The effect of the audit committee and

its characteristics on CSR decoupling

Arjen Kuipers, S3531031

University of Groningen

Abstract

Based on the agency theory, this study investigates the effect of audit committee characteristics on CSR

decoupling. CSR decoupling can be described as the misalignment between CSR performance and CSR

reporting. Research shows that CSR decoupling leads to lower firm value which is the complete opposite

of the objective of the shareholders. Decoupling behavior by managers is possible because of

information asymmetry between the managers and stakeholders. The audit committee can solve this

agency problem by monitoring effectively and creating transparency. Based on a worldwide sample of

6,266 firm-year observations for 1,501 different listed companies in 41 different countries, I found that

larger audit committees with a higher percentage of female members have a negative effect on CSR

decoupling. In addition, audit committees consisting of on average older aged and longer tenured

members have a negative effect on CSR decoupling as well. This negative effect of these characteristics

results in a smaller gap between CSR performance and CSR reporting. I did not find significant evidence

that an independent audit committee has a negative effect on CSR decoupling. This study contributes to

the literature by linking the audit committee to CSR decoupling, thereby broadening the understanding

of the determinants of CSR decoupling.

Keywords: CSR decoupling, Audit committee, CSR performance, CSR reporting, Corporate

governance, Agency theory.

MSc Management Accounting and Control

January 20, 2020

Supervisor: dr. Nazim Hussain

Word count: 10,550

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INTRODUCTION

In the last couple of decades, “corporate social responsibility” (CSR) has become more important due

to “growing institutional pressures for responsible practices, community involvement, increased

transparency, higher labour standards, reduced greenhouse gas emissions, and many other

environmental causes” (Hawn & Ioannou, 2016, p. 2569). However, literature about CSR started to

show up from 1950 and the construct of CSR dates back to the 1930s and 1940s (Carroll, 1999).

According to Bowen (1953), the hundred largest companies had so many power that their actions and

decisions had influence on the lives of citizens. He defined CSR as “the obligations of businessmen to

pursue those policies, to make those decisions, or to follow those lines of action that are desirable in

terms of the objectives and values of our society” (Bowen, 1953, p. 6). This definition of CSR has not

changed that much over time. McWilliams & Siegel (2001) described it as actions that are not required

by law and are beyond the interest of the firm but are undertaken to do something good for society.

One of the goals of CSR is making companies not only responsible for their own profits but also

for their stakeholders and the environment (Aguinis & Glavas, 2019). According to Boiral (2013), CSR

is a way of informing stakeholders about the social and environmental impact of business activities.

Another goal of reporting on CSR is taking away information asymmetry and thus agency problems

between managers and its stakeholders, like customers, governments, institutional owners, suppliers,

and employees (McWilliams & Siegel, 2001). Furthermore, in the literature researchers predominantly

agree that it pays to be sustainable (Kim, Kim, & Qian, 2018; Waddock & Graves, 1997). Although the

goals of CSR are clear, many studies found that CSR is more of improving a companies’ image and

social legitimacy (Duchon & Drake, 2009). Banerjee (2008) even states that CSR is nothing more than

window dressing. Furthermore, companies only adopt CSR when it fits in their strategic interests, and

it is only done to uphold competitors an ideal image (Graafland & Smid, 2019; Harrison & Freeman,

1999).

This window dressing behavior of companies can lead to organizational hypocrisy and

organizational facades (Cho, Laine, Roberts, & Rodrigue, 2015). According to Brunsson (2007),

organized hypocrisy is ‘‘a way of handling conflicts by reflecting them in inconsistencies among talk,

decisions, and actions’’ (p. 115). This organizational hypocrisy might eventually damage the integrity

and legitimacy of a company (Simons, 2002). It can lead to organizational facades as well, which is

defined by Abrahamson & Baumard (2008) as ‘‘a symbolic front erected by organizational participants

designed to reassure their organizational stakeholders of the legitimacy of the organization and its

management’’ (p. 437). This organized hypocrisy and organizational facades can become problematic

because society will not be able to monitor and evaluate the activities of a company effectively without

reliable reporting (Cho et al., 2015).

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This pressure for a company to gain social legitimacy from stakeholders on the one hand and

serving internal needs for efficiency and profits on the other hand might lead to decoupling behavior of

companies (Cho et al., 2015; Meyer & Rowan, 1977). CSR decoupling can be defined as “the condition

of full divergence among policies, programs, and impacts amounting to purely ceremonial CSR”

(Graafland & Smid, 2019, p. 231). Tashman, Marano and Kostova (2019) describe CSR decoupling as

the gap between CSR performance and CSR disclosure and Hawn and Ioannou (2016) describe it as the

gap between internal and external CSR actions. An example of CSR decoupling could be the investment

of 32 million USD by British Petroleum (BP) in a new beyond petroleum brand in 2000. Greenpeace

showed later that this was more about showing good intentions instead of actually investing in renewable

energy (Visser, 2011). Still, little research has been done about the determinants of CSR decoupling and

about CSR decoupling in general, while according to Graafland & Smid (2019), the whole concept of

CSR may become redundant when CSR has no observable impact on society anymore.

CSR decoupling is especially tempting in the absence of effective monitoring mechanisms

(Greenwood & Hinings, 1996). In case of CSR decoupling, there is clearly a problem of information

asymmetry between the stakeholders and the management (Spence, 2002). This might result in agency

costs which reduces the value of the firm (Tashman et al., 2019). According to the agency theory, one

way to solve information asymmetry and agency costs is monitoring by the board of directors and its

committees (Eisenhardt, 1989). In this paper, I have investigated the characteristics of the audit

committee because the goal of monitoring mechanisms to solve information asymmetry between

managers and stakeholders is especially important for investors and financial intermediaries

(Greenwood & Hinings, 1996). Furthermore, according to Appuhami & Tashakor (2017), the audit

committee is one of the most important governance mechanisms. The Enron and WorldCom fraud and

other financial misconducts showed that the audit committee has an important task in monitoring the

reliability of reports for stakeholders, together with managers and external auditors (Thiruvadi & Huang,

2011). The audit committee monitors the financial and non-financial reports and tries to minimise

information asymmetry (Karamanou & Vafeas, 2005). Because of the importance of the audit

committee, and the demand for more research into the determinants of CSR decoupling by Graafland

and Smid (2019), together with the future research direction into the role of the audit committee in CSR

performance as suggested by Hussain, Rigoni & Orij (2018), I answered the question how the

composition of the audit committee affects CSR decoupling. The characteristics I have hypothesized are

size, independency, gender diversity, tenure, and age. According to Bédard, Coulombe & Courteau

(2008), all these audit committee characteristics will have an impact on financial and non-financial

disclosures of a firm.

