The Effect of Board Capital and CEO Power on Corporate Social Responsibility Disclosures

Transcription

1 J Bus Ethics DOI /s y The Effect of Board Capital and CEO Power on Corporate Social Responsibility Disclosures Mohammad Badrul Muttakin 1 Arifur Khan 1 Dessalegn Getie Mihret 1 Received: 7 December 2015 / Accepted: 25 February 2016 Springer Science+Business Media Dordrecht 2016 Abstract This study examines the effect of directors human and social capital (i.e. board capital) on the level of corporate social responsibility (CSR) disclosures by drawing on insights from a resource-based view. It also investigates the effect of chief executive officer (CEO) power on this relationship. Data were obtained from annual reports of companies listed on the Dhaka Stock Exchange in Bangladesh from 2005 to We employ outside directors experiences and expertise as a proxy for board capital and measure CEO power using a power index that comprises CEO duality, ownership, tenure and family CEO status. Results show that board capital is positively associated with CSR disclosure levels; however, CEO power is negatively associated with CSR disclosures and reduces the effect of board capital on CSR disclosures. Thus, we conclude that although board capital can improve CSR practices, CEO power can also inhibit these practices. Keywords Board capital CEO power Corporate social responsibility disclosure Bangladesh Introduction An increasing societal focus on the corporate social responsibility (CSR) disclosures of firms has attracted considerable research on the behaviours of firms. Previous & Arifur Khan arifur.khan@deakin.edu.au 1 Department of Accounting, Deakin Business School, Deakin University, 221 Burwood Highway, Burwood, VIC 3125, Australia studies have investigated the association between CSR disclosures and board characteristics such as board independence and incentives (e.g. Haniffa and Cooke 2005; Harjoto and Jo 2011; Fabrizi et al. 2013). This area of research is largely premised on the agency theory argument that independent directors effectively monitor and control firms (e.g. Klein 2002; Davidson et al. 2005). The CSR disclosures of firms are often voluntary in nature and, consequently, lack strict monitoring and control benchmarks. Thus, it may be necessary to supplement agency theory with other theories to gain a better understanding of the CSR disclosure behaviours of firms. The resource-based view provides a conceptual tool to understand why (in addition to board independence, emphasised in the monitoring argument), knowledge, experience and networks of directors may matter. Becker (1964) defined board capital as a combination of directors human and social capital. Hillman and Dalziel (2003) contend that the concept of board capital can enable us to develop hypotheses based on the resourcebased view (Pfeffer 1972; Pfeffer and Salancik 1978). Human capital refers to directors knowledge, skills and experience. Conversely, social capital refers to relationships and networks developed through interlocking directorate ties (Hillman and Dalziel 2003; Haynes and Hillman 2010). Previous research shows that board capital could enhance board effectiveness in relation to decision making and policy formulation (see, for example, Baysinger and Hoskisson 1990). Boards with high human and social capital provide useful advice and counsel to management on important matters facing firms (Haynes and Hillman 2010). Jeremias and Gani (2014) document a positive impact of board capital on firm performance and also find that board capital mitigates the negative effect of CEO

2 M. B. Muttakin et al. duality and board dependence 1 on firm performance. Additionally, Reeb and Zhao (2013) contend that board capital facilitates board oversight and improves disclosure quality. These results suggest that the effectiveness of a board is more dependent on directors human and social capital (Becker 1964) than directors independence. However, as CSR disclosures have yet to be examined in this emerging area of research, the relationship between board capital and CSR disclosures remains largely unknown. A relationship between the two concepts is predicted, as empirical evidence shows that boards with high human and social capital provide useful advice to management on strategically important matters (Haynes and Hillman 2010). Further, CSR activities and associated disclosures are increasingly regarded as important strategic matters for firms due to increasing attention being directed towards firms CSR activities (Reverte 2009). Recent research shows that CEO power could influence the effect of board capital on firm decisions (Chen 2014; Haynes and Hillman 2010). CEO power could be particularly important in the context of CSR matters, as CSR expenditures may contradict management s short-term financial targets and the voluntary nature of CSR activities may reduce management attention to CSR (McWilliams and Siegel 2001; McWilliams et al. 2006). However, research on CSR disclosure has yet to empirically test these relationships. Using empirical evidence from Bangladeshi listed companies, this study investigates whether any association exists between board capital and CSR disclosures and whether CEO power affects this association. Bangladesh, a developing South Asian country, provides an ideal setting for the present study for a number of reasons. First, interests in CSR disclosures by Bangladeshi corporations are increasing (Momin and Parker 2013). The scrutiny on CSR practices by Bangladeshi companies has escalated in the wake of numerous high profile environmental, health and safety corporate disasters in the garment industries that claimed hundreds of lives (The Daily Star 2012; Washington Post 2013). Such incidents have directed international attention to Bangladeshi labour rights and worker safety and spawned stakeholder activism that has led to international buyers pressuring Bangladeshi businesses to improve labour practices and become socially responsible businesses. 