Corporate social responsibility performance and the reputational incentives of independent directors

Abstract

AbstractWe link the reputational incentives of independent directors in the labor market to firms’ corporate social responsibility (CSR) performance. We show that when a larger fraction of a firm's independent directors considers the firm more prominent, the firm has better CSR performance. This association is more pronounced for firms that are more visible and those that face greater external CSR pressure. Such firms are also more likely to (1) issue CSR reports and obtain independent assurance on those reports; (2) include CSR items in annual general meeting agendas; (3) invest in the optimal level of CSR. Finally, we show that an independent director is more likely to gain directorships if the CSR performance of their most prominent board improves. Our results are robust to controlling for firm fixed effects and when using plausibly exogenous shocks to the reputational incentives of independent directors. Overall, our results are consistent with our conjecture that the reputational incentives of independent directors have a positive influence on firms’ CSR performance.