The impact of ISO 26000 implementation and corporate governance on financial performance of socially responsible firms

doi:10.21203/rs.3.rs-5260680/v1

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The impact of ISO 26000 implementation and corporate governance on financial performance of socially responsible firms

https://doi.org/10.21203/rs.3.rs-5260680/v1

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Purpose: This study aims to test the effect of the commitment of companies to corporate social responsibility (CSR) via the implementation of the ISO 26000 framework on their financial performance and the moderating effect of corporate governance (CG).

Methodology: A number of European socially-responsible listed companies were observed over the period ranging from 2014 to 2020 based on the GLS (Generalized Least Squares) method.

Results: our findings indicated that the individual impacts of CSR and CG on financial performance, measured by the Return on assets and Tobin’s Q, were significant and negative. However, the combined effect of CSR and governance index on financial performance was found to be significant and positive, highlighting an important moderating effect of CG. Overall, this work addresses the discrepancy between the negative individual effect of CSR commitment and CG on the financial performance of the sampled firms despite being recognized as socially responsible and their positive combined effect.

Originality: The results question the validity of CSR engagement in companies operating in European context and call for a differentiated approach to measure CSR engagement based on ISO 26000s. This study also enhances the existing literature on CSR–CFP and makes it more relevant to firms with effective CG system.

JEL classification: M14, G30, L25

CSR engagement

ISO 26000

corporate governance

financial performance

Over the last few decades, sustainable development has been a major concern for academicians and professionals. It integrates three fundamental dimensions, namely environment preservation, social progress and economic development, in addition to profit maximization objectives. For the sake of mitigating the potential economic, social and environmental risks and enhancing the company’s reputation among stakeholders, corporate social responsibility (CSR) emerged in the business world. Such a concept puts forward thecorporate participation and involvement in sustainable development and addressed the related challenges. Thus, CSR initiatives have been adopted to manage and absorb the surrounding pressures, and, ultimately, to optimize performance. Empirically, the relationship between CSR and corporate financial performance has been subject of several studies. Indeed, while some authors maintain that CSR engagement helps in boosting profitability (Al-tuwaijri et al., 2004; Burnett et Hansen, 2008; Erhemjamts et al., 2013; Nollet et al., 2016;Chijoke-Mgbame, 2020), others argue that it could negatively affect the market value of their firms(McGuire et al., 1988; Graves and Waddock, 1994; Orlitzky, 2005; McWilliams and Siegel, 2001; Hemingway and Maclagan, 2004; Jo and Martajo, 2011 ; Brammer et al., 2006; Elouidani, 2015). Additionally, other views highlighted an insignificant relationship between CSR and financial performance (Daugaard, 2020; Makni et al., 2009; Aras et al., 2010; Revelli and Viviani, 2015).

The inconclusive results about the relationship between CSR and financial performance need further analysis. Margolis and Walsh (2003) suggest that previous studies are subject to various imperfections, such as measurement problems related to both CSR and financial performance. Karyawati et al. (2020) suggest that the complex nature of CSR has an impact on its measurement, causing an inconsistent relationship between CSR and financial performance. In this context, Moratis (2017) argues that when firms are engaged in green washing behavior, they fail to consistently fulfill their commitment and, consequently, the credibility of CSR claims has been compromised. In addition to the problems of measuring variables, Margolis and Walsh (2003) add that previous studies lack necessary analyses of causality and/or endogeneity or omit variable problems. So, calls for investigations on moderators have been made to provide further explanations of previous mixed findings (Wang and Sarkis, 2017).

We may consider other determinants of firm performance, namely corporate governance (CG) practices.Throughout the last few decades, the world has been tormented by several crises, scandals, frauds and bankruptcies. This made the adoption of CG practices necessary in order to reduce managerial opportunism and attenuate the agency conflicts and maximize value creation. Empirical studies found divergent results concerning CG mechanisms and firm performance’ relationship (Terjesen et al., 2016; Puni and Anlesynia, 2020; Kyere and Ausloos, 2021; Alodat et al. 2022).

Accordingly, the arising question is to what extent firm financial performance is affected by CSR engagement and CG mechanisms. Hence, our objectives consist firstly in examining the direct effect of CSR engagement and CG mechanisms and subsequently their joint effect on firm financial performance.

The present study is intended to provide an additional contribution to the existing literature focusing on the joint effect of CSR activities and governance on corporate performance. Firstly, we consider applying a different approach to measure the CSR engagement, namely, the ISO 26000 standard that delineates social-responsibility guidelines for the purpose of computing the extent to which firms are CSR engaged. Moratis (2017) noticed that firms are looking for strategies that can help in enhancing the credibility of their CSR claims. The use of ISO 26000 CSR standards can contribute to substantiating firms’ CSR claims and enhancing their credibility.

