Received: 12 February 2019 Revised: 21 August 2019 Accepted: 6 September 2019

DOI: 10.1002/csr.1863

RESEARCH ARTICLE

The role of business strategy and CEO compensation structure

in driving corporate social responsibility: Linkage towards a
sustainable development perspective

Chih-Wei Peng

Department of Accounting, National

Changhua University of Education, Bao-Shan
Campus, Changhua, Taiwan
Correspondence
Chih-Wei Peng, Associate Professor,
Department of Accounting, National
Changhua University of Education, Bao-Shan
Campus, No.2, Shi-Da Road, Changhua
500, Taiwan.
Email: nqd6281@cc.ncue.edu.tw
Funding information
Ministry of Science and Technology, Grant/
Award Number: 105-2410-H-018-005
Abstract
This study extends prior studies by analyzing how business strategies affect corpo-
rate social responsibility (CSR) engagement. Studies in the business strategy and
compensation literature further investigate whether firms have superior CSR if they
tend to align their compensation with their company's overall strategy. This tendency
would tend to encourage firms to make their investment decisions on the basis of a
long-term sustainability development perspective. The data consist of a broad cross-
section of companies and industries in the United States for the 2003–2012 period.
To avoid a potential endogenous effect, a two-stage instrumental variables regres-
sion is also adopted in this study. It is found that the prospector business strategy
has a strong positive association with CSR. In addition, CEOs with short-term com-
pensation have less incentive to invest in CSR if their firms adopt a defender strat-
egy. The opposite is true for the prospector group, suggesting that sometimes,
misfits may also produce good CSR outcomes.

KEYWORDS
business strategy, CEO compensation, corporate social responsibility, resource-based theory,
sustainable development

1 | I N T RO D UC T I O N
A number of strategy scholars indicate that corporate social responsi-
bility (hereinafter CSR) can serve as a complementary measure of firm
performance, and it is gaining empirical support as a useful predictor
of the ability of firms to develop long-term sustainability (Ahmed,
Islam, Mahtab, & Hasan, 2014; Chakrabarty & Wang, 2012;
Kacperczyk, 2009; Lopez, Garcia, & Rodriguez, 2007; Ogden & Wat-
son, 1999). Although CSR has become one of the central issues for
many organizations, most prior empirical studies examine the relation-
ship between CSR and firm performance (Al-Tuwaijri, Christen, &
Hughes, 2004; Wang, Chen, Yu, & Hsiao, 2015) or the role of individ-
ual executives, such as CEO narcissism (Petrenko, Aime, Ridge, & Hill,
2016) and CEO materialism (Davidson, Dey, & Smith, 2019), in shap-
ing CSR strategies. Despite this heightened interest in CSR in general,
there are very few studies on the association between CSR and
business strategy.
In fact, Yuan, Bao, and Verbeke (2011) indicate that integrating
CSR initiatives into business practices is one of the greatest chal-
lenges firms currently face. Rangan, Chase, and Karim (2015) indicate
that many companies are unclear on how to adequately anticipate the
effect of social issues on their overall strategy. For example, on the
basis of 142 managers who attended Harvard Business School's CSR
executive education program, their study shows that well-managed
US companies do not integrate CSR into their business strategies.
Thus, there appears to be more confusion with respect to building the
link between CSR and overall firm strategy. Basically, firms that follow
prospector business strategies are more likely to invest in innovation
activities (Miles & Snow, 2003), and Vilanova, Lozano, and Arenas
(2009) find that most innovative firms have a strong commitment to