2 Second, the small size and family ownership structures of Bangladeshi firms provide a sizable number of observations for a study of the CEO power effect 1 Jeremias and Gani (2014) define board dependence as the number of inside directors divided by the total number of directors on the board. 2 The United States of America announced the suspension of United States trade privileges for Bangladesh in June 2013 following concerns relating to labour rights and workers safety (Washington Post 2013). (Farooque et al. 2007; Siddiqui 2010). Many Bangladesh corporations have adopted an Anglo-American governance model that necessitates majority board independence and the separation of the CEO and chairperson positions; however, family CEOs and CEO duality continues in the Bangladeshi corporate sector (Sobhan and Werner 2003; Uddin and Choudhury 2008). The results of our study show that board capital is positively associated with CSR disclosures, CEO power is negatively associated with CSR disclosures and CEO power reduces the positive effect of board capital on CSR disclosures. Thus, it appears that while board capital can improve CSR practices, CEO power can inhibit this improvement. Our additional analysis shows that CEO duality, CEO ownership and CEO tenure are important dimensions of CEO power affecting Bangladeshi companies CSR disclosures. Three important implications can be drawn from the findings of this study. First, a more comprehensive understanding of the governance issues influencing the CSR disclosures of firms will inform policymaking decisions. This is important as CSR policy issues continue to gain prominence and some countries have introduced mandated CSR expenditures for companies (Subramaniam et al. 2015). Second, under the current voluntary disclosure regime, readers of CSR reports need to put into perspective the information detailed in these reports. Third, we extend the conclusions of emerging research on board capital and corporate disclosures (e.g. Reeb and Zhao 2013) in relation to the voluntary CSR disclosures of firms. The remainder of this paper is structured as follows. Theory and hypothesis development in section develops the theoretical framework and hypotheses. Research design in section describes the research methods employed in this study. Results in section presents the empirical results and further analyses. Finally, Conclusion in section concludes the study. Theory and Hypothesis Development Theoretical Perspectives The argument of this paper is grounded in Hillman and Dalziel s (2003) concept of board capital that comprises directors human capital and social capital. Hillman and Dalziel (2003) drew on resource dependency theory and agency theory to develop this concept. Under the resource dependency theory, board capital refers to a board s ability to provide advice and counsel. Conversely, under agency theory, a board has crucial control and an independent monitoring role. In the present study, board capital is defined as the ability of directors to use their skills, reputations,

3 The Effect of Board Capital and CEO Power on Corporate Social Responsibility Disclosures experience, expertise and knowledge to perform both manager-monitoring activities and provide advice and counsel to management (Hillman 2005; Chen 2008). Resource dependence theory focuses on the strategic actions of organisations that aim to manage and control resource scarcity within organisations through interdependence with other firms in their environment (Mustakallio 2002). Under this theory, human capital (i.e. board members experiences and occupational backgrounds) is the main component of a board s capital and enables directors to act as a resource to management by providing advice and counsel. Previous research shows that board members who are also CEOs of other large firms (Baysinger and Butler 1985; Rosenstein and Wyatt 1994), government officers (Hillman 2005; Hillman et al. 1999), members of board of directors of influential firms (Haunschild and Beckman 1998) or university professors (Jeremias and Gani 2014) usually possess high board capital that can assist managers to perform their duties effectively. Such prominent board members can also reduce the risk of environmental uncertainty (Daily and Dalton 1994), help managers to formulate strategic decisions (Westphal 1999) and assist managers to identify strategic opportunities (Judge and Zeithaml 1992). Further, top managers can tap into a board s breadth of knowledge (Zahra and Pearce 1989). Board members provide these resources through their skills, knowledge and experiences (Corbetta and Salvato 2004); that is, through what Hillman and Dalziel (2003) described as their board capital. A board s ability to provide independent monitoring and control (Jensen and Meckling 1976) may be more important to compliance-oriented reporting than voluntary disclosures such as CSR (McWilliams et al. 2006). CSR refers to actions that appear to further some social good, beyond the interests of the firm and that which is required by law (McWilliams and Siegel 2001, p. 117). Consequently, some powerful CEOs may not prioritise CSR practices (McWilliams et al. 2006). Agency theory research shows that some managers become powerful due to their concentrated ownership, long tenure and status as founders and because they hold the dual roles of CEO and chairperson (Morck et al. 1988). The power CEOs hold usually insulates them from disciplining and controlling forces, such as boards of directors, the managerial labour market and/or the market for corporate control (Fama and Jensen 1983). Entrenched forms of CEO power may be used to advance self-interests rather than the interests of shareholders or stakeholders (Weisbach 1988). It may be that powerful CEOs are not motivated to invest in CSR practices, if these practices are not linked to their