the values of executives have the potential to

affect corporate decision making processes and thus outcomes of corporate actions such as initiatives

that foster CSP (Chin et al., 2013). For example, Stulz and Williamson (2003) find national culture affects

financial choices and resource allocation. Therefore, directors with national cultures favouring CSR could

enhance the means available for green and social initiatives and increase the subsequent corporate

social performance.

In this paper, CSR is defined based on stakeholder theory as “actions on the part of the firm that further

the needs or goals of an identifiable stakeholder group or larger societal collective that go beyond

immediate legal requirements of the firm (Waldman et al., 2006, p.824).” As such, corporate social


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performance entails the performance in adhering to the needs and goals of identifiable stakeholder

groups or society at large. In the contemporary economy, corporate social responsibility and

performance have become strategic issues for companies that are critical items on board’s agendas

(Kakabadse, 2007). Despite endogeneity issues, enhanced CSP is believed to have a positive effect on

financial performance in terms of higher ROE and EBIT margins (Margolis and Walsh, 2003; Barta,

Kleiner, and Neumann, 2012). However, Friedman (1970) advocates the sole responsibility of a firm is to

increase the profits for its shareholders and therefore views CSP increasing initiatives as an implicit tax

that decreases performance and firm value. In addition, Nollet, Filis and Mitrokostas (2016) find CSP

negatively affects corporate financial performance and could only yield a positive long-run effect for the

governance pillar (ESG) after a certain threshold of governance-related investments in CSP is made. In

controversial industries, stakeholders could suspect that companies are trying to build positive

reputations by enhancing their corporate social performance and diverting the attention of their

negative impacts (Cai, Jo, and Pan, 2012; Moura-Leite, Padgett, and Galán, 2014). Therefore, the

corporate financial performance of the firm could decrease as stakeholder groups take action and

penalize the firm, e.g. by refraining from buying products or providing loans (Rodrigo, Duran, and Arenas,

2016).

On the other hand, enhanced corporate social performance yields higher firm valuations (Bear et al.,

2010; El Ghoul et al., 2016), positive announcement returns (Flammer, 2015), lower cost of equity capital

(Dhaliwal et al., 2011; El Ghoul et al., 2011) and lower the cost of debt (Goss and Roberts, 2011). In

addition, increasing CSP could cater to customers and attract employees that are responsive to

sustainable practices with the possibility to increase profitability in the end (McWilliams and Siegel,

2001). In this paper, high corporate social performance is implicitly assumed to be beneficial for

companies, despite extensive academic critique and ambiguity whether CSP could be insignificantly or

even negatively affecting corporate outcomes (Friedman, 1970; Nollet et al., 2016).

Within cultural research, the seminal work of Hofstede (e.g. 1980, 2001) provided the foundations of

numerous research avenues for years to come.2 The framework developed by Hofstede (1980) serves as

2 The work of Hofstede has been extensively used within academic research and is equally criticized. As a response, House et al. (2004) developed a comparable and arguable more comprehensive framework to compare cultures in terms of values and practices. However, data availability for the dimensions of House et al. (2004) is insufficient in regard of the scope of this research and therefore Hofstede’s (1980) cultural model with four dimensions is adopted.


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the basis on which national culture is based in this study and comprises of four different cultural

dimensions: individualism (IDV) versus collectivism, power distance (PDI), masculinity versus femininity

(MAS) and uncertainty avoidance (UA) which will be explained in turn shortly. First, in individualistic

societies social ties are loosely-knit as individuals primarily focus on their own interests and those of

their immediate families, as opposed to collectivistic societies that are more concerned about the

interests and welfare of the group (Hofstede, 1980). Second, power distance resembles the degree to

which societies accept and expect hierarchical order and inequality. Third, masculine societies are

characterized by increased value on competitiveness, achievement, assertiveness, power and material

reward for success as in contrast to feminine societies that tend to value relationships, cooperation,

caring, modesty and quality of life (Hofstede, 1980). Finally, uncertainty avoidance describes the degree

to which individuals in society accept uncertainty and ambiguity. A high score on the uncertainty

avoidance dimension entails a preference for rigid codes of conduct and strict laws, while a low score

yields more flexible attitudes and riskier behavior (Hofstede, 1980).

In this paper, the board-level national culture is advocated to influence decisions regarding CSR

initiatives and in turn affect the CSP of the firm. Therefore, this section continues with the formulation of

hypotheses regarding the impact of board national culture on CSP based on Hofstede’s (1980) four

cultural dimensions.

2.1.1 Power distance

In high power distance cultures, individuals tend to accept hierarchal order and inequality without

further justification (Hofstede, 1980). This tendency allows managers to pursue their personal interests

freely without questioning by other groups. Based on the agency theory (Ross, 1973; Jensen and

Meckling, 1976), executives will adhere to shareholders’ interests as their financial bonuses and job

security are tied to the performance evaluation of the owners of the firm. Therefore, shareholders’

interests are presumably prioritized over other stakeholder groups and society at large. In addition, high

levels of power distance are associated with polarization and low level of employee involvement in

decision-making processes that inhibit more inclusive, stakeholder-oriented approaches to management

(Ringov and Zollo, 2007). Moreover, high power distance decreases the dialogue between the company

and consumers that pressure for CSR related issues (Peng et al., 2012). As a consequence, CSP is

expected to be inferior for boards with more executives from power distant cultures.


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On the other hand, people in low power distance cultures strive for an equal distribution of power. As

such, corporate executives from these cultures are not entirely free to pursue their own interests. In

general, shareholders’ interests and managerial self-interest in financial terms are frequently aligned due

to governance structures. Based on the dimension of power distance, these executives are expected to

focus less on their self-interests and to increasingly adhere to stakeholder and minority shareholder

pressures due to more equal power distribution. Therefore, they are more likely to engage in CSR

practices and their firms exhibit a better corporate social performance (Thanetsunthorn, 2015).

Furthermore, Ringov and Zollo (2007) indicate social and environmental initiatives are more likely to

emerge and be openly discussed if power distance is low. Subsequently, low power distance should have

a positive impact on the timely recognition and remedy of social and environmental risks. Both examples

depict low power distance of boards to be favourable for CSR practices among the social and

environmental categories. Based on the abovementioned literature, the following hypothesis is

formulated:

Hypothesis 1a: Higher board-level power distance (PDI) adversely influences CSP

2.1.2 Individualism

In individualistic cultures, people primarily focus on their own interests and those of their immediate

families (Hofstede, 1980). As such, ties with individuals outside the family are rather loose and

membership of groups could be changed if required or desired. Individualists attach substantial value to

their personal time, freedom and independence and individual interests are regarded as more important

than group interests (Ho et al., 2012). Based on the agency theory (Ross, 1973; Jensen and Meckling,

1976), executives perform the role of agents in a principal-agent relationship with the firm’s owners and

are presumed to act solely out of self-interest. In general, governance systems are established by the

shareholders to both monitor and control performance and to incentivize goal-congruent behavior. As a

result, individual executives should act according to the shareholders’ interests to serve their self-

interest in terms of financial bonuses and job security. Therefore, the notion Friedman (1970) that the

sole responsibility of the firm is to increase profits for its shareholders seems more important than

stakeholders’ interests from group such as employees, customers and NGOs. Consequently, CSP will be

lower as individualistic executives are less concerned about the impact of business on society unless it is

their recognized self-interest (Ringov and Zollo, 2007). In regard of simplicity, shareholders are assumed

to be solely interested in shareholder value and do not pursue broader, non-financial goals. The latter

might present an inaccurate view of reality, as the type of ownership (e.g. family, institutional or state)


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could affect the company’s orientation towards CSR initiatives. However, this broader corporate

governance perspective remains outside the scope of this research.

On the contrary, people in collectivistic societies are more concerned about the interests and welfare

from the group rather than their personal interests (Ho et al., 2012; Thanetsunthorn, 2015). Therefore,

collectivists highly value the impact of business on society and how corporations fulfill their

responsibilities towards others. Following the stakeholder theory of Freeman (1984), individual

executives could subordinate their personal or corporate interests in favour of other stakeholder groups

or society at large. Consequently, individuals from more collectivistic societies are expected to

emphasize the broad range of stakeholders’ interests and conduct CSR practices accordingly. In line with

previous literature, the following hypothesis is stated:

Hypothesis 1b: Higher board-level individualism (IDV) adversely influences CSP

2.1.3 Masculinity

In masculine cultures, individuals regard competitiveness, achievement, power and material success as

desirable characteristics (Hofstede, 1980). In order to accelerate career advancement, individuals act

solely in the interest of the firm and neglect affairs that could negatively affect the competitive position

or financial result of the firm. Consequently, highly masculine societies assign little value to caring for

others, inclusion and solidarity (Ringov and Zollo, 2007). In the view of responsibility, the care for and

inclusion of (vulnerable) stakeholder groups with corporate decision making would positively affect CSP.

Furthermore, feminine societies favour relationships and cooperation (Hofstede, 1980). On the other

hand, cooperation is considered a sign of weakness in masculine societies (Ringov and Zollo, 2007) and

masculinity inhibits helping and cooperative behavior (Ho et al., 2012). As a result, close cooperation

with stakeholders such as consumers, suppliers and local communities risks being frustrated.

Consequently, when corporate executives originate from countries with masculine national cultures

stakeholders’ interests are taken less into account and CSP is expected to be inferior. Therefore, the

following hypothesis is stated:

Hypothesis 1c: Higher board-level masculinity (MAS) adversely influences CSP


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2.1.4 Uncertainty avoidance

According to Hofstede (1980), individuals in societies with a high score on uncertainty avoidance dislike

and are uncomfortable with uncertain and ambiguous situations. Therefore, rigid codes of conduct, strict

laws and regulations are preferred to minimize uncertainty (Thanetsunthorn, 2015). Uncertainty

avoiding societies are rule- and routine-oriented and should generally find it more difficult to adapt to

novel social and environmental demands and practices inherent to CSP (Ringov and Zollo, 2007).