Secondly, the present research provides new empirical evidence enabling to explain the mixed results so far attained with respect to the CG effect on CSR activities. Indeed, it highlights the significant impact of CG on the behaviour of companies with regard to CSR engagement. Thus, effective CG system mitigates management errors when making an investment decision and prevents managers from behaving opportunistically in carrying out investment in CSR activities namely the greenwashing behaviour.

Thirdly, we aim to provide empirical evidence related to the CSR effect on firm performance in regard to the European context where the importance of CSR reporting has increased following the publication of the European Directive 2014/95/EU.

The remainder of this study is organized as follows. Section 2 is designed to provide a conceptual framework of CSR and governance, while section 3 is devoted to displaying a review of relevant studies. Section 4 is intended to discuss the methodology applied. Section 5involves the reached empirical results, and section 6 bears the main concluding notes and remarks.

2.1 CSR and financial performance

The impact of CSR commitment on the financial performance has thoroughly been investigated in the literature. The heterogeneity of findings was explained by Golrida et al. (2018) who suggested that CSR practices are contextual and inherent in the institutions in which they are conducted. Firstly, some discovered a positive impact (Waddock and Graves, 1997; Preston and O'bannon, 1997; Cochran and Wood, 1984; Al-tuwaijri et al., 2004; Allouche and Laroche, 2005a; Burnett & Hansen, 2008; Erhemjamts et al., 2013; Reverte et al., 2016; Maqbool and Zameer, 2017; Aftab et al., 2024). These results are explained by the stakeholder theory maintaining the idea that stakeholder satisfaction strengthens the company’s brand image and reputation and thereby, boosts its performance (Freeman, 1983).

Secondly, others highlighted the predominance of a negative impact, which is advocated by the neoclassical theory (Friedman, 1970). This author suggests that the company’s exclusive responsibility lies primarily in legally maximizing the shareholders’ wealth. He argues that supporting social actions involves additional costs for the company and generates a competitive disadvantage. Furthermore, the over-investment explanation stipulates that top management uses the CSR engagement to enhance private benefits of social-citizen reputation that could hurt the market value of the firm (McGuire et al., 1988; Graves and Waddock, 1994; Orlitzky, 2005; McWilliams and Siegel, 2001; Hemingway and Maclagan, 2004; Elouidani, 2015; Zhou et al., 2021). Other theoretical models affirm the absence of a relationship between CSR and financial performance (Ullmann, 1985; Makni et al., 2009; Aras et al., 2010).

According to Coelho (2023), social responsibility should be viewed as an investment opportunity rather than a cost for companies to contribute positively to a more sustainable world while achieving better financial results. This assumption may be explained by the conflict-resolution hypothesis based on stakeholder theory. The latter posits that engaging into CSR activities to reduce potential conflicts between top management and various stakeholders could eventually improve firm value by mitigating agency conflicts. Accordingly, we posit the first following hypothesis:

H₁: CSR engagement has a positive effect on financial performance.

2.2 CG and financial performance relationship

The collapse of several corporations in the 1990s/2000s imposed the necessity of implementing good CG practices, transparency, disclosure, accountability, CSR practices as well as the adoption of effective risk management (Intrudes, 2013; Ntim et al., 2013). Campbell (2007) sees CG mechanisms as a set of homogeneous functions, coherent structures and roles that the board of directors plays in organizing companies to achieve firms’ goals (Coleman and Wu, 2020). Thus, the company’s board of directors is required not only to formulate efficient corporate management policies, but also to take the strategic decisions (Bechir and Jouirou, 2021). Actually, good CG is widely recognized as a highly useful mechanism fit for mitigating agency problems and promoting the corporate managers’ effective behavior (Terjesen et al., 2015), thereby, boosting company performance (Economist, 2010).