self-interests (McWilliams et al. 2006). Thus, CEO power could also restrict the potential of board capital to invest in CSR and make associated disclosures. Board Capital and CSR Disclosures Boards of directors are one of the most important governance devices for monitoring on behalf of shareholders. Previous studies show the importance of board characteristics such as board composition, size, independence and leadership in relation to the proper functioning of a board (Agrawal and Knoeber 1996; Yermack 1996). As the capabilities of board members represent the board s ability to monitor and assist decisions of management, board capital is important in the day-to-day operations of firms. Previous research shows that board members with high human and social capital effectively perform various duties (Jeremias and Gani 2014). As outlined above, board members with higher levels of expertise and experience and richer social networks are better able to perform their duties than directors with lesser experience, unproven track records and limited social networks. Previous research shows the effectiveness of board monitoring and that board capital positively affects the performances of firms. Jermias and Gani (2014) found that firms benefit from board capital, as outside directors have the ability to monitor managers and provide advice and counsel resulting in better firm performance. Reeb andzhao(2013) contend that board capital should be of great importance to shareholders who have little recourse in relation to poor decisions that originates from the limited abilities or skills of the board. Reeb and Zhao (2013) further argue that board capital (i.e. directors educational backgrounds, experiences and networks) facilitates board oversight and improves board efficacy, thus enhancing the quality of disclosures. Chen (2014) argues that because of their education, knowledge and industry-specific experience, directors may more accurately evaluate the prospects for innovations and related research and development (R&D). Directors with such capabilities are likely to increase their efforts to provide valuable strategic advice and resources and support R&D investment to enhance innovative capabilities. Accordingly, a positive relationship between board capital and R&D intensity has been documented in the Taiwanese electronics industry. The values, motives and experience of directors influence corporate disclosure policies (Haniffa and Cooke 2005). Consequently, board capital could influence corporate social disclosures. Directors with skills, experience and knowledge may have a greater ability to monitor corporate social activities and provide relevant information to stakeholders. Thus, we propose the following hypothesis: H1 There is a positive relationship between board capital and the level of CSR disclosures.

4 M. B. Muttakin et al. CEO Power and CSR Disclosures CEO power is another variable that could potentially influence the level of CSR disclosures by inhibiting a board s monitoring ability. CEO power may originate from multiple sources (Jackling and Johl 2009) such as CEO duality, CEO ownership, CEO tenure and family CEO status. A powerful CEO may affect board decisions (Dalton and Kesner 1987), ultimately reducing the effectiveness of the board (Boyd 1994). Conversely, under the influence of a dominant CEO, directors may engage in greater discussion and debate and consider a wider range of viewpoints (Zahra and Pearce 1989). A CEO who also chairs the board may exert a greater influence over the board (Cannella and Shen 2001), as the chairperson often sets the agenda for board meetings and thus has the ability to control the issues brought before the board (Imhoff 2003). CEOs who serve as chairpersons also often have a significant influence on the selection of candidates for board seats. This may increase the likelihood that new board appointees will not be independent of management, even if they are presented as independent. Haniffa and Cooke (2002) outline two competing arguments in relation to this issue. If two separate people perform the two separate roles of CEO and chairperson, the checks and balances of performance management are enhanced. However, the separation of these two roles is not always necessary and many companies are well run and exhibit effective board monitoring in circumstances where these roles have been combined. In companies where a CEO has a dual role, the CEO also has greater power that may enable him/her to make decisions that do not take into account the interests of stakeholders. This may also result in reduced attention to and involvement in social or community activities and thus affect related disclosures. A CEO that owns a fraction of a firm s shares is affected by managerial actions and thus will align his/her incentives with those of other shareholders (Jensen and Meckling 1976). However, it has also been argued that increased share ownership may result in managers becoming entrenched (Demsetz 1983). An entrenched CEO may dominate a board s decisions on firm strategies and policies concerning organisational social behaviour. Prior research suggests that managerial ownership negatively affects incidences of voluntary disclosures (Chau and Gray 2010). If a CEO has held his/her position for a long period, agency problems could begin to arise, as long tenure has been shown to increase managerial power (Morck et al. 1988; Berger et al. 1997; Rose and Shepard 1997; Hermalin and Weisbach 1998; Chidambaran and Prabhala 2003; Ryan and Wiggins 2004) through entrenchment. An entrenched CEO is likely to place less emphasis on stakeholders interests and may be reluctant to invest in social activities. Similarly, a family CEO (appointed by family members) is more likely to make decisions that protect the interests of the family. Demsetz and Lehn (1985) argue that families tend to supply top managers to better meet their consumption goals through