To answer the question whether the audit committee and its characteristics have an impact on

CSR decoupling, I followed the method used by Tashman et al. (2019) to measure CSR decoupling. In

their paper they measured CSR decoupling by subtracting CSR performance scores from CSR reporting

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scores. CSR performance scores are based on ESG ratings which consists of environment, social and

governance scores. CSR reporting scores are based on the intensity of CSR reporting of a company. The

misalignment between CSR performance and CSR reporting can be seen as CSR decoupling. As been

done in previous studies, I have used control variables that can influence CSR decoupling as well. The

control variables I have used in this research are firm size, firm performance, leverage, board

independence, board size, R&D intensity, capital intensity, CEO duality, organizational slack, and

analyst coverage (Appuhami & Tashakor, 2017; Graafland & Smid, 2019; Hawn & Ioannou, 2016;

Tashman et al., 2019). In addition to the original test, I have performed an additional analysis to test

dimensional decoupling. In this way I was able to determine whether the audit committee characteristics

only had influence on CSR decoupling as a whole or also on environmental and social decoupling

separately. To test the hypotheses, I have used a sample of 6,266 firm-year observations for 1,501

different listed firms from 41 different countries worldwide. The year span I investigated ranged from

2006 till 2017 and I included firm, year, and industry fixed effects. The data to measure CSR decoupling

were retrieved from Thomson Reuters ASSET4 and Bloomberg, and the audit committee data was

retrieved from BoardEx. The control variables were retrieved from Thomson Reuters ASSET4 and

BoardEx.

This paper makes two contributions to the literature. First, this is the first paper that explores

the effect of the audit committee characteristics on CSR decoupling based on a large worldwide sample

for the years 2006-2017. Both audit committee characteristics and CSR decoupling have been explored

independently but there are no studies that have linked these topics. Secondly, this study expands the

knowledge of CSR decoupling and its determinants which is underexplored at the moment according to

Graafland & Smid (2019).

In this research I hypothesized that audit committee size, independence, gender diversity, tenure,

and age will have a negative effect on CSR decoupling. This negative effect indicates a smaller gap

between CSR performance and CSR reporting. I found evidence that a larger audit committee and a

higher percentage of women on the audit committee will have a negative effect on CSR decoupling.

Furthermore, an audit committee with longer tenured and older members will have a negative effect on

CSR decoupling as a whole, and on environmental and social decoupling separately as well.

Additionally, the control variables showed that larger firms that are performing well and that are

monitored by an independent board are decoupling less. On the other hand, firms that are highly visible

due to high analyst coverage are decoupling more.

The remainder of this paper continues with the theory part in which the previous literature and

the hypotheses development are explained. The methodology part explains the main variables and the

method used for this study. The methodology section is followed by the results part in which the main

results of this study are given. The final section presents the discussion and conclusion of this study.

4

LITERATURE REVIEW AND HYPOTHESES

Literature review

CSR policies and actions are becoming more and more important, and as a result of this, more companies

start adopting CSR policies like ISO certifications, codes of conduct, and stakeholder initiatives

(Graafland & Smid, 2019). An important reason for this shift towards CSR compliance comes from the

increased pressure of stakeholders (Chen & Wang, 2011). Besides that, previous studies found that CSR

policies and actions will lead to a competitive advantage for companies due to the generation of valuable

firm resources (Choi & Wang, 2009; McWilliams & Siegel, 2001). This increased pressure of

stakeholders to be socially responsible, together with the possible competitive advantage can result in

decoupling behavior of companies. CSR decoupling can be described as the misalignment between

internal CSR performance and external CSR reporting (Tashman et al., 2019).

Some potential benefits of CSR decoupling can be that socially responsible companies have

better investment opportunities (Sen, Bhattacharya, & Korschun, 2006), are more attractive to

employees, and are better able to retain employees (Greening & Turban, 2000). Moreover, firms that

are decoupling have better access to capital, and companies that implement CSR policies have better

firm performance (Orlitzky, 2008; Saeidi, Sofian, Saeidi, Saeidi, & Saaeidi, 2015). On the other hand,

Hawn and Ioannou (2016) found that CSR decoupling is associated with lower firm value due to a wider

gap between internal and external CSR actions.

In contrast, the traditional goal of managers who are controlled by corporate governance

mechanisms, is to maximize firm value for the shareholders who own the company (Denis, 2016). There

is a clear conflict between the causes and results of CSR decoupling and the objectives of shareholders.

Managers trying to be sustainable in the long term and profitable in the short term which results in

conflicting demands (Cho et al., 2015). This conflict results in agency problems which might result in

agency costs. Agency problems arise due to conflicting interests between managers and shareholders,

information asymmetry, and opportunistic behavior of managers (Hussain et al., 2018). In case of CSR

decoupling, these agency problems arise because CSR decoupling results in information asymmetry

between the management and stakeholders (Hawn & Ioannou, 2016; Meyer & Rowan, 1977).

