S2_Ownership Type CSR

Does Ownership Type Matter for CorporateSocial Responsibility?

Lammertjan Dam and Bert Scholtens*

ABSTRACT

Manuscript Type: EmpiricalResearch Question/Issue: This study examines how different types of owners relate to corporate social responsibility (CSR).Research Findings/Insights: We use firm-level data for more than 600 European firms from 16 countries and 35 industriesfor 2005. We find that ownership by employees, individuals, and firms is associated with relatively poor corporate socialpolicies of the firms they invest in. In contrast, the holdings by banks and institutional investors as well as those by the stateappear to be neutral in this respect.Theoretical/Academic Implications: This study develops and tests notions as to how particular types of owners could havea specific impact on the firm’s CSR. The relative value put upon CSR can differ along different types of owners. This resultsfrom their different economic roles in society. The study provides empirical support for the relationship between ownershiptype and CSR policies in Europe. As such, it provides a new focus on the content of shareholder activism, namely thatshareholder background has to be taken into account. Another innovation is that we show it is important to account for themultidimensional nature of CSR as well.Practitioner/Policy Implications: This study offers a new perspective for firms, investors and other stakeholders aboutportfolio investments and CSR. As we find that it does matter who invests, corporate engagement policies can be directedmuch more effectively. In particular, the investors who act as intermediaries appear to be the most sensitive ones in thisrespect. Our study suggests that firms should take the background of their shareholders into account in relation to their CSRstrategy. Furthermore, our study helps stakeholders to direct their efforts more effectively. It also provides a perspective forexecutives and investment managers of multinational firms to consider if and how they can create social value next toshareholder value. We suggest that policy makers promote the transparency of ownership information as well as that ofCSR performance.

Keywords: Corporate Governance, Corporate Social Responsibility, Firm Policy, Investor Activism, Investor Type

INTRODUCTION

W e investigate whether ownership type does matter forcorporate social responsibility (CSR). CSR is about the

impact of firm performance on people and the environmentwhile taking care that profits are such that the corporationremains viable (Blowfield & Murray, 2008; Heal, 2005). Loand Sheu (2007) argue that CSR is a value-increasing strat-egy. Many other researchers have investigated how peopleand the environment connect with profits at the level ofthe firm (for an overview, see Margolis & Walsh, 2001, 2003;Margolis, Elfenbein, & Walsh, 2007). The evidence is mixed,with most studies pointing at a neutral relationship, which

suggests that accounting for people and the environmentdoes not significantly impact on profits. Furthermore,several studies suggest that differences in corporate gover-nance have an impact on CSR (Aguilera, Williams, Conley, &Rupp, 2006; Neubaum & Zahra, 2006). It is within this realmthat we posit our hypothesis that ownership type matters forCSR. So far, this issue has almost exclusively been investi-gated for institutional investors. We will investigate howvarious types of shareholders relate to the CSR of the firmsthey invest in. This is important for the shareholders them-selves as it reflects their potential impact on people and theenvironment. It is also important for firms who want tocreate social value next to shareholder value. Furthermore, itcan help stakeholders direct their efforts more effectively.

There are several definitions of CSR and there are severalways to measure it (see Wood, 2010). Blowfield and Murray(2008) find that the definitions of CSR share the belief that

*Address for correspondence: Bert Scholtens, Department of Economics, Econometrics& Finance, Faculty of Economics and Business, University of Groningen, P.O. Box 800,9700 AV, Groningen, The Netherlands. Tel: 31-503637064; E-mail: [email protected]

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companies have a responsibility for the common good andthat CSR actions basically are voluntary, that is that they gobeyond what is legally required. The definitions emphasizedifferent elements. The main areas of CSR appear to beleadership, vision and values, marketplace activities, work-force activities, supply chain activities, stakeholder engage-ment, community activities and environmental activities(Blowfield & Murray, 2008). At the firm level, Harjoto and Jo(2011) suggest four motives as to why firms might engagewith CSR: first, management wants to build their reputationas a good global citizen (Barnea & Rubin, 2010); second, itcan be a strategic choice by CEOs to generate support fromstakeholders in order to reduce the probability of CEO turn-over in a future period (Cespa & Cestone, 2007); third, viaCSR the firm can signal quality in the broadest sense of theword (Fisman, Heal, & Nair, 2005; Siegel & Vitaliano, 2007);and fourth, firms use CSR to reduce conflicts of interestbetween managers and stakeholders (Calton & Payne, 2003;Jensen, 2001; Scherer, Palazzo, & Baumann, 2006).

Our aim is to find out whether and how ownership type isconnected with CSR. In this respect, we depart from thefourth motive put forward by Harjoto and Jo (2011), i.e., CSRas conflict resolution, and we ask whether CSR might differwith different types of investors. Is the presence of institu-tional investors beneficial to CSR policies of the firm? Therelative value placed on CSR can differ because the share-holders have a different role and position in society andbecause of their size, which can give rise to economies ofscale and scope. For example, financial institutions andbanks are intermediaries who manage risk and money onbehalf of others; firms and employees predominantly have astrategic agenda; individuals, like employees, usually arehampered by scale and informational disadvantages; thestate has to make do with a wide range of (conflicting) goals.The connection between investor type and CSR is an impor-tant issue as the literature suggests that there is a demand forCSR from multiple stakeholders (Brammer & Millington,2008; McWilliams, Siegel, & Wright, 2006). Furthermore,Arora and Dharwadkar (2011) suggest that behavioral traitsimpact on the association between corporate governance andCSR dimensions.

To find out how different types of shareholders connectwith CSR, we investigate multinational firms in 16 Europeancountries and 35 industries in 2005.1 We analyze differenttypes of investors in connection with CSR for multinationalenterprises. We find that with the state, banks, and institu-tional investors, there is no significant relationship withCSR. However, in the case of ownership by firms, individu-als, and employees, we find that this goes together withrelatively poor CSR performance.

This research is distinct from the existing literature inseveral respects. First, we investigate European multina-tional enterprises from a large number of countries andfrom different industries. Most research so far is about onecountry or compares a small number of countries. Given theinternational differences in ownership, it is important to takea broader perspective. Second, apart from the institutionalinvestors that prevail in most studies, we also includeseveral non-financial investors (state, firms, individuals, andemployees) in our analysis. Third, we perform a thoroughempirical investigation into the relationship between own-

ership and CSR. We look into an aggregate measure of CSRand also investigate three constituting dimensions of CSR:environment, ethics and stakeholders. Bird, Hall, Momente,and Reggiani (2007) and Margolis et al. (2007) argue thattaking account of this type of heterogeneity is crucial whenstudying CSR. Next, we apply the factors in a regressionanalysis, accounting for industry effects and for firm hetero-geneity. We conclude that ownership does matter for CSRindeed, but that it differs by type of owner as well as bydimension of CSR.

The structure of this paper is as follows. We first providethe background about ownership type in connection withCSR and we motivate our hypotheses. Then, we introduceour data and the methodology. Next, we present and discussthe results. Finally, we draw conclusions on the relationshipbetween ownership type and CSR policies.

BACKGROUND AND HYPOTHESES

The relationship between the owner and the management ofthe firm is complicated as their interests are not perfectlyaligned. Agency theory (Jensen & Meckling, 1976) describesthe standard problems in the principal-agent relationshipbetween owners and managers. Ownership types differ formainly institutional reasons; regulation and tradition oftenis at the basis of the existence of a particular investortype (Brammer, Pavelin, & Porter, 2008). The scale and timehorizon can differ between ownership types too, whichaffects their investment decisions. In addition, a firm has todeal with several stakeholders who may have conflictinginterests (Jensen & Meckling, 1976). To reduce informationand agency costs, firms can take social initiatives that fosterstakeholder relations (Harjoto & Jo, 2011; Jones, 1995). At thesame time, stakeholders can invest in the firm and become ashareholder to increase the strength in the relationship and tosignal that they are committed (Belfer, 1953).

Several studies analyze whether ownership and gover-nance do matter for firm performance. Ryan and Schneider(2002) argue that investors’ propensity for activism is relatedto their portfolio, to market characteristics, and to character-istics of the investors themselves. Gompers, Ishii, andMetrick (2003) and Lehmann, Warning, and Weigand (2004)find that better governance goes hand in hand with betterstock market performance. Bhagat, Black, and Blair (2004)find mixed evidence for the relationship between investoractivism and corporate performance in the US: there is sucha relationship in the 1980s, but it seems to have vanished inthe 1990s. Cornett, Marcus, Saunders, and Tehranian (2007)show there is a significant relationship between a firm’soperational cash flow returns and both the percentage ofinstitutional stock ownership and the number of institu-tional shareholders. Ferreira and Matos (2008) show thewide diversity in international institutional investment.Sánchez-Ballesta and García-Meca (2007) perform a meta-analysis and find that corporate governance is indeed asso-ciated with firm performance. However, recent evidencesuggests that this relationship weakens over time (Barnea &Rubin, 2010; Statman & Glushkov, 2009).

