Board Diversity and Managerial
Control as Predictors of
Corporate Social Performance
ABSTRACT. While it is widely assumed that greater
diversity in corporate governance will enhance a
firm’s corporate social performance, this study
considers an alternative thesis which relates manage-
rial control to corporate philanthropy. The study
empirically evaluates both board diversity and
managerial control of the board as possible predic-
tors of corporate philanthropy. The demonstration of
a positive relationship between managerial control and
corporate philanthropy contributes to our under-
standing that corporate social performance results
from a complex set of economic and social motives.
Possible future research and managerial implications
are discussed.
Individual business leaders in the United States
have long donated to charitable causes, but not
until the federal government’s enactment of the
Revenue Act of 1935 did companies in the
United States begin to make charitable contri-
butions. Following a court decision, Smith v.
Barlow, in 1953 which ensured the legitimacy of
corporate giving, American companies have
routinely contributed to charitable causes. Over
the last few years, several economic and non-
economic motivations for corporate philanthropy
Betty S. Coffey is an assistant professor of management at
the Walker College of Business, Appalachian State
University. She received her Ph.D. from the University
of Tennessee. Her research interests include corporate
governance, corporate social responsibility, and strategy
implementation issues.
Jia Wang is an associate professor of management at the Sid
Craig School of Business, California State University,
Fresno. He received his Ph.D. from the University of
Tennessee. His current research interests include the study
of corporate governance and corporate social performance.
Journal of Business Ethics 17: 1595–1603, 1998.
© 1998 Kluwer Academic Publishers. Printed in the Netherlands.
Betty S. Coffey
Jia Wang
have been examined in the literature (Coffey and
Fryxell, 1991; Fry, Keim and Meiners, 1982;
McMillan, 1996; Pava and Krausz, 1996).
Recently, companies have begun to link corpo-
rate philanthropy directly to strategic objectives
(Smith, 1994) with the expectation that the
well-being of the company and the community
is enhanced by corporate giving. As Smith
described, “like citizens in the classical sense,
corporate citizens cultivate a broad view of their
own self-interest while instinctively searching for
ways to align self-interest with the larger good”
(1994, p. 107). Consequently, corporate philan-
thropy has become a strategic issue about which
boards of directors of corporations in the United
States are concerned.
Boards of directors play a central role in the
governance and oversight of corporate America.
All publicly held companies are required by the
general corporate laws of the states in which they
are incorporated to have boards of directors. The
impact of boards of directors on corporate per-
formance has frequently been questioned, both
conceptually (e.g., Drucker, 1973; Jensen and
Meckling, 1976; Mace, 1972; Mintzberg, 1983;
Molz, 1995) and in an increasing number of
empirical studies (e.g., Daily and Dalton, 1994;
Kesner, 1988; Kosnik, 1987; Pfeffer, 1972; Singh
and Harianto, 1989; Vance, 1955, 1964). The
attention devoted to understanding board
governance and corporate performance has been
justified in different ways. Some critics have
expressed concerns that complacent corporate
boards have relinquished control to management
groups who further their own self-interests. A
related criticism is that corporate boards have
been remiss in their accountability to share-
holders and other societal stakeholders. In
1596 Betty S. Coffey and Jia Wang
contrast, proponents have described a positive
role for corporate boards of directors. For
example, active boards of directors routinely
monitor management’s performance and ensure
that executive functions are carried out. In
particular, considerable research has argued that
corporate boards proactively enhance the corpo-
rate social performance (CSP) of firms (e.g.,
Freeman, 1984; McGuire, Sundgren and
Schneeweis, 1988; Ullmann, 1985).
Given that past research has yielded contra-
dictory findings on board composition and
improved corporate performance, there continues
to be considerable discussion of reforms aimed at
improving the expertise and assertiveness of
boards in formulating corporate policy on such
issues as corporate social performance. One of
the commonly proposed board reforms has been
aimed at increasing outsider representation
(Schellhardt, 1994). Presumably, outsiders would
strengthen a board’s independence and thereby
eliminate “the operating biases of business
executives from social strategic planning deci-
sions” (Marx, 1985, p. 12). Despite the popu-
larity of this view, there has been little empirical
evidence to support it. In part, the empirical
equivocality may be traced to the complexity of
the CSP construct and oversimplifications about
corporate motives for socially-oriented actions.
This study describes key assumptions underlying
the expectation that more outsiders will enhance
corporate philanthropy. As some of these assump-
tions appear tenuous, an alternative thesis is
proposed which relates managerial control to
corporate philanthropy. Which of these com-
peting theses is more strongly predictive promises
greater insight into the validity of the assump-
tions about corporate philanthropy and an
assessment whether this particular form of cor-
porate social performance is consistent with
popular calls for reform.