the firm rather than through their wealth. A family CEO may also have an important role in selecting board members and may appoint outside directors based on personal connections. Additionally, family CEOs tend to be less accountable to general shareholders (Gomez-Mejia et al. 2001). Thus, it is expected that family CEOs will be less motivated in relation to CSR strategies and activities than non-family CEOs. In summary, the power of a CEO is likely to be a function of CEO duality, ownership, tenure and family status. Powerful CEOs may be more concerned with their own interests and the costs of CSR practices and, consequently, negatively influence corporate decisions in relation to CSR activities. Thus, we propose the following hypothesis: H2 There is a negative relationship between CEO power and the level of CSR disclosures. Board Capital, CEO Power and CSR Disclosures In practice, in addition to directors, CEOs are also responsible for the allocation of resources and making strategic decisions (Minnick and Noga 2010). Thus, interactions between powerful CEOs and directors may influence the quality of board decisions (Dalton and Kesner 1987; Kor 2006). As noted above, a powerful CEO is more likely to engage in self-serving actions that decrease the value of shareholders wealth (Dunn 2004). Powerful CEOs may be reluctant to invest heavily in CSR-related activities. Conversely, directors (particularly outside directors) with skills, experiences and knowledge who protect shareholders and stakeholders interests may advocate for more CSR activities. Where the power of CEOs is prevalent, CEOs may also influence the appointment of directors by selecting directors who are unlikely to challenge their decisions (Uddin and Choudhury 2008). This enables CEOs to dominate board decisions on CSR matters. Thus, we propose the following hypothesis: H3 The interaction between CEO power and board capital is negatively related to the level of CSR disclosures. Research Design Sample and Data Our sampling period covers reporting years from 2005 to 2013 (inclusive). Table 1 summarises the sample selection

5 The Effect of Board Capital and CEO Power on Corporate Social Responsibility Disclosures procedure. In 2005, 282 companies were listed on Bangladesh s Dhaka Stock Exchange (DSE). The sample comprises all 155 non-financial companies listed on the DSE from 2005 to Unlike many developed countries, Bangladesh has no formal database for annual reports and thus this study relied on the annual reports available at the DSE library. The DSE library has a limited collection, but a sufficient number of annual reports from 2005 onwards. Thus, we decided to begin our study period in At the time we conducted the research project, the latest year that annual reports were available was Of 1395 firm-years, we selected a final sample of 1005 firm-years due to the unavailability of necessary information and annual reports for 390 firm-years. We collected the financial and corporate governance data from the annual reports of the sample companies. Social responsibility information was collected from the CSR disclosures, corporate governance disclosures, directors reports, Chairman s statements and notes attached to the financial statements contained in the annual reports. Board capital data were collected from the annual reports, the prospectuses of the listed companies, stock exchange documents and company websites. CSRD ¼ a þ b 1 BCAP þ b 2 CEOPWR þ b 3 BCAP CEOPWR þ b 4 BIND þ b 5 BSIZE þ b 6 LEV þ b 7 LAGE þ b 8 ROA þ b 9 FSIZE þ b 10 INDUSTRY DUMMIES þ b 11 YEAR DUMMIES þ e ; ð3þ where Variable Definition Expected sign CSRD Corporate social responsibility disclosure score/index BCAP Board capital? CEOPWR Chief executive officer power BIND Board independence? BSIZE Board size ± LEV Leverage ± LAGE Firm age? ROA Return on assets? FISZE Firm size? Model We use regression analysis to test the effect of board capital and CEO power on the level of CSR disclosures. We test assumptions underlying the regression model for multicollinearity based on a correlation matrix and the variance inflation factor (VIF). None of the variables has a VIF value in excess of 10 (Neter et al. 1983), suggesting that multicollinearity is not a problem in interpreting the regression results. The regression 3 equations are as follows: CSRD ¼ a þ b 1 BCAP þ b 2 BIND þ b 3 BSIZE þ b 4 LEV þ b 5 LAGE þ b 6 ROA þ b 7 FSIZE þ b 8 INDUSTRY DUMMIES þ b 9 YEAR DUMMIES þ e ð1þ CSRD ¼ a þ b 1 CEOPWR þ b 2 BIND þ b 3 BSIZE þ b 4 LEV þ b 5 LAGE þ b 6 ROA þ b 7 FSIZE þ b 8 INDUSTRY DUMMIES þ b 9 YEAR DUMMIES þ e ð2þ 3 We use the panel least square regression technique. Dependent Variable The CSR disclosure (CSRD) index is the dependent variable in this study. To assess the level of CSRD in annual reports, a checklist of 20 items was constructed based on previous CSR studies (Rashid and Lodh 2008; Muttakin and Khan 2014). These 20 items relate to five themes/categories (i.e. community, environment, employee, products and services and value added information) applicable to the Bangladeshi environment. The community theme includes three items: community involvement, charitable donations and subscriptions, sponsorship and advertising and community in relation to health and education. The theme for environment includes disclosures relating to environmental policies. The theme for employee information includes nine items: number of employees, employee relationships, employee welfare, employee education, employee training and development, employee profit sharing, remuneration, employees occupational health and safety and child labour and related actions. The product and service theme comprises six items: types of product disclosed, product R&D, product quality and safety, discussion of marketing network, customer, service and satisfaction and customer award. The value added information theme focuses on the disclosure of a value added statement.