However, Lee and Faff (2009) find companies with leading corporate social performance experience

reduced idiosyncratic risk. In addition, Sassen, Hinze, and Hardeck (2016) use a sample of over 8750

European firms and find higher CSP decreases total and idiosyncratic risk. With respect to social

performance, systematic risk is reduced as well. In the view of environmental risk, idiosyncratic risk is

generally reduced for all companies, whereas total and systematic risk are only lower for

environmentally sensitive industries. As result, individual executives from uncertainty avoidant countries

are more motivated to engage in CSR initiatives and thus increase CSP as a means to reduce firm risk.

Alternatively, individuals with a national culture that accept uncertainty to a greater extent are more

likely to take risks (Hofstede, 1980). The latter is highly correlated to taking socially undesirable actions in

terms of fraudulent behavior and accepted business practices. Therefore, corporate executives from

countries with low uncertainty avoidance could hinder the level of corporate social performance

(Rallapalli, Vitell, Wiebe, and Barnes, 1994). Following the existing literature, the subsequent hypothesis

is formulated:

Hypothesis 1d: Higher board-level uncertainty avoidance (UA) positively affects CSP

2.2 Board nationality diversity and corporate social performance

In addition to board national culture, the focus of this section is on board diversity and the impact on CSP

directly. In their recent paper, Harjoto et al. (2015) find that board diversity positively affects CSP with

gender, tenure and expertise diversity as the driving forces. The findings are consistent with the

stakeholder theory that board diversity enhances firms’ ability to satisfy the needs of their broader

groups of stakeholders (Freeman, 1984). With regard to gender diversity, the current literature is

extensive and derives the conclusion that gender diversity and more woman in the board results in

higher CSP (e.g. Bear et al., 2010; Zhang, 2012; Harjoto et al., 2015; Setó-Pamies, 2015). In addition, Hafsi

and Turgut (2013) argue that younger directors are more sensitive to the environment and ethical issues


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and possess of more energy and alertness to address these. Therefore, the age of directors is relevant in

considering the level of CSP as well.

In this paper, board national culture and the relationship with CSP are examined in the context of

increased board internationalization. As foreign or non-national directors are more prevalent in

corporate executive boards, diversity in terms of nationality changes as well. However, existing literature

considers diversity as a double-edged sword with both advantages and disadvantages resulting in a

debate on board homogeneity versus heterogeneity (Hambrick et al., 1996). On the one hand,

heterogeneous boards are at risk to be divided in sub groups which inevitably experience increased

challenges, conflicts and dissatisfaction that slow down decision making processes (Rao and Tilt, 2016).

Therefore, the firm’s ability to adapt to changes in the business environment might decrease which could

ultimately lower performance (Rivas, 2012). In addition, communication challenges, lower group loyalty

and commitment could negatively affect firm and corporate social performance (Anderson et al., 2011;

Rivas, 2012). On the other hand, the resource dependency theory indicates more diverse boards possess

a broader range of knowledge, information and resources that improves the quality of decision making

as individual biases and prejudices are reduced (Estélyi and Nisar, 2016). Furthermore, Nielsen and

Nielsen (2013) argue multinational teams integrate their diverse experiences which results in in-depth

discussions, consideration of various alternatives and generation of new ideas. As such, nationality

diverse boards are better at solving complex tasks and arrive at more innovative solutions. The latter is

especially relevant since broad and heterogeneous perspectives improve the quality of decisions

regarding the voluntary and highly complex engagements that foster CSP (Rao and Tilt, 2016). As a

consequence, heterogeneous top management teams achieve better results in high environmental

uncertainty that follows from increasing stakeholder pressures in the international domain (Nielsen,

2010). In addition, Kang, Cheng, and Gray (2007) advocate demographically diverse directors can help to

extend the domain of corporate governance beyond shareholders to other stakeholders. Following the

authors, greater board diversity leads to closer monitoring of management’s decisions related to CSP. As

such, the executive board members increasingly ensure that multiple stakeholders’ interests are

represented in the corporate governance of the firm and corporate decisions are favourable for

stakeholders.

In conclusion, nationality diversity broadens the perspectives and alternatives considered within highly

complex and uncertain decision making processes required to foster CSP. However, Frijns et al. (2016)


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argue that too much nationality diversity inhibits effective communication and decision making and

consequently adversely affect both firm performance and value. In a similar vein as with board

nationality diversity and firm internationalization, the effect of nationality diversity could be both

positive and negative and thus depict an inversed curvilinear (U-shaped) relationship (Schmid and Dauth,

2014). Therefore, the following hypothesis is formulated:

Hypothesis 2: There is an inversed U-shaped relationship between board nationality diversity and CSP

3. Data and methodology

3.1 Sample selection and data collection

Currently, there exists no complete database with archival data that covers the nationality of executives.

As a result, the data on board characteristics are hand-collected in a limited time span and therefore the

number of countries included in this research is limited. The sample consists of public companies listed in

the countries Germany, France, the Netherlands, Sweden, Switzerland and the UK at the beginning of the

year 2010. As the main aims of this paper are to assess the effect of board national culture and board

nationality diversity on CSP, countries in which companies generally employ a large extent of foreign

directors provide viable research settings. The latter differentiates boards in terms of national board

culture and largely prevents boards solely consist of national directors. As such, the problem of a high

correlation between the country-level and board-level cultural values is minimized. In their paper,

Jhunjhunwala and Mishra (2013) indicate 40-50% of the directors in the Netherlands, Switzerland and

the UK are non-nationals. In addition, Germany, France, the Netherlands, Sweden, Switzerland and the

UK are characterized by having the least companies without international directors worldwide

(Jhunjhunwala and Mishra, 2013). As a result, the countries are included in the research setting as these

rank highly in terms of board nationality diversity and thus differentiation in board national culture.

The initial sample consists of the 175 largest German, French, Dutch, Swedish, Swiss, and British firms

that comprised the stock indexes of Deutscher Aktienindex (DAX), Cotation Assistée en Continu (CAC 40),

Amsterdam Exchange index (AEX), OMX Stockholm 30 (OMX S30), Swiss Market Index (SMI) and the

Financial Times Stock Exchange 100 (FTSE 100) in 2010. Table 1 provides an overview of the number of

companies in each index. Due to time constraints, the number of companies included from the FTSE 100

index is capped to those 30 with the highest average market value in the year 2010.


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Table 1 Companies per stock exchange and country Country Stock index Number of firms Germany DAX 30 France CAC 40 40 The Netherlands AEX 25 Sweden OMX S30 30 Switzerland SMI 20 UK FTSE 100 30*

Total 175 *The FTSE 100 index generally includes a total of 100 firms. Due to time constraints, the 30 largest companies in the FTSE 100 are included in the sample.

The sample period of 2010-2014 is chosen as the most recent five-year time period for which CSP data

are completely available. Table 2 denotes the sample breakdown and number of firms excluded for a

particular reason. First, to be included in the final sample a firm has to be active and listed during the

entire sample period. If the latter condition is not sufficed, data on the dependent and independent

variables is unavailable. Consequently, four delisted firms and one merged company are removed from

the sample. Second, seven firms are cross-listed in two countries included in the research setting and

therefore included only once in the final sample. Third, two firms are double listed within the same

country and stock index and thus included only once in the final sample. In addition, firms with missing

data on the dependent variable are excluded in the statistical analyses due to the panel structure of the

data. Finally, 29 financial firms are removed as the different capital structures, extreme firm sizes and

occasionally highly negative financial performance distort the control variables. The final sample

comprises 130 firms and 650 firm-year observations over the time period 2010-2014.


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Table 2 Sample breakdown

The initial sample consisted of 175 firms comprising the DAX, CAC4 40, AEX, OMX S30, SMI and FTSE 100 indexes in 2010. Delisted and merged firms are delisted during the sample period. Cross-listed firm are listed in two countries of the research setting and included only once. Double listed firms are listed twice within the same stock index and thus removed. Firms with missing data on the dependent variable CSP_Index are excluded in the statistical analyses due to the panel structure of the data. Financial firms comprise companies with a SIC code between 6000 and 6999 and general industry classification between 4 and 6 and are removed from the sample. Number of removed firms Number of firms left Initial sample 175 Delisted 4 171 Merged 1 170 Cross-listed 7 163 Double listed 2 161 Missing data 2 159 Financial firms 29 130

Final sample 45 130

The data on corporate social performance and firm control variables such as firm size, ROA, leverage and

industry type are gathered from Thomson Reuters’ Asset 4 Database (ESG) database. Furthermore, the

data on executive board characteristics in terms of nationality, age, gender and board size are hand-

collected from annual reports and corporate websites. When the data from the annual reports and

corporate websites are incomplete or unavailable, complementary information is gathered from

BoardEx, Bloomberg Profiles, Thomson Reuters Company Profiles – People and Management Scope. In

this research, the executive board is defined as stated in the annual report or on the corporate website

by the company. In regard of the two-tier board governance structure, the separation between the

supervisory board and executive board is generally evident in Germany, France, the Netherlands,

Sweden and Switzerland. In these countries the executive board is denoted under names such as

executive board, executive management or management board. In the United Kingdom, a one-tier board

structure complicates the determination of the executive board. Despite this complication, the executive

directors should be identified as they determine the strategic course for the company and implement

these decisions. For the companies in the UK, the executive board consists of the executive directors in

the one-tier board. In general, the members of the extended executive board, extended management

board, extended management committee or similar entities with additional regional and functional

executives are excluded from the executive board.


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3.2 Definitions and measures

3.2.1 Independent variable – board national culture

In this paper, national culture is assessed with the initial four Hofstede (1980) dimensions of power

distance (PDI), individualism (IDV), masculinity (MAS) and uncertainty avoidance (UA). The data on

national culture at country-level are gathered from Hofstede’s personal website (Hofstede, 2015). In this

database, 70 countries are represented with complete data on the four dimensions per country.