Other studies address the issue of how CSR connects withownership (for a recent review, see Jamali, Safieddine, &

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Rabbath, 2008). For example, Neubaum and Zahra (2006)find that long-term institutional ownership is positivelyassociated with CSR. They also find that activism interactswith long-term institutional holdings and that this positivelyaffects corporate social performance after three years. Incontrast, Barnea and Rubin (2010), for a more recent timeperiod, find that institutional ownership is no longer signifi-cantly related to CSR. The reason may be that an institutionalinvestor’s duration is in fact much smaller than generallysuggested, in particular because of the aging populationin industrialized economies (OECD, 2009). Aguilera et al.(2006) reveal that differences in governance arrangements inthe UK and the US translate into differences in the impor-tance ascribed to a company’s CSR policy. David, Bloom,and Hillman (2007) find that shareholder activism actuallyreduces corporate social performance: rather than pressur-ing firms to improve their CSR, they find that activismengenders diversion of resources away from CSR to politi-cal activities by managers to resist external pressures andto retain discretion. Prior, Surroca, and Tribó (2008) findthat part of the investments in CSR is used for managerialentrenchment to gain support from stakeholders afterhaving employed practices that damage shareholders’ inter-ests such as earnings management.

In addition, the relationship between the firm and theshareholder can be moderated because of the aims of theshareholder. The theory of the firm (Berle & Means, 1932)recognizes that firms and organizations may have a differentrole in society and that this role can impact upon its strategyand behavior. However, most of the economic literature forquite a long time disregarded this nuance and treated firmsand organizations as homogeneous entities, all aiming atprofit maximization (see Ferraro, Pfeffer, & Sutton, 2005).Behavioral economics and finance have helped to changethis and now it is common practice to include more objec-tives in the utility function of households (Pitelis, 2004). Inparticular, we will take the role, position and size of differ-ent shareholder types into account when hypothesizingtheir relationship with CSR.

Why would owners care about CSR? The main reason isthe connection between financial performance and CSR.Margolis et al. (2007) perform a meta-analysis on 167 studiesof how CSR relates to financial performance. They find thatin 58 percent of them there is a non-significant relationshipbetween CSR and financial performance. There is a positiverelationship in 27 percent, and a negative relationship in 2percent of the studies. The other 13 percent did not reportsample size or other key characteristics that made it impos-sible to test for significance. These results suggest that com-panies do not appear to suffer through CSR. The recentempirical evidence supports this conjecture (Bauer, Koedijk,& Otten, 2005; Galema, Plantinga, & Scholtens, 2008). Thenon-negative association may be a reason for some ownersto advance CSR. Then, management will act differently withregard to social activities in the presence of a particular typeof shareholder than they would without this shareholder(David et al., 2007; Neubaum & Zahra, 2006). In addition,Bénabou and Tirole (2010) suggest that moral values aredecisive too.

From the firm perspective, instrumental stakeholdertheory helps explain why firms account for owners when

investing in CSR (see Jones, 1995). This theory suggests thatfirms can reduce transaction and agency costs by takingsocial initiatives that affect stakeholder relations. The initia-tives may affect the stakeholder if the initiatives have apositive contribution regarding the goals and aims of thatstakeholder. For example, a firm which is partially ownedby unions could improve health and safety conditions farbeyond what is legally required. There can also be an indi-rect effect when initiatives of the firm are seen as a signal ofacting in a responsible manner. This can improve the bondbetween the firm and its stakeholders. Both channels miti-gate agency problems. Then, CSR is used as means of con-flict resolution (Harjoto & Jo, 2011). Thus on the basis of theinstrumental stakeholder approach, CSR can be viewed asa means to “neutralize” agency problems. The reducedagency problems can result in superior financial perfor-mance. As a result, we expect there will be a positive asso-ciation between CSR and owners.

However, when additional (non-financial) motives enterthe investment decision, there is a potential conflict of inter-est with CSR that may not be fully reflected in market prices(McWilliams & Siegel, 2001). Clark and Hebb (2005) find thatinvestors seeking to protect the value of their investment arevery attentive to the sensitivity of the share price regardingthe reputation of the firm they invest in. Therefore, we wantto find out if the relationship between CSR and owners –positive according to instrumental stakeholder theory – ismitigated on the basis of the type of owner involved. In thisrespect, we assume that financial and non-financial motivesplay a role for all investors but the weight of these twomotives can differ by type of owner (see Aguilera, Rupp,Williams, & Ganapathi, 2007; Lydenberg, 2007; Ryan &Schneider, 2002). We assume that agency problems will berelatively high if the owner is predominantly motivated byfinancial performance; she invests primarily because of theexpected returns and risks of her investment. In this case,CSR may be used as a means of conflict resolution. Whennon-financial motives enter the owner’s investment objec-tive, reducing transaction and agency costs may become lessimportant, especially when the interests of the firm andshareholder are well aligned and/or when portfolios arerelatively small. Hence, from the perspective of the firm,there is less need to engage in CSR as a means to reduceagency problems.

We focus on the nexus between CSR and governance tofind out whether there is a significant relationship betweenCSR policies and particular types of owners. We investigatesix types of owners: institutional investors, banks, corporateinvestors, the state, individuals, and employees. We wantto point out that NGOs, too, may hold stock in order tohave access to AGMs to speak up about issues they wantto discuss with the board (Gunningham & Sinclair, 2004).But, here, just one share will suffice and we do not furtherinvestigate this type of owner.

We are interested in the differences in the sensitivities ofvarious types of shareholders regarding CSR. The mainissue is if and how CSR is affected by the holdings of aparticular owner. Basically, there can be a positive, a nega-tive or a neutral association (see Hamilton, Jo, & Statman,1993). With the first, ownership by a particular investor is tobe associated with above average CSR performance. In case

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of a negative association, the specific owner can be con-nected with below average CSR performance. In case of aneutral association, there is no significant relationshipbetween ownership type and CSR performance. Please notethat a neutral association does not imply that ownershipdoes not matter for CSR. It only suggests that there is nosignificant impact. We consecutively motivate the hypoth-eses for the different types of owners. Furthermore, in linewith the criticism by Margolis et al. (2007), we will not onlyinvestigate an overarching measure of CSR, but also analyzeits main constituents in connection with ownership types.As our dependent variable we have a measure of CSR policyof the firm. This is either the encompassing CSR indicator orone of its three key dimensions (ethics, environment, andstakeholder). The percentage of shares owned by a specificowner (institutional investor, bank, firm, the state, indi-vidual, employee) is the independent variable.

Institutional InvestorsInstitutional investor ownership relates to the stock marketinvestments of institutional investors (pension funds, insur-ance companies, mutual funds). In most countries, they arethe largest category of shareholders. They invest a consider-able part of their funds in stocks. They invest to arrive atfinancial returns and to manage risks in the best interest oftheir ultimate investors (OECD, 2009). Institutional investorshave to be regarded as delegated monitors (Allen & Santo-mero, 1997; Scholtens & Van Wensveen, 2000): they investon behalf of ultimate investors (usually employees) andtransform risks. Therefore, they are predominantly inter-ested in financial performance (risks, returns) regarding theinvestment objects.

It appears that the early empirical literature arrives ata positive relationship between institutional ownershipand CSR. Graves and Waddock (1994) conclude that improv-ing a company’s corporate social performance invokes nopenalty in institutional ownership. Turban and Greening(1997) argue that institutional investors see the long-termbenefits of a firm’s involvement and spending in CSR.Bushee and Noe (2000) establish that institutional ownershipis positively related to the disclosure rankings of firms. Cox,Brammer, and Millington (2004) find that long-term institu-tional investment is positively related to CSR in the UK.Thus, it appears for this type of shareholder that CSRhelps to reduce conflicts and does not impact on financialreturns and may even mitigate firm-specific risk (Harjoto &Jo, 2011; Lydenberg, 2007; Margolis et al., 2007; Scholtens,2008). Therefore, we posit that there is a positive associationbetween CSR performance and ownership. Or, put anotherway, firms with financial owners will have a relativelyhigh CSR score (ceteris paribus). Therefore, we have as thehypothesis

Hypothesis 1. The extent of institutional investor ownership ispositively associated with the firm’s range of CSR involvement.