According to the agency theory (Jensen and Meckling, 1976), CG intervenes for the purpose of increasing corporate value. More particularly, it is aimed at controlling the managerial practices for the sake of positively influencing the performance of companies, thereby, maintaining their persistence. In fact, several empirical studies emphasize the positive association between the good governance practices and firm performance (Gompers et al., 2003; Brown & Caylor, 2006; O’Connor, 2012; Maranho and Leal, 2018). Carvalhal and Leal (2005) constructed a large-scale CG index specific to companies listed in Brazil, to investigate the relationship between the quality of CG practices and their performance. Their attained empirical results revealed that companies with higher levels of CG achieve a significantly higher performance (ROA) and an insignificant association with Tobin’s Q. However, Black et al. (2006) stressed the existence of a significant link between the governance index applied and Tobin’s Qin Korea. Accordingly, companies operating under shareholder and market-force pressures apply a rather effective CG system. Hodgson et al. (2011) examined Thai companies and proved a positive relationship between the CG index and financial performance measured via ROA and return on equity (ROE). Pillai et al. (2017) studied the impact of internal CG mechanisms on performance in the Gulf Cooperation Council context and concluded that audit type and board size significantly affect financial performance. However, other studies document an insignificant link between governance and company performance (Gupta et al., 2009; Core et al., 2006; Pandey et al., 2015).

Actually, CG mechanisms have been developed to reduce agency problems and address the economic environmental issues facing the developed economies’ site industries by assessing and predicting performance and practice effectiveness (Villanueva-Villar et al., 2016).It is important to note, at this level, that the developed study indexes vary significantly, thus displaying certain confusion, and highlighting the importance of CG practices for highly effective firm performance to take place (Coleman and Wu, 2020). Hence, our second research hypothesis is expressed as follows:

H2: Corporate governance has a positive impact on financial performance.

2.3 The combined effect of governance and CSR on company financial performance

Previous research has shown mixed results about the relationship between CSR and financial performance on one side and between CG and financial performance on the other. In this regard, several studies consider the relationship between CSR, CG mechanisms and financial performance. Jo and Harjoto (2011) employ two-stage regression analyses consisting of the first-step CSR–CG choice issue and the second-step CG–CSR-firm value association. They found that CSR engagement is driven by both internal and external CG and that CSR engagement is positively associated with firm value after considering the first-stage CSR choice issue. Similarly, Pillai et al. (2017) concluded that separated effects of governance variables and CSR on financial performance are positive and significant in Gulf countries sited companies. Wang and Sarkis (2017) found that the CSR outcomes fully mediate the relationship between governance and financial consequences in US green companies. These findings are confirmed by Sahut et al. (2018) in American and European companies and show that governance mechanisms are essential prerequisites for CSR to be effectively implemented.Ali et al. (2019) tested whether CSR moderates the relationship between CG and firms’ financial performance and found that CSR moderates the relation between foreign institutional shareholders, the presence of female directors on the board and the firm’s financial performance.

Hence, given such inconclusive results regarding the association between the CSR, CG mechanisms and financial performance, continuous research dealing with the relevant links remains necessary. Then, it would be reasonable to assume that GC moderates the relation between CSR and firms’ financial performance. The following hypothesis seems worth advancing:

H3: The interaction between CSR and governance has a positive impact on company financial performance.

The hypotheses formulated above are schematized by the following diagram:

3.1. Sample selection and data collection

Our initial sample includes all socially responsible European companies operating in fourteen countries listed on the “Ethibal Sustainable Index Excellence Europe”, “ESI” index, observed over the time period: 2014–2020. In 2015, CSR Europe launched the Enterprise 2020 Manifest, aiming at providing orientation to firms on social responsibility stakes and play a substantial role in promoting and strengthening an inclusive and sustainable economy. The relevant data have been manually collected from annual and special reports obtained from financial Database and the Data-Stream database (Thomson Reuters database). On eliminating the companies of financial character, insurances, and those missing data or outliers, our final sample involves 109 companies, with a balanced panel of 763 company-year observations.

Table 1

Sample Selection
Total of firms	186
- Financial firms	(30)
- Firms whose financial-statement deadlines do not correspond to 31/12	(16)
- Firms with missing data	(31)
Final sample	109

Table 2

Number of companies per country
Country	Number
Switzerland	9
Italy	4
Norway	2
France	33
Germany	9
Netherlands	12
Sweden	7
United Kingdom	13
Belgium	3
Denmark	3
Portugal	2
Spain	4
Ireland	2
Finland	6

3.2. Variable measurement

3.2.1. Dependent variable: Financial performance

It is worth noting that in the existent literature, financial performance is usually measured by accounting data or stock market data. In the present study, we consider applying ROA as an accounting measure, and Tobin’s Q as a stock market measure, as follows:

ROA = Operating income/total Assets

Tobin’s Q = market value (equity + debts) / asset replacement cost.