Complementary data for the countries South Africa, Kenya and Lebanon that occurred in the sample are

collected from subsequent and supplementary research and added to the database (Hofstede and

Minkov, 2010). Initially, the values of the dimensions in replication studies of Hofstede’s original research

could range beyond a value of one hundred. In this paper, rescaled data are employed where the cultural

dimensions are scored on a scale of zero to one hundred to be able to use the complementary data from

the countries South Africa, Kenya and Lebanon. The minimum score of zero denotes collectivistic, power

distance rejecting, feminine and risk-taking national cultures, whereas scores close to the maximum of

one hundred entail a society with a national culture that is characterized as more individualistic,

subjected to power distance, masculine and uncertainty avoidant. The common assumption of Hofstede

(1980) is followed that cultural values remain relatively stable over time.

Thereafter, the nationalities of executives are hand-collected and matched with the country-level

cultural database. As stated in the literature review, Hofstede (1980) national culture entails

homogeneous norms and values that are different between groups of humans and influences human

behavior. As such, each executive is attributed the cultural values of the country of his/her nationality on

the dimensions of power distance, individualism, masculinity and uncertainty avoidance. Subsequently,

the individual executive’s scores on the cultural dimensions are arithmetically averaged to obtain a

board-level score for the cultural dimensions in a particular year. As a result, the variable board national

culture is defined in terms of Board_PDI (power distance), Board_IDV (individualism), Board_MAS

(masculinity) and Board_UA (uncertainty avoidance) as based on the average of the individual board-

level cultural attributes.

3.2.2 Independent variable – board nationality diversity

In addition to the relevance for board national culture, the nationality of directors is relevant from a

diversity perspective as well. Following previous literature, both insufficient and excessive diversity

within the board could hamper CSP performance (Estélyi and Nisar, 2016; Rao and Tilt, 2016). As a


16

measure of diversity based on nationality, the Blau index (1977) for heterogeneity within a group is

employed:

B = 1 - ∑ 𝑝𝑖2, (1)

where p denotes the proportion of individuals (executives) in a category and i is the number of

categories. B denotes the value of Blau_Index for board nationality diversity that ranges from 0-1, where

zero depicts a perfectly homogenous group and the maximum score of one indicates a perfect

heterogeneous group. The nationality of directors is measured as stated in the annual report, on the

corporate website and in the various databases.

3.2.3 Dependent variable – corporate social performance

The primary aims of this study are to assess the effects of board national culture and board nationality

diversity on corporate social performance. Corporate social performance could be measured with

different methods such as forced-choice surveys, content analysis of corporate documents (e.g. CSR

reporting), behavioral and perceptual measures and responsibility indexes or scales (Ioannou and

Serafeim, 2012). In this paper, CSP data are derived from the Thomson Reuters Asset4 (ESG) database

which has collected the information since 2002. The analysts gather over 900 data points per firm based

on objective and public available information and use these to calculate key performance indicators

which comprise scores on 18 categories within four pillars: economic, environmental, social and

governance. The work of Ioannou and Serafeim (2012) is followed to construct a composite CSP index

based on the environmental and social dimensions in which corporate social performance is measured.

Based on the description provided by Datastream, the environmental pillars measures a company’s

impact on living and non-living natural systems, including the air, land and water, as well as complete

ecosystems. This pillar typically includes measures regarding emission reductions, extent of eco-efficient

product innovation and efficient use of natural resources such as materials, energy and water. In

addition, the social pillar measures a company's capacity to generate trust and loyalty with its workforce,

customers and society. The performance is based on e.g. refraining from bribery, safeguarding human

rights, workforce diversity and ensuring safety and health of employees. This paper refrains from the use

of the governance pillar as it is mainly associated with corporate governance and shareholder protection

related aspects instead of the firms’ performance in corporate social responsibility related issues.


17

Based on Waldman et al. (2006) and Ioannou and Serafeim (2012), the convention within research using

ASSET4 ESG data is followed to assign equal importance and thus weights to the environmental and

social performance scores. Therefore, the variable CSP_Index constitutes the equally weighted average

index of the environmental and social scores for a firm in a particular year. As the ESG Asset4 pillar

scores range from zero to one hundred, the CSP_Index ranges from zero to hundred as well, where a

higher score yields a higher corporate social performance.

3.2.4 Board-level control variables

In previous literature, board diversity in terms of gender is attributed to higher corporate social

performance (e.g. Bear et al., 2010; Zhang, 2012; Harjoto et al., 2015; Setó-Pamies, 2015). The gender of

executives is listed as stated in the annual reports and the variable Gender is defined as the proportion of

female directors in the board of a company within a certain year.

In addition, Hafsi and Turgut (2013) argue that younger directors are more sensitive to the environment

and ethical issues and possess of more energy and alertness to address these. Therefore, the age of

directors at the beginning of the calendar year is controlled for. The latter is either directly collected

from the annual reports or calculated with the date of birth. The variable Age is the average age of the

executives within the executive board of a company in a particular year.

Furthermore, board size measured by the number of executive board members is controlled for as this

constitutes an important control variable in board diversity related research (e.g. Nielsen and Nielsen,

2013; Estélyi and Nisar, 2016). Nevertheless, board size is subjected to a certain amount of ambiguity

due to varying executive board definitions between companies. The variable Board_Size represents both

the positive effects of broadened perspectives and increased experience and the negative impact on

effective communication and decision making resulting from larger boards. The net effect of board size

could be of influence on corporate social performance.

3.2.5 Corporate-level control variables

In previous literature, higher CSP has been attributed to various organizational characteristics. First,

McWilliams and Siegel (2001) hypothesize firm size in terms of both sales and assets increases the

corporate social performance of firm. Following to the resource based view, firms have to invest in

resources and inputs that ultimately increase CSP across three areas. First, capital investments in


18

equipment, machinery and real estate that are devoted to increase CSP yield higher capital expenditures.

Second, inputs have to be purchased from suppliers who are socially responsibly leading to higher costs

for materials and services in the short term. Third, staff is hired and human resource management

practices to implement CSR policies and increase CSP come at the cost of higher wages and additional

personnel. However, McWilliams and Siegel (2001) argue economies of scale are experienced when

investing in resources that enhance CSP. Therefore, larger firms with significant resources benefit more

from these economies of scale and thus firm size is expected to positively affect CSP.

As the two measures of size in terms of assets and revenues correlate highly, the measure of total assets

is adopted as the measure of firm size. In Datastream, the total assets is described as the sum of total

current assets, long term receivables, investment in unconsolidated subsidiaries, other investments, net

property plant and equipment and other assets. Subsequently, the variable Firm_Size on corporate-level

is calculated as the average of assets in thousands of euros at the beginning and the end of the year. In

addition, the variable firm size seems to grow exponentially as the difference in assets between

companies is significant. As a result, the logarithm of firm size is taken and the variable employed in this

research is Log(Firm_Size).

Second, Campbell (2007) advocates firms that are more profitable engage more in socially responsible

corporate behavior than firms that are less profitable. The main argument of the author is based on the

slack resource theory that more profitable firms have more resources to spare for socially responsible

actions which in turn translates in superior CSP. Conversely, Campbell (2007) notes firms with a very

weak financial position risk suffering substantial losses and jeopardizing shareholder value. Therefore,

the managers of these firms act out of self-interest to ensure their job security and attempt to improve

the firm’s financial situation by acting in socially irresponsible ways. As a result, higher financial

performance is expected to positively impact CSP. In this paper, financial performance is proxied by ROA

which is defined in Datastream as Net Income – Bottom Line + ((Interest Expense on Debt-Interest

Capitalized) * (1-Tax Rate))) / Average of Last Year's and Current Year’s Total Assets * 100.

Third, McGuire, Sundgren, and Schneeweis (1988) and Campbell (2007) indicate financial leverage is

negatively related to firm CSP. A low total debt ensures that a firm can easily continue to satisfy implicit

claims of stakeholders as based on the same analogy as with high financial performance. When more

resources are available for socially responsible actions, the corporate social performance will improve as


19

well. As such, firms with many implicit contracts with stakeholders and thus presumably higher CSP will

be characterized by lower debt than other firms. The variable financial leverage is defined as D/E which is

extracted from Datastream and calculated as (total debt/total equity) * 100%.

Finally, the country of geographical classification (GEOGC) is gathered from the Thomson Reuters’

Datastream. As such, the effect of board-level national culture on CSP can be investigated whilst

controlling for the national culture of the country from which the firm originates. With the exception of

individualism, the country- and board-level cultural variables of power distance, masculinity and

uncertainty avoidance correlate highly as many executives are nationals from the country from which

the firm originates. In addition, Country dummies are employed to check for country-level influences on

CSP, e.g. including the national culture of the country and other factors.