Corp Soc Resp Env Ma. 2019;1–12. wileyonlinelibrary.com/journal/csr © 2019 John Wiley & Sons, Ltd and ERP Environment 1
2 PENG
CSR on the basis of sustainability reports or environmentally friendly
policies. For example, most innovative companies, including Google,
Microsoft, 3M, and Sony, claim to have a strong commitment to CSR
on the basis of their sustainability reports, codes of conduct, gover-
nance issues, and environmental policies (Vilanova et al., 2009). As a
result, firms that follow prospector business strategies might be likely
to engage in CSR, so this study examines the impact of business
strategy on CSR engagement.
It is also important to consider the fit between business strategy and
CEO compensation because CEOs may be instrumental in formulating
and implementing the overall CSR policies of firms (Petrenko et al.,
2016; Davidson et al., 2018), and CEO compensation plays an important
role in shaping CEOs' CSR decisions (Porter & Kramer, 2006). On the
basis of a matching hypothesis, the “fit” between the contextual vari-
ables and the types of compensation structures represents a state of
equilibrium (Covaleski, Evans, Luft, & Shields, 2003), where a good fit
strategy and compensation structure will generate better performance
than a poor fit (Doty, Glick, & Huber, 1993). Chen and Jermias (2014)
argue that any misfit between business strategy and compensation
structure has a negative impact on firm performance. However, CSR has
unclear implications for the executive compensation–strategy link. To
shed light on this disparity, this study examines the implications of the
fit between a firm's overall strategic orientation and CEO compensation.
The sample used in this study comprises US firms for the period
from 2003 to 2012. After controlling for firm characteristics and macro-
economic factors that determine CSR engagement, this study expects
and finds that firms that follow prospector business strategies are more
likely to engage in CSR. In addition, CEOs with short-term compensa-
tion have less incentive to invest in CSR if their firms adopt a defender
strategy. In contrast, in the case of the prospector group, it suggests
that misfits may sometimes also produce good CSR outcomes.
This paper makes two primary contributions. First, prior studies
have focused on studying the determinants of firm CSR engagement
via internal drive or outsider drive perspectives. For example, research
studies have focused on internal drivers such as managerial compen-
sation incentives (McGuire, Dow, & Argheyd, 2003; Deckop, Mer-
riman, & Gupta, 2006; Fabriz, Mallin, & Michelon , 2014; Maas, 2018;
Jouber, 2019), top management team (TMT) commitment (Lau, Lu, &
Liang, 2016; Liao, Lin, & Zhang, 2018; McGuinness, Vieito, & Wang,
2017; Muller & Kolk, 2010), CEO ability (Yuan, Tian, Lu, & Yu, 2019),
CEOs' political connections (Chin, Hambrick, & Treviño, 2013), board
effectiveness (Harjoto & Jo, 2011), and firm ownership (Lau et al.,
2016; McGuinness et al., 2017). On the other hand, external drivers
include things like stakeholder activism (David, Bloom, & Hillman,
2007; Marquis, Glynn, & Davis, 2007) or institutional pressures
(McGuinness et al., 2017). Among this research on the determinants
of CSR, a rich body of literature has failed to explore its effects on
internal drivers such as business strategy at the organizational level or
the effects of a combination of the internal drivers of business strat-
egy and CEO compensation on firms' strategic CSR decisions. This
study contributes to the existing literature on the determinants of firm
CSR engagement. Second, understanding the relationship between
business strategy and CSR will provide a more complete picture of
how business strategy affects CSR engagement in firms. This study
extends the CSR literature and takes a first step in this direction on
the basis of the resource-based theory. In addition, this study uses
archival data to measure business strategy as discussed in Bentley,
Omer, and Sharp (2013) and examines how business strategy imple-
mentation (prospector or defender strategy) is related to firms' CSR
engagement for a broad cross-section of companies and industries.
2 | PRIOR LITERATURE AND HYPOTHESES
2.1 | Business strategy and CSR
The major challenge that CSR researchers face when addressing
issues related to why firms engage in CSR is that this issue is theoreti-
cal. Prior studies on CSR have employed stakeholder theory frame-
works. Stakeholder theory posits that firms are expected to be
responsible for the management of stakeholders' social interest net-
work when they pursue maximum profits for their shareholders
(Freeman, 1984; Kacperczyk, 2009). Some empirical studies support
stakeholder theory and suggest that investments in CSR can lower
transaction costs with stakeholders and therefore offer a net benefit
to firms (Manchiraju & Rajgopal, 2017; McWilliams & Siegel, 2001).
Recent empirical works have also suggested a number of factors
that drive firms to respond to stakeholders' needs and expectations.
Fabrizi et al. (2014) find that nonmonetary incentives such as career
concerns among incoming or departing CEOs and power and entrench-
ment are associated with CSR. McGuinness et al. (2017) show evidence
that greater gender balance in TMT supports stronger CSR performance
and that qualified foreign institutional investors perceive a greater scope
of meaningful CSR impact for non-state-owned enterprises in China.
Yuan et al. (2019) document that firms' CSR performance increases with
CEO ability and that the above positive relationship is weaker for CEOs
who are also the chair of the board and CEOs who are close to retire-
ment. Liao et al. (2018) find that firms with a large board size, more
female directors, and separate CEO and chairman positions are more
likely to improve the quality of their CSR reports in China. Maas (2018)
finds that the use of quantitative, hard corporate social performance tar-
gets is an effective way to improve corporate social performance
results. Jouber (2019) suggests that the CEO pay slice (CPS)1 is posi-
tively associated with a firm's CSR practices and that sustainability is
more pronounced under some situations, such as those where there are
stronger investor protection and strict law enforcement.
An alternative framework for the analysis of why firms engage in
CSR is provided by the resource-based theory, which posits that firms
gain competitive advantages through specific resources that are valu-
able, rare, inimitable, and nonsubstitutable (Barney, 1999; Bowman &
Ambrosini, 2003). CSR activities may bring internal benefits to firms
by helping them develop new resources and capabilities related to
technique and corporate culture (Branco & Rodrigues, 2006). For
example, human resources activities are viewed as resources that are
1
The CPS is defined as the proportion of the top five executives' total compensation that is
captured by the CEO.
PENG
valuable, rare, inimitable, and nonsubstitutable and can offer competi-
tive advantages to firms. CSR activities, such ensuring a safe work-
place, fair wages, flexible working hours, training opportunities, and
the provision of childcare facilities, can boost employee morale,
improve employee loyalty to firms, raise productivity, reduce staff
turnover, and in turn improve firm performance.
In accordance with the theoretical frameworks highlighted above,
this study selects the resource-based theory to explain the possible link
between business strategy and CSR. Porter and Kramer (2006) link
competitiveness dimensions with corporate resources and capabilities
developed through CSR practices and suggest that firms should embed
sustainability initiatives into their organizational goals and strategies to
create long-term value. In other words, when firms integrate their CSR
strategies with their competitive strategies, managers can assess the
costs and benefits of CSR investment, which will help decision making
and promote effective resource allocation. They also link sustainability
initiatives to financial performance and identify which types of CSR
activities would be a value driver to ensure that CSR actions can benefit
not only stakeholders but also shareholders. In addition, when firms
integrate sustainability strategies with organizational strategies, boards
of directors will put more effort into monitoring CSR activities, and
managers will be less likely to engage in self-interest activities that
would be harmful the long-term value of these firms. This study uses
the three major arguments in resource-based theory—moral obligation,
sustainability, and reputation—to establish Hypothesis .
First is fulfilling a moral obligation—that is, companies have a
duty to be good citizens and “do the right thing,” according to the
leading nonprofit CSR business association in the United States. It
asks its members to “achieve commercial success in ways that
honor ethical values and respect people, communities, and the nat-
ural environment.” Moral CEOs might strategically engage in CSR
as a business strategy that is integrated with core business objec-
tives and core competencies to enhance firm value as well as envi-
ronmental value (McElhaney, 2007). Maignan, Ferrell, and Hult
(1999) support the idea of integrating business strategy with the
moral obligation argument in CSR, although they document that
reactive organizations deny the importance of CSR and do less
than what is required by society's standards. Proactive businesses,
on the other hand, anticipate future responsibilities and act beyond
the minimal requirements. Moreover, Galbreath (2010) tests the
differences in CSR between proactive and reactive companies. As
expected, reactive companies engage less in CSR than those that
are proactive. On the basis of the strategic orientation concept of
Miles and Snow, it is expected here that if a company follows a
competitive defender strategy, it will deny that it has any social
responsibilities and will thus do less than is required by the norms
of the society. However, if a company follows competitive pros-
pector strategy, it appears that it will be particularly adept at scan-
ning the environment and gathering and processing information
(Rogers & Bamford, 2002), which might in turn lead to a better
ability to understand and meet stakeholders' CSR demands.
Second, sustainability emphasizes environmental and community
stewardship. Porter and Kramer (2006) indicate that the principle of
3
sustainability encourages companies to operate in ways that secure
long-term economic performance by avoiding short-term behavior that
is socially detrimental or environmentally wasteful. The principle works
best for issues that coincide with a company's economic or regulatory
interests. Studies in the sustainability management area have also
emphasized the win–win potential between firms and their stake-
holders if firms fully adopt a proactive corporate environmental
management policy (Benn, Dunphy, & Griffiths, 2014; Berry &
Rondinelli, 1998; Porter & Kramer, 2011). DuPont, for example, has
saved over US$2 billion due to reductions in energy use since 1990.
McDonald's has changed the materials for its food packaging, reducing
its solid waste by 30%. However, the traditionalist perspective argues
that organizational responsibilities must be those of the owners of the
organization rather than those of the stakeholders (Friedman, 1970),
which suggests that firms should not engage in proactive corporate
environmental management policies. According to Miles and Snow
(1978), prospectors analyze all aspects of their environment and grow
by developing new products and markets. Similarly, firms with advanced
environmental positions must consider the entirety of their contexts
and reconcile the views of all participants (Hart, 1995). By integrating
business strategy with the concept of sustainability in CSR, prospectors
can apply different measures to modify their products and markets for
environmental reasons. This approach will lead to the development of
new products and designs with minimal negative impacts on the natural
environment. Further, Vilanova et al. (2009) find that most innovative
companies have a strong commitment to CSR and/or corporate citizen-
ship, as evidenced through sustainability reports, codes of conduct, and
governance and environmental policies. Thus, firms with a “prospector”
strategy tends to value resources that enable innovation, and, in turn,
these firms are better suited to engage in CSR.
Finally, many companies use their reputation to justify their
CSR initiatives and say that they will improve the firm's image,
strengthen its brand, enliven morale, and even raise the value of
stock. For example, several previous studies demonstrate that a
good corporate reputation generally leads to superior financial per-
formance among firms on the basis of the provision of empirical
evidence of its positive impact on stakeholder behavior (Fombrun,
1996; Fombrun, 2001; Fombrun & Shanley, 1990; Roberts & Dowl-
ing, 2002; Schwaiger, 2004). Although these justifications have
advanced the thinking in the field, none of them has offered suffi-
cient guidance for the difficult choices that corporate leaders must
make. When integrating business strategy with the concept of rep-
utation based on CSR, reputation acts as a fundamental driver to
implement CSR because it is currently an accepted and valued
intangible asset (Schnietz & Epstein, 2005), as well as a key issue
in risk management (Van De Ven and Jeurissen, 2005). Further,
reputation and image generate opportunities for innovation within
organizations in terms of corporate branding, which in turn builds
corporate reputation, image, and identity (Fan, 2005). Reputation
thus becomes a driver not only to initiate CSR approaches in firms
but also to drive the related processes inside the company. As
demands for CSR information increase, CSR-related marketing com-
munications have an opportunity to play a role in shaping brand
4 PENG

