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Corporate Social Responsibility, Corporate Governance and CEO Compensation Incentives

Written by A. Amiot, F. H. Johansson

Paper category

Master Thesis


Business Administration>General




Master Thesis: Corporate Social Responsibility (CSR) Corporate social responsibility is a complex concept, and its definition may be different, but corporate social responsibility usually refers to the company's voluntary activities in terms of the environment, employees, and community well-being than required by law ( Mcwilliam and Siegel 2001; Barnea and Rubin, 2010. In the past few decades, the interest and relevance of corporate social responsibility has increased, because some managers have become more aware of the importance of multiple stakeholders, not just Only shareholders (Mitchell, Agle, and Wood 1997; Diebecker and Sommer, 2017). Therefore, it can be said that for these managers, voluntary CSR is at least as important as legal requirements. The stakeholder’s perspective assumes that multiple interests are satisfied Stakeholders’ companies will reduce potential conflicts, strengthen relationships, and ensure that they focus on the concept of continuing operations that create value for the company (Freeman, Harrison, Wicks, Palmer, and Cole, 2010). However, investing in In the short term, CSR usually leads to lower results, regardless of whether the company chooses to report it as a cost or an investment. Therefore, not every manager agrees that meeting multiple stakeholders will be in the best interests of the company and its shareholders. The costs associated with CSR activities conflict with profit maximization and are therefore regarded as agency costs. This view refers to the more traditional shareholder philosophy, because satisfying shareholders is important for these managers and can be achieved by increasing the company’s profits. Realization (Mitchell et al., 1997; Diebecker and Sommer, 2017). Those who advocate shareholder views believe that managers engage in corporate social responsibility to improve the company’s social and sustainable responsibilities, at the expense of shareholders’ interests , But did not see any long-term benefits. They believe that if managers avoid participating in CSR activities, thereby increasing shareholder profits and value, these costs will not exist (Mcwilliam and Siegel, 2001; Jiraporn and Chintrakarn, 2013). On the other hand, those who advocate stakeholder views believe that participation in CSR should be seen as a long-term investment, because meeting multiple stakeholders will reduce potential conflicts, strengthen relationships, and ensure that the concept of continuing operations is focused on creating value for the company ( Freeman, Harrison, Wicks, Palmer, and Cole, 2010). The difference between these two views of corporate social responsibility has sparked a controversial argument that corporate social responsibility participation is It is still undermining shareholder value. A large amount of literature has studied this issue, but no consistent results have been obtained because positive, negative, and insignificant relationships have been observed (Borghesi et al., 2014; Margolis et al., 2009; Krüger, 2015). 2.2 Agency theory applied to chief executive officer (CEO) Jensen and Meckling (1976) defined agency theory as the relationship between principal and agent. The principal hires an agent to execute the goal on behalf of the principal. Agency costs are caused by the self-interested behavior of agents, who make decisions to maximize their personal interests at the expense of their principals. Jensen and Meckling (1976) suggested that the principal can design appropriate incentive measures to keep the agent's interests in line with the principal's interests. The costs incurred by incentives are called monitoring costs, and they usually result in higher rewards for the agent. In this study, there may be a principal-agent problem that leads to agency costs, because shareholders (principals) hire CEOs (agents) to optimize shareholder value. The following section describes the conclusions of previous research on how corporate governance and compensation affect agency costs and the responsibilities of the board of directors and the CEO. 2.2.1 Responsibilities of the CEO and the Board of Directors The board of directors is elected by shareholders to monitor their interests, because shareholders themselves usually do not have sufficient ownership to effectively influence the company's business decisions. Therefore, the board of directors can be regarded as the link between the company's senior management and its shareholders, and the shareholders are ultimately responsible for supervising the work of the senior management in the interests of shareholders (Volonté, 2015). The board of directors has two main responsibilities within the company—supervising and providing advice to management. The first of these duties (based on agency theory and the emergence of agency costs) highlights the importance of board functions to prevent and reduce principals— The agent problem often exists between managers and shareholders (Jensen and Meckling, 1976; Fama and Jensen, 1983). The second main responsibility involves how to manage the company and its future plans (strategy, ethics, goals). The board of directors is also responsible for appointing the company's chief executive officer, whose responsibility is to implement board decisions and ensure the effective and efficient operation of daily activities (Volonté, 2015). The responsibility of supervising and advising the manager since the board of directors can be problematic if the CEO is also a member of the board. In this case, the CEO is responsible for day-to-day activities and is also responsible for overseeing these decisions. Therefore, previous studies have found that if the CEO is not a member of the board of directors, corporate governance will be stronger. Therefore, the dual identity of the CEO is used as an agent to measure the strength of corporate governance (Volonté, 2015). Read Less