Competing perspectives of board
composition and philanthropy
Corporate philanthropy
Wartick and Cochran (1985) argued that social
responsibility – the extent to which organiza-
tional outcomes are consistent with societal
values and expectations – is distinct from social
responsiveness and the effective management of
social issues. Whereas these latter dimensions map
more clearly to strategic alignment processes,
social responsibility is strongly related to the view
of CSP as a tradeoff of profits for socially good
acts. Thus, it is necessary to be more precise
in discussing CSP; in this instance, corporate
philanthropy is a manifestation of this social
responsibility dimension (Wokutch and Spencer,
1987).
The board diversity thesis
Board diversity is defined as variation among
its members. This variation may derive from
multiple sources such as expertise and manage-
rial background, personalities, learning styles,
education, age and values. A board may be
viewed as more diverse when it is comprised of
owners, nonowning managers, and outside
members. Diversity is related to managerial
control in that a board which is highly controlled
is likely to lack diversity. However, managerial
control is defined as management’s ability to
influence the outcome of board decisions. Thus,
it is possible to conceive of a diverse board
subject to the control of management and vice-
versa.
The board diversity thesis purports that there
is a positive relationship between outsider repre-
sentation on a corporate board and corporate
philanthropy. This belief is associated with four
related assumptions: 1) Charitable donations
are altruistic; 2) Insiders are preoccupied with
short-term economic outcomes; 3) Philanthropic
giving is consistent with long-term economic
outcomes, and, 4) Board diversity will increase
decision-making effectiveness.
Corporate altruism. Tax and other implications
notwithstanding, corporate donations to founda-
tions or other charitable donations tend to be
viewed as economic diversions. Since no con-
tractual reciprocity is created, such resources are
presumed to be diverted from corporate use. This
assumption is further promoted by its termi-
 Board Diversity and Managerial Control as Predictors of CSP 1597

nology; actions which are called philanthropic, board of directors will be positively
charitable or, more simply, gifts are assumed to related to corporate philanthropy.
lack an economic payback.
Conversely, this thesis would argue that man-
Short-term economic utility. Insiders – both owners agerial control is negatively related to corporate
and top managers as their agents – are assumed philanthropy. For example, the previous assump-
to be more preoccupied with economic utilities tions make it clear that more instrumental
than are outside board members. Publicity about managers and manager-owners would prioritize
undeserved salary increases and about self-serving allocations for capital investment, dividends (as
phenomena such as greenmail and golden compensation and to retain control), and salary
parachutes give credence to this assumption. increments over donations with questionable
Thus, outsiders import a broader view of cor- returns. This suggests the following hypothesis:
porate performance which would be consistent
with philanthropy. H1(b): An increase in the managerial control
of the board of directors will be
Long-term corporate interests. While the former negatively related to corporate philan-
assumption excludes short-term returns from thropy.
charitable donations, the thesis generally adheres
to the argument of enlightened self-interest.
Thus, it is also assumed that at some indefinite The managerial control thesis
point in the future the corporation will be better
off for having been philanthropic. An alternative thesis about the relationship
between board composition and corporate phil-
Diversity and decision-making. Outsider represen-
anthropy could begin with the simple observa-
tatives are assumed to improve the effectiveness
tion that many charitable foundations (e.g.,
of corporate decisions in several ways. First,
Carnegie, Ford, and MacArthur) are made in
outsiders on the board are assumed to be suffi-
family names. This observation suggests a
ciently active so as to check the self-serving
managerial control thesis which would anticipate
excesses by top managers which could reduce the
a positive relationship between managerial
revenue pool from which donations may be
control and corporate philanthropy.
taken. Second, outsiders are generally assumed to
This thesis could be derived from an alterna-
enhance the stakeholder orientation of the firm
tive set of assumptions: 1) Charitable giving is
(Freeman, 1984), thereby linking board diversity
often instrumental; 2) Insiders are preoccupied
with more responsive policies. As a consequence,
with both short-term economic and non-
diverse boards are assumed to avoid problematic
economic utilities; 3) Philanthropic giving may
confrontations which may impede strategy
not be consistent with long-term corporate
implementation.
interests; and, 4) Board diversity does not nec-
Collectively, these assumptions create a thesis
essarily increase decision-making effectiveness.
that there are no calculable short-term returns
from corporate philanthropy, but that philan-
Instrumentality of giving. Charitable donations are
thropy, nevertheless, is in the best long-term
assumed to arise from instrumental motives and,
interest of the firm. Since board diversity not
while true it may exist, altruism is relegated to
only inhibits short-term thinking but also
a subordinate role. It is reasoned that individuals
broadens performance to include noneconomic
and corporations are presumed to engage in
benefits accruing from altruistic actions, it will
philanthropic acts in anticipation of many
surely lead to greater corporate philanthropy.
outcomes, only some of which are economic.