beliefs. Pro-social marketing initiatives can become a market differ-
entiating strategy (McWilliams & Siegel, 2001), build brand equity
(Hoeffler & Keller, 2002), and lead to customer loyalty and other
positive post-purchase outcomes (Bhattacharya & Sen, 2004).
Therefore, on the basis of the above arguments, the following
hypothesis is proposed:
Hypothesis 1. Prospector business strategies are
more positively associated with higher CSR than
defender business strategies.
2.2 | The effect of business strategy and CEO
compensation on CSR
Studies have examined the relationship between firm strategies at the
corporate and business levels as well as their relationship to executive
3 | RESEARCH METHOD
3.1 | Sample
The data available for this study are drawn from US companies for the
period from 20032 to 2012. Data on CEO compensation are taken
from S&P's Execucomp database; financial data are obtained from the
COMPUSTAT annual database, and the CSR sample is drawn from all
US companies in the KLD (Kinder, Lindenberg, and Domini) database.
The initial sample contains 10,203 observations3 with positive sales
and asset observations and nonmissing historical SIC codes for the
period from 2003 to 2012 from the KLD, COMPUSTAT, and
ExecuComp databases. A total of 3,353 observations without CSR data
and 116 observations without the necessary data to compute control
variables are eliminated. Thus, the sample contains 6,734 observations
with required data for the period from 2003 to 2012. Consistent with
Bentley et al. (2013) and Ittner, Larcker, and Rajan (1997), the busi-

compensation systems. These empirical studies reflect an underlying ness STRATEGY measure is constructed using a rolling average over

theoretical argument put forth by many early compensation theorists the prior five years but excludes 2,840 observations. As a result, a