3.3 Descriptive statistics

In this section, the sample summary statistics and the correlations among variables are discussed. In

table 3, an overview is provided of the 650 firm-year observations of 130 non-financial companies over

the time period 2010-2014. The dependent variable CSP_Index theoretically ranges from zero to one

hundred, whilst the mean and median indicate the observed CSP is heavily skewed towards higher

scores. The latter pattern results from the environmental and social scores that constitute the

CSP_Index. These scores are heavily skewed towards higher scores as well, which entails the majority of

the companies experience a CSP_Index of higher than 50 and thus perform relatively well in terms of

social corporate performance. In addition, the board-level national culture variables as represented by

Board_PDI, Board_IDV, Board_MAS and Board_UA do not depict unexpected values and fall within the

zero to one hundred range. With respect to the Blau_Index for nationality diversity, the minimum value

of zero entails complete board homogeneity, whereas the maximum value of 0.938 implies almost

perfect board heterogeneity based on nationality. The mean and median for Blau_Index of 0.385 and

0.444 respectively entail that boards in the sample countries are quite diverse in terms of nationality

(Jhunjhunwala and Mishra, 2013). The average board age is 52.8 years, where the youngest boards are

35 and the oldest ones 66 years old respectively. Furthermore, executive boards encompass on average

only 9.1% of female executives. The minimum value of zero denotes no women are present in the

executive board in a particular year. The latter occurs more often than women executives are appointed

to the board as becomes apparent from the median value of zero. The maximum value of 0.500

implicates the boards in the sample do not contain more than fifty percent of females. As follows from


20

table 3, Board_Size ranges from one executive to the substantial number of 27 persons depending on the

company’s definition of the executive. The average board consists of seven executive board members,

with on average four in directors Germany, six members in the Netherlands and the UK and nine

executives in France, Sweden and Switzerland. Whilst the variable Board_Size is somewhat arbitrarily, it

encompasses the net positive or negative effect of more effective decision making with smaller boards

and broadened perspectives and increased experience with more extensive ones. With the removal of

financial firms and taking the logarithm of Firm_Size, the variable Log(Firm_Size) does not depict unusual

values and is useful for linear estimations. In addition, the ROA for the firms in the sample is on average

5.6% on annual basis. The negative and minimum ROA of minus twenty percent could theoretically occur

for a short period of time as the default risk increases with longer times of unprofitability. Finally, the

average and mean D/E ratio of 0.762 and 0.604 seem plausible, whilst the minimum of -36.279 and

maximum of 32.173 are truly extraordinary. The former extreme negative value is explained by a short-

term negative equity of the company. In the long run, such a situation is not sustainable and within the

sample the negative D/E ratios are turned around within one year. Additionally, the extreme positive D/E

ratios are mainly explained by firms that possess virtually no debt.

As follows from the descriptive statistics, the control variables Board_Size, ROA and D/E depict extreme

values and are potentially subjected to outliers. In order to reduce the effect of spurious outliers, these

variables are winsorized at the 2.5% level at both sides. The adjusted descriptive statistics are presented

in table A.2


21

Table 3 Descriptive statistics

This table presents the descriptive statistics of the variables employed in this research. The sample consists of 650 firm-year observations of 130 non-financial firms over a time period of 2010-2014. Data is retrieved from the Thomson Reuters Asset4 Database (ESG) and annual reports and corporate websites. Variable definitions are presented in Table A.1.

Variable Mean Minimum Median Maximum Std. Dev. Obs. CSP_Index 86.421 23.225 90.858 96.035 11.975 650 Board_PDI 45.128 26 39 81 12.755 650 Board_IDV 73.658 23 72 91 9.364 650 Board_MAS 47.531 5 50 71 17.462 650 Board_UA 59.117 29 61 89 16.998 650 Blau_Index 0.385 0.000 0.444 0.938 0.270 650 Age 52.862 35 53 66 3.952 650 Gender 0.091 0.000 0.000 0.500 0.121 650 Board_Size 7.206 1 7 27 4.121 650 Log(Firm_Size) 17.187 14.301 17.214 19.672 1.108 650 ROA 0.056 -0.200 0.049 0.356 0.063 650 D/E 0.762 -36.279 0.604 32.173 2.538 650

In table 4, the correlation matrix between the dependent, independent and control variables of this

study are presented. With regard to the CSP_Index and the cultural variables of Board_PDI, Board_IDV

and Board_MAS, a positive sign is depicted although a negative relationship is expected. However, one

has to refrain from drawing conclusions about association solely based on correlations. Furthermore,

board nationality diversity in terms of the Blau_Index is negatively associated with corporate social

performance. The latter is unexpected as more diversity is generally accompanied by a broader range of

knowledge, information and resources. As such, individual biases and prejudices against CSR initiatives

should be reduced and CSP would have been expected to increase (Estélyi and Nisar, 2016).

In general, multicollinearity does not seem to be an issue except for the association between the

variables Board_PDI and Board_UA. With a correlation of 0.805, multicollinearity could affect the results

of the statistical analyses. In regard of the separate hypothesized effects on CSP, a step-wise introduction

of the variables is opted for and vigilance is required when interpreting the complete model due to the

high correlation between Board_PDI and Board_UA. Additionally, unreported results denote the

variables social and environmental pillar scores correlate highly with the CSP_Index as these constitute

the latter index. As social and environmental pillar scores are merely used for robustness purposes and

not employed simultaneously, multicollinearity does not seem an issue in this situation.


22

Table 4 Correlation matrix

This table presents the correlation matrix among the independent and dependent variables employed in this research. The sample consists of 650 firm-year observations of 130 non-financial firms over a time period of 2010-2014. Data is retrieved from the Thomson Reuters Asset4 Database (ESG) and annual reports and corporate websites. The variables Board_Size, ROA and D/E are winsorized at the 2.5th and 97.5th percentile values. Variable definitions are presented in Table A.1.

1 2 3 4 5 6 7 8 9 10 11 12

1 CSP_Index 1.000

2 Board_PDI 0.128 1.000

3 Board_IDV 0.004 -0.337 1.000

4 Board_MAS 0.111 0.007 0.082 1.000

5 Board_UA 0.108 0.805 -0.453 0.223 1.000

6 Blau_Index -0.113 -0.191 0.116 0.103 -0.179 1.000

7 Age 0.037 0.288 -0.050 0.200 0.287 -0.089 1.000

8 Gender -0.021 -0.110 0.169 -0.183 -0.200 0.011 -0.161 1.000

9 Board_Size 0.087 0.158 -0.083 -0.154 0.113 0.361 0.001 0.146 1.000

10 Log(Firm_Size) 0.393 0.010 -0.077 -0.062 -0.063 0.027 0.124 0.038 0.324 1.000

11 ROA -0.106 -0.184 0.012 -0.019 -0.277 0.122 -0.106 0.016 -0.092 -0.112 1.000

12 D/E 0.137 -0.023 0.150 0.020 0.006 -0.198 -0.051 0.014 -0.078 0.154 -0.275 1.000

3.4 Methodology

In this paper, panel EGLS (cross-section random effects) regression is adopted to estimate the

relationship between board-level national culture and corporate social performance. In order to test the

first hypothesis regarding board national culture and CSP, the empirical model is formulated as follows:

𝐶𝑆𝑃_𝐼𝑛𝑑𝑒𝑥 𝑖,𝑡= 𝛼0 + 𝛽1𝐵𝑜𝑎𝑟𝑑_𝑃𝐷𝐼𝑖,𝑡 + 𝛽2𝐵𝑜𝑎𝑟𝑑_𝐼𝐷𝑉𝑖,𝑡+ 𝛽3𝐵𝑜𝑎𝑟𝑑_𝑀𝐴𝑆𝑖,𝑡 + 𝛽4𝐵𝑜𝑎𝑟𝑑_𝑈𝐴𝑖,𝑡+ 𝛽5𝐴𝑔𝑒𝑖,𝑡 +

𝛽6𝐺𝑒𝑛𝑑𝑒𝑟𝑖,𝑡 + 𝛽7𝐵𝑜𝑎𝑟𝑑_𝑆𝑖𝑧𝑒𝑖,𝑡 + 𝛽8𝐿𝑜𝑔(𝐹𝑖𝑟𝑚_𝑆𝑖𝑧𝑒)𝑖,𝑡 + 𝛽9𝑅𝑂𝐴𝑖,𝑡 + 𝛽10𝐷/𝐸𝑖,𝑡 + 𝜀𝑖,𝑡 + 𝑣𝑖,𝑡, (2)

where 𝐶𝑆𝑃_𝐼𝑛𝑑𝑒𝑥 𝑖,𝑡 denotes CSP performance based on the social and environmental scores of firm i in

year t and 𝛼0 is a constant that is the same for all cross-sectional units and stable over time. The

variables 𝐵𝑜𝑎𝑟𝑑_𝑃𝐷𝐼𝑖,𝑡, 𝐵𝑜𝑎𝑟𝑑_𝐼𝐷𝑉 𝑖,𝑡, 𝐵𝑜𝑎𝑟𝑑_𝑀𝐴𝑆𝑖,𝑡 and 𝐵𝑜𝑎𝑟𝑑_𝑈𝐴 𝑖,𝑡 denote the board-level scores

on Hofstede’s (1980) cultural dimensions of power distance, individualism, masculinity and uncertainty

avoidance respectively. 𝐴𝑔𝑒𝑖,𝑡 depicts the average age of the board for a particular firm in a particular

year. 𝐺𝑒𝑛𝑑𝑒𝑟𝑖,𝑡 encompasses the proportion of female executives in the executive board in particular


23

year. 𝐵𝑜𝑎𝑟𝑑_𝑆𝑖𝑧𝑒𝑖,𝑡 is the number of individuals in the executive board of a firm in a particular year.

𝐿𝑜𝑔(𝐹𝑖𝑟𝑚_𝑆𝑖𝑧𝑒)𝑖,𝑡 proxies firm size as measured by the logarithm of firm size in assets in thousands of

euros. Furthermore, 𝑅𝑂𝐴𝑖,𝑡 is the return on assets that is used as a proxy for financial performance.

𝐷/𝐸𝑖,𝑡 is the debt-to-equity ratio that proxies financial leverage. Finally, 𝜀𝑖,𝑡 denotes a random variable

that varies cross-sectionally but is constant over time and 𝑣𝑖,𝑡 is the individual observation error term.

𝜀𝑖,𝑡 measures the random deviation of each entity’s intercept term from the global intercept term 𝛼0

that is the same for all cross-sections (Brooks, 2014).