BanksAs to bank stock ownership, banks can invest in stock fortheir trading portfolio or because they combine lending with

direct investment. The bank holdings can be motivated bynon-financial reasons, such as package deals in the loan andbond markets or having stock for proprietary trading pur-poses (Resti & Sironi, 2007). In most cases it will be purelyfinancial motives that drive the investment decision: banksinvest to improve financial performance. In the economicliterature, banks are regarded as delegated monitors par excel-lence (Allen & Santomero, 1997; Diamond, 1984). Scholtens(2009) discusses how banks account for CSR. Unfortunately,we did not come across specific literature on the responsibil-ity of bank investments as such. Given their economic role asdelegated monitors (Allen & Santomero, 1997; Scholtens &Van Wensveen, 2000), we will treat banks as similar to insti-tutional investors as regards their motives and assume thatthey predominantly are financially motivated. Therefore, weposit

Hypothesis 2. The extent of bank ownership is positively asso-ciated with the firm’s range of CSR involvement.

Corporate InvestorsIn this paper, corporate ownership relates to shares held byfirms. Apart from concentrating on their core business, wefind that firms also do invest in other corporations. From apurely financial perspective, this seems odd as the ultimateinvestors themselves are much better equipped to diversify.It appears that firms often have conflicting and internallyinconsistent goals (Daft, Murphy, & Willmott, 2010). So, cor-porations may invest not only with financial returns inmind, but especially for strategic reasons such as prospectivemergers, future potential, and branding (Hillier, Grinblatt, &Titman, 2008). These strategic objectives are well docu-mented in the literature (see Daft et al., 2010; Hendry & Kiel,2004; Knapp, Dalziel, & Lewis, 2011; Schmidt & Brauer,2006).

It has to be noted that most takeovers do result in negativeabnormal returns for the acquirer, which suggests that theseinvestments are not perceived as a success on purely finan-cial grounds as the market value of the acquirer usuallyshows a significant drop (Andrade, Mitchell, & Stafford,2001; Cartwright & Schoenberg, 2006; Hagendorff, Collins,& Keasey, 2007). Doukas and Petmezas (2007) suggest thatacquisitions often are undertaken by overconfident CEOs.With regards to corporate investments and CSR, the brand-ing motive can also be an issue that might lead corporateowners to account for CSR (see Becker-Olsen, Cudmore, &Hill, 2006; Klein & Dawar, 2004). By acquiring (part of)another firm, the investor expects that a good reputation ofthe target firm will translate into an improvement of itsown reputation (Delgado-García, de Quevedo-Puente, & dela Fuente-Sabaté, 2010). On the basis of the literature, weassume that the “strategic ownership” motives in most casesdominate the financial (investor) motives. Therefore, wehypothesize

Hypothesis 3. The extent of corporate ownership is negativelyassociated with the firm’s range of CSR involvement.

StateState ownership refers to stock investments by governmen-tal institutions. In most countries, the government explicitly



aims at improving the quality of the environment andsocial conditions (OECD, 2010). But, of course, it is not theonly responsibility they bear. Employment, growth, equity,regional development, education, health, and social care arealso important. The goals in these areas can be aligned withthose regarding CSR, but they can conflict too. For example,health and social care seems to go hand in hand with theadvancement of CSR, but there can be conflicts when thegovernment wants to keep unemployment low in particularregions or industries. The ways in which governments try toachieve their policy goals differ widely. One of the meanscan be direct investment: many governments own firms andparticipate in the stock of listed firms. They can invest in aparticular firm because of its political and strategic value,e.g., airliners, energy or weapons, or to support particularregions (Harris & Wiens, 1980; Klein, Mahoney, McGahan, &Pitelis, 2009). As such, governments tend to own stock infirms and industries that usually are not the most competi-tive ones (Ding, Zhang, & Zhang, 2007; Vining & Boardman,1992). Furthermore, state-owned companies can use owner-ship to pursue political goals (see Ding et al., 2007; Shen &Lin, 2009).

Governments might try to advance sustainability and cor-porate social responsibility via their portfolio investments aswell (OECD, 2010). But, so far, there is little empirical evi-dence on this. An exception is Van der Zee (2012) who showsthat most sovereign wealth funds do not account for CSRissues. Only a minority of them to some extent account forCSR in the investment process (e.g., the Norwegian Petro-leum Fund). Because we are not aware of any governmentpolicy that intends to harm CSR, we expect that govern-ments will invest in firms with relatively good CSR. There-fore, we hypothesize

Hypothesis 4. The extent of state ownership is positively asso-ciated with the firm’s range of CSR involvement.

Individual InvestorsIndividual investors make up a small category of sharehold-ers. With individual ownership, we refer to the stock marketinvestments by private individuals. The literature showsthat, apart from maximizing returns, there are variousmotives with this group of investors. For example, Grahamand Kumar (2006) point at investors who aim at dividendincome. Sialm and Starks (2009) find that a fraction of theindividual investors is motivated mainly by tax incentives.Bollen (2007) establishes that some investors are ethicallymotivated. Most individual investors will be using much lessinformation given the relatively large cost of informationproduction and processing in relation to their limited port-folio size and risk capacity (De Bondt, 1998; Van der Burg &Prinz, 2006). As such, the individual investors are likely to beunable to arrive at optimal portfolios (Barber & Odean,2000).

McLachlan and Gardner (2004) as well as Vyvyan, Ng,and Brimble (2007) find that there are substantial differencesbetween responsible and conventional investors. Bauer andSmeets (2010) establish that responsible investors too areheterogeneous. In connection with CSR, we assume thatsome investors will clearly appreciate the responsible

conduct of the firm. They may even restrict their investmentto firms that perform well in this respect. On the other hand,other individual investors will shy away from responsibleinvesting or ignore it completely. Eurosif (2010) reports thatindividuals’ investments make up only a very small frac-tion of overall responsible investments. As such, we con-clude that responsible investing is still a niche market withthese investors. Therefore, we assume that they will notdrive the aggregate result for the individual investor. Giventhe individual investor’s limits to information processingand the scale disadvantage, we hypothesize

Hypothesis 5. The extent of individual ownership is negativelyassociated with the firm’s range of CSR involvement.

EmployeesEmployee ownership is the investment in stocks of the firmwhere the investor is employed. Employees and managersmay invest in the firm because of the terms of their contractor the terms of their pension scheme. With regards to thelatter (covered under Institutional investors above), the gov-ernance system usually is weak (Stewart & Yermo, 2008).Guedri and Hollandts (2008) show that there is an invertedU-shaped relationship between employee ownership andfirm’s (accounting-based) performance, but no clear rela-tionship with market-based performance measures. Compa-nies may support employee ownership to strengthen thebond with their employees. Labor unions tend to own stockin firms and industries that usually are not the most com-petitive ones (Iheduru, 2001). When the environmental andsocial performance of these firms and industries is belowaverage, their ownership can be associated with poor CSRperformance. Furthermore, employee-ownership may bemotivated by keeping the business running at whatevercost. This can result in supporting the traditional ways ofproduction and refraining from investments in moreresource-efficient technologies (see Barnea & Rubin, 2010).Unfortunately, we could not find academic research thatconnects owner and employee investments with CSR andwe lack empirical support for our hypothesis

Hypothesis 6. The extent of employee ownership is negativelyassociated with the firm’s range of CSR involvement.

We want to investigate if and how ownership matters forCSR. If there is a positive association between the two, thiswould suggest that CSR is used for conflict resolution andit would support the instrumental stakeholder view. Weexpect a positive relationship between relative CSR perfor-mance and ownership of institutional investors, banks, andthe state. We expect a negative relationship for corporations,individuals, and employees. In order to account for the criti-cism of Bird et al. (2007) and Margolis et al. (2007) aboutthe neglect of heterogeneity of CSR, we will also look intothe relationship between ownership and three constitutingdimensions of CSR.

DATA AND METHODOLOGY

We use data on shareholdings and on corporate social per-formance of 691 European companies in 2005. We measure



shareholdings of the various investor types and we alsomeasure CSR of the companies they invest in. Our data oncorporate social performance is taken from Ethical Invest-ment Research Service (EIRIS). EIRIS has a dataset for2005 which covers 2,685 multinational enterprises (MNEs),located across the globe, and contains information oncompany policy, corporate reporting as well as on breachesby or convictions of the MNE. Using these data implies thatwe focus on MNEs. CSR topics that are included in thedatabase are, among others, environmental issues, stake-holder issues, governance, business ethics, and geneticengineering. This data is also used for the FTSE4Good sus-tainability indices and in, for example, Dam, Scholtens, andSterken (2007). In CSR research, many studies use the well-known KLD dataset. However, this dataset covers US firmsonly. The EIRIS dataset covers many aspects of CSR for over2,600 firms globally, which allows us to focus on Europeancountries. Furthermore, it covers a wide range of topics fromwhich we picked 20 variables on which the database hadinformation for more than 600 companies.