Stakeholders are unable to monitor a company effectively when companies are behaving ceremonial,

and don’t have the same information that is available for managers. Furthermore, information

asymmetry is possible according to Crilly et al. (2012) because “executives can deceive stakeholders

about the state of practice inside their firms to gain legitimacy whilst pursuing their personal

organizational interest” (P. 1431). This information asymmetry dissuades the stakeholders from

collaborating with the firm while collaboration will be beneficial to the firm (Axelrod, 1984).

5

Following the agency theory, one way to solve this information asymmetry and reduce agency

costs is implementing effective corporate governance mechanisms, like monitoring by the board of

directors and its committees (Eisenhardt, 1989). Besides that, the agency theory implies that effective

corporate governance mechanisms improve a firms’ legitimacy (Michelon & Parbonetti, 2012). The

board of directors makes sure that the interest of the shareholders are guaranteed (Fama & Jensen, 1983).

According to King, Lenox & Terlaak (2005), boards can serve as a third party to communicate

compliance and give their certification. Furthermore, CSR decoupling can be reduced when the

responsibility for CSR reporting is shifted towards the board of directors, consisting of committed board

members (Graafland & Smid, 2019). Committed board members will have a positive effect on

decreasing decoupling because they will not be satisfied with decoupled communications which in the

end stimulates employees to reach their social responsible goals (Waldman, Siegel, & Javidan, 2006).

As mentioned before, CSR decoupling is more tempting in situations without monitoring mechanisms

(Greenwood & Hinings, 1996), and sometimes organizations deceive its board of directors in their

monitoring task (Egels-Zandén, 2007). Another reason that the board of directors can solve the CSR

decoupling problem is that the allocation of CSR programs to the top level of the company gives a strong

signal to the stakeholders that the company is really committed to CSR. This will lead to increased

legitimacy, and the company will maintain this by making sure that their commitment to CSR results in

CSR impact (Graafland & Smid, 2019). Based upon the above, the agency theory accentuates the

importance of the monitoring role of the board of directors to decrease CSR decoupling at the

management level. In addition to that, this monitoring role of the board will result in more transparency

which will decrease decoupling possibilities (Halme & Huse, 1997). In this research, I focus on one

specific committee of the board of directors, the audit committee.

The audit committees’ main tasks are minimising information asymmetry between management

and stakeholders, and monitoring the financial and non-financial reports (Karamanou & Vafeas, 2005).

According to Kolk & Pinkse (2010), the audit committee has to make sure that companies take

responsibility for long-term environmental, economic and social impact on stakeholders. The audit

committee is seen as the most important governance mechanism which makes sure that the firm is

transparent and credible for its activities (Appuhami & Tashakor, 2017). Following this stream of

literature, the main task of the audit committee is creating transparency which minimises the information

asymmetry between management and stakeholders. Therefore, the information asymmetry resulting

from CSR decoupling can be reduced by the audit committee.

In this research, I specifically look at the characteristics of the audit committee because,

according to Bédard et al. (2008), adequate characteristics of the audit committee will have impact on

the financial and non-financial (including CSR) disclosures of a firm. The characteristics I investigate

are size, independence, gender diversity, tenure, and age of the audit committee.

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Hypotheses development

The Sarbanes-Oxley Act from 2004 states that American listed firms have to appoint an audit committee

and according to this act, the audit committee must consist of independent directors with at least one

director who is a financial expert (Rockness & Rockness, 2005). Adding to this, the Blue Ribbon

Committee (BRC) (1999) recommends a minimum size of the audit committee of 3 members and

according to the National Association of Corporate Directors (NACD) the size of the audit committee

should be limited to 6 members (NACD, 2000). Following the literature, large audit committees will

improve the monitoring quality and thus reduce CSR decoupling because they have more status and

power within an organization (Kalbers & Fogarty, 1993), and they have access to more valuable

resources (Pincus, Rusbarsky, & Wong, 1989). According to Bédard et al. (2004), large audit

committees have “the necessary strength, diversity of expertise and views to ensure appropriate

monitoring” (p. 18). Guest (2009) argues that more diversity in expertise will result in more qualitative

advice. Based on the agency theory I therefore expect that larger audit committees are better able to

monitor the managers which will decrease information asymmetry and thus have a negative effect on

CSR decoupling. Therefore, the first hypothesis is stated as follows:

H1: Larger audit committees have a negative effect on CSR decoupling.

When we look at the independence of the audit committee, the Sarbanes-Oxley Act states that

all the audit committee members should be independent outside directors (Rockness & Rockness, 2005).

A director is independent when he or she has no ties with the firm and is only paid for director services

(Zhang, Zhou, & Zhou, 2007). From the literature we see that audit committee independence is seen as

an important factor for effective controlling by the audit committee. Pucheta-Martinez and De Fuentes

(2007) found that “an audit committee formed exclusively of external and independent directors would

result in better accountability and transparency for organizations” (p. 308). Besides that, independent

audit committee members are better able to make independent decisions without influence from the

company, which enhances the credibility of the financial and non-financial reports (Mangena & Pike,

2005; Pucheta-Martınez & De Fuentes, 2007). Collier and Gregory (1999) found that insiders on the

audit committee have a negative impact on the activity of the audit committee. From an agency

perspective a more effective monitoring process as a result of an independent audit committee will

protect stakeholders from opportunistic behavior of the management (Jing Li, Mangena, & Pike, 2012).

Therefore, I expect that an independent audit committee will have a negative effect on CSR decoupling

because of the effective monitoring role of an independent audit committee. Hypothesis 2 is therefore

stated as follows:

H2: An independent audit committee has a negative effect on CSR decoupling.

Another characteristic that can have influence on the functioning of the audit committee is

gender diversity. According to the literature, more gender diverse audit committees will improve their

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monitoring and oversight function (Stewart & Munro, 2007). Following the agency theory, better

monitoring and oversight will lead to better financial reporting quality which in the end will lead to less

manipulation, fraud and earnings management (Thiruvadi & Huang, 2011). Furthermore, women in the

audit committee are more “risk averse, cautious and ethical than men” (Thiruvadi & Huang, 2011, p.