6 M. B. Muttakin et al. Table 1 Sample description Panel A: sample size Number of firm-years 1395 Less Firm-years without necessary 390 information/annual reports Total 1005 Industry sector Panel B: Industry wise distribution Cement 62 Ceramics 35 Engineering 168 Food 180 Jute 25 Paper and printing 13 Miscellaneous 93 Pharmaceuticals 183 Tannery 43 Textile 203 Total 1005 Number of firm-years A dichotomous procedure is applied whereby a company is awarded 1 if an item under each theme is disclosed and 0 otherwise. We undertook a content analysis to develop our CSR disclosure index. To mitigate any coder reliability issues that could arise from this approach, a number of precautionary measures were adopted. Specifically, the first and third authors prepared a scoring sheet for each firm-year observation and rated each item of the checklist accordingly. Later, the second author verified each scoring sheet to ensure reliable ratings had been given across all sample firm-year observations. Where incongruities arose, the annual reports were reanalysed and the differences were resolved. To calculate the CSR disclosure scores, we adopted an approach used in previous research (Haniffa and Cooke 2005; Khan et al. 2013) that takes the ratio of actual scores awarded and the maximum score that could be awarded by a sample firm-year observation. Further, we use Cronbach s (1951) coefficient alpha to assess the internal consistency of our disclosure scores. Cronbach s coefficient alpha measures the degree to which correlations among different categories of the disclosure index are weakened due to random error. As a general rule, an alpha of indicates that a correlation is weakened very little by random measurement error. In this study, the coefficient score for the five categories in the disclosure index is Thus, random error is less likely to reduce the power of empirical tests when we use the CSRD index as a dependent variable. Hypothesised Variables Adopting the approach of Jeremias and Gani s (2014), we measure board capital as the number of outside directors also serving as CEOs or directors of another listed company or university professors or government officers divided by total numbers of directors on the board. 4 Previous studies use different dimensions such as CEO duality (Hermalin and Weisbach 1998; Jackling and Johl 2009), CEO ownership (Veprauskaite and Adams 2013), CEO tenure (Morck et al. 1988; Brookman and Thistle 2009) and CEO remuneration (Grinstein and Hribar 2004; Florackis and Ozkan 2009; Jiraporn and Chintrakarn 2013) as proxies of CEO power. No single measure is likely to capture every possible dimension of CEO power; however, we have developed a CEO power index that comprises four different dimensions to test the influence of CEO power on the level of CSR disclosures. The approach of developing a CEO power index to capture different dimensions is consistent with that of Veprauskaite and Adams (2013). The dimensions of the index are CEO duality, CEO ownership, CEO tenure and family CEO status (i.e. whether the CEO was a family member). Due to data limitations, we did not consider CEO remuneration under the power index. However, we did consider family CEO status as a source of CEO power under the index because a majority of Bangladeshi listed companies are family-owned companies and appoint family members as CEOs (Farooque et al. 2007). To develop the power index, we first created scores for each of the four power dimensions using a dichotomous procedure; for example, a dummy variable equals 1 if the CEO of a firm also holds the position of chairperson and 0 otherwise. Similarly, a dummy variable equals 1 if CEO ownership of a firm is above median ownership and 0 otherwise. A dummy variable equals 1 if the tenure of a CEO is above median value and 0 otherwise. A dummy variable equals 1 if the CEO is a family CEO and 0 otherwise. Accordingly, to derive the CEO power index, we calculate the ratio of actual scores awarded to the maximum score attainable (i.e. 4) by a company for a particular year. Cronbach s coefficient alpha for these measures is For example, Mr K. M. Masud Siddiqui, the secretary of the Ministry of Industries, was appointed as an independent director on the board of the British American Tobacco Company Bangladesh Limited in Dr Mijanur Rahman, the Vice Chancellor of Jagganath University, was appointed as an independent director on the board of Maksons Spinning Mills Limited in Mr M. Azizul Huq, the managing director of GlaxoSmithKline (GSK) Bangladesh Limited, was appointed as an independent director of Berger Paints Bangladesh Limited in 2012.

7 The Effect of Board Capital and CEO Power on Corporate Social Responsibility Disclosures Control Variables We control for the following variables: board independence (BIND), board size (BSIZE), leverage (LEV), firm age (LAGE), profitability (ROA) and firm size (FSIZE). Board independence (BIND) is measured by calculating the ratio of the total number of independent directors to the total number of directors on the board. Independent directors are usually perceived as acting to protect the interests of minority shareholders and tend to exert pressure on management to disclose additional information, including CSR matters (Haniffa and Cooke 2005). Further, independent directors have been found to proactively address CSR issues to enhance their reputation in society (Zahra and Stanton 1988). Thus, we expect a positive effect of board independence on CSR disclosures. Board size (BSIZE) is measured as the total number of directors on the board. Cheng (2008) argues that larger boards encounter more problems in relation to directors free-riding than smaller boards. Based on this view, if a board has several directors, the directors might have different opinions on CSR-related matters and a lack of consensus on CSR disclosures may result. Thus, it could be expected that larger boards would have a negative effect on the level of CSR disclosures. However, Pfeffer and Salancik (1978) contend that a large board size could indicate that a firm is attempting to form links with its environment and society and that board size could positively affect CSR disclosures. Thus, the relationship between board size and CSR disclosures could be either positive or negative. Leverage (LEV) is measured by calculating the ratio of total debts to total assets. Companies with high debts may provide more information to assure their creditors that they are unlikely to default on any debt covenants (Schipper 1981). However, Purushothaman et al. (2000) contend that companies with high leverage might have close relationships with their creditors and use means other than annual reports to provide additional information, including CSR disclosures. Thus, the effect of leverage on CSR disclosures could be either positive or negative. Firm