3.2.2. Independent variable: CSR engagement

Implementing the ISO 26000 standard can be beneficial to companies, namely by maintaining and boosting the company's reputation and brand image, obtaining a license to operate socially, reducing the company's business risks and expanding access to resources (Sugianto, S., & Soediantono, 2022).Accordingly, in our empirical study, CSR operationalization rests on the international standard ISO 26000 analytical framework "guidelines on corporate social responsibility", which accounts for seven central issues, i.e., governance, human rights, labor practices, environment, fair-operating practice, consumer issues and the community involvement and development. For a thorough understanding of the CSR concept, and in compliance with the above cited standard, we consider using an analysis grid comprising the various relevant items and sub-items. Each item corresponds to a particular aspect of CSR and each sub-item stands for a societal action defined by the ISO 26000 standard. In the case when the company proves to have published information on sustainable development action in its report, it is granted the value "1", otherwise it is allotted"0". Accordingly, the CSR score should correspond to the sum of the affirmative responses on societal action to the number of sub-items ratio, such as:

CSR = Sum of affirmative responses / number of all sub-items.

3.2.3. Corporate governance

As our study seeks to examine the moderating impact of governance on the correlation between CSR and financial performance, we reckon to apply the “CG Score” index, provided by the Thomson Reuters-ASSET 4 database, to measure the CG effect. In fact, this index has the advantage of bringing together a number of governance mechanisms, through analyzing four main dimensions of CG, specifically, the directors’ board characteristics (composition/structure), ownership structure, stakeholder relations and rights, along with financial transparency and information disclosure.

Noteworthy, also, is that each dimension involves several items or components reflecting company characteristics. The cited governance index assigns each firm a point for each of the index set criteria the firm proves to respect relative to the total number of criteria.

3.2.4. Control Variables

As part of our study, a number of firm characteristics are selected to test their respective effects on financial performance. The first characteristic is leverage (Lev). Many studies have shown a negative impact of debt on profitability (Majumdar and Chhibber,1999; Eriotis et al., 2002; Ngobo and Capiez, 2004; Goddard et al., 2005; Rao et al. 2007; Zeitun and Tian, 2007; Nunes et al., 2009). It is measured by the total Debts/total Assets ratio. The second control variable is liquidity, an important setting to ensure that companies are able to honor their engagements and obligations and an indicator of continued financial health (Vanitha and Selvam, 2010; Omondi and Muturi, 2013; Borhan et al., 2014).It is estimated by the current assets - stocks/current liabilities ratio.

It is widely proved that companies with high growth opportunities have a high return as they are able to generate profits from the investment, influencing positively their performance (Margaritis et Psillaki, 2007; Zeitun et Tian, 2007; Nunes et al., 2009).Growth opportunities are computed by the market-to-book ratio, which corresponds to market capitalization divided by total equity.

Finally, results have shown that company size has a significant positive effect on financial performance (Flamini et al., 2009, Almajali et al., 2012; Omondi and Muturi, 2013). In the present study, size is measured by the logarithm of assets.

3.3. Models

For testing the impact of direct impact of CSR engagement on the financial performance, multiple linear regression practices, as a statistical analysis method, are opted. Accordingly, our first model (Model 1) will be presented as follows:

FP _it = α₀ + α₁CSR_it + α₂Liquidity_it + α₃LEV_it + α₄GO_it + α₅Size + ε_it (Model 1)

To test empirically the relation between CG and financial performance as specified in H2, the following regression model (Model 2) is used:

FP _it = α₀ + α₁GOV_it + α₂Liquidity_it + α₃LEV_it + α₄GO_it + α₅Size + ε_it (Model 2)

H3 is tested via the following model

FP _it = α₀ + α₁ CSR_it + α₂ Gov_it + α₃ CSR_it* Gov_it + α₄QR_it + α₅LEV_it + α₆GO_it + α₇Size + ε_it(Model 3)

With:

i : 1,…..,109 firms

t :the time period: 2014–2020

FP_it: Financial performance of firm i in year t

CSR_it:CSR of firm i in year t

Gov_it: the governance score of company i in year t

LEV_it: leverage

Liquidity _it

GO_it:Growth opportunities

Size_it: Firm size

\(\:{\varvec{\epsilon\:}}_{\mathbf{i}\mathbf{t}}\) : Error term

4.1. Descriptive statistics

With respect to our study sample, and with reference to Table 3, the financial performance measuring variables (ROA, Tobin’s Q) scored means are (0.056; 1.5), respectively. Moreover, as depicted in Table 3, the CSR variable corresponding mean score is 0.895, SD 0.067. Such a finding highlights well the persistence of CSR entrenchment within European companies, displaying an average of 89.5%, which still needs to be more effectively accounted for to stand as a strategic corporate element. The social responsibility level tends to pursue an upward trend. Indeed, the CSR recorded score proves to vary between 0.659 and 1, reflecting the companies’ commitment to the reverse side of CSR, though with different scores and levels. Additionally, the descriptive statistics reveal that 69% of the sample records a governance index exceeding 50%, indicating that only few firms demonstrate poor governance levels.