486). Also, audit committees with female members do have a positive influence on the reporting quality

of managers and it will have a positive effect on the audit quality (Thiruvadi & Huang, 2011). Moreover,

female members in the audit committee “will enhance the confidence of the public regarding accounting

information” (Thiruvadi & Huang, 2011, p. 484). They sent a positive signal about the trustworthy and

legitimacy of the accounting information to the stakeholders. This finding is also related to Stewart and

Munro (2007) who state that women are better communicators. Besides that, Orij (2010) found that

women in the board are more oriented towards social issues in comparison to men. Lastly, Halpern

(2012) found that the overall firm performance is higher for firms with gender diverse boards and gender

diversity will also lead to less corporate failures (Burgess & Tharenou, 2002). Based on these findings

I expect that a gender diverse audit committee will have a negative effective on CSR decoupling as a

result of better monitoring, oversight, and more ethical behavior of woman on the board. Therefore,

hypothesis 3 is stated as follows:

H3: A gender diverse audit committee has a negative effect on CSR decoupling.

Another audit committee characteristic that can have influence on CSR decoupling is director

tenure. Director tenure can be measured as the number of years a member of the committee serves on

the audit committee. Previous studies mainly agrees that longer tenured audit committee members are

better able to monitor the financial reporting because they have more firm-specific expertise (Sharma &

Iselin, 2012). Further, the longer the director is serving on the audit committee, the more significant

knowledge the director will gain about the company, the company’s environment, processes,

procedures, and risk management, which helps him or her to audit correctly (Vafeas, 2003). Based on

the organizational behavior theory, longer tenured audit committee members are more committed to the

firm (Buchanan, 1974). Besides that, longer tenured directors are better able to challenge the

management when needed and have more incentives to protect stakeholders (Sharma & Iselin, 2012).

Based on the above, I expect a negative effect of audit committee member tenure on CSR decoupling

because longer tenured audit committee members are better able to control the financial reporting and

protect stakeholders’ interests. Hypothesis 4 is therefore stated as follows:

H4: A higher average audit committee tenure has a negative effect on CSR decoupling.

The last audit committee characteristic I look at is the average age of the audit committee

members. Based on the Upper Echelons Theory it is expected that audit committee members from

different ages have different values and perceptions and that these values and perceptions influence the

audit committee members’ decisions (Carpenter, Geletkanycz, & Sanders, 2004; Hambrick & Mason,

8

1984). DeZoort (1998) found that older, more experienced audit committee members have better internal

control capabilities and are thus better able to function as internal auditor. Furthermore, older audit

committee members have more relevant technical knowledge because of previous experiences and

training (DeZoort, 1998). According to Hambrick and Mason (1984) older audit committee members

are more conservative and according to Qi and Jiaotong (2012) older audit committee members are

trying to avoid risky decisions like CSR decoupling. The aforementioned characteristics of older audit

committee members will have a positive effect on the monitoring effectiveness. Therefore, I expect that

a higher average age of the members of the audit committee will have a negative effect on CSR

decoupling. Hypothesis 5 is therefore stated as follows:

H5: Higher average age of the audit committee members has a negative effect on CSR

decoupling.

METHODOLOGY

Sample and Data collection

The sample I used for this study included in total 6,266 firm-year observations for 1,501 different listed

firms from 41 different countries worldwide for the years 2006 till 2017. The data was unbalanced

because not all the data was available for every year and for every company. The first two digits of the

SIC code were used to identify the 9 main industries the companies operate in. For most listed firms,

especially in the US because of the Sarbanes-Oxley act from 2004 (Rockness & Rockness, 2005), there

is an requirement to have an audit committee. The data for the audit committee characteristics is

retrieved from BoardEx. To measure CSR decoupling I followed the method used by Tashman et al.

(2019) who calculated CSR decoupling by subtracting CSR performance scores from CSR reporting

scores. The data for CSR performance are retrieved from Thomson Reuters ASSET4 while the data for

CSR reporting is retrieved from Bloomberg. These databases have already been validated by previous

CSR studies (Cheng, Ioannou, & Serafeim, 2014; Hawn & Ioannou, 2016; Ioannou & Serafeim, 2012).

According to Hawn and Ioannou (2016, p. 2576), ASSET 4 provides “objective, relevant, auditable, and

systematic CSR information”. The control variables are retrieved from Thomson Reuters ASSET4 and

BoardEx. All the variables including measurement and data sources can be found in table 1.

Dependent variable

CSR decoupling is defined as “the condition of full divergence among policies, programs, and impacts

amounting to purely ceremonial CSR” (Graafland & Smid, 2019, p. 231). To measure CSR decoupling

9

I followed the method used by Tashman et al. (2019) who measured CSR decoupling by the

misalignment between CSR reporting and CSR performance. The CSR performance score is based on

ESG ratings which are a combination of environmental, social and governance performance scores. CSR

reporting ratings are based on the intensity of CSR reporting by a company. Hawn and Ioannou (2016)

used a similar approach but they see CSR performance as internal CSR actions like the use of renewable

energy. In addition, they see CSR reporting as external actions like reports and disclosures that show

stakeholders what the company is doing in the field of CSR. CSR decoupling is the case when a company

is, intentionally, reporting more external CSR actions than they are actually implementing internal CSR

actions. This misalignment can be the other way around as well which results in understatement of CSR

performance and is called silent green. Silent green companies are performing more internal CSR actions

than they actually report about these actions (Delmas & Burbano, 2011). In this research I focus on the

overstatement of CSR performance.

The misalignment between CSR performance and CSR reporting is measured by subtracting the

standardized data for CSR performance from the standardized CSR reporting scores. A higher score

indicates a larger gap between CSR performance and CSR reporting, which implies more CSR

decoupling. This measurement has originally been developed by Marquis, Toffel & Zhou (2016) and

has been improved by Tashman et al. (2019).