(Rappaport, 1978; Salter, 1973) suggesting that firms must match final total of 3,894 observations are considered in this study.

their compensation systems to their strategic contexts in order to

realize positive performance benefits. The matching hypothesis has 3.2 | Variables
been generally supported, with empirical studies examining diversifi-
The KLD rates companies on a number of CSR indicators in 12 major
cation (Kerr, 1985), the type of product-market strategy (Gupta &
areas (corporate governance, community relations, diversity,
Govindarajan, 1984), and industry type (Galbraith & Merrill, 1991).
employee relations, human rights, the environment, product, alcohol,
Rajagopalan (1997) indicates that linking a firm's strategy to its
gambling, military contracting, nuclear power, and tobacco). The KLD
compensation plan characteristics has implications for some of the
database is also suitable for conceptualizing sustainability develop-
problems identified in agency theory. An incentive alignment problem
ment practices (Chakrabarty & Wang, 2012). Deng, Kang, and Low
arises when managerial behavior cannot be specified a priori by the
(2013) indicated that the last five dimensions are exclusionary screen-
principal and can thus deviate from what would be optimal (Jensen &
ing categories (e.g., alcohol, gambling, military contracting, nuclear
Murphy, 1990). To alleviate the problem of managerial incentive align-
power, and tobacco). Each major area contains a set of “strength” and
ment, the executive compensation literature identifies a wide variety
“concern” ratings, where strength is often used to represent exem-
of compensation plans that are actually used by corporations. For
plary social performance, and concern is used to represent poor CSR.
example, long-term plans impose less risk on firm managers than
Following the study of Deng et al. (2013), a CSR measure is con-
short-term plans because managers are less likely to be penalized for
structed in this work. First, strength and concern scores for each
short-term fluctuations in performance over which they may have lit-
dimension are divided by the respective number of indicators on the
tle control (Jensen & Meckling, 1976). Also, Chen and Jermias (2014)
strength and concern side, and adjusted strength and concern scores
find that firms adopting a product differentiation strategy use a higher
for each dimension are then derived. The difference between the
proportion of performance-linked compensation than those adopting
adjusted total strength score and the adjusted total concern score
a cost-leadership strategy. The characteristics of long-run compensa-
(adjusted CSR score) is taken. The adjusted CSR score thus gives equal
tion thus make them particularly suited to prospector strategies
weight to the seven dimensions but not to the individual indicators
because they are more likely to align the interests of managers with
(Manescu, 2009). In other words, the adjusted CSR is a standard mea-
the long-run CSR target. Therefore, the following hypotheses are
sured by a net score for each dimension by subtracting total concerns
proposed:
from total strengths and then adding the net scores from each dimen-
sion for a grand total in the KLD database. Additionally, the standard-
Hypothesis 2-1. Prospector firm CEOs with long-
ized CSR performance in this study is also adjusted by industry
term equity compensation have a greater incentive
medians to obtain relative performance scores that are comparable
to engage in CSR than defender firm CEOs.
across industries (which, in this study, includes 44 different industries).

Hypothesis 2-2. Defender firm CEOs with short-
term bonus compensation have a lower incentive to
engage in CSR than prospector firm CEOs.
2
KLD expanded coverage to the 1,000 largest US firms, and in 2003, it increased coverage to
the 3,000 largest companies. Thus, the KLD database contains complete firm data
since 2003.
3
The financial industry and public administration are not examined in this work.
PENG
Then, SCSR is defined as the standardized CSR performance as a
median across industries.
Consistent with Bentley et al. (2013), a discrete STRATEGY com-
posite measure is constructed here that proxies for the organization's
business strategy. Higher STRATEGY scores indicate companies with
prospector strategies, and lower scores indicate companies with
defender strategies. Similar to Bentley et al. (2013) and Ittner
et al. (1997), this study uses the following characteristics for the
STRATEGY composite measure: (a) the ratio of research and develop-
ment to sales, (b) the ratio of employees to sales, (c) a historical growth
measure (1-year percentage change in total sales), and (d) the ratio of
marketing (SG&A) to sales, which differentiates prospectors from
defenders, as Hambrick (1983) empirically finds. Miles and Snow's
(1978, 2003) theory suggests that other important attributes that dis-
tinguish prospectors and defenders include organizational stability
regarding the length of employee tenure and the efficiency and auto-
mation of operations, as reflected in overall capital intensity. This
study captures these two attributes using (e) a measure of employee
fluctuations (standard deviation of total employees) and (f) a measure
of capital intensity (net property, plant and equipment scaled by total
assets), respectively. Within each firm-year, those observations with
variables in the highest quintile are given a score of 5; those in the
second highest quintile are given a score of 4, and so on, and those
observations with variables in the lowest quintile are given a score of
1 (except capital intensity, which is reversed-scored so that observa-
tions in the lowest [highest] quintile are given a score of 5 [1]). The
score is expected to range between 6 and 30. Then, for each firm-
year, the scores across the six variables are added, and if a company
receives a high score, then it tends to adopt a prospector strategy,
whereas a lower score indicates that it tends to adopt a defender
strategy. It is expected that a firm following a prospector strategy
(STRATEGY) will be positively associated with higher CSR.
This study uses the method in Bergstresser and Philippon (2006)
to calculate the amount of newly granted restricted stocks and stock
options for equity incentives (EQUITY). The dollar change in the value
of the CEO's stock and option holdings that would come from a one-
percentage point increase in the company stock price (CEO_ONEPCT)
is then calculated using the following formula:

variable using the two-digit SIC codes.
CEO ONEPCTi,t = 0:01 × PRICEi,t × CEOSHARESi,t + CEODELTAi,t × CEOOPTIONSi,t :
ð1Þ
In the above specification, for any fiscal year t and firm i, PRICE is
the fiscal year-end company share price; CEOSHARES is the number of
shares held by the CEO at the fiscal year-end; CEODELTA is an estimate
of the delta of the CEO's option portfolio, and CEOOPTIONS is the num-
ber of options held by the CEO at the fiscal year-end.
A variable (BONUS) is also created in this study, which is the log
transformation of the CEO's annual bonus disclosed in ExecuComp.
Finally, on the basis of prior studies, this study includes several control
variables, and Table 1 summarizes the definitions of the key variables
employed in this study.
5
TABLE 1 Definitions of variables
Variables Definition
Dependent variable
SCSR CSR is standardized measured using a net score for
each dimension by subtracting total concerns from
total strengths and then adding the net scores from
each dimension for a grand total in the KLD database.
Then, SCSR is standardized CSR performance by
industry medians across industries.
Independent variables
STRATEGY For each firm-year, the scores across the six variables
are added: (a) the ratio of research and development to
sales, (b) the ratio of employees to sales, (c) a historical
growth measure (one-year percentage change in total
sales), and (d) the ratio of marketing (SG&A) to sales.
This study also captures these two attributes using (e)
a measure of employee fluctuations (standard
deviation of total employees) and (f) a measure of
capital intensity (net property, plant and equipment
scaled by total assets), respectively. The resulting
score will be between 6 and 30. With regard to
STRATEGY for each firm-year, the scores across the
six variables are added. If a company receives a high
score, then it tends to adopt a prospector strategy,
whereas a low score means that it tends to adopt a
defender strategy.
EQUITY CEO long-term compensation (EQUITY) is measured as
the dollar change in the value of the CEO's stock and
option holdings that would come from a
one-percentage point increase in the company stock
price.
BONUS This study creates a variable (BONUS), which is the log
transformation of the CEO's annual bonus.
TENURE CEO tenure (TENURE) is measured by the number of
years since being appointed CEO.
SIZE SIZE is the natural logarithm of a firm's sales.
ROAt − 1 ROAt − 1 is firm's prior performance, defined as the prior
year's returns on assets.
BM BM is the ratio of a firm's book value of equity to its
market value of equity.
LEV LEV is the ratio of total debt to total assets.
LOSS LOSS is defined as a categorical variable when the firm's
earnings are negative, and 0 otherwise.
INDUSTRY Industry effect (INDUSTRY) is defined as a categorical
YEAR Year effect (YEAR) is defined as a categorical variable
using the sample firm year.
4 | E M P I R I C A L RE S U LT S
4.1 | Descriptive statistics
Table 2 provides the descriptive statistics and Pearson correlations for
the sample observations. First, the average standardized CSR (SCSR)
score is 0.06. Second, the average business strategy (STRATEGY) score
is 18.74, which is near the median value. Because this study adds the
scores across the six variables to measure business strategy, the score
is between 6 and 30. Third, the mean long-term compensation
6 PENG

TABLE 2 Descriptive statistics and Pearson correlations

Variables Mean Std. Dev V1 V2 V3 V4 V5 V6 V7 V8 V9 V10

V1. SCSR 0.06 0.52
V2. STARTEGY 18.74 3.41 .07**
V3. EQUITY 0.28 0.36 .18** −.18
V4. BONUS 0.47 1.01 −.06** −.04 −.15**
V5. TENURE 7.01 7.38 −.11** −.15** −.13** .09**
V6. SIZE 7.17 1.82 .33** −.31** .34** .01 −.16**
V7. ROAt − 1 0.03 0.15 .11** .13** .05** .02 .04* .28 **
V8. BM 0.51 1.02 −.07** .01 .01 .01 −.03 −.07** −.01
V9. LEV 0.18 0.18 .06** −.24** .07** .01 −.12** .30** −.05** −.13**
V10. LOSS 0.22 0.41 −.11** −.18** −.10** −.01 −.05** −.32** −.44** .07** .05**

Note. Definitions of the variables appear in Table 1. The sample includes 3,894 observations.
*Significance at the 5% level using the two-tailed test.
**Significance at the 1% level using the two-tailed test.