age (LAGE) is a natural log of the number of years since a firm s inception. Roberts (1992) found that more mature firms are more concerned about their reputations and thus disclose more social responsibility information. Thus, we expect a positive relationship between firm age and CSR disclosures. Profitability (ROA) is measured by calculating the ratio of earnings before interest and taxes to the total assets. Profitable companies may wish to show their high commitment to the wellbeing of society and thus may provide more CSR disclosures. Firm size (FSIZE) is the natural logarithmic transformation of total assets. Large companies tend to undertake activities that have greater impact on society, as they are often exposed to greater stakeholder scrutiny than smaller firms. We therefore, expect a positive association between firm size and CSR disclosures. Results Univariate Results Panel A of Table 2 sets out the descriptive statistics of the CSRD index, corporate governance and financial variables. The board capital variable (BCAP) shows that outside directors with skills, knowledge and experiences comprise, on average, 14 % of our sample. This is much lower than the figure of 48 % reported by Jermias and Gani (2014) for their sample of UK firms. The average CSR disclosures (CSRD) are The average of the CEO power (CEOPWR) index is The average level of profitability (ROA) is approximately 7 %. The average firm size (natural log) is and the average firm age in our sample is approximately 24 years. Panel B of Table 2 sets out the descriptive statistics of the CSR disclosures score based on different Table 2 Descriptive statistics Variable Mean Median SD Panel A CSRD BCAP CEOPWR CEODU CEOOWN CEOTEN FCEO BIND BSIZE AGE LEV ROA FSIZE Panel B COMDIS ENVDIS EMPDIS PRODIS VADIS

8 M. B. Muttakin et al. themes/categories. The three most disclosed categories are employee-related disclosures (EMPDIS = 30 %), disclosure of the value added statement (VADIS = 26 %) and community-related disclosures (COMDIS = 25 %). The relatively high score of employee-related disclosures is unsurprising given that Bangladesh, particularly the textile sector, is notorious in the international community for its poor working conditions, workplace health and safety and use of child labour. Thus, Bangladeshi companies may be providing more employee-related information in an attempt to change the perceptions of the international community. Table 3 presents the univariate tests on the means of CSRDs between firms with high rankings by hypothesised variables (including the different dimensions of CEO power) and those with low rankings. High is equal to or higher than the median value of each respective variable and Low is equal to or lower than the median value. Comparing firms with high and low board capital, we find that high board capital firms provide more CSR disclosures than firms with low board capital. We also find that firms with high CEO power provide fewer CSR disclosures than low CEO power firms. Further, we determine that the extent of CSR disclosures differs significantly as firms dimensions of CEO power such as CEO duality, CEO ownership, CEO tenure and family CEO differ. Table 4 presents the correlation matrix. Notably, the incidences of board capital (BCAP) and CEO power (CEOPWR) are positively and negatively correlated with CSR disclosures (CSRD), respectively, at the 1 % level. We also document that CEO power (CEOPWR) is positively correlated with CEO duality (CEODU), CEO ownership (CEOOWN), CEO tenure (CEOTEN) and family CEO status (FCEO), and negatively correlated with board independence (BIND) at the 1 % level. Notably, the magnitude of these correlations is fairly large. This suggests that the four dimensions used in this study to develop CEO power index are important determinants of power in Bangladesh. We also document that the control variables such as board independence (BIND), board size (BSIZE), profitability (ROA), firm age (LAGE) and firm size (FSIZE) are positive and significantly Table 3 Mean difference tests Variable CSRD [Median (high) \Median (low) t test (P value) BCAP CEOPWR CEODU CEOOWN CEOTEN FCEO correlated with CSR disclosures (CSRD); however, leverage (LEV) is negatively correlated with CSR disclosures (CSRD). Multivariate Results Table 5 sets out the results of regressing the hypothesised variables on the level of CSR disclosures. In model 1, we explore the effect of board capital on CSR disclosures. The board capital (BCAP) variable has a positive and significant coefficient (at the 1 % level). Thus, a greater proportion of outside directors with skills, knowledge and experiences provides a higher level of CSR disclosure (supporting our first hypothesis). In model 2, we use an alternative definition of board capital. Specifically, we replace BCAP by BCAPDUM. BCAPDUM is a dummy variable that equals 1 if there are any outside directors serving as CEOs or directors of a listed company or university professors or government officers and is otherwise 0. Again, we document a positive and significant coefficient (at the 1 % level) for the BCAPDUM variable. Overall, our results suggest that outside directors are concerned about legitimacy and reputation. This is consistent with the notion that directors skills, knowledge and experiences can improve board monitoring and decision making (Jeremias and Gani 2014; Reeb and Zhao 2013) and that directors can contribute to public accountability by ensuring greater investments in CSR activities and disclosing accordingly. In model 3, we investigate the effect of CEO power (CEOPWR) on the level of CSR disclosures. We document a negative and significant coefficient of the CEO power variable (at the 5 % level). Consistent with our second hypothesis, this suggests that more CEO power results in fewer CSR disclosures. In weak legal, family-dominated environments, CEOs are mainly family- or self-interest driven. These CEOs are entrenched and less likely to care about public accountability and legitimacy. Further, on many occasions these CEOs do not engage in an activity, if the costs of the CSR-related activity outweigh the benefits (Fabrizi et al. 2013). Thus, powerful CEOs tend to be less interested in using issues such as CSR to gain legitimacy. In model 4, we test whether CEO power affects the relationship between board capital and the level of CSR disclosures. In this model, the key variable is the interaction between board capital and CEO power (BCAP*- CEOPWR). We document a negative and significant coefficient (at the 1 % level) of the interaction variable. This suggests that board capital has a negative effect on the level of CSR disclosures in the presence of greater CEO power. Thus, supporting our third hypothesis, the interaction between board capital and CEO power negatively affects the level of CSR disclosures.