Table 3

Descriptive Statistics
Variables	Mean	Median	Standard deviation	Minimum	Maximum
Tobin’s Q	1.50	1.153	1.316	0.348	12.235
ROA	0.056	0.051	0.132	-0.416	0.978
CSR	0.895	0.909	0.067	0.659	1
GOV	0.690	0.724	0.211	0.1522	0.977
LEV	0.348	0.341	0.929	0.0028	0.929
Liquidity	0.967	0.881	0.435	0.275	3.453
size	9.544	9.415	1.119	6.260	12.277
GO	0.029	0.023	0.108	-1.584	0.682

This table presents summary statistics from our sample firms. ROA: return on assets; Tobin’s Q; CSR: CSR engagement; GOV: governance score; LEV: firm leverage; liquidity; GO: Growth opportunities; SIZE: firm size.

Table 4 reveals well that the variance inflation factors (VIF) are lower than 3, displaying an average of 1.52. According to Mayer (1990) and Chatterjee et al. (2000), a multi-collinearity problem persists when the VIF test scored value turns out to be greater than or equal to 10, and / or when the VIF average score proves to exceed or equal 2. With regard to the present study, one could well note the absence of any multi-collinearity problem of any type.

Table 4

Pearson Correlation Matrix and variance inflation factor test
N = 763	LEV	Liquidity	CSR	GOV	MB	Size
LEV	1
Liquidity	-0.3102*** 0.0000	1
CSR	-0.1193** 0.0327	-0.0007 0.9895	1
GOV	0.0137 0.8112	-0.1028* 0.0712	-0.0990* 0.0824	1
GO	-0.0055 0.9215	-0.0248 0.6547	0.0617 0.2663	0.0653 0.2523	1
Size	0.1176** 0.0355	-0.2885*** 0.0000	0.3233*** 0.000	0.1032* 0.0706	0.0478 0.3892	1
VIF	1.58	1.75	1.18	1.12	1.06	1.33
This table presents the Pearson correlation matrix for the key variables in the sample and VIF test. CSR: CSR engagement ; GOV: governance score; LEV: firm leverage; liquidity; GO: Growth opportunities; SIZE: firm size. Note: * significant at the level 1%; significant at the level 5%; * significant at the level 10%

5.1. Hypothesis test

Due to a heteroscedasticity problem, the GLS (Generalized Least Squares) method is used to test the hypotheses. The regression results (Table 5) affirm that the CSR variable affects positively and insignificantly Tobin’s Q (coeff= -1.266; sig = 0.235) and ROA (coeff = 0.128; sign = 0.257). Hence, hypothesis 1 is rejected. These findings notice that the CSR commitment level decreases financial performance. These results do not seem to conform with our expectations, nor with those documented in the already published studies highlighting that CSR engagement positively impacts financial performance (Freeman, 1984; McGuire et al., 1988; Graves and Waddock, 1994; Karagiorgos, 2010; Feng et al., 2017 and Maqbooln and Zameer, 2017; Aftab et al., 2024). However, these results corroborate the one found by Ullmann, 1985; Makni et al., 2009; Aras et al., 2010.

Concerning CG mechanisms, findings, as reported in Table 5 panel B, show that the governance score affects negatively and insignificantly financial performance, as measured through the Tobin’s Q (-0.0001, sig = 0.973), but it affects significantly ROA (-0.0004; sig = 0,092). Consequently, our second hypothesis is partially rejected. These findings are consistent with those released by Cheng (2008), who argues that the more the board size increases, the less likely are firms to take extreme decisions, which leads, in turn, to lower variations in corporate performance. Yet, such results are not congruent with our expectations, nor with the findings of already published studies (Gompers et al., 2003; Brown and Caylor, 2006; O'Connor, 2012; Black et al., 2006; Akbar et al., 2016; Pillai et al., 2017; Maranho and Leal, 2018). These findings may be explained by the aggregate measure of CG mechanisms. So, we could conclude that some mechanisms are not effective in firms. Actually, companies were expected to benefit noticeably from the advantages associated to CG mechanisms, mainly, close and effective monitoring, reduced agency costs and easier access to financial resources.