In this paper, the random effects approach is adopted which proposes different intercept terms for each

entity that are constant over time and assumes the relationships between the independent and

dependent variable to be the same both cross-sectionally and temporally (Brooks, 2014). The main

difference with a fixed effects approach is that under the random effects model, the intercepts for each

cross-section are assumed to differ from the general intercept by a random variable that varies cross-

sectionally but is constant over time. An advantage of the random effects approach entails the

explanatory variables that do not vary over time are not removed and hence their impact on the

independent variables can be observed (Brooks, 2014). As board characteristics tend to change slowly

over time, random effects seem advantageous for the setting of the study. Another advantage is that

fewer parameters are estimated and hence degrees of freedoms are saved and the random effects

model produces more efficient estimation than the fixed effects models. However, a major disadvantage

is the random effects approach arises from the fact that the error terms have to be uncorrelated with all

of the explanatory variables (Brooks, 2014). If the latter condition is violated, the parameter estimates

will be biased and inconsistent and a fixed effects approach should be preferred. Therefore, the

Hausman test is employed and denotes a p-value of 0.211 that is insignificant at all customary

significance levels. As a result, the null hypothesis that the unobserved omitted firm specific effects are

uncorrelated with the independent variables is not rejected and the random effects model is deemed to

be appropriate in this study (Brooks, 2014). Finally, the adopted approach has the benefit that omitted

and unobserved firm-specific factors are taken into consideration and thus potential endogeneity issues

are addressed.


24

In addition, a second aim of this study is to consider the relationship between board nationality diversity

and corporate social performance. Therefore, an additional empirical model using panel EGLS (cross-

section random effects) regression is estimated:

𝐶𝑆𝑃_𝐼𝑛𝑑𝑒𝑥 𝑖,𝑡= 𝛼0 + 𝛽1𝐵𝑜𝑎𝑟𝑑_𝑃𝐷𝐼𝑖,𝑡 + 𝛽2𝐵𝑜𝑎𝑟𝑑_𝐼𝐷𝑉𝑖,𝑡+ 𝛽3𝐵𝑜𝑎𝑟𝑑_𝑀𝐴𝑆𝑖,𝑡 + 𝛽4𝐵𝑜𝑎𝑟𝑑_𝑈𝐴 𝑖,𝑡+

𝛽5𝐵𝑙𝑎𝑢_𝐼𝑛𝑑𝑒𝑥𝑖,𝑡 + 𝛽6𝐵𝑙𝑎𝑢_𝐼𝑛𝑑𝑒𝑥^2𝑖,𝑡 + 𝛽7𝐴𝑔𝑒𝑖,𝑡 +𝛽8𝐺𝑒𝑛𝑑𝑒𝑟𝑖,𝑡 + 𝛽9𝐵𝑜𝑎𝑟𝑑_𝑆𝑖𝑧𝑒𝑖,𝑡 +

𝛽10𝐿𝑜𝑔(𝐹𝑖𝑟𝑚_𝑆𝑖𝑧𝑒)𝑖,𝑡 +𝛽11𝑅𝑂𝐴𝑖,𝑡 + 𝛽12𝐷/𝐸𝑖,𝑡 + 𝜀𝑖,𝑡 + 𝑣𝑖,𝑡,

(3)

where most variables are identical to those in the above stated empirical model (2). Furthermore,

𝐵𝑙𝑎𝑢_𝐼𝑛𝑑𝑒𝑥𝑖,𝑡 denotes the Blau (1977) index for heterogeneity within groups based on nationality. A

score of zero implicates perfect homogeneity, whilst a value close to one represents near perfect group

heterogeneity based on nationality. The Blau (1977) index denotes the standalone effect of board

nationality diversity on corporate social performance. 𝐵𝑙𝑎𝑢_𝐼𝑛𝑑𝑒𝑥^2𝑖,𝑡 is calculated as the square of the

variable 𝐵𝑙𝑎𝑢_𝐼𝑛𝑑𝑒𝑥𝑖,𝑡 and represents a substantial increase in board diversity based on the nationality

of the directors. In combination with the standalone effect, 𝐵𝑙𝑎𝑢_𝐼𝑛𝑑𝑒𝑥^2𝑖,𝑡 is employed to test

hypothesis 2 whether there is an inversed curvilinear relationship between board nationality diversity

and corporate social performance. 𝜀𝑖,𝑡 and 𝑣𝑖,𝑡 are employed to incorporate cross-section random

effects.

4. Results

4.1 The effect of board national culture on CSP

In this section, the results concerning the relationship between board national culture and CSP are

presented. In table 5, the first model depicts the control variables employed in this study. As follows

from the table, Log(Firm_Size) positively and significantly (p<0.01) affects CSP as expected (McWilliams

and Siegel, 2001). The variable ROA that proxies financial performance negatively, yet significantly,

impacts CSP as in contradiction with the expectation of Campbell (2007) that better performing firms

have more resources to spare for socially responsible actions. Additionally, the positive yet insignificant

coefficient of Age is in contrast with the expectation that younger board directors foster CSP (Hafsi and

Turgut, 2013). The negative yet insignificant effect of more female directors on CSP is unexpected based

on the existing literature (e.g. Bear et al, 2010; Setó-Pamies, 2015). The negative effect of ROA and

positive effect of financial leverage as proxied by D/E are both unexpected. Following Campbell (2007),

an increased financial performance (ROA) yields the firm possesses more resources to spare for socially


25

responsible actions which in turn translates in superior corporate social performance. McGuire,

Sundgren, and Schneeweis (1988) and Campbell (2007) indicate a lower financial leverage ensures

implicit claims of stakeholders are more easily satisfied and thus corporate social performance is

enhanced. Finally, when the board size increases the CSP seems to be positively, yet insignificantly,

affected due to broadened perspectives and increased experience of the board as whole.

Subsequently, the board cultural variables in terms of Board_PDI, Board_IDV, Board_MAS and Board_UA

are introduced step-wise in models 2-6. The variable Board_PDI is positively, yet insignificantly

associated with CSP whilst a negative relationship is expected (Ringov and Zollo, 2007; Ho et al., 2012;

Thanetsunthorn, 2015). Therefore, hypothesis 1a is rejected. The positive sign of Board_PDI could be

explained by the high correlation with the variable Board_UA that depicts a positive sign as well when

introduced in model 5. In addition, Board_IDV is negative as expected and insignificant at all customary

significance levels. However, in the final model board individualism positively, yet insignificantly

influences CSP. As a result, hypothesis 1b is rejected as a negative relationship with CSP is expected

(Ringov and Zollo, 2007; Ho et al., 2012; Thanetsunthorn, 2015). In contrast with previous literature, the

variable Board_MAS significantly (p<0.05) and positively affects corporate social performance when

introduced and in the final model 6. Based on the findings of Ringov and Zollo (2007), Ho et al. (2012)

and Thanetsunthorn (2015), it is expected higher values of Board_MAS would lead to lower levels of CSP

and thus hypothesis 1c is rejected. If CSP is assumed to foster the financial results of the company, a

potential explanation for the positive coefficient could entail masculine executives support initiatives

that increase CSP as the financial results that contribute to achievement and material success are

enhanced (Margolis and Walsh, 2003; Barta et al., 2012). When Board_UA is introduced, the relationship

with CSP is positive and insignificant (p>0.10) which initially indicates the expected, positive relationship

between board-level uncertainy avoidance and CSP. Nevertheless, in model 6 Board_UA is negative and

insignificant and therefore hypothesis 1d has to be rejected as well. In conclusion, hypotheses 1a-1d are

rejected and board national cultural does not significantly affect corporate social performance in the

directions as would have been expected from studies on country-level.

As board characteristics remain fairly stable over time due to infrequent changes in the executive board,

it could be fruitful to use cross-sectional data as an additional test to confirm the above stated results. In

table A.3, the results of the panel estimation with averaged data for each firm over a five-year time

period of 2010-2014 is presented. The results remain largely unchanged except for a few exceptions. In


26

the step-wise introduction, the variables Board_PDI, Board_MAS and Board_UA are only marginally

significant (p<0.10), whilst these are not significant anymore in the final model in which all variables are

employed. The sign of Board_UA has become positive as uncertainty avoidant executives prefer higher

level of CSP as it decreases the firm’s total and idiosyncratic risk (Lee and Faff, 2009; Sassen et al., 2016).

As such, hypotheses 1a-1d are rejected and board national culture does not significantly affect CSP.

Furthermore, older boards tend to hamper the CSP of the firm as in line with Hafsi and Targut (2013).

In unreported results, a robustness check is conducted to check whether the results vary when the

dependent variable of CSP_Index is changed to either environmental or social CSP. The latter

environmental and social score are initially averaged with equal weights to constitute the CSP_Index. The

results remain largely unchanged and the hypotheses 1a-1d are rejected once again for both dependent

variables. However, board individualism and uncertainty avoidance depict the expected relationships

based on the signs for environmental CSP. With regard to the control variables, board age positively and

significantly (p<0.01) affect CSP and this explains the positive sign of Age in table 5. Older executives

tend to positively impact the environmental practices of the firm due to their higher moral reasoning and

their environmental consciousness resulting in a desire to preserve the earth for future generations (Post

et al., 2011). In the view of social CSP, the board age has a negative (yet insignificant) effect as in line

with Hafsi and Targut (2013) and in contrast with environmental CSP and total CSP.


27

Table 5 Pooled Ordinary Least Squares regression: effect of board culture on corporate social performance This table presents the panel EGLS (cross-section random effects) results of empirical model (2). CSP_Index is calculated as the equal-weighted average of environmental and social CSP. Board_PDI, Board_IDV, Board_MAS and Board_UA result from assigning country-level scores of the Hofstede (1980) dimensions towards individual executives based on their nationalities and subsequently calculating the average of these dimensions on board-level. Age is calculated as the average age of the board. Gender is the proportion of female executives with respect to the total number of executive board members. Board_Size is calculated as the number of individuals in the executive board. Log(Firm_Size) is the logarithm of firm size in assets in thousands of euros. ROA is defined as the total of earnings before interest and taxes divided by total assets. D/E is calculated by (total debt/total equity) * 100%. Corresponding standard errors are shown in parentheses. *, ** and *** denote statistical significance at the 10%, 5% and 1% level respectively.