(EQUITY) is 0.28, indicating that the dollar change in the value of the
CEO's stock and option holdings is approximately 28%. The mean
short-term compensation (BONUS) is 0.47. This value is measured by
the natural log of the annual bonus. Finally, regarding the control vari-
ables, the average CEO tenure (TENURE), the average firm size (SIZE),
prior year financial performance (ROA t − 1), book-to-market value of
equity (BM), debt ratio (LEV), and indicator variable of negative earn-
ings (LOSS) are 7.01, 7.17, 0.03, 0.51, 0.18, and 0.22, respectively.
4.2 | Empirical findings
A methodological consideration should impact the modeling of the
variable for CSR performance. If the CSR performance regression
models fail to consider potentially endogenous variables (i.e., business
strategy or compensation payment), then these will be correlated with
the error term, and the use of traditional ordinary least squares
methods will cause an omitted variable bias. Thus, a two-stage instru-
mental variables (IV) regression method is used to eliminate this bias
by first regressing the endogenous variable (business strategy or com-
pensation payment) on the independent variables. In the case of the
business strategy regression model, this study includes a number of
independent variables, such as INTANG (intangible assets to total
assets), SALES (the natural logarithm of firm sales), CASH (the ratio of
operating cash flow to total assets), CAPITAL (the ratio of investment
cash flow to total assets), RDI (the natural logarithm of median value
of industry research and development), BM (book value of equity to
its market value), and industry and year effects, as taken from the rel-
evant literature (e.g., Li & Simerly, 2002). Then, the predicted values
of the endogenous variables in lieu of the observed values are used in
the second stage, when CSR performance is regressed on the
predictor variable.
In addition, a two-stage instrumental variable regression is
adopted to address concerns about endogeneity as they related to
compensation payment. This study includes a number of indepen-
dent variables, such as MV (log of market capitalization), BM (book
value of equity to its market value), DUAL (a dummy variable was
used to code CEO duality, where 1 equals CEO also the chair, and
0 otherwise), AGE (log of CEO age), ROAt − 1 (return on assets in
the previous year), LEV (total debt to total equity), and industry and
year effects, as taken from the relevant literature (e.g., Core,
Holthausen, & Larcker, 1999; Indjejikion & Nanda, 2002). Then, in
lieu of the observed values, the predicted values of the endogenous
variables are used in the second stage, when CSR performance is
regressed on the predictor variables.
Table 3 presents the instrumental variable regression results for
the hypotheses. In terms of ., the model for the second stage within
the instrumental regression has an r-square of 22.21%. Panel A of
Table 3 shows that business strategy (STRATEGY) has a strong posi-
tive association with the standardized CSR (SCSR; coefficient =
0.081 and p < .01). In terms of Hypothesis 2-1, the Defender (Ana-
lyzer, Prospector) sample for the second stage has an r-square of
30.91% (21.63% and 25.06%, respectively). Panel B of Table 3
shows that CEOs with long-term compensation (EQUITY) have a
greater incentive to engage in CSR; however, Panel C of Table 3
shows that for the prospector sample firms, the coefficients on
long-term compensation (EQUITY) become insignificant. In terms of
Hypothesis 2-2, Panel C of Table 3 shows that for the defender
sample firms, the coefficient on short-term compensation (BONUS)
is significant. In contrast, for the prospector sample firms, the coeffi-
cients on short-term compensation (BONUS) are insignificant. The
difference in the coefficients on long-term (EQUITY) and short-term
compensation (BONUS) variables between these two groups
(Defender vs. Prospector) are all significant. The above results suggest
a “substitution effect” of long-term compensation and the prospec-
tor business strategy on CSR engagement and a “joint effect” of
short-term compensation and the defender business strategy on
CSR engagement.
The previous literature on CSR fails to consider the role of orga-
nizational business strategy, thus providing a limited picture of how
different types of business strategy affect CSR-related decisions.
PENG 7

TABLE 3 The impact of business strategy and compensation on CSR engagement

Panel A: Business strategy and CSR Panel B: CEO compensation and CSR
Dependent variable: SCSR Dependent variable: SCSR
Independent Second Independent First Independent Second Independent First
variables stage variables stage variables stage variables stage
Intercept −2.449** Intercept 21.799** Intercept −0.422** Intercept 1.132**
STRATEGY 0.081** INTANG 3.196** EQUITY 0.341* MV 0.007**
SIZE 0.146** SALES −1.373** BONUS −0.025** BM −0.098**
ROAt − 1 0.093 CASH 1.157** TENURE −0.004** DUAL −0.093*
BM −0.021* CAPITAL −9.660** SIZE 0.283** AGE −0.225**
LEV −0.046 RDI 1.255** ROAt − 1 0.109 ROAt − 1 0.145
LOSS 0.009 BM 0.028 BM 0.005 LEV 0.469**
LEV −0.178**
LOSS −0.077*
Industry effect Included Industry effect Included Industry effect Included Industry effect Included
Year effect Included Year effect Included Year effect Included Year effect Included
2 2 2 2
Adjusted R = 22.21% Adjusted R = 46.82% Adjusted R = Adjusted R = 13.46%
21.39%
N = 3,894 N = 3,894 N = 3,439 N = 3,439
Panel C: Business strategy and CEO compensation on CSR
Dependent variable: SCSR
Samples Defender Analyzer Prospector Defender vs. prospector
Independent Second Second stage Second stage F value p value
variables stage
Intercept 0.158 −0.368** −0.141** — —
EQUITY −1.022* −0.962** 0.140 4.63 .03
BONUS −0.053** 0.011 −0.019 3.05 .08
TENURE −0.166** −0.065** −0.050* 13.20 <.01
SIZE 0.109** 0.146** 0.082** 0.01 .98
ROAt − 1 0.575* 0.281 −0.131* 9.00 <.01
BM −0.007 −0.093** −0.046* 0.08 .78
LEV −0.087 −0.162* 0.006 0.32 .57
LOSS −0.001 0.102* 0.083* 24.21 <.01
Industry effect Included Included Included
Year effect Included Included Included
Adjusted R2 30.91% 21.63% 25.06%
N 592 560 405

Note. Definitions of the variables appear in Table 1. The maximum VIF is 2.79. INTANG is defined as intangible assets to total assets. SALES is defined as
the natural logarithm of firm's sales. CASH is defined as the ratio of operating cash flow to total assets. CAPITAL is defined as is defined as the ratio of
investment cash flow to total assets. RDI is defined as the natural logarithm of median value of industry research and development. MV is defined as the
log of market capitalization. DUAL is defined as a dummy variable was used to code CEO duality, where 1 equals CEO also the chair, and 0 otherwise. AGE
is defined as the log of CEO age.
*Significance at the 5% level using the two-tailed test.
**Significance at the 1% level using the two-tailed test.