Our second objective consists in studying the joint effect of CG and CSR on financial performance. As illustrated in Table 6, we notice a positive and significant relationship between the interaction term and performance measured by Tobin’s Q (0.576, p = 0.062) and ROA (0.061, p = 0.004). In fact, the stronger the company applies governance practices are, the more willing to implement CSR practices it is, and consequently, the more effectively it will perform. Thus, our hypothesis 3 is accepted. Our achieved results corroborate the findings attained by previous studies (Khanchel El Mehdi, 2013; Ntim and Soobaroyen, 2013; Pillai et al., 2017; Sahut et al. 2018), stressing that the interaction between CG and CSR helps in further intensifying and accentuating their effect on financial performance. Thus, our study supports already published results maintaining that CSR practices improve the financial performance of the firm through the moderating effect of governance. In fact, the adoption of these practices increases the company’s competitive advantage on the market, while improving its management process. Therefore, CSR activities can have a positive effect on financial performance due to an effective or good CG allowing the reduction of conflicts of interests. Yet, in poorly governed firms, a greenwashing behaviour may be adopted and then poor CSR practices leading to intensify the stakeholders’ conflicts (Jo and Harjoto, 2011). Thus, CSR can have a negative effect on financial performance.

By adopting CSR and good governance practices, the company could promote its reputation and brand image, thereby, attracting new customers. Additionally, integrating CSR and governance in activities and decisions allows firms to establish stronger ties and a permanent co-integration among the different stakeholders, resolve conflicts of interest, minimize agency costs and satisfy the stakeholders' expectations. On the one hand, the interaction between governance and CSR provides the company a greater transparency, respect for shareholder rights, and effective control. On the other hand, an effective system of governance interactively coupled with CSR practices is liable to curb the opportunistic behavior of managers. Particularly, this could be achieved by helping reduce the problems of liquidity and information asymmetry, thereby, inhibiting the manipulation of accounts. It is certain that a company concerned with social, environmental and governance standards, and striving to satisfy them, enjoys greater credibility in the eyes of the population and outsiders, alike, and is therefore met with greater trust from their part. Such a procedure coincides well with the hypothesis assuming that the major expected effect of CSR and good governance practices lies in a considerable attenuation of risk perceived by investors, while maintaining the promotion and boosting of the company’s financial performance.

As explained by Ntim and Soobaroyen (2013), our findings are consistent with the neo-institutional framework that emphasis on the efficiency and legitimation effects of CSR engagement. So, when the CG mechanisms are effective, managers are more likely to invest in CSR activities that can help legitimize corporate actions by aligning with higher-order values and enhancing corporate efficiency. Thus, good CG can be a positive catalyst on the CSR-financial performance relationship by helping to reduce interests’ conflicts among the various stakeholders.

As regards the control variables, results reveal that the indebtedness level, measured through the ratio (total debt / total assets), and in conformity with the sign expected, has a negative and significant effect on financial performance, measured with Tobin’s Q, ROA, at the 1% threshold. As for liquidity, the correlation proves to be positive and significant, with the recorded values of Tobin’s Q (0.468, p = 0.001) and ROA (0.025, p = 0.069). Thus, the higher the liquidity level, the better the company performance. In addition, a positive and significant relationship has been perceived to exist between firm size and financial performance. With respect to the growth opportunity, the relevant coefficients are positive and statistically significant, thereby, corroborating the findings published by Margaritis and Psillaki (2007), Zeitun and Tian (2007) and Nunes et al. (2009). In fact, company growth is generally recognized as a positive signal by shareholders, whose main objective is maximizing wealth,

by pressurizing managers to promote company growth and act more efficiently to achieve a rather high corporate performance.

Table 5

Direct effects Panel A : CSR and financial performance
Variables	Model 1 : Tobin’s Q		Model 1 : ROA
Variables	Coefficient	p-value	Coefficient	p-value
CSR	1.266	0.235	0.128	0.257
LEV	-0.002	0.306	-0.00028	0.297
QR	0.134	0.421	-0.015	0.368
GO	1.135	0.069*	0.074	0.260
Size	-0.399	0.000***	-0.029	0.000***
year fixed effects	Yes		Yes
Constant	6.379	0.000***	0.250	0.021***
Wald chi2	57.64		19.74
Prob > chi2	0.000***		0.0014***
Panel B: CG and financial performance
Variables	Model 1 : Tobin’s Q		Model 1 : ROA
Variables	Coefficient	p-value	Coefficient	p-value
CG	-0.0001	0.973	-0.0004	0.092*
LEV	-0.002	0.377	-0.0027	0.193
Liquidity	0.120	0.472	-0.006	0.668
GO	1.107	0.077*	0.118	0.039
Size	-0.424	0.000***	-0.221	0.000***
year fixed effects	Yes		Yes
Constant	5.494	0.000***	0.314	0.000***
Wald chi2	55.99		30.67
Prob > chi2	0.000***		0.0000***
Note: * significant at the level 1%; significant at the level 5%; * significant at the level 10%

