Internal Governance and Corporate Social Responsibility Performance

Abstract

Internal governance is the process by which vice presidents use their influence with the chief executive officer (CEO) to impact the firm’s direction and policy. This study examines the effect of internal governance on corporate social responsibility (CSR) performance. Based on a large sample of U.S. firms and after controlling for various CEO incentives, corporate governance, and other determinants of CSR performance, we find that more effective internal governance is associated with a better CSR performance. These results are robust to alternative internal governance and CSR measures, alternative samples, and various approaches that mitigate potential endogeneity problems. Further analysis shows that the effect of internal governance on CSR performance is more pronounced when (a) the CEO is subject to more intensive monitoring, b) vice presidents are more powerful, (c) firms experience less short-term financial performance pressure, and (d) they face stronger product market competition. This study advances our understanding of corporate governance’s effect on CSR by showing the importance of internal governance.

Keywords: Corporate Governance; Internal Governance; Mutual Monitoring; Corporate Social Responsibility; Corporate Executives; Managerial Horizon; Power; Agency Problems; Financial Pressures; Product Market Competition

JEL Classification: G34; M14; M52