Independent variables

The audit committee is seen as the most important governance mechanism which makes sure that the

firm is transparent and credible for its activities (Appuhami & Tashakor, 2017). In some countries an

audit committee is mandatory, like in the US. All listed firms in the US have to appoint an audit

committee according to the Sarbanes-Oxley Act of 2004 (Rockness & Rockness, 2005). The

characteristics of the audit committee I look at in this research are: size, independence, gender diversity,

tenure and age.

The size of the audit committee is measured by the logarithm of the total number of members

that are appointed to the audit committee for a specific year and company (Appuhami & Tashakor,

2017). The logarithm is used to normalize the data. The independence of the audit committee is

measured by the proportion of independent directors in the audit committee. An audit committee

member is independent when he or she has no ties the firm except for director services fees (Zhang et

al., 2007). Gender diversity is measured by the proportion of female members relative to the total

members of the audit committee and tenure is measured by the logarithm of the average years that the

committee members are working on the audit committee. Lastly, age is measured by the logarithm of

the average age of the members of the audit committee.

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Control variables

To test the effect of audit committee characteristics on CSR decoupling I controlled for other variables

that might influence this relation. The first variable I control for is firm size, because previous studies

found that firm size is positively related to CSR disclosure (Li, Pike, & Haniffa, 2008). Besides that,

Lepoutre and Heene (2006) state that smaller companies are often less experienced and have less

knowledge which makes implementing CSR programmes more difficult. Also the appearance and

activity of an audit committee is dependent on the firm size, according to Collier and Gregory (1999).

The second variable I control for is firm performance because according to Graafland and Smid (2019)

it is easier to implement costly CSR programmes when companies are more profitable and have more

budget available. For companies who have less CSR budget available but still want to comply with the

pressures of stakeholders to be socially responsible it will be more tempting to decouple. On the other

hand, Delmas and Burbano (2011) argue that more profitable companies face less risk when they are

decoupling because they have budget to cover possible reputation damage. Firm performance is

measured by the Return On Assets (ROA), following Appuhami and Tashakor (2017). The third variable

I control for is leverage because according to previous literature (CSR) disclosure of firms increases

when firms are in need of a loan (Goss & Roberts, 2011). The following control variable I controlled

for is board independence because previous studies argued that audit committee effectiveness and

independence is related to board independence (Klein, 2002). Besides that, board size is included as

control variable as well because larger boards have higher CSR performance scores (De Villiers, Naiker,

& Staden, 2011). Following Tashman et al. (2019) I also controlled for R&D intensity, measured as the

logarithm of the ratio of R&D expenses to total sales. Firms with a higher R&D intensity are more

innovative, which has a positive effect on CSR performance (McWilliams & Siegel, 2000). Another

variable I controlled for is capital intensity, measured as the logarithm of ratio of total assets to total

sales (Tashman et al., 2019). The capital intensity of a firm can affect the acquirement of assets to

improve CSR performance (Russo & Fouts, 1997). Further, I controlled for CEO duality because a CEO

who is also chairperson of the board has more power which can be used to influence CSR reporting

(Sauerwald & Su, 2019). CEO duality is “1” if the CEO is also chairperson of the board and “0”

otherwise. Next, following Tashman et al. (2019), I controlled for organizational slack, measured as the

logarithm of the ratio of current assets to current liabilities. High organizational slack can be used to

improve and intensify CSR actions (Bansal, 2005). Lastly, following Hawn and Ioannou (2016), I also

controlled for analyst coverage to control for firm visibility, measured as the number of analysts that are

following a firm in a specific year.

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Empirical model

To test whether to use a random or fixed effect model for my panel data, I applied a Hausman

specification test (Hausman, 1978). Based on the results of this Hausman specification test, I used a

fixed effect regression to measure the effect of audit committee characteristics on CSR decoupling. In

this analysis I included firm, year and industry fixed effects. By using this method I can see what

influence the independent variables have on CSR decoupling and I can see how much of the variance is

explained by this model as a whole. To address non-normality issues I standardized the continuous

variables and I checked for multicollinearity problems analysing the variance inflation factor and the

bivariate correlations.

Table 1: Variables and data sources

Variable name Measurement Value Source

CSR decoupling CSR reporting score minus CSR performance

score

Continuous Asset 4,

Bloomberg

AC size Logarithm of number of members on the AC Continuous BoardEx

AC independence Proportion of independent members on the AC Continuous BoardEx

AC gender Proportion of female directors on the AC Continuous BoardEx

AC tenure Logarithm of the average tenure of AC members Continuous BoardEx

AC age Logarithm of average age of AC members Continuous BoardEx

Firm size Logarithm of the total assets Continuous Asset 4

Firm performance Measured as Return On Assets (ROA) Continuous Asset 4

Leverage Ratio of total liabilities to total assets Continuous Asset 4

Board independence Proportion of independent directors on the board Continuous BoardEx

Board size Logarithm of number of members on the AC Continuous BoardEx

R&D intensity Logarithm of the ratio of R&D expenses to sales Continuous Asset 4

Capital intensity Logarithm of the ratio of total assets to sales Continuous Asset 4

CEO duality 1 when CEO is also chairman of board, 0

otherwise

0 or 1 BoardEx

Organizational slack Ratio of current assets to current liabilities Continuous Asset 4

Analyst coverage Number of analysts Continuous Asset 4

RESULTS

Descriptive statistics and correlations

Table 2 presents the descriptive statistics of all the variables used in this research. The mean CSR

decoupling gap is negative, indicating that the majority of observations in our sample have higher CSR

performance scores than CSR reporting scores. This validates the measurement of CSR decoupling used

by Hawn and Ioannou (2016). The mean AC size of 4.22 is consistent with the recommendation of the

Blue Ribbon Committee (BRC) (1999) recommendation of a minimal audit committee size of 3

members. Also consistent with the requirement of the Sarbanes-Oxley Act (Rockness & Rockness,

2005) is the mean AC independence. This mean is 0.99 which indicates that almost all members of the

audit committees are independent directors. The descriptive statistics for AC age indicate that the audit

12

committee members in our sample are relative older directors with a minimum age of 39 and a maximum

age of 79.33. Lastly, the Analyst coverage of the firms in my sample have a mean of 13.98 which

indicates that the firms are highly visible and are relatively large, which is consistent with the sample of

Hawn and Ioannou (2016). The Variance Inflation Factor (VIF) values of al the independent variables

are not higher than 2, which is well below the threshold value of 10 and suggests that multicollinearity

is not a problem in this study (Belsley, Kuh, & Welsch, 1980).