Table 6

Moderating effects of governance
Variables	Model 2 :Tobin’s Q		Model 2 : ROA
Variables	Coefficient	p-value	Coefficient	p-value
CSR	-0.59	0.443	-0.933	0.101
GOV	-0.005	0.177	-0.003	0.083*
*CSRGOV**	0.576	0.062*	0.061	0.004***
LEV	-0.016	0.000***	-0.0009	0.000***
Liquidity	0.468	0.001***	0.025	0.069*
GO	8.605	0.000***	0.335	0.000***
Size	-0.237	0.000***	-0.0023	0.000***
year fixed effects	Yes	Yes	Yes	Yes
C	8.437	0.001***	1.133	0.000***
Wald chi2	344.19		248.94
Prob > chi2	0.000***		0.000***
Note: * significant at the level 1%; significant at the level 5%; * significant at the level 10%

5.2. Additional analysis

For a more effective assessment of our results’ robustness, we consider implementing a number of sensitivity tests. The first robustness test is administered by applying the ROE as an alternative measure of financial performance. In fact, the ROE variable helps in determining the firm’s efficiency level on using the shareholders’ funds as a means to generate profits. The results (Table 7) highlight clearly that the effect of CSR engagement on financial performance is negative and significant confirming the first results. Concerning the effect of governance on financial performance, it proves to remain negative and significant. However, the joint effect of CSR and governance improves financial performance (0.475, p = 0.044).

Table 7

Additional tests
Variables	Model 2 : ROE
	Coefficient	p-value
CSR	-0.396	0.047**
GOV	-0.404	0.054**
*CSRGOV**	0.475	0.044**
LEV	-0.019	0.069*
Liquidity	0.564	0.035**
GO	1.220	0.000***
Size	-0.0015	0.074*
C	0.638	0.144
Year fixed effects	Yes
Wald chi2	148.25
Prob > chi2	0.000***
Note: * significant at the level 1%; significant at the level 5%; * significant at the level 10%

Second, we replace CG index by board characteristics. As Table 8 indicates, the interactions of the variables CSR*board size CSR*mandate respective coefficients are negative and statistically significant, suggesting that the board and relating expertise prove to negatively affect the relationship between CSR and firm financial performance. As regards the interaction of the variables CSR*expertise and CSR*duality, a statistically positive relationship between the interaction terms and firm performance exists. This result highlights well that when firms with accumulated director-CEO positions and enjoying a great deal of experience engage in CSR activities, financial performance would certainly decrease. Contrarily, if directors’ expertise and independence are associated with CSR activities, it raise financial performance.

Table 8

Moderating effects of CSR and board characteristics
Variables	Model 1 : Tobin’s Q		Model 1: ROA
Variables	Coefficient	p-value	Coefficient	p-value
*CSRboard size**	-0.032	0.085**	0.002	0.230
*CSRmandate**	-0.197	0.161	0.007	0.671
*CSRduality**	0.546	0.000***	0.029	0.094**
*CSRexpertise**	0.461	0.003***	0.039	0.028**
*CSRindependence**	0.540	0.025**	0.027	0.339
LEV	-0.004	0.067**	-0.0005	0.093**
Liquidity	0.394	0.027**	-0.010	0.623
GO	0.68	0.215	0.065	0.311
Size	-0.421	0.000***	-0.036	0.000***
Year fixed effects	Yes	Yes	Yes	Yes
C	5.180	0.000	0.354	0.000
Wald chi2	180.59		43.82
Prob > chi2	0.0000		0.0000
Note: * significant at the level 1%; significant at the level 5%; * significant at the level 10%

Third, to account for any potential endogeneities and simultaneity problems that may arise due to the presence of a lagged CSR-financial performance association, we proceed with estimating a lagged CSR-financial performance structure and two-stage least squares (2SLS), by incorporating the previous year’s ROA into the model.

To address simultaneity problems that may arise due to the presence of a lagged CSR-financial performance connection, and following McGuire et al. (1988), we consider re-estimating model (1) in the form of a lagged structure using a dynamic panel specified as:

ROA_it = α₀ + α₁ ROA_it−1 + α₂CSR_it + α₃Gov_it + α₄CSR_it*Gov_it + α₅LEV_it + α₆QR_it + α₇GO_it + α₈Size_it + ε_it

Indeed, it is necessary to consider the validity of the instruments using GMM analysis. Then, the condition of exogeneity of the instruments (delayed variables) can be checked by means of the Hansen test. Table 9 shows that Hansen’s over-identification test does not reject the null hypothesis of the validity of the lagged and differential variables as instruments. The level of significance and the value of the coefficients of the delayed variable of ROA (Lag ROA) provide anew justification for the dynamic specification of the model and confirm the need to include these effects. Indeed, ROA depends strongly on their retarded variables and socially responsible engagement.