The findings of this study provide new evidence that can increase
the magnitude of CSR investment, which is the relation between
the firm and the prospector business strategy. In addition, previous
studies have found the empirical relation between CEO compensa-
tion and CSR to be mostly inconclusive (Callan & Thomas, 2011;
Deckop et al., 2006; Fabrizi et al., 2014; Jouber, 2019; Maas, 2018;
Mahoney & Thorne, 2005; McGuire et al., 2003). A positive rela-
tionship has been found between CEO bonus compensation and
CSR (Callan & Thomas, 2011) and between long-term equity incen-
tives and CSR (Deckop et al., 2006; Mahoney & Thorne, 2005). In
contrast, both McGuire et al. (2013) and Fabrizi et al. (2014) find
that poor CSR is associated with both bonus and long-term equity
8 PENG

TABLE 4 Considering the sample selection problem

Panel A: Business strategy and CSR Panel B: CEO compensation and CSR
Dependent variable: SCSR Dependent variable: SCSR
Independent variables Coeff. t value Independent variables Coeff. t value
Intercept −1.440** −6.31 Intercept −4.091** −3.87
STRATEGY 0.031** 11.70 EQUITY 0.087** 3.36
SIZE 0.125** 6.14 BONUS −0.021** −3.13
ROAt − 1 0.057 0.83 TENURE −0.019* −2.38
BM −0.022** −2.65 SIZE 0.418** 4.60
LEV −0.020 −0.39 ROAt − 1 0.669** 3.30
LOSS −0.020 −0.82 BM −0.060** −2.71
Inverse Mills 0.094 0.23 LEV −0.150 −1.87
Industry effect Included LOSS −0.002 −0.01
Year effect Included Inverse Mills 1.481** 2.63
Industry Effect Included
Year Effect Included
Adjusted R2 = 15.96%, N = 3,894 Adjusted R2 = 9.81%, N = 3,439
Panel C: Business strategy and CEO compensation on CSR
Dependent variable: SCSR
Samples Defender Analyzer Prospector
Independent variables Coeff. t value Coeff. t value Coeff. t value
Intercept 0.689 1.66 −0.016 −0.05 −1.201* −2.52
EQUITY 0.114 1.57 0.008 0.11 −0.024 −0.34
BONUS −0.053* −2.10 −0.042 −1.74 −0.005 −0.18
TENURE −0.099** −3.81 −0.050 −1.95 −0.016 −0.57
SIZE −0.024 −0.68 0.082** 2.39 0.223** 5.11
ROAt − 1 1.231** 2.90 0.518 1.47 −0.055 −0.25
BM −0.030 −0.33 0.279 1.33 −0.085 −0.74
LEV 0.221 1.10 −0.232 −0.83 −0.409* −2.20
LOSS −0.089 −0.98 0.040 0.46 0.149 1.71
Inverse Mills −0.912* −2.00 −1.474* −2.14 0.255 0.74
Industry effect Included Included Included
Year effect Included Included Included
Adjusted R2 19.48% 20.67% 35.58%
N 592 560 405

Note. Definitions of the variables appear in Table 1. The maximum VIF is 1.86.
*Significance at the 5% level using the two-tailed test.
**Significance at the 1% level using the two-tailed test.

compensation. Recently, Maas (2018) includes corporate social per-
formance targets in the compensation structure, and Jouber (2019)
uses the CPS. Both studies suggest that new compensation measures
have a positive association with a firm's CSR. This study argues that
the possible reason for the inconsistency in the previous CEO com-
pensation findings is due to the lack of empirical measures for the
firm channels through which business strategy may also influence
CSR. This study extends prior research and highlights the combined
effect of business strategies at the organizational level, which influ-
ences the individual executive compensation structure. This study
finds new evidence of the “substitution effect on CSR engagement”
or the “joint effect on CSR engagement” between CEO compensa-
tions and the firms' business strategy orientation.
4.3 | Additional tests
The following additional tests are conducted to assess the validity of
the results. First, sample selection bias may occur because the firms
with good CSR practices identified in our sample may not be repre-
sentative of all firms. Following Heckman (1979), a two-stage
PENG 9

estimation was used in the current work to control for the sample
selection problem. In the first stage, the probit selection equation and
the full sample of firms with and without CSR are used to estimate
the probability that a firm has an incentive to disclose the details of its
CSR practices. The estimated parameters are used to calculate the
inverse Mills ratio, which is then included as an additional explanatory
variable in the OLS estimation (see Greene, 1997). Table 4 shows the
results, where after considering the sample selection problem, the
Third, organizational theory (Miles & Snow, 1978, 2003) posits
that when companies adopt a specific business strategy, the strategy
should remain consistent over time. To examine the consistency of
the STRATEGY scores, the variance in the STRATEGY measure within
companies is examined, and first differences are run for each firm-
year STRATEGY score to determine how many total times companies
with consecutive year observations changed their scores. The
untabulated results reveal that approximately 84% of the companies

results are similar to those of the main test specifications, and no under consideration changed their scores by less than two points (e.g.,

inferences are affected. In addition, most models for correcting the changing from 30 to 28), whereas less than 5% of companies changed

sample selection problem have relatively lower explanatory power their STRATEGY score by more than three points. The untabulated