Table 2: Descriptive statistics

Variable name Mean SD Min Max VIF

1. CSR decoupling - 28.60 22.91 - 92.53 47.57 -

2. AC size 4.22 1.28 1 14 1.25

3. AC independence 0.99 0.04 0 1 1.04

4. AC gender 0.26 0.30 0 1 1.08

5. AC tenure 4.25 2.40 0 16.25 1.27

6. AC age 61.19 5.05 39.00 79.33 1.19

7. Firm size 6.94 0.89 4.07 11.41 1.67

8. Firm performance 6.13 11.42 -338.50 132.58 1.15

9. Leverage 0.48 0.19 0.01 2.45 1.11

10. Board independence 0.68 0.23 0 1 1.27

11. Board size 10.28 3.04 2 35 1.45

12. R&D intensity - 1.39 0.88 - 3.30 4.06 1.11

13. Capital intensity 0.14 0.32 - 0.72 4.45 1.20

14. CEO duality 0.52 0.50 0 1 1.11

15. Organizational slack 1.22 0.78 -1.28 4.93 1.16

16. Analyst coverage 13.98 10.10 0 56 1.33

n = 6,266 observations for 1,501 firms. Unstandardized data.

Multicollinearity is also tested using a Pearson bivariate correlation test with the unstandardized

data as presented in table 3. All the correlations are well below the threshold of 0.8 which indicates that

also based on the correlations results, together with the low VIF values, multicollinearity is not a

problem in this study (Greene, 1999). A significant negative relation is found between AC size (- 0.177),

AC tenure (- 0.095) and AC age (- 0.037) on CSR decoupling. AC independence (- 0.018) and AC gender

(- 0.013) have a negative insignificant relation with CSR decoupling. Further, the table shows that for

the control variables, Firm size (- 0.144), Firm performance (- 0.147), Leverage (- 0.055), Board

independence (- 0.164), Board size (- 0.180), CEO duality (- 0.044), and Analyst coverage (- 0.198)

have a significant negative relation with CSR decoupling and R&D intensity (0.127), Capital intensity

(0.191), and Organizational slack (0.048) have a significant positive relation with CSR decoupling.

Lastly, the matrix shows that Board size (0.333) has a significant positive correlation with AC size and

that Firm size (0.388) has a significant positive correlation with Board size. This indicates that larger

firms have larger boards which in turn have larger audit committees.

13

Table 3: Pearson bivariate correlation matrix

Variable name 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

1. 1. CSR decoupling 1

2. AC size - 0.177** 1

3. AC independence - 0.018 0.006 1

4. AC gender - 0.013 - 0.23* 0.070** 1

5. AC tenure - 0.095** 0.081** 0.043** 0.094** 1

6. AC age - 0.037** 0.070** 0.016 - 0.029* 0.332** 1

7. Firm size - 0.144** 0.083** - 0.131** - 0.135** - 0.060** 0.078** 1

8. Firm performance - 0.147** 0.027* - 0.17 - 0.046** 0.046** 0.017 0.095** 1

9. Leverage - 0.055** 0.066** 0.008 0.034** - 0.030** - 0.050** 0.011 - 0.097** 1

10. Board independence - 0.164** 0.213** 0.134** 0.200** 0.202** 0.164** - 0.194** - 0.006 0.003 1

11. Board size - 0.180** 0.333** - 0.018 - 0.047** 0.047** 0.005 0.388** 0.045** 0.084** - 0.125** 1

12. R&D intensity 0.127** - 0.076** 0.034** 0.083** 0.027* - 0.034** - 0.154** - 0.108** - 0.050** 0.115** - 0.119** 1

13. Capital intensity 0.191** - 0.055** - 0.005 0.028* - 0.024* 0.004 0.084** - 0.250** - 0.154** - 0.068** - 0.033** 0.181** 1

14. CEO duality - 0.044** 0.128** 0.019 0.118** 0.162** 0.136** 0.044** 0.036** - 0.015 0.199** 0.113** 0.057** - 0.057** 1

15. Organizational slack 0.048** - 0.023* 0.026* 0.047** 0.083** 0.093** - 0.254** 0.022* - 0.196** 0.124** - 0.128** 0.078** - 0.104** 0.087** 1

16. Analyst coverage - 0.198** 0.061** - 0.010 - 0.036** 0.206** 0.035** 0.417** 0.080** - 0.012 - 0.011 0.213** - 0.033** 0.031** 0.029* - 0.087** 1

n = 6,266 observations for 1,501 firms. *: Correlation is significant at the 0.05 level (2-tailed). **: Correlation is significant at the 0.01 level (2-tailed). Unstandardized data.

14

Regression results

Table 4 presents the results of the fixed effect multiple regression analysis including firm, year and

industry fixed effects. The basic model with only the control variables is tested in model 1. In model 2

all the independent and control variables are added to test the hypotheses. In both models the continuous

variables are standardized to control for non-normality problems. Both models have significant

explanatory power to predict the effect on CSR decoupling because both P-values of the model are below

the 0.01 level. The adjusted R² of both models are respectively 0.032 and 0.044 indicating that the

independent variables are appropriate to measure CSR decoupling.