CSP_Index

(1) (2) (3) (4) (5) (6) Constant 29.748** 28.287** 30.482** 25.001* 28.606** 23.951* (12.915) (12.925) (13.763) (12.998) (13.108) (14.461) Board_PDI 0.039 0.053 (0.047) (0.063) Board_IDV -0.008 0.001 (0.058) (0.063) Board_MAS 0.082** 0.083** (0.035) (0.035) Board_UA 0.013 -0.013 (0.038) (0.050) Age 0.093 0.082 0.094 0.083 0.090 0.071 (0.077) (0.078) (0.078) (0.077) (0.077) (0.080) Gender -1.419 -1.454 -1.387 -1.364 -1.400 -1.430 (2.154) (2.155) (2.167) (2.150) (2.154) (2.171) Board_Size 0.083 0.085 0.085 0.064 0.083 0.066 (0.120) (0.120) (0.121) (0.120) (0.120) (0.120) Log(Firm_Size) 2.997*** 3.010*** 2.983*** 3.083*** 3.027*** 3.080*** (0.743) (0.739) (0.748) (0.740) (0.739) (0.743) ROA -4.970 -4.665 -4.961 -5.071 -4.806 -4.822 (4.763) (4.778) (4.767) (4.753) (4.785) (4.786) D/E 0.079 0.090 0.085 0.118 0.087 0.124 (0.405) (0.405) (0.408) (0.404) (0.405) (0.408)

R2 0.038 0.040 0.038 0.047 0.039 0.048 Adjusted R2 0.029 0.029 0.028 0.036 0.028 0.034 Obs. 650 650 650 650 650 650 Firms 130 130 130 130 130 130

Based on previous research regarding the relationship between national culture and CSP on country-

level (e.g. Thanetsunthorn, 2015), the national culture of the country in which the company primarily

operates could be of importance. In table 6, country dummies are created to control for country-level

influences on CSP including the effect of national culture of the country. The results are presented in

table 6. The results remain largely unchanged with a couple of exceptions. The step-wise introduction of

board cultural variables in the models 2-5 implicates Board_PDI negatively and insignificantly (p>0.10)


28

influences the CSP of the firm. However, in model 6 Board_PDI turns positive (and insignificant at all

customary significance levels) and hypothesis 1a is therefore rejected. Whilst Board_IDV is positive and

insignificant in model 3, the final model depicts a negative, yet insignificant, relationship with CSP as

more in line with the work of Ringov and Zollo (2007) and Ho et. al (2012). Nevertheless, hypothesis 1b is

rejected due to the insignificance of the relationship. The variable Board_MAS depicts a positive, but

insignificant relationship with CSP as in contrast with the previous estimation in table 5. Therefore,

hypothesis 1c is rejected as the results contrast the work of Thanetsunthorn (2015) as the author

indicates a higher score on masculinity should lower corporate social performance. The variable

Board_UA has become negative and marginally significant (p<0.10) in model 5 which contradicts the

expectations and results in the rejection of hypothesis 1d (Rinkov and Zollo, 2007). The latter could

potentially be explained by the high correlation with the variable Board_PDI that initially denotes a

negative sign when introduced in model 2. The reference point for the dummy variables is the

Netherlands. As such, companies in France, Germany and the UK experience higher CSP in comparison to

the Netherlands. Swiss and Swedish firms denote a lower corporate social performance than Dutch

firms. However, drawing inferences is hard as the coefficients are insignificant at all customary levels.

Nonetheless, the low corporate social performance of the Netherlands, Switzerland and Sweden seems

surprising. With specific regard to Sweden, Nordic countries are renowned for embedding responsible

business practices at the heart of their economies and Sweden is among the countries which ranks the

highest in terms of (environmental) social performance (Zadek and MacGillivray, 2008; Lee, MacGillivray,

Begley, and Zayakova, 2010). As both Sweden and the Netherlands are characterized by welfare state

models, the government could be regarded as principally accountable for social responsibility and hence

explain the lower corporate social performance in these countries where corporations fulfill less active

roles in the area of social responsibility.

In addition to the country dummies, an additional analysis is performed with dummy variables indicating

cross-listing or listing through American Depositary Receipts (ADR) in the United States. The reason for

this examination is that the United States differs greatly from Western European countries except the UK

in terms of the corporate governance setting and national culture (Hofstede, 1980). If stocks are traded

in the United States, the CSP of the firm is expected to be adversely affected due to the high scores on

the national cultural values of individualism and masculinity which generally inhibit a high level of CSP.

However, as virtually the whole sample is traded over-the-counter (OTC) in the United States this

particular analysis renders futile results.


29

Table 6 Pooled Ordinary Least Squares regression: effect of board culture on corporate social performance with country dummies This table presents the panel EGLS (cross-section random effects) results of empirical model (2). CSP_Index is calculated as the equal-weighted average of environmental and social CSP. Board_PDI, Board_IDV, Board_MAS and Board_UA result from assigning country-level scores of the Hofstede (1980) dimensions towards individual executives based on their nationalities and subsequently calculating the average of these dimensions on board-level. Age is calculated as the average age of the board. Gender is the proportion of female executives with respect to the total number of executive board members. Board_Size is calculated as the number of individuals in the executive board. Log(Firm_Size) is the logarithm of firm size in assets in thousands of euros. ROA is defined as the total of earnings before interest and taxes divided by total assets. D/E is calculated by (total debt/total equity) * 100%. Country_dummyCH, Country_dummySE, Country_dummyUK, Country_dummyGE and Country_dummyFR are dichotomous variables that denote one for the countries Switzerland, Sweden, UK, Germany and France respectively and zero otherwise. Corresponding standard errors are shown in parentheses. *, ** and *** denote statistical significance at the 10%, 5% and 1% level respectively.

CSP_Index

(1) (2) (3) (4) (5) (6) Constant 28.489** 28.970** 28.481** 26.586** 32.405** 34.735** (12.825) (12.886) (13.762) (12.917) (12.982) (14.722) Board_PDI -0.023 0.032 (0.056) (0.071) Board_IDV 0.001 -0.045 (0.062) (0.070) Board_MAS 0.068 0.057 (0.043) (0.044) Board_UA -0.081* -0.097 (0.047) (0.060) Age 0.067 0.071 0.067 0.065 0.072 0.075 (0.078) (0.078) (0.079) (0.078) (0.078) (0.080) Gender -1.162 -1.111 -1.165 -1.241 -1.163 -1.204 (2.174) (2.180) (2.179) (2.172) (2.174) (2.187) Board_Size 0.087 0.084 0.088 0.059 0.056 0.035 (0.125) (0.126) (0.126) (0.127) (0.127) (0.128) Log(Firm_Size) 2.978*** 2.996*** 2.975** 2.961*** 2.999*** 2.914*** (0.767) (0.767) (0.769) (0.768) (0.762) (0.770) ROA -2.821 -2.937 -2.829* -2.959 -3.208 -3.157 (4.839) (4.852) (4.841) (4.832) (4.844) (4.844) D/E 0.075 0.068 0.074 0.113 0.021 0.081 (0.406) (0.406) (0.408) (0.406) (0.407) (0.409) Country_dummyCH -2.986 -2.991 -2.981 -4.726 -2.286 -3.802 (3.693) (3.689) (3.711) (3.864) (3.685) (3.943) Country_dummySE -2.306 -2.479 -2.298 -1.012 -3.533 -2.677 (3.524) (3.544) (3.544) (3.626) (3.565) (3.775) Country_dummyUK 3.989 3.999 3.991 2.210 3.528 2.042 (3.308) (3.304) (3.316) (3.503) (3.290) (3.503) Country_dummyGE 5.452 5.314 5.461 3.664 6.162 4.621 (3.208) (3.221) (3.260) (3.411) (3.209) (3.626) Country_dummyFR 6.801 7.266 6.807 6.203 9.049 8.081 (3.021) (3.226) (3.052) (3.057) (3.274) (3.401)

R2 0.065 0.066 0.065 0.069 0.070 0.073 Adjusted R2 0.049 0.048 0.047 0.051 0.053 0.051 Obs. 645 645 645 645 645 645 Firms 129 129 129 129 129 129


30

In addition, an alternative approach to controlling for country-level influences is to add the respective

country-level values on Hofstede’s (1980) four dimensions as control variables. In previous studies,

country-level cultural values are found to influence CSP of firms (Waldman et al., 2006; Ringov and Zollo,

2007; Ho et al., 2012; Peng et al., 2012; Thanetsunthorn, 2015; Cai et al., 2016). Furthermore, executives

whose nationality corresponds with the country of geographical classification tend to dominate the

executive board in terms of the number of board members. For example, French and German executives

are generally dominant in firms that are registered as being primarily French and German. With the

exception of the variable individualism, the country and board-level cultural variables of power distance,

masculinity and uncertainty avoidance correlate quite highly. As such, a cautious interpretation is

required due to potential multicollinearity issues.

In table 7, the results of the panel EGLS estimation are presented with controls for country-level cultural

values. The conclusions remain unchanged and the hypotheses 1a-1d are rejected due to the

insignificance of all board cultural variables at the customary significance levels. The estimation seems

somewhat more in line with the work of Thanetsunthorn (2015) as both Board_PDI and Board_IDV

depict negative signs when introduced in the model. In addition, the country-level influence of national

culture on CSP becomes apparent when power distance (p<0.05) and uncertainty avoidance are

introduced (p<0.01). The Country_UA positively affects investments to enhance the social corporate

performance as the firm’s total and idiosyncratic risk will be reduced (Lee and Faff, 2009; Sassen et al.,

2016). The positive sign of Country_PDI is unusual but could be explained due to the high correlation

with Country_UA as similar with board-level cultural variables.

In addition, for some companies the country of geographical classification differs from the country in

which the global corporate headquarters is currently located. For example, several companies are listed

on the London Stock Exchange in the UK whilst the corporate headquarters and operating activities are

located in Mexico, Australian and the United States. Therefore, these countries could be considered as

the country of origination. As such, the analysis in table 7 is repeated for with the national cultural values

of the country in which the global corporate headquarters is located. The results remain unchanged and

the latter analysis could be considered as a robustness test.