9 The Effect of Board Capital and CEO Power on Corporate Social Responsibility Disclosures Table 4 Correlation matrix BCAP CSRD LAGE LEV ROA FSIZE CEOPWR CEODU CEOOWN CEOTEN BIND FCEO BSIZE BCAP P value CSRD P value LAGE P value LEV P value ROA P value FSIZE P value CEOPWR P value CEODU P value CEOOWN P value CEOTEN P value BIND P value FCEO P value BSIZE P value

10 M. B. Muttakin et al. Table 5 Regression results: board capital, CEO power and CSR disclosures Variable Model 1 Model 2 Model 3 Model 4 Model 5 Coefficient Prob. Coefficient Prob. Coefficient Prob. Coefficient Prob. Coefficient Prob. Panel A: OLS Constant BCAP BCAPDUM CEOPWR BCAP*CEOPWR BCAPDUM*CEOPWR BIND BSIZE FSIZE LEV LAGE ROA Industry dummies Included Included Included Included Included Year dummies Included Included Included Included Included Adjusted R F-statistic Prob (F-statistic) Variable Model 1 Model 2 Model 3 Model 4 Coefficient Prob. Coefficient Prob. Coefficient Prob. Coefficient Prob. Panel B: IV 2SLS Constant BCAP BCAPDUM CEOPWR BCAP*CEOPWR BCAPDUM*CEOPWR BIND BSIZE FSIZE LEV LAGE Industry dummies Included Included Included Included Year dummies Included Included Included Included ROA Adjusted R F-statistic Prob (F-statistic) In model 5, we replace BCAP by the BCAPDUM variable and rerun the regression equation reported in model 4. Under this model, the key variable is the interaction between BCAPDUM and CEOPWR (BCAP- DUM*CEOPWR). Similar to the results for model 4, the newly created interaction variable has a negative and significant coefficient (at the 1 % level). In weak legal, family-dominated environments, powerful CEOs are inclined, on many occasions, to appoint outside directors based on family and personal connections to ensure that their

11 The Effect of Board Capital and CEO Power on Corporate Social Responsibility Disclosures interests remain intact. In firms where CEOs have a greater level of power, there is a general tendency not only to ignore corporate social activities but also to save on the costs related to reporting CSR. Thus, a negative association between board capital and CSR disclosures results. Overall, it appears that in the presence of a higher degree of CEO power, outside directors with the necessary skills and experiences may not challenge the decisions made by CEOs in relation to CSR activities, resulting in a lower level of CSR disclosures. We also document that the signs and significance levels of the coefficients of board capital (BCAP) and CEO power (CEOPWR) are consistent with our findings for models 1 and 3. In relation to the control variables, our findings across all four models suggest that larger firm size (FSIZE), older firms (LAGE) and better performance (ROA) are significantly related to a greater level of CSR disclosures. However, we find a negative and significant effect of leverage (LEV) on the level of CSR disclosures. Thus, it appears that Bangladeshi companies with higher leverage may have closer relationships with their creditors and use other avenues to disclose social responsibility activities (Purushothaman et al. 2000). We also document that board independence (BIND) and board size (BSIZE) have positive effects on CSR disclosures. The results of our analysis in relation to the control variables are consistent with the previous studies (Roberts 1992; Haniffa and Cooke 2005). A potential concern of our previous analysis is that directors with more abilities or experience may choose to sit on boards with greater CSR disclosure to minimise reputation costs and litigation risks (see Panel A, Table 5). Thus, causality may run in the other direction. To address this concern, we use an IV regression (2 SLS) and predict board capital using the firm s location (the dummy variable is equal to 1 if the firm is located in the capital city of the country, and 0 otherwise) as an instrument along with other variables. We chose a firm s location as an instrument, as it is expected that there will be a bigger pool of directors with abilities and experience in a capital city; that is, firms located in a capital city will be more attractive to directors with high abilities because of the geographical proximity. Panel B sets out the results of the IV regression. In model 1, we document that the coefficient of board capital (BCAP) variable is positive and significant (at the 1 % level), implying that a greater proportion of outside directors with skills, knowledge and experiences give a greater level of CSR disclosures. In model 2, we use an alternative definition of board capital variable (BCAP- DUM) to determine whether the results remain qualitatively unchanged. In model 3, we explore the interaction effect between the variables of board capital and CEO power (BCAP*CEOPWR). We document a negative and significant coefficient (at the 5 % level) for the interaction variable. Thus, it appears that board capital has a negative effect on the level of CSR disclosures in the presence of greater CEO power. In model 4, we use an alternative definition of the board capital variable (BCAPDUM); however, the sign and significance of the interaction variable remains qualitatively similar to that