A drawback of our dataset compared to KLD’s is that it isa cross section, which limits the use of techniques such aspanel data econometrics. The EIRIS data is also subject tocriticism by Chatterji, Levine, and Toffel (2009) and Wood(2010). Chatterji et al. (2009) find little evidence that CSRratings predict outcomes. However, they do a reasonable jobof aggregating past performance, although the ratings do notoptimally aggregate the historical data. As we will not usethe data for making predictions, this problem does notappear to be a direct concern. Wood (2010) argues that actualand good data about CSR are inaccessible. Some companiesare non-transparent, whereas others are outright manipula-tive or deceptive in their provision of relevant information(Wood, 2010). However, so far, using CSR ratings seems theonly way in which academics can arrive at CSR data. This isbecause CSR is a complex concept. First, it consists of severaldimensions, and one can question if every dimension isquantifiable, let alone suitable for aggregation (Kates, Parris,& Leiserowitz, 2005; Wood, 2010). In addition, to a largeextent the CSR metrics measure policies, not actual perfor-mance (Chatterji et al., 2009). In practice, it appears thatCEOs are very well able to differentiate the various conceptspertaining to governance, CSR, and ethics (Fassin & VanRossem, 2009).

We use 20 different indicators from the dataset that aim atmeasuring various aspects of corporate social responsibility.For the definitions of these indicators, see Appendix A.1. Byapplying factor analysis, the 20 indicators also are efficientlysummarized by three factor scores which we label “Stake-holders,” “Ethics,” and “Environment.” Reducing the numberof variables by applying factor analysis is an elegant way toensure sufficient variation in CSR scores while still takinginto consideration the main dimensions of CSR data. Inaddition, we use factor analysis to generate a single factor,labeled “CSR,” which is our aggregate measure of corporatesocial responsibility. We consecutively use the four factors inour econometric analysis as the dependent variable. Appen-dix A.2 summarizes the factor analysis and gives the factorloadings.

Regarding our independent variables, data on ownershippercentages is from Amadeus, a database that contains

accounting information for a large number of Europeanfirms. However, not all information is disclosed in Amadeusand we exclude those European companies that do not dis-close their main shareholders. Shareholders are classified ingroups: Institutional investors, Banks, Firms, State, Indi-viduals, and Employees. We aggregate the shareholdings bytype. For example, if two banks each have a share of 25percent in the company, our variable Bank will have the value50 percent; Institutional Investor measures the percentage ofshareholdings by pension funds, insurance companies, andmutual funds. Our database shows that institutional inves-tors own 47 percent of the shares in European MNEs. Firmsrank second with 25 percent of total shareholdings, bankownership is 15 percent, individual ownership is 10 percent,state ownership is 2 percent, and employee ownership is1 percent.

Previous literature (e.g., Heal, 2005; McWilliams & Siegel,2000; Ullmann, 1985) finds that size, risk, and industry areimportant control variables for corporate social perfor-mance. Therefore, we use operating revenue, return on totalassets, industry type, country of origin, leverage, and liquidityratio of the firm as control variables (see Arora & Dharwad-kar, 2011; Bird et al., 2007; Elsayed & Paton, 2005; Lo & Sheu,2007; Ohlson, 1995). Size, measured by operating revenue, is arelevant control variable as there is some evidence thatsmaller companies are less concerned with CSR and becauseit reflects organizational slack (Arora & Dharwadkar, 2011;Waddock & Graves, 1997). Return on assets is a control, asmany studies find a correlation between financial and socialperformance as shown in the survey by Margolis and Walsh(2001). Leverage (debt to equity) and liquidity (liquidity ratio;liquid assets to total assets) act as controls related to the levelof risk a company is willing to take (Barnea & Rubin, 2010).To account for heterogeneity between industry characteris-tics, we use 34 dummy variables to control for the company’sindustry, i.e., an industry fixed effect (see Appendix A.3 forthe industries).

Table 1 gives descriptive statistics. One would expect thesocial responsibility indicators to have mean equal to zeroand standard deviation equal to one, as factors are con-structed this way, but the fact that we applied factor analysison the complete dataset first and then selected Europeancompanies from the sample explains why it shows somedeviations. As we use Oblimin rotation in our factor analysis,the factors are not orthogonal, but have positive correlation.The relatively large standard errors and min-max rangesreveal that there is substantial variation in the controls. Thecorrelations among the various types of ownership are low,so we do not expect any multicollinearity problems. Thisalso is evidenced by the relatively low variance inflationfactors. Note that theoretically we should have a perfectlinear dependency between the ownership types, as ulti-mately the shares aggregate to 100 percent. However, own-ership shares below 2.5 percent are usually not reported, andtherefore this linear dependency is not perfect.

Many researchers have investigated the effect of the typeof shareholders on companies (see Coffey & Fryxell, 1991;David et al., 2007; Johnson & Greening, 1999; Lehmann &Weigand, 2000; Neubaum & Zahra, 2006). We follow this lineof research and assume that shareholder interest is distinctbetween ownership types but similar within a particular



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type of owner. We investigate the relationship betweenCSR performance and type of shareholder and estimate thefollowing equation:

G v T Xi i i i= + + +β γ μ , (1)

Here the dependent variable Gi is a measure of corporatesocial performance of company i, n is a constant, Ti the setof aggregate shareholdings per type for company i, Xi a setof firm specific control variables, and mi an error term. Werun these regressions including industry-specific effects.We are aware of potential endogeneity issues; do respon-sible firms attract a certain type of shareholder, or docertain types of shareholders activate responsible behavior?Perhaps estimating a system with 2SLS using an appropri-ate instrument could disentangle both effects. But thisapproach introduces new problems, such as finding thecorrect instrument and making sure the system is identi-fied. Another solution would be to look at Granger causa-tion; however, as we have cross-section data, this is not anoption. We feel that a simple OLS regression is suitable tosee whether a particular ownership type is to be associatedwith more responsible behavior, regardless of the causality.Of course, in a general supply and demand system, onecould potentially draw wrong conclusions, but as thenumber of shares outstanding of a firm is usually (almost)fixed, we have no theoretical reason to believe that a simpleOLS would lead to incorrect conclusions. As our cross-sectional design might raise concerns about the validity ofthe empirical tests, we also lag the independent variablesfrom the dependent variable and we test how a change inownership affects CSR.

RESULTS

Here, we provide the estimation results for the relationshipbetween various types of shareholders and CSR policies ofEuropean multinational enterprises. We use four alternativemeasures of CSR policies as the dependent variable, namelyCSR, Stakeholders, Ethics, and Environment, where the firstmeasure is an aggregation of the latter three.

The estimation results for equation (1) are presented inTable 2. It shows that there is statistical significance forspecific owners and that there is a lot of variation regard-ing the three CSR dimensions. The control variables havethe expected signs. Company size, measured by Operatingrevenue, is very important for the level of engagement in CSR(t = 16.5, p < .01), a phenomenon that is widely recognizedand accepted in the literature (see Brammer & Millington,2008). We find that the Liquidity ratio has the expected signifi-cant coefficient (t = 3.26, p < .01) (see also Barnea & Rubin,2010). If we interpret liquidity as a measure for risk-takingbehavior, the results show that more risk-averse companiesare more socially responsible as well. This is in line withthe literature (Scholtens, 2008). Leverage is insignificant. Fur-thermore, there does not appear to be a trade-off betweenreturns and social performance (Margolis et al., 2007). Onlywith Ethics is there a significant negative coefficient (t = -2.56,p < .05) with Return on total assets. We do not report the resultsfor the industries in this table for brevity; we find that chemi-

cals, electricity, mining, personal care & household, andutilities are significantly positive.

Table 2 shows that ownership by banks and institutionalinvestors does not significantly impact on CSR and we musttherefore reject both H1 and H2: there is no positive asso-ciation between relatively good CSR performance and own-ership by institutional investors or by banks. This contrastswith other results for institutional investors (Bushee & Noe,2000; Mahoney & Roberts, 2007; Turban & Greening, 1997).However, it is in line with Barnea and Rubin (2010) andCoffey and Fryxell (1991). For bank ownership, our study isthe first to explicitly address the association between CSRand bank investments.

