How do entrenched boards reduce human rights violations? An empirical analysis

Abstract

As part of corporate social responsibility, companies invest in activities that promote human rights or refrain from activities that violate human rights. Investments in human rights, however, usually do not yield immediate benefits. Rather, they are expected to improve the reputation of the firm over time as a good corporate citizen. As one of the most effective takeover defences, a staggered board insulates managers from the takeover market. Secured in their positions, managers are less likely to be myopic and are more likely to adopt policies that yield long-term benefits, such as investments in human rights. Consistent with this notion, our results show that firms with a staggered board exhibit much better human rights performance. We also show that our results are not likely driven by endogeneity.

Keywords:

• staggered boards
• classified boards
• managerial entrenchment
• human rights
• corporate social responsibility

JEL Classification:

• G30
• G34

Notes

¹ We do not take a position either for or against the notion that investments in socially responsible activities improve firm performance or not. This issue continues to be fiercely debated in the literature. We simply argue that it is generally believed that, in the long run, such activities help improve the reputation of the firm, which leads to higher firm value.

² The KLD database has been widely used in the literature on corporate social responsibility. Over 40 peer-reviewed studies have used the KLD data.

³ Prior research shows that staggered boards influence several corporate outcomes such as firm value (Bebchuk and Cohen, 2005), capital structure choices (Jiraporn and Liu, 2008), dividend policy (Jiraporn and Chintrakarn, 2009), corporate risk-taking (Chintrakarn et al., 2013) and the cost of debt (Chen, 2013, forthcoming).

⁴ We also explore the effect of the staggered board on other social performance such as employee satisfaction and environmental responsibility. However, we do not find robust evidence that staggered boards influence other social performance significantly.

⁵ Theoretically, reverse causality is unlikely. Removing or installing a staggered board usually requires shareholders’ approval, a process that demands a great deal of effort and time. On the contrary, managers can exercise much more discretion on human rights policies. It is more likely that managers design human rights policies while taking the structure of the board as given.

⁶ The results are not shown but are available upon request.