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Does CEO–Audit Committee/Board Interlocking Matter for Corporate Social Responsibility?

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Abstract

This study examines the impact of the Chief Executive Officer (CEO)’s interlocking, created through serving on other companies’ audit committees and/or boards, on corporate social responsibility (CSR) performance of the focal company (interlocked CEO’s company) and that of its linked companies. We find that CEO interlocking positively affects CSR performance of both the focal company and its linked companies. Further analysis shows that interlocks created by the CEO enhance CSR performance and in turn the financial performance of both the focal company and its linked companies. Our findings are robust to a battery of analyses, including Heckman’s (1979) selection bias correction, propensity score matching (PSM), alternative measures of CSR performance, and CEO interlocks. These findings are important to regulators, company management teams, and other stakeholders with an interest in how the social ties of CEOs influence companies’ CSR performance and in the CSR–financial performance nexus.

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Data Availability

Data are obtained from the sources mentioned in the paper.

Notes

  1. The importance of directors serving on other companies’ boards has been addressed by the Sarbanes–Oxley Act of 2002 (SOX 2002) and rules promulgated by the US Securities and Exchange Commission (SEC), New York Stock Exchange (NYSE), and National Association of Securities Dealers (NASD) (Duchin et al., 2010). These directors are regarded as vital custodians of shareholders’ interests, and these regulations require greater participation on other companies’ boards and key committees. Prior studies argue that interlocking directors enhance skills, knowledge, and perspectives from their work outside the focal company and become better advisors (Hillman et al., 2009). Shropshire (2010) finds that if a company appoints interlocking directors, these directors can access critical resources, employing them to enhance the company’s performance.

  2. The MSCI ESG KLD STATS measure of CSR performance comprises six main categories: the community, diversity, employee relations, human rights, products, and the environment. The first five categories are classified as social performance, and the last one is environmental performance. Corporate governance is considered to be a separate dimension.

  3. The findings reported by Hussain et al. (2018) cover board size, board independence, CEO duality, women on the board, number of board meetings, and a CSR committee under the corporate governance structure.

  4. External scarce resources can be: knowledge about products, goods and services; markets; information about innovation; industry business strategy expertise; and better governance (Mizruchi & Stearns, 1988; Pearce II & Zahra, 1992; Johnson et al., 1996).

  5. The MSCI GMI Ratings database reports only 500 companies’ audit committee information in its 2013 data file. Due to the non-availability of audit committee data in 2013, we restrict our sample period to 2012 as the cut-off point.

  6. The six exclusionary screens comprise alcohol, firearms, gambling, the military, nuclear power, and tobacco, for which only negative ratings (i.e., concerns) are available.

  7. We use the number of links created by a CEO serving as an audit committee and/or board member in other companies, which is consistent with prior research where the number of audit committee–audit partner interlocks is used (e.g., Hossain et al., 2016).

  8. In Table 4, we report the natural logarithms of ACSIZE, CEOAGE, CEOTEN, BSIZE, and BIND.

  9. We also examine whether the effect of CEO interlocking is incremental to that of board interlocking. We utilize Gujarati’s (2003) ∆R2-F-statistic to measure the incremental role of CEO interlocking over board interlocking. The unreported Gujarati (2003) F-statistics suggest that CEO interlocking significantly increases the regression models’ explanatory power when CEO interlocking and board interlocking are included in the same model. This indicates that CEO interlocking is incrementally more informative than board interlocking.

  10. For the dummy variables, we follow Hoi et al. (2013) to construct the company-level measure. For example, referring to having a female CEO (FCEO), we compose the company-level measure as a dummy variable that equals 1 if FCEO equals 1 in at least half the years from 2005 to 2012; otherwise, it equals 0.

  11. Hoi et al. (2013) consider companies that have a score of four or more concerns as being highly socially irresponsible.

  12. We do not find that CEO_AC interlocks have any association with the community dimension, and CEO_BRD interlocks with the products dimension of CSR performance.

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This study was not funded by any external grant authority.

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Authors and Affiliations

  1. Discipline of Accounting and Finance, Newcastle Business School, The University of Newcastle, Sydney, NSW, 2000, Australia

    Sudipta Bose

  2. Department of Accounting and Data Analytics, La Trobe University, La Trobe Business School, Melbourne, VIC, 3086, Australia

    Muhammad Jahangir Ali

  3. School of Accounting, Auditing & Taxation, Business School, UNSW Sydney, Sydney, NSW, 2052, Australia

    Sarowar Hossain

  4. Discipline of Accounting and Finance, Newcastle Business School, The University of Newcastle, Newcastle, NSW, 2308, Australia

    Abul Shamsuddin

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  1. Sudipta Bose
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Correspondence to Muhammad Jahangir Ali.

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Dr Sudipta Bose declares that he has no conflict of interest. A/Prof. Muhammad Jahangir Ali declares that he has no conflict of interest. Dr Sarowar Hossain declares that he has no conflict of interest. Prof. Abul Shamsuddin declares that he has no conflict of interest.

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Bose, S., Ali, M.J., Hossain, S. et al. Does CEO–Audit Committee/Board Interlocking Matter for Corporate Social Responsibility?. J Bus Ethics 179, 819–847 (2022). https://doi.org/10.1007/s10551-021-04871-8

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