The estimation results in Table 2 confirm H3 about thenegative relationship between corporate ownership andCSR: firms invest in firms with relatively poor CSR perfor-mance. This finding is in line with most of the literature(Andrade et al., 2001; Cartwright & Schoenberg, 2006;Doukas & Petmezas, 2007; Hagendorff et al., 2007). It conflictswith the idea that branding and reputation managementis a dominant motive in corporate portfolio investments(Becker-Olsen et al., 2006; Klein & Dawar, 2004).

On the basis of the results in Table 2, we reject H4 aboutthe positive relationship between state ownership and CSR,but we want to point out that the t-statistic shows onlymarginal significance (t = -1.73, p < .10). It appears thatinvestments from the state have to be associated with rela-tively poor CSR performance of the firm the state invests in.This negative association of state ownership and CSR is inline with the findings of Van der Zee (2012).

The results in Table 2 also confirm H5 as there is a (mar-ginally) significant negative association between individualowners and CSR (t = -1.74, p < .10). It suggests that indi-viduals on average invest in firms with relatively poor CSRperformance. We want to point out that this finding is inline with those of Barber and Odean (2000) and Barnea andRubin (2010).

Lastly, the estimation results confirm H6 about the nega-tive association between employee ownership and CSR(t = -2.17, p < .05). This suggests that employee ownershipis with firms with relatively poor CSR performance. Thisfinding is congruent with that of Guedri and Hollandts(2008).

Table 2 also reveals that state ownership (t = -1.96, p < .10),albeit marginally, and ownership by other firms (t = -3.01,p < .01) is negatively associated with Stakeholders. The impactof other investor types is not statistically significant here.Regarding the dimension Ethics, we find that employeeownership (t = -1.85, p < .10), albeit marginally, as well ascorporate ownership (t = -2.70, p < .01) are significantlyand negatively related. For Environment, we find there isa (marginally) significant and negative association withownership by employees, individuals, and firms (t = -2.39,p < .05; t = -1.88, p < .10; and t = -1.69, p < .10, respectively).Thus, the negative association between state ownershipand CSR is driven mainly by the negative association withStakeholders. The negative association between employeeownership and CSR is driven by a negative associationregarding both Ethics and Environment. With individuals,it is the negative association regarding Environment. Thenegative association between corporate ownership and CSR



is driven by a significantly negative association regardingall three dimensions. As such, we establish that differentinvestor types are sensitive to different dimensions ofCSR. This finding transposes the observations by Clark andHebb (2005), Coffey and Fryxell (1991), and Ryan andSchneider (2002) to the broader European setting. However,it contrasts with observations of Neubaum and Zahra (2006)for the US and Mahoney and Roberts (2007) for Canada. Wehave carried out additional analysis regarding the role ofcountries.

To find out whether the results are driven by nationalcharacteristics, we report the country effects in relation tothe UK in Table 3. It shows that most multinationals outside

the UK indeed are impacted significantly differently (namelyless) than the British multinationals in connection with theirshareholders (i.e., CSR of non-British firms is significantlyless affected). More specifically, this is the case with multi-national enterprises in France, Germany, Greece, Italy, theNetherlands, Spain, Sweden, and Switzerland.

It is interesting to find that the results in Table 3 are incon-gruent with legal system, property rights, and politicalsystem or with leadership, factors that are used in otherstudies on corporate governance to help explain the results(La Porta, Lopez-de-Silanes, Shleifer, & Vishny, 1998, andHouse, Hanges, Javidan, Dorfman, & Gupta, 2004, respec-tively). Within our sample, as to legal system, the UK legal

TABLE 2Ownership Type and Corporate Social Performance of European MNE’s in 2005 (Accounting for Industry Effects)

Dependent variable (1) (2) (3) (4)CSR Stakeholders Ethics Environment

Institutional investors .00 .00 -.00 .00(.21) (.33) (-.14) (.02)

Banks -.00 -.00 -.00 -.00(-.42) (-.58) (-.25) (-.08)

Corporate -.01** -.01** -.01** -.00†(-3.23) (-3.01) (-2.70) (-1.69)

State -.01† -.01† -.01 -.01(-1.73) (-1.96) (-.93) (-.92)

Individuals -.01† -.00 -.00 -.00†(-1.74) (-1.46) (-1.03) (-1.88)

Employees -.03* -.02 -.03† -.03*(-2.17) (-1.53) (-1.85) (-2.39)

Log operating revenue .36** .29** .30** .28**(16.50) (13.26) (13.20) (16.68)

Leverage -.00 -.00 -.00 .00(-.49) (-.48) (-1.12) (.06)

Return on total assets -.01 -.01 -.01* -.00(-1.58) (-1.33) (-2.56) (-.28)

Liquidity ratio .05** .05** .04* .03**(3.26) (2.84) (2.49) (2.74)

Constant -4.93** -3.99** -3.95** -3.90**(-12.10) (-9.70) (-9.46) (-12.41)

Adj. R2 .41 .32 .28 .53N 690 690 690 690Industry effects Yes Yes Yes YesCountry effects No No No No

†p < .10, *p < .05, **p < .01. Table 3 gives the estimation results with country-specific effects.The estimated equation is Gi = n + bTi + gXi + mi, using Ordinary Least Squares. Here n is a constant, Gi a measure of corporate socialperformance of company i, Ti the set of aggregate shareholdings per type for company i, Xi a set of firm-specific control variables, and mi

an error term. t-statistics in parentheses. For brevity, the industry fixed effects (dummy variables for each industry) are not reported.The industries are Aerospace & Defense, Automobiles & Parts, Beverages, Chemicals, Construction & Building Materials, DiversifiedIndustrials, Electricity, Electronic & Electrical Equipment, Engineering & Machinery, Food & Drug Retailers, Food Producers & Proces-sors, Forestry & Paper, General Retailers, Health, Household Goods & Textiles, Information Technology Hardware, Insurance, Leisure &Hotels, Media & Entertainment, Mining, Oil & Gas, Personal Care & Household Products, Pharmaceuticals & Biotechnology, Real Estate,Software & Computer Services, Specialty & Other Finance, Steel & Other Metals, Support Services, Telecommunication Services, Tobacco,Transport, Utilities – Other, and Water.



TABLE 3Ownership Type and Corporate Social Performance of European MNE’s in 2005 Detailing the Country Effects

(Relative to the UK)


Institutional investors -.00 -.00 -.00 -.00(-.99) (-.73) (-.64) (-1.15)

Banks -.00 -.00 -.00 -.00(-.55) (-.72) (-.13) (-.30)

Corporate -.00† -.00* -.00 -.00(-1.89) (-2.19) (-.69) (-1.51)

State -.01† -.01† -.01 -.00(-1.71) (-1.89) (-1.45) (-.50)

Individuals -.00† -.00 -.00 -.01†(-1.65) (-1.32) (-1.19) (-1.90)

Employees -.02 -.02 -.02 -.01(-1.30) (-1.18) (-1.08) (-.49)

Log operating revenue .41** .33** .31** .33**(18.66) (14.98) (13.97) (17.82)

Leverage -.00 -.00 -.00 -.00(-.27) (-.23) (-.76) (-.07)

Return on total assets -.01† -.01 -.01† -.00(-1.71) (-1.47) (-1.94) (-.78)

Liquidity ratio .05** .05** .04** .03*(3.39) (2.90) (2.73) (2.28)

Switzerland -.56** -.69** -.07 -.19(-2.96) (-3.63) (-.36) (-1.15)

Sweden -.60** -.72** -.44* -.01(-3.56) (-4.28) (-2.56) (-.04)

Spain -.52** -.38* -.69** -.05(-2.95) (-2.16) (-3.87) (-.30)

Portugal -.55 -.50 -.44 -.25(-1.20) (-1.09) (-.96) (-.65)

Norway .00 .00 .00 .00Netherlands -.59** -.71** -.00 -.54**

(-3.18) (-3.77) (-.02) (-3.40)Italy -.34† -.36† .01 -.18

(-1.78) (-1.85) (.07) (-1.07)Greece -.67† -.33 -.73* -.59*

(-1.94) (-.93) (-2.08) (-2.01)Germany -.44** -.29† -.66** -.07

(-2.80) (-1.80) (-4.11) (-.54)France -.47** -.36* -.38* -.35**

(-3.04) (-2.33) (-2.43) (-2.68)Finland -.03 -.01 -.00 .06

(-.10) (-.03) (-.01) (.27)Belgium -.23 .07 -.69* -.07

(-.75) (.23) (-2.24) (-.27)Austria -.37 -.49 -.80 .53

(-.59) (-.78) (-1.26) (1.00)Constant -5.16** -3.99** -4.20** -4.31**

(-17.08) (-13.06) (-13.74) (-16.68)

Adj. R2 .40 .31 .28 .41Industry effects No No No No

†p < .10, *p < .05, **p < .01.The estimated equation is Gi = n + bTi + gXi + mi, using Ordinary Least Squares. Here n is a constant, Gi a measure of corporate socialperformance of company i, Ti the set of aggregate shareholdings per type for company i, Xi a set of firm specific control variables, and mi anerror term. t-statistics in parentheses.



system is the only one based on common law. Table 3 showsthat the relationship in Germany and Switzerland withregards to CSR does significantly differ from that in theUK, but that in Austria does not (German-based civillaw countries). The same is the case in Sweden on the onehand and Norway and Finland on the other (Scandinavian-based civil law countries), as well as in Italy and Spain on theone hand and Portugal on the other (Latin-based civil lawcountries). As such, we conclude that the legal system is notto be regarded as a moderator of the results presented inTable 2.

