Abstract
The financial crises over the past two decades were identified as the main reason for the economic collapse. Malaysia suffered the same fate when many organisations crumpled from inappropriate compliance of governance mechanisms and corporate social responsibility (CSR) disclosure practices. Given this condition, this study intends to examine the effects of governance mechanisms and CSR practice on firm performance and the moderating effect of board independence is investigated on corporate governance-CSR (CG-CSR) and performance nexus of 588 Malaysian companies listed on Bursa Malaysia between 2006 and 2017. Both accounting-based (ROA) and market-based (Tobin’s Q) performance measures have been used for measuring performance. Dynamic model using Generalized Method of Moments (GMM) has been employed on the dataset to control for potential endogeneity, reverse causality, and dynamic heterogeneity. Findings indicate that ownership concentration negatively affects ROA; chief executive officer (CEO) duality positively affects ROA and negatively affects Tobin’s Q. Moreover, investment on CSR is negatively related to both performance measures. Finally, board independence negatively moderates the CG mechanisms, CSR practice, and performance relationship. Findings of the study have implications for Bursa Malaysia and Securities Commission Malaysia to reset the limit of independent directors on board so that their unnecessary interference in operations of management may be avoided. Furthermore, companies need to reassess their CSR strategies whether they are spending on CSR activities or hiding their financial malfeasance in the name of investment on CSR.
Highlights
While the interest in corporate governance (CG) and corporate social responsibility (CSR) is increasing, recent research has provided unclear and mixed results about their relationships
This study aims to investigate the influence of CG and CSR on firm performance where CG attributes chosen for the study are ownership concentration, managerial ownership, institutional ownership, and chief executive officer (CEO) duality whereas the CSR measure adopted in the study is investment on CSR
Investment on CSR shows the average value of 71.27% indicating that more than 70% of Malaysian firms invest on CSR activities
Summary
While the interest in corporate governance (CG) and corporate social responsibility (CSR) is increasing, recent research has provided unclear and mixed results about their relationships. Supporters of the agency theory argue that CSR is costly to the firm and managers tend to hide their failure or unfavourable performance by overinvesting in CSR activities breaching the CG’s overinvestment prevention Such practices do not maximise the firm’s value, CSR is viewed as a waste of resources with a negative impact on CG (Barnea & Rubin, 2010). It is important to mention that CSR is not solely related to the social behaviour of the firm, and to the marketplace, environment, and workplace (Karim et al, 2019a) Given this stance, another important element is the issue of skills gap and inadequate knowledge management strategies adopted by the board of directors (Hermalin & Weisbach, 2003). Since Malaysia has been continuously striving to ensure effective governance practices while highlighting the role of efficient board of directors in the company but still there are discrepancies in compliance of CG codes by the listed firms in Malaysia that necessitate this study
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