31

Table 7 Pooled Ordinary Least Squares regression: effect of board culture on corporate social performance with country-level cultural controls This table presents the panel EGLS (cross-section random effects) results of empirical model (2). CSP_Index is calculated as the equal-weighted average of environmental and social CSP. Board_PDI, Board_IDV, Board_MAS and Board_UA result from assigning country-level scores of the Hofstede (1980) dimensions towards individual executives based on their nationalities and subsequently calculating the average of these dimensions on board-level. Country_PDI, Country_IDV, Country_MAS and Country_IDV are the scores on the Hofstede (1980) dimensions for the country of geographic classification. Age is calculated as the average age of the board. Gender is the proportion of female executives with respect to the total number of executive board members. Board_Size is calculated as the number of individuals in the executive board. Log(Firm_Size) is the logarithm of firm size in assets in thousands of euros. ROA is defined as the total of earnings before interest and taxes divided by total assets. D/E is calculated by (total debt/total equity) * 100%. Corresponding standard errors are shown in parentheses. *, ** and *** denote statistical significance at the 10%, 5% and 1% level respectively.

CSP Index

(1) (2) (3) (4) (5) (6)

Constant 29.748** 21.609* 31.306* 24.647* 19.886 10.808

(12.915) (12.923) (16.679) (13.043) (13.035) (21.841)

Board_PDI -0.032 0.002

(0.054) (0.069)

Board_IDV -0.007 -0.039

(0.059) (0.066)

Board_MAS 0.070* 0.058

(0.042) (0.044)

Board_UA -0.071 -0.081

(0.047) (0.058)

Country_PDI 0.190** 0.132

(0.074) (0.169)

Country_IDV -0.010 0.108

(0.130) (0.187)

Country_MAS 0.023 0.025

(0.047) (0.053)

Country_UA 0.174*** 0.097

(0.056) (0.143)

Age 0.093 0.081 0.095 0.082 0.080 0.073

(0.077) (0.078) (0.078) (0.077) (0.077) (0.080)

Gender -1.419 -1.174 -1.384 -1.314 -1.031 -0.920

(2.154) (2.155) (2.168) (2.153) (2.153) (2.174)

Board_Size 0.083 0.034 0.084 0.072 0.011 0.024

(0.120) (0.121) (0.123) (0.121) (0.121) (0.123)

Log(Firm_Size) 2.997*** 3.133*** 2.974*** 3.078*** 3.298*** 3.273***

(0.743) (0.726) (0.751) (0.741) (0.724) (0.757)

ROA -4.970 -4.062 -4.955 -5.060 -3.968 -4.247

(4.763) (4.777) (4.769) (4.754) (4.783) (4.797)

D/E 0.079 0.060 0.085 0.109 0.031 0.060

(0.405) (0.405) (0.408) (0.405) (0.405) (0.408)

R2 0.038 0.051 0.038 0.047 0.055 0.064

Adjusted R2 0.029 0.039 0.026 0.035 0.043 0.044

Obs. 650 650 650 650 650 650

Firms 130 130 130 130 130 130


32

In conclusion, hypotheses 1a, 1b, 1c and 1d are rejected and therefore board national culture in terms of

power distance (Board_PDI), individualism (Board_IDV), masculinity (Board_MAS) and uncertainty

avoidance (Board_UA) is not affecting CSP as expected based on previous literature.

4.2 The effect of board nationality diversity on CSP

In addition, the effect of board nationality diversity on corporate social performance is examined in this

section. Based on the existing literature, an inversed curvilinear relationship is expected between board

nationality diversity and CSP. As such, an increase in nationality diversity should yield a positive effect on

CSP due to an increased variety in knowledge, information and resources of the board (Estélyi and Nisar,

2016). Thereafter, excessive levels of nationality diversity implicate group decision-making and

cooperative processes become less effective as a result of increased conflicts and communication

challenges (Anderson et al., 2011; Rao and Tilt, 2016).

In table 8, the variable Blau_Index is added to the estimation to examine the standalone effect of

nationality diversity on CSP. Model 2 depicts board nationality negatively, yet insignificantly (p>0.10),

affects the corporate social performance of the firm as in contrast with the expectations. In order to test

the second part of the hypothesis, high levels of nationality diversity have to be observed. Therefore,

model 3 includes the squared term of the Blau_Index that proxies a substantial increase in board

nationality diversity. As follows from the results, Blau_Index^2 and thus substantial levels of board

nationality diversity positively and insignificantly (p>0.10) influences CSP. The latter is contrast with the

expectation that increased conflicts and communications challenges outweigh the positive effects of

increased board nationality diversity for high levels of diversity. Based on the standalone effect of

Blau_Index and the effect of Blau_Index^2, hypothesis 2 is rejected as there is no significant inversed

curvilinear relationship between board nationality diversity and corporate social performance. Despite

the insignificance of the coefficients, the negative sign of Blau_Index and positive association of

Blau_Index^2 implicate a curvilinear relationship (U-shaped) between board nationality diversity and CSP

is more justified. As such, an increase in diversity initially increases the conflicts within the group as the

homogeneous character is distorted. Additionally, a critical mass of board nationality diversity seems to

be required to reap the benefits of the increased variety in knowledge, information and resources. In

models 4-8, the board-level national culture variables are added as control variables and no significant

changes are observed in the results.


33

Table 8 Pooled Ordinary Least Squares regression: the effect of board national diversity on corporate social performance

This table presents the panel EGLS (cross-section random effects) results of empirical model (3). CSP_Index is calculated as the equal-weighted average of environmental and social CSP. Blau_Index the extent of board heterogeneity based on nationality. Blau_Index^2 is the square of the variable Blau_Index and represents a sharp increase in board diversity based on nationality. Board_PDI, Board_IDV, Board_MAS and Board_UA result from assigning country-level scores of the Hofstede (1980) dimensions towards individual executives based on their nationalities and subsequently calculating the average of these dimensions on board-level. Age is calculated as the average age of the board. Gender is the proportion of female executives with respect to the total number of executive board members. Board_Size is calculated as the number of individuals in the executive board. Log(Firm_Size) is the logarithm of firm size in assets in thousands of euros. ROA is defined as the total of earnings before interest and taxes divided by total assets. D/E is calculated by (total debt/total equity) * 100%. Corresponding standard errors are shown in parentheses. *, ** and *** denote statistical significance at the 10%, 5% and 1% level respectively.

CSP Index

(1) (2) (3) (4) (5) (6) (7) (8)

Constant 29.748** 29.824** 29.853** 28.550** 30.422** 24.881* 29.062** 24.679*

(12.915) (12.893) (12.931) (12.984) (13.774) (12.964) (13.182) (14.505)

Blau_Index -0.675 -1.680 -1.560 -1.656 -1.937 -1.602 -1.943

(1.376) (3.263) (3.269) (3.271) (3.257) (3.283) (3.285)

Blau_Index^2 1.533 1.497 1.500 0.999 1.491 1.020

(4.492) (4.494) (4.504) (4.486) (4.494) (4.506)

Board_PDI 0.037 0.054

(0.047) (0.063)

Board_IDV -0.007 -0.002

(0.058) (0.063)

Board_MAS 0.087** 0.088**

(0.035) (0.036)

Board_UA 0.009 -0.021

(0.039) (0.051)

Age 0.093 0.091 0.090 0.080 0.091 0.079 0.088 0.068

(0.077) (0.077) (0.078) (0.079) (0.079) (0.078) (0.078) (0.080)

Gender -1.419 -1.387 -1.417 -1.453 -1.390 -1.317 -1.405 -1.387

(2.154 (2.157) (2.160) (2.162) (2.174) (2.156) (2.161) (2.178)

Board_Size 0.083 0.100 0.099 0.099 0.100 0.095 0.098 0.097

(0.120) (0.125) (0.126) (0.126) (0.126) (0.125) (0.126) (0.126)

Log(Firm_Size) 2.997*** 3.005*** 3.012*** 3.016*** 3.001*** 3.106*** 3.030*** 3.084***

(0.743) (0.741) (0.744) (0.742) (0.749) (0.738) (0.742) (0.744)

ROA -4.970 -4.954 -4.894 -4.611 -4.888 -5.007 -4.781 -4.843

(4.763) (4.766) (4.774) (4.791) (4.778) (4.764) (4.798) (4.797)

D/E 0.079 0.074 0.080 0.090 0.085 0.114 0.086 0.118

(0.405) (0.405) (0.406) (0.407) (0.409) (0.406) (0.407) (0.409)

R2 0.038 0.039 0.039 0.040 0.039 0.048 0.039 0.050

Adjusted R2 0.029 0.028 0.027 0.027 0.025 0.035 0.026 0.032

Obs. 650 650 650 650 650 650 650 650

Firms 130 130 130 130 130 130 130 130


34

5. Discussion and conclusion

In this paper, the aim is to investigate whether executive board national culture and board nationality

diversity affect the corporate social performance (CSP) of the firm. Based on the upper echelon theory

(Hambrick and Mason, 1984), executive’s individual characteristics affect organizational outcomes. As

national culture is widely recognized as a critical factor in determining individual’s value and belief

systems (Hofstede, 1991; Thanetsunthorn, 2015), the nationality and hence national culture of directors

are supposed to significantly affect decision making processes and organizational outcomes. In previous

studies, country-level cultural values are found to influence CSP of firms (Waldman et al., 2006; Ringov

and Zollo, 2007; Ho et al., 2012; Peng et al., 2012; Thanetsunthorn, 2015; Cai et al., 2016). Both notions

of national culture and upper echelons are combined to investigate the effect of board-level national

culture on CSP. With a sample of 130 executive boards of non-financial firms in France, Germany, the

Netherlands, Sweden, Switzerland and the UK over a time period of 2010-2014, it could be concluded

there is no significant relationship between board national culture and CSP. In general, adjusting the

board composition and hence the board national culture to foster CSP seems unjustified based on the

findings in this paper.