The results presented in Table 9highlight the presence of dependence or temporal dynamics. Thus, the ROA at period t-1 is strongly and positively correlated with that in (t) (p-value = 0.019). They also confirm the previous results stipulating that the CSR and governance are negatively correlated with ROA. Thus, we mention the existence of a synergy of complementarities, given the dynamic temporal nature between ROA and CSR engagement and governance.

Table 9 : Dynamic estimation of panel data
Variables	Coefficient	P value
ROA L1.	4.649	0.019**
CSR	-0.6011	0.041**
GOV	-0.0120	0.034**
*CSRGOV**	0.0126	0.013**
LEV	-0.0001	0.093*
Liquidity	0.1540	0.004***
GO	0.3060	0.026**
Size	-0.0521	0.036**
year fixed effects	Yes	Yes
Constant	0.204	0.011
Saran test (Chi-square, p-value) 415.10 (p = 0.000)
Hansen test (Chi-square, p-value) 2.59 (p = 0.4594)
Note: * significant at the level 1%; significant at the level 5%; * significant at the level 10%

Several studies have investigated the effects of CSR activities and CG practices separately on financial performance. However, studies testing the joint effect of CSR strategies and CG are scarce. Then, this paper examines, first, the association between CSR and financial performance, and second, investigates whether CG moderate the relationship between CSR and financial performance. The empirical findings are based on the European context, using balanced panel data of 763 firm-year observations over the period spanning from 2014 to 2020. On examining the direct effects of CSR and governance on company financial performance, assessed through Tobin’s Q and ROA measures, it has been discovered that CSR and governance separately attained scores do not comply with our posited hypotheses. As to their jointly combined effect, however, the achieved results were significant and positive, highlighting that the interaction of CG index and CSR engagement proves to affect financial performance remarkably. Indeed, the stronger companies engage in governance and CSR practices, the more performing the company is. Such a finding highlights well the predominance of a complementary relationship between CSR and governance.

Our findings make some contributions to the past literature. First, using ISO 26000 framework to assess the engagement degree in CSR activities, we provide evidence that this comprehensive CSR standard provides directives for firms seeking to enhance the credibility of their CSR claims.

Second, although several studies have investigated direct links between CSR and financial performance and have found conflictual results, there are limited works explaining the reasons behind these findings. Thus, our results contribute to the past literature by providing new evidence indicating that a combination of CG practices and CSR activities has a substantial positive effect on financial performance. This extends the understanding of the heterogeneity of findings of previous studies examining the direct relationship between CSR and performance.

Third, we highlight the role of CG mechanisms in mitigating the opportunist behaviour of managers when firms to engage in CSR actions. So, board and ownership structure may pressure the firm to engage in CSR activities for both efficiency and legitimating reasons. Moreover, CG may limit green washing behaviour. In addition, the analysis of the association between CG, CSR, and financial performance suggests that firms associate legitimating and efficiency objectives and there are significant interaction effects among them, strengthening their relationships.

Finally, the findings have substantial practical implications for regulators, policymakers, practitioners, companies, and governments. With respect to regulators and governments, our results provide them a strong motivation to associate CG and CSR reforms. So, efforts at enhancing the CG efficiency, at reducing information asymmetry should be pursued in the light of stakeholders’ concerns, such as the environment, ethics, and health and safety. Regarding companies, our results may encourage managers to invest in CSR activities and strength their CG mechanisms to achieve their financial and non-financial objectives. Further, future studies can be carried out in a cross-country context, which may enhance the generalizability of the results.

Author Contribution

E.B: methodology and resultS.W: introduction and theotical developmentW.K: abstract and conclusion

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No competing interests reported.

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The impact of ISO 26000 implementation and corporate governance on financial performance of socially responsible firms

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Abstract

Figures

1. INTRODUCTION

2. Literature review

3. Research methodology

3.1. Sample selection and data collection

3.2. Variable measurement

3.2.1. Dependent variable: Financial performance

3.2.2. Independent variable: CSR engagement

3.2.3. Corporate governance

3.2.4. Control Variables

3.3. Models

4. Research results

4.1. Descriptive statistics

5. Discussion of the results

5.1. Hypothesis test

5.2. Additional analysis

6. Conclusion

Declarations

Author Contribution

References

Additional Declarations

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