Board Reforms around the World: The Effect on Corporate Social Responsibility

Abstract

This study examines the effects of major board reforms on firms’ corporate social responsibility (CSR) performance in countries around the world. Using a difference-in-differences design, we find robust evidence that worldwide board reforms can have significant effects on various stakeholders, resulting in increased firm CSR performance in both the environmental and social dimensions. Relative to countries that have implemented comply-or-explain reforms, countries with rule-based reforms tend to drive the increase in CSR performance post-reform. In addition, the effect of reforms on CSR performance is more pronounced for firms with higher levels of institutional ownership or lower levels of insider ownership and in countries with weaker CSR awareness and more stringent legal and regulatory environments. Further analyses show that reforms strengthen the relationship between CSR performance and future financial performance. Finally, we explore the possible mechanism through which board reforms could have a significant effect on firms’ CSR performance. We find that board reforms increase a firm’s likelihood of integrating CSR criteria in executive compensation.