In addition, board nationality diversity is said to increase if more non-nationals executives from different

nationalities are appointed to the board. As a double-edged sword, board diversity could both enhance

and hamper CSP. On the one hand, nationality diversity results in a broader range of knowledge,

information and resources within the board. As such, individual biases and prejudices against CSR

initiatives are reduced and CSP ultimately increases (Estélyi and Nisar, 2016). On the other hand,

increased nationality diversity results in increased conflicts and communication challenges that could

negatively affect firm and corporate social performance (Anderson et al., 2011; Rao and Tilt, 2016).

Based on the results, the relationship between board nationality diversity and CSP is found to be

negative, yet insignificant, as opposed to the expectations. In addition, very high levels of board

nationality diversity seem to positively, yet insignificantly, influence the CSP of a firm. Therefore, there is

no inversed curvilinear relationship between board nationality diversity and CSP. Nevertheless, the

results indicate a critical mass of nationality diversity could be required to experience a net positive

effect of increased board diversity on CSP. Further research could elaborate on the effect of nationality

diversity on CSP.


35

This paper contributes to the current literature as follows. First, whilst national culture affects CSP within

certain geographic regions, the board-level effects of national culture remains under researched (Harjoto

et al., 2015; Thanetsunthorn, 2015; Frijns et al., 2016). We advocate this research is to the best of our

knowledge among the first to address the relationship between national culture and CSP on board-level.

Second, this paper is the first to link board nationality diversity to CSP. The practical implications of the

research could have entailed companies could change board composition to either include executives

from certain cultural backgrounds or increase board nationality diversity in order to foster CSP (Post et

al., 2011). However, as the findings are insignificant the latter is regarded as unjustified based on this

paper.

Naturally, this research is subjected to a number of limitations. First and foremost, the sample size of

European listed companies included in this paper is restricted. Due to the absence of archival data on

director’s nationalities, data on board characteristics are hand-collected in a restricted time period. The

generalizability of the findings could be improved if a larger sample of companies including those outside

Western Europe is analyzed. Furthermore, the systematic establishment of an archival database of board

characteristics would enhance board diversity research and restrict the arbitrariness of data points

inherent to hand-collecting of data. As such, relevant characteristics such as international experience,

education and tenure of executives could be employed in further research as well.

Second, culture is commonly assumed to be stable over time and to represent the norms and values of

individuals in general terms (Hofstede, 1980). In addition, country-level cultural indicators are assumed

to apply to individual executives based on their nationalities. While the latter could be true based on the

notions of national culture and the upper echelon theory, individual executives do not necessarily have

to depict behaviour consistent with their national cultures. For example, directors with multiple

nationalities or extensive foreign experience due to conducting international business or living abroad do

not necessarily act based on the norms and values of one national culture. In this paper, executives with

a dual nationality are attributed the nationality as given by birth and listed first in the annual reports and

databases. Furthermore, these sources do not provide information regarding the country of birth,

country of residence during the executive’s life and international business experience that could affect

the cultural influence on the attitude towards CSP.


36

Third, in this research executives are presumed to equally influence the strategic decisions and

implementation of initiatives that affect CSP. In general, the Chief Executive Officer (CEO) and Chief

Financial Officer (CFO) are ultimately responsible for the firm’s performance and hence could have

superior decision-rights in comparison to other board members. Even when decision-making processes

are based on reaching a consensus, the voice of the Chief Executive Officer, Chief Financial Officer, Chief

Sustainability Officer or similarly named executives could outweigh that of others based on seniority and

expertise.

In line with the limitations, there are various avenues for further research. First, the scope and scale of

the sample could be broadened to wards companies outside Western Europe. For example, Rinkov and

Zollo (2007) and Ho et al. (2012) find national culture on country-level influences CSP in Europe, Asia and

the US. As a result, the sample could be extended to countries with less non-national executives and thus

lower nationality diversity. Within these countries, the difference between companies with virtually no

non-national executives and those with high nationality diversity might be more apparent.

Second, due to limited data availability the Long-term orientation (LTO) dimension of Hofstede (1991) is

not employed in this research. In a similar vein, the GLOBE framework of House et al. (2004) could be

used as an alternative for or complement to the dimensions that measure culture in this research. For

example, human orientation entails “the degree to which a collective encourages and rewards individuals

for being fair, altruistic, generous, caring, and kind to other” and could be used as a proxy for attitudes

towards fostering CSP in future research (House et al., 2004, p.569). Future research could include a

broader and alternative set of cultural measures.

Finally, the decision-process within executive boards is not transparent for outsiders. Future research

could focus on how decisions regarding CSR initiatives and enhancing CSP are actually taken, what the

intentions and motivations are and who possesses the decisive decision rights. In addition, the role of

supervisory boards in the formulation and implementation of CSR policies could be regarded.


37

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Appendices

Table A.1 Definition of variables Variable Definition CSP_Index The equally weighted average of environmental and social CSP. Board_PDI The board average of Hofstede's (1980) dimension power distance score. Country-level values for

power distance are assigned to individual executives based on their nationalities and subsequently averaged to receive the board-level power distance value.

Board_IDV The board average of Hofstede's (1980) dimension individualism score. Country-level values for individualism are assigned to individual executives based on their nationalities and subsequently averaged to receive the board-level individualism score.

Board_MAS The board average of Hofstede's (1980) dimension masculinity score. Country-level values for masculinity are assigned to individual executives based on their nationalities and subsequently averaged to receive the board-level masculinity score.

Board_UA The board average of Hofstede's (1980) dimension uncertainty avoidance score. Country-level values for uncertainty avoidance are assigned to individual executives based on their nationalities and subsequently averaged to receive the board-level uncertainty avoidance score.

Blau_Index The Blau (1977) heterogeneity index based on nationality calculated as B = 1 - ∑ 𝑝𝑖2, where p denotes

the proportion of individuals (executives) in a category and i is the number of categories. Perfect homogeneity entails a value of zero, whilst perfect heterogeneity is denoted by a value of one.

Age The average age of the executive board members. Gender The proposition of female executive members in comparison to the total number of board members. Board_Size The total number of executive board members. Log(Firm_Size) The logarithm of firm size as measured by assets in thousands of euros. ROA The return on assets calculated as the total earnings before interest and tax divided by total assets.

D/E The debt-to-equity ratio calculated by (total debt/total equity) * 100%.

Table A.2 Descriptive statistics This table presents the descriptive statistics of the variables employed in this research. The sample consists of 650 firm-year observations of 130 non-financial firms over a time period of 2010-2014. Data is retrieved from the Thomson Reuters Asset4 Database (ESG) and annual reports and corporate websites. The variables Board_Size, ROA and D/E are winsorized at the 2.5th and 97.5th percentile values.

Variable Mean Minimum Median Maximum Std. Dev. Obs. CSP_Index 86.421 23.225 90.858 96.035 11.975 650 Board_PDI 45.128 26 39 81 12.755 650 Board_IDV 73.658 23 72 91 9.364 650 Board_MAS 47.531 5 50 71 17.462 650 Board_UA 59.117 29 61 89 16.998 650 Blau_Index 0.385 0.000 0.444 0.938 0.270 650 Age 52.862 35 53 66 3.952 650 Gender 0.091 0.000 0.000 0.500 0.121 650 Board_Size 7.123 1 7 16 3.869 650 Log(Firm_Size) 17.187 14.301 17.214 19.672 1.108 650 ROA 0.056 -0.060 0.049 0.195 0.054 650 D/E 0.868 0.000 0.604 3.268 0.750 650


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Table A.3 Pooled Ordinary Least Squares regression: effect of board culture on corporate social performance with averaged firm cross-sections over a time period of 2010-2014. This table presents the panel EGLS (cross-section random effects) results of empirical model (2) with averaged firm cross-sections over the time period 2010-2014. CSP_Index is calculated as the equal-weighted average of environmental and social CSP. Board_PDI, Board_IDV, Board_MAS and Board_UA result from assigning country-level scores of the Hofstede (1980) dimensions towards individual executives based on their nationalities and subsequently calculating the average of these dimensions on board-level. Age is calculated as the average age of the board. Gender is the proportion of female executives with respect to the total number of executive board members. Board_Size is calculated as the number of individuals in the executive board. Log(Firm_Size) is the logarithm of firm size in assets in thousands of euros. ROA is defined as the total of earnings before interest and taxes divided by total assets. D/E is calculated by (total debt/total equity) * 100%. Corresponding standard errors are shown in parentheses. *, ** and *** denote statistical significance at the 10%, 5% and 1% level respectively.

CSP_Index

(1) (2) (3) (4) (5) (6) Constant 48.899*** 48.623*** 45.394** 48.079*** 46.608*** 36.791* (16.448) (16.300) (18.689) (16.328) (16.345) (19.858) Board_PDI 0.148* 0.131 (0.082) (0.143) Board_IDV 0.043 0.124 (0.108) (0.128) Board_MAS 0.100* 0.088 (0.058) (0.065) Board_UA 0.118* 0.055 (0.065) (0.127) Age -0.111 -0.263 -0.110 -0.212 -0.267 -0.403 (0.278) (0.288) (0.279) (0.282) (0.288) (0.294) Gender -5.042 -3.140 -5.832 -2.534 -1.194 -1.610 (9.462) (9.436) (9.698) (9.503) (9.612) (9.725) Board_Size -0.122 -0.225 -0.114 -0.064 -0.223 -0.184 (0.282) (0.285) (0.283) (0.281) (0.284) (0.287) Log(Firm_Size) 4.396*** 4.571*** 4.427*** 4.482*** 4.718*** 4.867*** (0.948) (0.945) (0.955) (0.942) (0.956) (0.975) ROA -18.069 -11.804 -18.092 -18.476 -6.473 -7.528 (21.632) (21.715) (21.707) (21.465) (22.365) (22.994) D/E 0.534 0.564 0.453 0.401 0.503 0.194 (1.403) (1.391) (1.423) (1.395) (1.390) (1.406)

R2 0.181 0.203 0.182 0.200 0.203 0.230 Adjusted R2 0.141 0.156 0.135 0.154 0.157 0.165 Firms 129 129 129 129 129 129

the influence of executive board national culture …1077895/...the influence of executive board...

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