than the main tests; for example, Panel A of Table 4 shows an correlation tests reveal that STRATEGY is positively and significantly
correlated with its one-year lag value and has a correlation coefficient
adjusted r-square of 15.96%, which is lower than that of Panel A of
above 0.75 (p < .001) for both the Pearson and Spearman correlations.
Table 3, with an adjusted r-square of 22.21%.
Altogether, consistent with expectations based on theory, these
Second, this study also considers whether managerial CSR engage-
results suggest that the STRATEGY measure is stable over time within
ment will also affect business strategies within a two-stage instrumental
firms. Finally, a single integrated indicator of CSR that combines both
variables regression. In other words, in the case of the business strategy
the strength and concern dimensions is used. Cho, Lee, and Pfeiffer
regression model, this study also includes standardized CSR in the first
(2013) argue that the CSR variables in the KLD database that encour-
stage. Table 5 shows the results; standardized CSR (SCSR) is positive and
age exemplary corporate performance may differ from those that dis-
significant at the 1% significance level in the first stage, which supports
courage dubious social performance. This study therefore also
that firm CSR engagement promotes greater adoption of a prospector
examines theses hypotheses by separating the measures for the con-
business strategy. After considering the above potential endogeneity
cerns and strengths of CSR. The untabulated results support most of
problem, the results are similar to those of the main test specifications,
the prior findings.
and business strategy (STRATEGY) is also found to have a strong positive
association with the standardized CSR (SCSR). In addition, Table 5 shows
an adjusted r-square of 22.96%, which is similar to the main results. 5 | C O N CL U S I O N S

TABLE 5 The impact of business strategy on CSR engagement Previous studies have not given much consideration of how business
strategy is related to CSR. This study fills this gap in the literature.
Dependent variables: SCSR Dependent variables: STRATEGY
This study documents that the prospector business strategy has a
Independent Second Independent First strong positive association with CSR. The results suggest that firms
variables stage t value variables stage t value
adopting a prospector strategic orientation will give their CEOs a bet-
Intercept −2.774** −15.01 Intercept 21.897** 61.9
ter understanding of the strategies they need to effectively engage
STRATEGY 0.097** 13.88 SCSR 0.270** 2.58 with a broader set of stakeholders. The findings of this study have
SIZE 0.149** 18.55 INTANG 3.181** 9.67 important practical implications for managers, regulators, practi-
ROAt − 1 0.108 1.30 SALES −1.380** −32.11 tioners, and academics. In other words, this study finds that firms
BM −0.019 −1.91 CASH 1.092* 2.48 adopting a prospector strategic orientation are also engaged in CSR
LEV −0.039 −0.52 CAPITAL −9.691** −4.73 activities. Thus, this type of firm has greater opportunities to increase
LOSS 0.003 0.08 RDI 1.225** 31.6 legitimacy, manage effectively, and develop a positive reputation that
BM 0.032 0.72 ultimately affects the long-term viability of the business.
Industry Included Industry Included This study provides evidence on the fit between firm strategy and
effect effect executive long-term and short-term compensation systems in relation
Year effect Included Year effect Included to CSR activities and determines that for the defender sample, an
2
Adjusted R = 22.96%, N = 3,894 2
Adjusted R = 46.96%, N = 3,894 organization's structure (e.g., short-term compensation) fits the
defender strategy and suggests a “joint effect on CSR engagement,”
Note. Definitions of the variables appear in Table 1. The maximum VIF is
2.31. INTANG is defined as intangible assets to total assets. SALES is where such firms tend to have lower CSR performance. The opposite
defined as the natural logarithm of firm's sales. CASH is defined as the is true for the case of the prospector group, suggesting that some-
ratio of operating cash flow to total assets. CAPITAL is defined as is times misfits can also produce good CSR outcomes. On the basis of
defined as the ratio of investment cash flow to total assets. RDI is defined
the substitution effect of the prospector business strategy and long-
as the natural logarithm of median value of industry research and
development. term compensation on CSR engagement, long-term reward plans
*Significance at the 5% level using the two-tailed test. seem unnecessary for firms when a firm with a “prospector” strategy
**Significance at the 1% level using the two-tailed test. tends to include CSR practices in its strategic thinking to address the
10
various needs of stakeholders. Prior literature focuses only on the role
of CEO compensation structure as an internal drivers and might
ignore the critical role of firm business strategy. Indeed, this study
finds new evidence of the “substitution effect on CSR engagement”
or the “joint effect on CSR engagement” between CEO compensa-
tions and the firms' business strategy orientation. This research might
be useful in terms of helping firms better understand the different
implications of their payment choices in different business strategic
orientation contexts. This study thus provides a complete picture of
how firms can make better decisions regarding efficient and strategic
resource allocation from a sustainable development perspective.
The implications of this paper, as set out above, should be made
with the following caveats: First, the results may not be generalizable
to other countries, and, thus, it is necessary for future studies to
extend the investigation. Second, this study focuses on CEO compen-
sation incentives. Future research might investigate how the charac-
teristics of the TMT affect a firm's CSR engagement.
ACKNOWLEDGMENTS
I thank Richard Welford, Corporate Social Responsibility and Environ-
mental Management's Editor, for his cordiality and encouragement
through the review process. I also thank two anonymous referees for
their invaluable advices. This study was funded by the Ministry of Sci-
ence and Technology, Taiwan (grant #MOST 105-2410-H-018-005).
The author acknowledges the helpful comments from 2017 European
Accounting Association Annual Congress and 2018 Annual Confer-
ence of Japan Accounting Association. Finally, the author gratefully
thanks Professor Anne Wu for her valuable suggestions.
ORCID
Chih-Wei Peng https://orcid.org/0000-0001-7394-211X
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How to cite this article: Peng C-W. The role of business
strategy and CEO compensation structure in driving corporate
social responsibility: Linkage towards a sustainable
development perspective. Corp Soc Resp Env Ma. 2019;1–12.
https://doi.org/10.1002/csr.1863