of the interaction variable in model 3. Further Analysis We carried out additional tests in relation to the main findings of the study. We examined the effects of board capital and CEO power on CSR disclosures for different categories/themes of CSR (see above). The results of these analyses are set out in Table 6. In models 1 to 5, we explored the effects of board capital (BCAP) and CEO power (CEOPWR) on community-related disclosures (COMDIS), environment-related disclosures (ENVDIS), employee-related disclosures (EMPDIS), product-related disclosures (PRODIS) and value addition-related disclosures (VADIS), respectively. It should be noted that we ran logit models for environment-related (ENVDIS) and value addition-related disclosures (VADIS), as there was only one item to consider under these two categories The signs of the estimated coefficients of our key variables are broadly consistent with our previous findings and provide further evidence that board capital (CEO power) is positively (negatively) related and the interaction term between board capital, and CEO power is negatively related to the level of different categories of CSR-related disclosures. It should be noted that none of the hypothesised variables have any significant effect on communityrelated disclosures (COMDIS). Additionally, the interaction between board capital and CEO power (BCAP*- CEOPWR) has no significant effect on product-related disclosure. Further, CEO power does not influence the likelihood of reporting value added statements to provide value addition-related disclosures. Overall, our results suggest that directors skills, knowledge and experiences improve the level of different categories of CSR disclosures; however, the level of CEO power reduces such disclosures. Further, greater CEO power can reduce the effectiveness of board capital and result in a lower level of different categories of CSR disclosures. We developed the CEO power index based on four different dimensions, and explored the relationships between each of these four dimensions and the level of CSR disclosures (CSRD). In original model (ii), we replaced the CEO power (CEOPWR) variable by four power dimension variables: CEO duality (CEODU), CEO ownership (CEOOWN), CEO tenure (CEOTEN) and CEO family status (FCEO), and reran the regression accordingly. The results are set out under model 1 in Table 7. Notably,

12 M. B. Muttakin et al. Table 6 Regression results: board capital, CEO power and different categories of CSR disclosures Variable Model 1 (COMDIS) Model 2 (ENVDIS) Model 3 (EMPDIS) Model 4 (PRODIS) Model 5 (VADIS) Coefficient Prob. Coefficient Prob. Coefficient Prob. Coefficient Prob. Coefficient Prob. Constant BCAP CEOPWR BCAP*CEOPWR BIND BSIZE LEV FSIZE ROA LAGE Industry dummies Included Included Included Included Included Year dummies Included Included Included Included Included Adjusted R Pseudo R F-statistic Prob (F-statistic) Table 7 Regression results: board capital, different dimensions of CEO power and CSR disclosures Variable Model 1 Model 2 Coefficient Prob. Coefficient Prob. Constant BCAP CEODU CEOOWN CEOTEN FCEO BIND BSIZE LEV LAGE ROA FSIZE BCAP*CEODU BCAP*CEOOWN BCAP*CEOTEN BCAP*FCEO Industry dummies Included Included Year dummies Included Included Adjusted R F-statistic CEO duality (CEODU) and CEO tenure (CEOTEN) have significant and negative effects on the level of CSR disclosures. Our results for the coefficients of the control variables are qualitatively similar to our original findings. In model 2, we reran our original Eq. (3) replacing the interaction variable (BCAP*CEOPWR) with four interaction variables: BACP*CEODU, BCAP*CEOOWN, BCAP*CEOTEN and BCAP*FCEO. As expected, we find that board capital has a positive and significant coefficient. Further, CEO duality and CEO tenure have negative and significant coefficients. These results also suggest that some important dimensions of CEO power such as CEO duality, CEO ownership and CEO tenure negatively and significantly affect the relationship between board capital and the level of CSR disclosures (CSRD). The signs and significance of the coefficients of control variables are consistent with our original findings. We undertook a number of other tests to verify the robustness of our results (these test results are not reported for the sake of brevity). First, we slightly changed the definition of board capital and the focus (particularly on the skills, expertise and experience of the outside independent directors). Next, we reran original Eqs. (1) and (3). We found that the new board capital variable (BCAP) has a positive and significant effect on the level of CSR disclosures in both Eqs. (1) and (3). In Eq. (3), the interaction between board capital and CEO power (BCAP*CEOPWR) has a negative and significant coefficient, suggesting that in the presence of powerful CEOs, Bangladeshi independent directors are less likely to invest and disclose CSR-related activities. Second, we use an alternative definition of CEO power to capture the effect of high and low CEO power. Specifically, based on the CEO power index we used in our main analysis, we created a dummy variable that equals 1 if