As to property rights, again, there is no clear relationshipwith the observations in Table 3. For example, some coun-tries that perform below the UK on the IPRI propertyrights index do not differ significantly from the UK as totheir relationship with CSR (e.g., Belgium and Portugal),whereas others do (e.g., France, Italy, and Spain). Forcountries that perform better on this index than the UK,some do not differ significantly from the UK with respectto the connection with CSR (e.g., Austria, Finland, andNorway), whereas countries that perform better do so(e.g., Netherlands, Sweden, and Switzerland). (See Interna-tional Property Rights Index (2011) for the data.) Thus, wecan conclude that the country effects appear to be unre-lated to this national context moderator.

Regarding leadership, the results of Table 3 are not in linewith the demarcations put forward in the GLOBE studyon leadership (House et al., 2004). We investigated whetherthe findings connect to the societal clusters, specificallyNordic Europe, Latin Europe, and Germanic Europe. Here, itappears that we are not able to establish a consistent relation-ship between (headquarters of) multinational enterprisesand (relative) CSR performance. The reference point here isthe British society (Anglo cluster). We find that for all threeEuropean clusters, there are countries that are significantdifferent from British society and at the same time countriesthat are not. We do not find that this pattern is congruent withour findings. Therefore, we cannot conclude that the clustersappear to have a moderating relationship. In addition, weinvestigated the nine cultural dimensions regarding societyvalues and society practices in relation to CSR sensitivity.However, we could not determine a significant influenceof the leadership dimensions.

RobustnessAs a robustness check and to investigate the issue of endo-geneity, we will relate ownership types to CSR by takingtiming into account. We will first lag the independent vari-ables from the dependents so as to reduce potential prob-lems with endogeneity (Table 4). Then, we will investigatewhether a change in ownership type does impact on CSR(Table 5).

Table 4 shows that the ownership by banks and institu-tional investors does not significantly impact on CSR andwe must reject both H1 and H2. There is no positiveassociation between CSR performance and ownership byinstitutional investors or by banks. This confirms previ-ous findings about institutional investor conduct (Barnea& Rubin, 2010; Coffey & Fryxell, 1991), but it contrastswith the results from other studies (Bushee & Noe, 2000;

Mahoney & Roberts, 2007; Turban & Greening, 1997). Forbank ownership, we cannot relate the results from Table 4 toprevious studies.

The estimation results in Table 4 no longer confirm H3about the negative relationship between corporate owner-ship and CSR. The regression coefficient is negative but hasbecome insignificant. This contrasts with the results ofAndrade et al. (2001), Cartwright and Schoenberg (2006),Doukas and Petmezas (2007) and Hagendorff et al. (2007).However, it also conflicts with the idea that branding andreputation management is a dominant motive in corporateportfolio investments (Becker-Olsen et al., 2006; Klein &Dawar, 2004), which would suggest there is a positive asso-ciation between corporate ownership and CSR.

We also reject H4 about the positive relationship betweenstate ownership and CSR. In fact, and in contrast to theresults of Table 2, it appears that there is a neutral relation-ship between the two. This contrasts with Van der Zee(2012).

The results in Table 4 confirm H5 as there is a negativeassociation between individual owners and CSR (t = -2.65,p < .05). We find that individual ownership loads negativelyon all the dependent variables. As such, this relationship iseven more pronounced than that reported in Table 2. Theresult is in line with those of Barber and Odean (2000) andBarnea and Rubin (2010).

Finally, the estimation results confirm H6 about thenegative association between employee ownership andCSR (t = -1.67, p < .10). The significance is lower than thatreported in Table 2. The findings are congruent with those ofGuedri and Hollandts (2008). It is especially the Ethics vari-able (t = -2.08, p < .05) that can be held responsible for thisresult.

Furthermore, also for robustness, we test whether achange in ownership type impacts on CSR. To this extent, werelate the first differences of ownership type (changesbetween 2004 and 2005) to CSR in 2005. Table 5 shows that inmany cases a change in ownership has no significant effecton CSR. More specifically, and in line with Tables 2 and 4, wecannot arrive at support for H1 about the positive relation-ship between institutional investors and CSR or for H2 onthe positive relationship between banks and CSR. This con-firms other findings about institutional investors (Barnea &Rubin, 2010; Coffey & Fryxell, 1991).

The estimation results in Table 5 support H3 about thenegative relationship between corporate ownership andCSR (t = -1.93, p < .10), although this result is only margin-ally significant. This finding is congruent with the resultsfrom Table 2 and the studies of Andrade et al. (2001), Cart-wright and Schoenberg (2006), Doukas and Petmezas (2007)and Hagendorff et al. (2007).

Table 5 suggests that we have to reject H4 about the posi-tive relationship between state ownership and CSR. In fact,and in contrast to the results of Table 2, it appears that thereis a neutral relationship between the two, as also shownin Table 4. This finding contrasts with that of Van der Zee(2012).

On the basis of the results in Table 5, we reject H5 as thereis a neutral association between individual owners and CSR.With Ethics as the dependent variable, we arrive at a positiveassociation with CSR, but only if we rely on the 90 percent



confidence interval. This result contrasts with that fromTables 2 and 3 as well as with the findings of Barber andOdean (2000) and Barnea and Rubin (2010).

With respect to H6, we observe we cannot accept thehypothesis about the negative relationship between CSRand employee ownership, in contrast to the observations foremployee ownership in Tables 2 and 4 as well as the findingsof Guedri and Hollandts (2008).

Regarding the estimation results in Table 5, we observethat the sign of changes in state ownership and CSR is posi-tive but not significant. The sign of institutional investors,banks, and employee owners is mixed. That for individuals

is positive and an increase in individual ownership is (mar-ginally) significantly associated with Ethics (t = 1.82, p < .10).This might reflect the increase of individuals’ responsibleinvestment practices (Eurosif, 2010). A remarkable result isthat an increase in corporate ownership worsens both theaggregate and the three dimensions of the CSR of multina-tional enterprises (CSR: t = -1.93, p < .10; Ethics: t = -1.66,p < .10; Environment: t = -2.72, p < .01; Stakeholders: negativebut insignificant).

Overall, the estimation results with regards to our model(1) lead to several observations. First, the relative contribu-tion of the ownership variables is limited compared to the

TABLE 4Ownership Type and Corporate Social Performance of European MNE’s in 2005 (with Lagged Independent

Variables and Accounting for Industry Effects)


Institutional investors .00 .00 -.00 .00(2004) (.58) (.72) (-.46) (.33)Banks -.00 -.00 -.00 -.00(2004) (-.36) (-.19) (-.83) (-.34)Corporate -.00 -.00 -.00 .00(2004) (-1.18) (-1.44) (-1.29) (.64)State -.01 -.00 -.01 -.01(2004) (-.98) (-.48) (-1.07) (-1.29)Individuals -.01** -.01* -.01** -.01*(2004) (-2.65) (-2.07) (-3.02) (-2.07)Employees -.03† -.03 -.04* -.01(2004) (-1.67) (-1.45) (-2.08) (-.91)Log operating revenue .29** .23** .25** .22**(2004) (11.00) (8.64) (9.29) (11.11)Leverage -.00 -.00 .00 -.00(2004) (-.51) (-.69) (.49) (-.79)Return on total assets .00 .00 -.00 -.00(2004) (.46) (.92) (-.04) (-.57)Liquidity ratio .06† .05 .03 .04†(2004) (1.79) (1.50) (.98) (1.69)Constant -4.14** -3.31** -3.30** -3.18**

(-8.64) (-6.85) (-6.86) (-8.84)


†p < .10, *p < .05, **p < .01.The estimated equation is Gi = n + bTi + gXi + mi, using Ordinary Least Squares. Here n is a constant, Gi a measure of corporate socialperformance of company i, Ti the set of aggregate shareholdings per type for company i, Xi a set of firm specific control variables, and mi




“usual suspects” as reflected in the control variables. Second,there is variation among the different owner types regard-ing their relationship. More specifically, it appears that theextent of ownership by firms, individuals, and employees isnegatively associated with the relative CSR performance ofthe firms they invest in. There is no robust statistically sig-nificant association between firms’ CSR performance andownership by institutional investors, banks and the state.Third, different types of owners perform quite differentlyregarding the key dimensions of CSR (environment, ethics,stakeholders).

