The role of corporate governance and transparency in the generation of financial performance in socially responsible companies

ABSTRACT

Socially responsible companies develop strategies based on ESG criteria. Literature and agents operating in the markets are concerned about knowing whether the Corporate Social Responsibility (CSR) and Corporate Governance (CG) practices have a positive impact on financial performance. Main studies indicate that good CG practices are associated with a commitment to transparency. Our aim is to analyse the impact that CSR disclosure, as a transparency mechanism, and good CG practices have on the financial performance of socially responsible companies. To this aim, a system of simultaneous equations is proposed, in which the CSR disclosure variable has a mediating role, acting as liaison between the CG adopted by the organisation and the financial valuation. The results indicate that companies who wish to rise funding on the financial markets should develop both: a good CG and a high level of CSR disclosure, as part of their CSR strategy.

RESUMEN

Las empresas socialmente responsables desarrollan estrategias basadas en criterios ESG. La literatura y los agentes que operan en los mercados están preocupados por conocer si las prácticas de Responsabilidad Social Corporativa (RSE) y Gobierno Corporativo (CG) tienen un impacto positivo en el desempeño financiero. Los principales estudios indican que las buenas prácticas de CG están asociadas con la transparencia corporativa. Nuestro objetivo es analizar el impacto que la divulgación RSE, como mecanismo de transparencia, y las buenas prácticas de CG tienen en el desempeño financiero de las empresas socialmente responsables. Para ello, se propone un sistema de ecuaciones simultáneas, en el que la variable de divulgación de la RSC tiene un papel mediador, actuando como enlace entre el sistema de CG adoptado por la organización y la performance financiera. Los resultados indican que las empresas que desean aumentar su participación en los mercados financieros deben desarrollar tanto un buen CG como un alto nivel de divulgación como parte de su estrategia de RSE.

KEYWORDS:

• Corporate governance
• transparency
• financial performance
• accessibility
• CSR disclosure
• global reporting initiative

PALABRAS CLAVE:

• Gobierno Corporativo
• transparencia
• performance financiera
• accesibilidad
• difusión RSE
• Global Reporting Initiative

Acknowledgements

Furthermore, the authors thank research groups GESES (Third Sector’s Social and Economics Studies Group) and CREVALOR (Value Creation in Organizations) for their support and suggestions.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. In the context of institutional theory, DiMaggio and Powell (1983) propose three possible ways of evolution of an organisation: As a response to political impositions, by mimicking other entities, or as a consequence of the professionalization of the organic structure. In this approach, transparency mechanisms become part of the process of accountability in order to comply with social rules or norms.

2. According to this theory, there is interdependence between an organisation and its stakeholders with regards to its resources (Oliver, 1991; Pfeffer & Nowak, 1976; Pfeffer & Salancik, 1978). CSR disclosure, as a transparency mechanism, becomes a strategic tool to initiate relations with stakeholders. It will be a communication channel that enhances stakeholder trust and promotes the survival of the organisation (Gálvez-Rodríguez, Pérez, & Godoy, 2012). Consequently, the relationship with stakeholders will be more intense, which allows the entity to diminish transaction costs. However, when the entity has obtained its resources, it will tend to break this interaction with the stakeholders. For this reason, we define this modality as static disclosure of information.

3. In this context, an organisation favours the creation of long-term partnerships with its stakeholders in a collaborative way, generating capabilities in line with innovative objectives (Barney, 1991). CSR disclosure is able to create value in the organisation and trust between stakeholders in a dynamic interaction (Di Domenico, Haugh, & Tracey, 2010).

4. EUROSIF (2012) characterises EMF Spanish market as a marginal market in the short term, given the financial stress that the Spanish economy has been suffering. However, the organisation points to the Spanish market as one of the most dynamic markets in Europe in the future.

5. These companies are listed in the Spanish market being part of the portfolios of these mutual funds. As a consequence, they are under the supervision of the Stock Exchange Market Commission.

6. Following Ahmed and Nicholls (1994) and Depoers (2000), there is no presence of financial companies in the sample. The nature of financial entities could cause significant bias in the testing of hypotheses (Gandía, 2008).

7. The information for the study of these items was extracted from the Annual Reports available on the webpages of the investee companies.

8. This report is essential in the process of convergence between Western countries. In fact, authors such as Aguilera and Cuervo-Cazurra (2004) state that ‘codes of good governance have some key universal principles for effective corporate governance that are common to most countries’. These principles are based on the Anglo-Saxon model of CG (Coombes & Watson, 2001; Nobes & Roberts, 2000). In this moment, even continental countries, such as Germany, have also included some governance practices, which are typical of the Anglo-Saxon sphere (Chizema, 2008; Cromme, 2005). For these reason, we use the ODCE principles as basis.

9. The Spanish Code of Corporate Governance is the result of the consolidation of the Olivencia (1998) and Aldama (2003) reports. Its content is based on the principles of the ODCE report (2004) and is regulated by Article 539 of the Spanish Corporations Law (Ley de Sociedades de Capital).

10. The Memorandum Circular of 8 April 2014 on the Application of Environmental, Social and Governance Criteria (ESG) in the Investment Policy of the Collective Investment Institutions.

11. According to Rule no. 7.2 of the CNMV Memorandum Circular 1/2004, ‘the accessibility of the content in section «Information for shareholders and investors» will be no more than three navigation steps (clicks) from the home page’. Due to this, the maximum Likert score level (7) is associated to 3 clicks. This criterion is known as ‘three-clicks rule’. It was created by Zeldman (2001) and it has been adopted in different contexts in Anglo-saxon (Bernard, 2002; Kalbach, 2002; Porter, 2003) and European countries (Glassey, 2004).

12. Additionally, we have also considered the Sharpe’s and Treynor’s ratio as proxies of the financial performance based on market information (Sharpe, 1966; Treynor, 1965).

13. This proposal has been used in other papers like Kaczmarek¸ Kimino, and Pye (2012), Ammari, Kadria, and Ellouze (2014), Wang, Tsai, and Lin (2013) and Dahya, Dimitrov, and McConnell (2008).

14. We have tested the causal relationship using the Campbell’s test. This test compares the correlation between two variables (X,Y) observed in different periods of time (Y_t,X_t-j or Xt,Y_t-j). We have obtained p-value>0.100 when the causal relationship is inverse. This result supports the specified model.

15. We also estimated the broad model. This model included the direct effect of CG on financial performance. This model was consistent with the results shown in Models 1 and 2, the direct effect between CG and financial performance not being significant.

Additional information

Funding

This research was funded by the Ministry of Education, Culture and Sports (FPU 13/02481) and Ministry of Economy and Competitiveness (ECO2016-74920-C2-1-R).