Model 1 presents a basic model with only control variables. The results of this multiple

regression show a significant negative effect of Firm size (β = - 0.886, p = 0.000), Firm performance (β

= - 0.006, p = 0.000), Board independence (β = - 0.003, p = 0.000), and Organizational slack (β = -

0.039, p = 0.008) on CSR decoupling. Further, Capital intensity (β = 0.296, p = 0.000) and Analyst

coverage (β = 0.006, p = 0.003) have a significant positive effect on CSR decoupling. This indicates that

firms with a higher amount of capital and firms that are more visible have more CSR decoupling. On

the other hand, larger firms who are performing well, have more resources unused, and being supervised

by an independent board have lower CSR decoupling.

Model 2 shows that AC size has a significant negative effect (β = - 0.209, p = 0.041) on CSR

decoupling which means that the predicted negative effect of AC size on CSR decoupling in hypothesis

1 is supported. The predicted negative effect of AC independence has an insignificant positive effect (β

= 0.011, p = 0.190) on CSR decoupling and thus is hypothesis 2 unsupported. Model 1 also represents

the results for hypothesis 3 that predicts that a higher percentage of females on the audit committee

results in less CSR decoupling. As predicted, AC gender has a significant negative effect (β = - 0.149,

p = 0.006) on CSR decoupling providing support for hypothesis 3. Further, model 1 finds a significant

negative effect (β = 0.389, p = 0.000) of AC tenure on CSR decoupling which supports the predicted

negative relation in hypothesis 4. Lastly, hypothesis 5 is supported as well because the negative

coefficient (β = 1.407, p = 0.007) of AC age and CSR decoupling is significant. The implications and

conclusions about the above results are discussed in the next chapter.

Additional test: Dimensional decoupling

To see what effect the audit committee characteristics have on the specific dimensions of CSR

decoupling, I used the triple bottom line method used by Hussain et al. (2018). The triple bottom line

approach gives equal weight to the three dimensions of CSR performance which are economic,

environmental and social performance (Elkington, 1997). In the original model of this study I tested

the effect of audit committee characteristics on CSR decoupling as a whole. In this additional

15

Table 4: Multiple regression results on CSR, Environmental and Social decoupling

(1) (2) (3) (4)

Variables CSR decoupling CSR decoupling Environmental decoupling Social decoupling

AC size - 0.209**

(0.041)

- 0.128

(0.244)

- 0.080

(0.491)

AC independence - 0.187

(0.557)

- 0.203

(0.556)

- 0.033

(0.927)

AC gender - 0.149***

(0.006)

- 0.109*

(0.062)

- 0.050

(0.410)

AC tenure - 0.389***

(0.000)

- 0.235***

(0.000)

- 0.151**

(0.012)

AC age - 1.407***

(0.007)

- 1.698***

(0.002)

- 1.963***

(0.001)

Firm size - 0.886***

(0.000)

- 0.909***

(0.000)

- 0.784***

(0.000)

- 0.506***

(0.000)

Firm performance - 0.006***

(0.000)

- 0.007***

(0.000)

0.000

(0.980)

- 0.003*

(0.068)

Leverage 0.001

(0.989)

0.002

(0.984)

- 0.144

(0.181)

- 0.257**

(0.022)

Board independence - 0.003***

(0.000)

- 0.003***

(0.000)

- 0.003***

(0.000)

0.000

(0.828)

Board size 0.160

(0.214)

0.413**

(0.012)

0.530**

(0.003)

0.259

(0.164)

R&D intensity - 0.004

(0.820)

- 0.009

(0.709)

- 0.028

(0.272)

0.018

(0.512)

Capital intensity 0.296***

(0.000)

0.474***

(0.000)

0.335**

(0.002)

0.149

(0.199)

CEO duality 0.011

(0.690)

0.021

(0.514)

0.026

(0.455)

- 0.053

(0.153)

Organizational slack - 0.039***

(0.008)

- 0.050***

(0.003)

- 0.021

(0.241)

- 0.014

(0.470)

Analyst coverage 0.006***

(0.003)

0.009***

(0.000)

0.005**

(0.043)

0.006**

(0.023)

Firm, year & industry fixed effects Yes Yes Yes Yes

Adjusted R² 0.032 0.044 0.042 0.066

n 6266 6266 6266 6266

n = 6,266 observations for 1,501 firms; P value in parentheses. *p< 0.1; **p< 0.05; ***p< 0.01

16

regression I tested whether these audit committee characteristics have an effect on environmental and

social decoupling separately, measured as the gap between environmental performance and reporting

and the gap between social performance and reporting. Whereas the environmental dimensions focuses

more on waste, emission, sustainable energy and environmental rules, the social dimension focuses

more on human rights, labour and society (Hussain et al., 2018). The economic dimension is not tested

in this additional analysis because this dimension is fundamental for a company and is already well

reported and checked in the financial statements (GRI, 2006).

The results of the additional analysis are shown in model 3 and 4 in table 4. Model 3 shows

the results of the effect of audit committee characteristics on environmental decoupling. AC tenure (β

= - 0.235, p = 0.000) has a significant negative effect on Environmental decoupling and AC age (β = -

1.198, p = 0.002) has a significant negative effect on Environmental decoupling as well. I was unable

to find a significant effect of AC size (β = - 0.128, p = 0.244), AC independence (β = - 0.203, p =

0.556), and Ac gender (β = - 0.109, p = 0.062) on Environmental decoupling. The results of the effect

of the audit committee characteristics on social decoupling are shown in model 4. AC tenure (β = -

0.151, p = 0.012) and AC age (β = - 1.963, p = 0.001) both have a significant negative effect on Social

decoupling. I did not find a significant relation between AC size (β = - 0.080, p = 0.491), AC

independence (β = - 0.033, p = 0.927), AC gender (β = - 0.050, p = 0.410), and Social decoupling. In

the next section I will discuss the above results for the original test and the additional tests.

DISCUSSION

In this study I investigated whether audit committee characteristics have an impact on CSR

decoupling. Building on the agency theory I proposed that monitoring by the audit committee could

take away the information asymmetry that makes CSR decoupling possible (Spence, 2002). My

analysis shows interesting results about the relationship between audit committee characteristics and

CSR decoupling. I found significant support for 4 out of 5 hypotheses building on agency theory.