CONCLUSION

This paper analyzes whether corporate social responsibility(CSR) policies of European multinational enterprises can berelated to different types of owners. In particular, we inves-tigate the role of institutional investors, banks, firms, thestate, individuals, and employees. The value placed on CSRmight differ because these owner types have a different roleand position in society.

We use data about ownership by investor type. Our CSRmeasure is based on data from EIRIS for 2005. We find that

TABLE 5Changes in Shareholdings Ownership Type and Corporate Social Performance of European MNE’s

(Accounting for Industry Effects)


Institutional investors -.00 -.00 -.00 .00(Change 2004–2005) (-.15) (-.27) (-.00) (.38)Banks -.00 -.00 .00 .00(Change 2004–2005) (-.03) (-.31) (.68) (.31)Corporate -.00† -.00 -.01† -.01**(Change 2004–2005) (-1.93) (-1.52) (-1.66) (-2.72)State .01 .01 .01 .01(Change 2004–2005) (.98) (.66) (.88) (1.35)Individuals .00 .00 .01† -.00(Change 2004–2005) (.52) (.34) (1.82) (-.33)Employees -.00 -.01 -.00 .01(Change 2004–2005) (-.05) (-.41) (-.10) (.62)Log operating revenue .32** .26** .27** .24**

(12.23) (9.84) (10.31) (12.14)Leverage -.00 -.00 -.00 -.00

(-.56) (-.48) (-1.12) (-.16)Return on total assets -.01 -.00 -.01* -.01

(-1.09) (-1.03) (-1.98) (-.01)Liquidity ratio .05** .04* .04* .03*

(2.70) (2.33) (2.16) (2.34)Constant -4.60** -3.74** -3.77** -3.49**

(-9.89) (-7.97) (-8.40) (-10.04)


†p < .10, *p < .05, **p < .01.The estimated equation is Gi = n + bTi + gXi + mi, using Ordinary Least Squares. Here n is a constant, Gi a measure of corporate socialperformance of company i, Ti the set of aggregate shareholdings per type for company i, Xi a set of firm specific control variables, and mi




different investor types are related in a different manner tothe constituting dimensions of CSR (environment, ethics,and stakeholders). We conclude that in many cases owner-ship does matter for CSR. More specifically, firm ownershipby corporations, individuals, and employees generally is tobe associated with relatively poor CSR performance offirms. For these three groups, it appears that other (non-financial) reasons prevail over CSR in the investment deci-sion. We find that the ownership of firms by institutionalinvestors, banks, and the state usually is neutral withrespect to the firms’ range of CSR involvement. This is inline with most of the recent findings from the literatureabout responsible investments and those about institu-tional ownership (Barnea & Rubin, 2010; Bauer et al., 2005;Galema et al., 2008). The reason may be that these investorsthoroughly assess costs and benefits of CSR and that, undermarket equilibrium, the two will compensate (Dam, 2008;McWilliams & Siegel, 2001), resulting in a neutral relation-ship between investment performance and CSR. We arguethat the relationship with CSR can differ because share-holders have a different role in society: financial institutionsare intermediaries who manage risk and money on behalfof others; firms and employees predominantly have a stra-tegic agenda; individuals (and employees) usually are ham-pered by scale and informational disadvantages; the statehas to make do with a wide range of (conflicting) goals. Wefind little support for the notion that CSR is used by firmsfor conflict resolution with particular types of owners.Instead, other non-financial motives of owners appear todominate. Another interesting finding is that we can relatedifferent owners to specific dimensions of CSR perfor-mance. For example, state ownership in particular is asso-ciated with poor stakeholder relations of the firm in whichit owns shares. Employee ownership relates to belowaverage ethical and environmental performance. Corporateownership negatively loads on all three measures of CSR:environment, ethics, and stakeholders. The results are con-gruent with the results of Barnea and Rubin (2010), David etal. (2007), and Prior et al. (2008) who observe that there canbe frictions between shareholders and CSR. Our resultscontrast with earlier studies for the US (e.g., Johnson &Greening, 1999; Neubaum & Zahra, 2006) who arrive ata positive association between institutional ownership andCSR.

In line with Aguilera et al. (2007), we argue that thedemand for CSR interacts with other motives and interestsof the owners. In particular, financially motivated investors(institutional investors and banks) will focus on firm valueand therefore closely watch CSR investments of the firm. Incontrast, owners like employees, the government, and otherfirms usually also have opportunistic, political, and strate-gic motives that may conflict with CSR and value maxi-mization. Therefore, in our opinion, the main theoreticalcontribution of our research is that we investigate thedemand for CSR from different types of owners. This iscomplementary to theory that focuses primarily on supplyfactors (McWilliams & Siegel, 2001; Siegel & Vitaliano, 2007)and to theory that focuses on NGOs and lobby groups(Gunningham & Sinclair, 2004; Servos & Marcuello, 2007).Furthermore, our findings support the multilevel theoryof social change in organizations by Aguilera et al. (2007).

They argue that stakeholders’ motives may conflict, butthey do not investigate this further. We are able to showhow different owners value CSR in the case of Europeanmultinational enterprises.

We also tried to find alternative potential drivers of firm-level CSR besides ownership as the national context doesappear to have an influence. To this extent, we investigatedlegal system, property rights, and leadership. For thesefactors, we did not find a systematic relationship with theimpact of ownership type on CSR. Therefore, future studieswill have to take a closer look at ownership. We especiallyexpect that conditioning for other governance characteristicsmight be useful in arriving at a sound explanation abouthow ownership impacts on CSR of firms. This requires anextension of the datasets to be used, especially an appro-priate (i.e., long-term) time-series of CSR, ownership, andgovernance characteristics of these firms. The conceptualframework can be based on the discussion in this paper aswell as on the findings and notions developed in the corpo-rate governance literature that connects with CSR (Aguileraet al., 2006; Arora & Dharwadkar, 2011; Barnea & Rubin,2010; David et al., 2007; Harjoto & Jo, 2011; Jamali et al., 2008;Prior et al., 2008).

Limitations of this study are that we have to rely on across section of data which makes it difficult to account forendogeneity and causality. To reduce potential problems ofendogeneity, we lag our independent variables and investi-gate the association between changes in the independentvariables and the dependent variable. Furthermore, ourmeasure of CSR (the EIRIS ratings) is subject to the moregeneral criticism on CSR ratings by Chatterji et al. (2009) andWood (2010) with regards to their limited validity and reli-ability. This is a drawback with regards to almost all empiri-cal CSR studies and results from the fact that there is noappropriate CSR accounting.

Our study has important practical implications as firmscan recognize how particular types of owners value theirefforts regarding CSR. From an ownership perspective, werecommend that firms with a high percentage of non-financial investors concentrate on what their owners actuallyaim at with their investments. If they have mainly institu-tional owners, they should advance CSR as a matter ofconflict resolution. Of course, apart from this ownershipperspective, there are several alternative reasons regardingcorporate engagement with CSR (see Bénabou & Tirole,2010; Blowfield & Murray, 2008; Harjoto & Jo, 2011). Policymakers should promote the transparency of ownershipinformation, both with investors and listed firms. Further-more, as different stakeholders connect with differentaspects of CSR, they should promote the transparency ofCSR performance. From a theoretical perspective, this studysuggests that it is very important to account for the hetero-geneity among shareholders in connection with CSR. Thisheterogeneity is related to their differences in role, position,and size within society.

In all, we believe our results add value as we investigatea large number of European firms and use both a broadmeasure of CSR as well as dimensions of CSR (ethics, envi-ronment and stakeholder) that have been objectively reached.We find that it does seem to matter for corporate socialresponsibility who owns the firm.



ACKNOWLEDGEMENTS

The authors very much appreciate the comments ofdiscussants and participants of the 15th Annual Interna-tional Sustainable Development Research Conference inUtrecht, The Netherlands in 2009, the UNPRI conference“Mainstreaming responsible investment” in Copenhagen,Denmark in 2010, the EBEN Research Conference “Fromtheory to practice – How does business ethics matter?” inTampere, Finland in 2010, and of the brown bag seminarseries at the University of Groningen. Furthermore, theauthors wish to thank three anonymous referees, associateeditor Huimin Chung, and editor William Judge for theirhelpful suggestions and support. The usual disclaimerapplies.

NOTE

1. The countries are Austria, Belgium, Denmark, Finland, France,Germany, Greece, Italy, Luxembourg, the Netherlands, Norway,Portugal, Spain, Sweden, Switzerland, and the UK. The industriesare Aerospace & Defense, Automobiles & Parts, Beverages,Chemicals, Construction & Building Materials, DiversifiedIndustrials, Electricity, Electronic & Electrical Equipment, Engi-neering & Machinery, Food & Drug Retailers, Food Producers &Processors, Forestry & Paper, General Retailers, Health, House-hold Goods & Textiles, Information Technology Hardware,Insurance, Leisure & Hotels, Media & Entertainment, Mining, Oil& Gas, Personal Care & Household Products, Pharmaceuticals &Biotechnology, Real Estate, Software & Computer Services, Spe-cialty & Other Finance, Steel & Other Metals, Support Services,Telecommunication Services, Tobacco, Transport, Utilities –Other, and Water.

APPENDIX A.1

Details of the Ethical Investment Research Services EIRIS Dataset

Variable Definition Score

Environmental policy How does EIRIS rate the company’s environmentalpolicy and commitment?

Inadequate = -1, Weak = 0, Moderate = 1,Good = 2, Exceptional = 3

Environmentalmanagement

How does EIRIS rate the company’s environmentalmanagement system?


Environmentalreporting

How does EIRIS rate the company’s environmentalreporting?


Environmentalperformance

What level of improvements in environmental impactcan the company demonstrate?

No data or inadequate data = -1, Noimprovement = 0, Minor improvement = 1,Significant improvement = 2, Majorimprovement = 3

Bribery & corruption Does the company have policies and procedures onbribery and corruption?

No policy disclosed = 1, Has adopted apolicy = 2, Has clear policy andprocedures = 3

Codes of ethics policy Does the company have a code of ethics and, if so,how comprehensive is it?

Limited, Basic = 1, Intermediate = 2,Advanced = 3

Codes of ethics system Does the company have a system for implementing acode of ethics and, if so, how comprehensive is it?

No = -1, Limited = 0, Basic = 1,Intermediate = 2, Advanced = 3

Ethics communication Has the company adopted a code of ethics or businessprinciples which it communicates to all employees?

No evidence of = 1, Has adopted = 2, Clearlycommunicates = 3

Stakeholder policy How good are the company’s policies towards itsstakeholders overall?

Little or no = 0, Basic = 1, Moderate = 2,Good = 3

Stakeholder systems How good are the company’s management systemsfor stakeholders overall?


Stakeholderengagement

What level of engagement with stakeholders isdisclosed by the company?


Stakeholder reporting How good is the company’s quantitative reporting onstakeholder relationships?

Little or no = 0, Some = 1, Moderate = 2,Good = 3

Equal opportunitiesemployees

How good is the company’s policy on equalopportunity and diversity issues?

Little or no evidence of = 0, Basic = 1,Moderate = 2, Good = 3

Equal opportunities:systems and Practice

How clear is the evidence of systems and practices tosupport equal opportunities and diversity?

Little or no evidence = 0, Some evidence = 1,Clear evidence = 2, Very clear evidence = 3

Employee health &safety

How clear is the evidence of health & safety systems? Little or no evidence = 1, Some evidence = 2,Clear evidence = 3

Job creation andsecurity

How clear is the evidence of systems and practices toadvance job creation and security?

Little or no evidence = 1, Some evidence = 2,Clear evidence = 3

Employee trade unionparticipation

How clear is the evidence of systems to manageemployee relations?

Little or no evidence = 1, Some evidence = 2,Clear evidence = 3



APPENDIX A.1Continued

Variable Definition Score

Customer/supplierrelationships policy

Does the company have policies on maintaining goodrelations with customers and/or suppliers?

Little or no evidence of policy = 1, Hasadopted policy = 2, Clearly communicatespolicy = 3

Customer/supplierrelationships system

How clear is the evidence of systems to maintaingood relations with customers and/or suppliers?

Little or no evidence = 0, Some evidence = 1,Clear evidence = 2, Very clear evidence = 3

The complete dataset covers the following topics: Environmental policy, Environmental management, Environmental reporting, Environmentalperformance, Chemicals of concern, Ozone depleting chemicals, Greenhouse gases, Mining and quarrying, Nuclear power, Pollution convictions,Roads, Tropical hardwood, Water pollution, Governance, Board practice, Bribery & corruption, Codes of ethics, Directors’ pay, Disclosure, Politicaldonations, Responsibility for stakeholders, Women on the board, Human rights overall, Human rights policy, Human rights systems,Human rights reporting, Human rights principles, Core ILO standards, Supply chain overall, Supply chain elements, Positive products andservices, Stakeholder issues, Stakeholder policy, Stakeholder systems, Stakeholder engagement, Stakeholder reporting, Employee issues,Equal opportunities, Health & safety, Job creation and security, Trade unions and employee participation, Training, Customers & suppliers,Advertising complaints, Customer/supplier relations, Community involvement, Other ethical concerns: Alcohol, Animal testing, BusinessDetails, Contraception/abortion/clinics, Anti-personnel landmines, Financial institutions, Fur, Gambling, Genetic engineering, Intensive farmingand meat sale, Military production and sale, Pornography and adult entertainment services, Size, Third world, Tobacco. We selected 20 indicatorsof which detailed definitions are given below. The inclusion in our final dataset is driven mainly by data availability and consistency, as not everycompany scores on each issue.

APPENDIX A.2

Summary of Factor Analysis for Social Responsibility Indicators

Indicator Factor loadings

“Stakeholders” “Ethics” “Environment”

Environmental policy .00 .08 .88Environmental management -.04 .03 .90Environmental reporting .08 .01 .74Environmental performance .10 .04 .73Bribery and corruption .13 .77 -.02Code of ethics policy -.05 .99 .05Code of ethics system .10 .70 .14Ethics communication -.10 .92 .08Stakeholder policy .64 .39 -.07Stakeholder system .85 .10 .08Stakeholder engagement .68 .07 .09Stakeholder reporting .76 -.06 .18Equal opportunities employees .42 .45 -.11Equal opportunities: system and practice .84 -.05 -.04Employee health and safety .55 .07 .29Employee job creation and security .77 -.12 -.03Employee trade union participation .38 -.11 .30Customer/supplier relationships policy .46 .15 .04Customer/supplier relationship system .60 .03 .11Community involvement .57 .19 .03Extraction method: maximum likelihoodRotation method: Oblimin with Kaiser normalization

Data Source: EIRIS. All statistics are for the year 2005. Boldfaces in this table mean that the variable is included in the factor on the basisof its factor loading.



APPENDIX A.3

Industries and Distribution of Firms in the Sample

Industry Number of firms Percentage

Aerospace & defense 12 1.74Automobiles & parts 17 2.46Beverages 8 1.16Chemicals 26 3.76Construction & building materials 45 6.51Diversified industrials 5 .72Electricity 13 1.88Electronic & electrical equipment 21 3.04Engineering & machinery 36 5.21Food & drug retailers 12 1.74Food producers & processors 19 2.75Forestry & paper 7 1.01General retailers 36 5.21Health 24 3.47Household goods & textiles 20 2.89Information technology hardware 23 3.33Insurance 1 .14Leisure & hotels 27 3.91Media & entertainment 43 6.22Mining 7 1.01Oil & gas 25 3.62Personal care & household products 9 1.3Pharmaceuticals & biotechnology 26 3.76Real estate 34 4.92Software & computer services 37 5.35Specialty & other finance 6 .87Steel & other metals 5 .72Support services 72 10.42Telecommunication services 23 3.33Tobacco 5 .72Transport 30 4.34Utilities – other 16 2.32Water 1 .14Total 691 100

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Lammertjan Dam earned his PhD at the University ofGroningen, the Netherlands. He is assistant professor at theUniversity of Groningen and was visiting scholar at the Uni-versity of Umeå, Sweden. His research interests are Corpo-rate Finance, Corporate Social Responsibility, Environmentaland Resource Economics, and Banking.

Bert Scholtens earned his PhD at the University ofAmsterdam, the Netherlands. He is professor of Econo-mics of Sustainability at the University of Groningen. Hisresearch interests are Banking and Financial Institutions,Corporate Social Responsibility, Energy Finance, Environ-mental and Resource Economics, and International MonetaryEconomics.



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