Against my expectations I couldn’t find a significant relation between independence of the audit

committee and CSR decoupling (H2). A possible reason for this can be that the mean independence

ratio of the audit committee was 99%. This indicates that almost all of the observations had a highly

independent audit committee which makes it hard to predict if a high independence ratio has a

negative influence on CSR decoupling, compared to a low independence ratio.

The empirical results show that a larger audit committee has a negative effect on CSR

decoupling (H1). This result is in line with the arguments found based on the agency theory. Larger

audit committees are better able to monitor because they have more status and power within an

organization and they have access to more valuable resources (Kalbers & Fogarty, 1993; Pincus et al.,

17

1989). Furthermore, the results support the literature that larger audit committees have more diversity

in expertise which will result in more qualitative advice and monitoring (Guest, 2009).

In line with the agency theory and existing literature, the empirical results show support for

H3. A higher percentage of woman on the audit committee will lead to less CSR decoupling. The

monitoring function will be positively influenced by a more gender diverse audit committee because

woman are better communicators, more risk averse, ethical, and cautious than man (Stewart & Munro,

2007; Thiruvadi & Huang, 2011). The empirical results show support for H4 as well and are in line

with the agency theory and previous literature. The results show support for the negative effect of

longer tenured members of the audit committee on CSR decoupling because of more effective

monitoring. Longer tenured members are better able to monitor because they have more firm-specific

expertise, knowledge, and experience and are better able to challenge the management (Sharma &

Iselin, 2012; Vafeas, 2003).

Also consistent with the agency theory and previous literature is H5. The empirical results

support the negative effect of a higher average age of the audit committee members on CSR

decoupling. Older audit committee members are more experienced and have gained more knowledge,

which improves their monitoring effectiveness (DeZoort, 1998). Furthermore, older audit committee

members are more conservative and show less risk taking behavior which has a positive effect on their

monitoring activities (Hambrick & Mason, 1984; Qi & Jiaotong, 2012).

In the additional test I tested whether the audit committee characteristics also have an effect on

the separate dimensions of CSR decoupling. In this way I am able to see if the audit committee

characteristics only have influence on one dimensions of CSR decoupling or if they have influence on

CSR decoupling as a whole. My findings show that only age and tenure of audit committee members

have a significant negative effect on Environmental and Social decoupling separately. These results

indicate that audit committees consisting of older aged and longer tenured members have a negative

effect on environmental and social decoupling. These results are in line with the agency theory

because older aged and longer tenured members are better able to monitor which creates transparency

and in the end will reduce decoupling behavior. The insignificant results of the relation between the

size and gender diversity of audit committees and environmental and social decoupling indicates that

these characteristics are only effective in reducing CSR decoupling as a whole.

Taken together, my results show the negative effect of audit committee characteristics on CSR

decoupling based on agency theory. Larger audit committees with more females on the audit

committee will have a negative effect on CSR decoupling. Furthermore, audit committees with a

higher average age and tenure will have a negative effect on CSR decoupling as well. All these

characteristics will improve the monitoring function of the audit committee which is according to the

agency theory an effective governance mechanism to reduce the information asymmetry that makes

18

CSR decoupling possible. In addition to this, the size and gender diversity of the audit committee only

have a negative effect on CSR decoupling as a whole while the age and tenure of audit committee

members also have a negative effect on environmental and social decoupling separately.

CONCLUSION

The purpose of this study was to investigate the effect of audit committee characteristics on CSR

decoupling. CSR decoupling leads to lower firm value while the shareholders’ objective is to increase

firm value. This agency conflict can be solved by applying effective monitoring mechanisms like the

audit committee. Previous literate found that in case of CSR decoupling there is a problem of

information asymmetry between the management and the stakeholders (Spence, 2002). The main tasks

of the audit committee are creating transparency and solving information asymmetry and monitoring

the financial and non-financial reports. I found that larger audit committees with a higher percentage

of female members on the audit committee will have a negative effect on CSR decoupling.

Furthermore, higher average age and tenure of the audit committee will also have a negative effect on

CSR decoupling as a whole, as well as on environmental and social decoupling separately. These

results imply that effective corporate governance will improve CSR performance and helps to meet the

stakeholders’ objectives resulting in increased legitimacy.

This study makes two important contributions to the literature. First, this is the first study that

links CSR decoupling to audit committee characteristics, based on a large sample of worldwide listed

companies for the years 2006-2017. Both CSR decoupling and audit committee characteristics have

been investigated separately, but no study has found a significant link between these two topics, based

on the agency theory. Second, according to Graafland & Smid (2019), the determinants of CSR

decoupling are underexplored in the literature. In an attempt to fill this gap I draw on the agency

theory to see how the audit committee characteristics influence CSR decoupling. This study helps to

understand the negative effect of CSR decoupling for stakeholders and how specific audit committee

characteristics can decrease CSR decoupling. This understanding of the relation between audit

committee characteristics and CSR decoupling can help the board of directors in the formation of the

audit committee.

Although this study has some important contributions to the literature, it also suffers from

some limitations. The first limitation of this study is that this study is tested using data from worldwide

listed firms. In general, listed firms have more resources available to use for CSR investments than

medium and small sized unlisted firms. Besides that, listed firms have in general more corporate

governance mechanism than medium and small unlisted firms. The results of this study are therefore

limited to large listed firms. The second limitation of this study is that this study is based on secondary

19

data. More in-depth data based on interviews could result in more in-depth clarifications for certain

outcomes and results and it could also broaden our understanding why managers decouple.

To conclude, the limitations mentioned give opportunities for interesting directions of future

research. The understanding of the relationship between audit committee characteristics and CSR

decoupling can be validated by using more in-depth data acquired through interviews. Furthermore,

future research can focus on the effect of other committees on CSR decoupling, like the CSR

committee or nominating committee.

20

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