Thus, the following hypothesis is consistent with
The absence of a contractual obligation (i.e., a
the board diversity thesis:
promise for a promise) is not seen as an obstacle
H1(a): An increase in the diversity of the to returns. Thus, a corporate donation to the
1598 Betty S. Coffey and Jia Wang
new art museum, for example, may be made
more in anticipation of cooperation from city
authorities (e.g., granting a desired zoning
variance), than from some pure sense of civic
duty.
Noneconomic utilities. The managerial control
thesis also recognizes a potential for personal
benefits to the controlling manager or manager-
owner. Certainly economic benefits may be
realized, but other noneconomic benefits are also
likely to be realized from charitable donations,
such as membership into a social elite, immor-
tality (e.g., having a building dedicated in one’s
name), and deflecting criticism or abating guilt
(i.e., drawing attention away from some irre-
sponsible activity). Given this assumption, an
effective board may at times need to question
possible self-serving intentions. For example,
Gaventa (1980) documented instances where
Appalachian coal companies made large contri-
butions to the arts in Philadelphia while actively
denying social benefits to the local coal
communities; an effective board might have
questioned these proclivities.
Inconsistency with long-term corporate interests. If
philanthropic actions may serve personal utilities,
then they might not always serve corporate inter-
ests. This is particularly likely if a more focused
definition of corporate interest were adopted.
If clear contributions to some fairly specific long-
term objective is what is meant by corporate
interests, then such inconsistency is easily con-
ceived. For example, a large donation to a cancer
fund based on one’s grief for a recently departed
relative is difficult to clearly link back to corpo-
rate performance. Certainly, the difficulty in
establishing empirical relationships between
philanthropy and typical performance indicators
provides some basis for skepticism.
Dubiousness of diversity. Because it is assumed that
some philanthropic acts may be more self-serving
than firm-serving, an effective board may actually
serve to screen and eliminate philanthropic
intentions. Of course, the decision-making
literature also shows that diversity is no guarantee
of decision effectiveness (Davis, 1969; Janis, 1972;
Mintzberg, 1983). For example, outsiders may
merely serve a symbolic purpose, be passive in
decision-making, or be hand picked for agree-
ability.
These assumptions lead to different expecta-
tions about the relationship between board
composition and corporate philanthropy. In
contrast to the diversity thesis, the managerial
control thesis would posit a positive relationship
between managerial control and corporate phil-
anthropy. It is reasoned that managerial control
facilitates the implementation of instrumental
intentions, especially those which are personally
rewarding. Corporate philanthropy is particularly
susceptible to this type of behavior because
personal returns tend to be noneconomic. Thus,
it would be hypothesized that:
H2(a): An increase in the managerial control
of the board of directors will be
positively related to corporate philan-
thropy.
The same assumptions also undermine the
relationship between board diversity and chari-
table giving. Rather than pushing for such
contributions, outside members are recognized as
being relatively more impotent and ambivalent
about philanthropy. In the event they should take
a position it is possible it could be to challenge
the sensibility of a particular donation. This
pattern of offsetting outcomes leads to the
following hypothesis:
H2(b): There is no significant relationship
between the diversity of the board and
corporate philanthropy.
Methodology
Sample
The sample used in this study was comprised of
98 Fortune 500 companies. The companies
selected represented a broad range of industries.
Data regarding corporate philanthropic behavior
was taken from the report compiled by the
Council on Economic Priorities (CEP) and
corresponding data about board composition and
 Board Diversity and Managerial Control as Predictors of CSP 1599

managerial control was collected from proxy While the CEP is an advocate of incorporating
statements filed with the Securities and Exchange social criteria into corporate policy, these figures
Commission (SEC). Table I shows that the group were either self-reported by the firms or taken
of companies in the sample averaged approxi- from objective secondary sources. Where
mately 14 directors per board which is consistent possible, foundations were included and calcula-
with the findings of Kesner (1988) and others in tions were made based on world-wide earnings.
larger studies. Additionally, other characteristics In this sample, the average level of charitable
of the board are typical for large corporations; donations was about 1% of net income (see
the directors averaged 59 years in age and had Smith (1983) for a discussion of the different
served on the board for an average of 9 years. approaches to this type of calculation).
Table I also reports the descriptive statistics for
the construct measures which are discussed in the Board diversity. Two variables were used to
next section. operationalize the concept of board diversity –
the percentage of inside board members and the
percentage of women board members (the sum
Measures of women directors divided by the size of the
board). The classification of board members as
Corporate philanthropy. Charitable contributions insiders and outsiders was guided by previous
as reported by the CEP was used to opera- work (e.g., Pfeffer, 1972; Vance, 1959, 1964). An
tionalize corporate philanthropy and was inside director was defined as a current or retired
measured as a percentage of pretax earnings. employee of a firm or one of its subsidiaries. All
other directors were considered outsiders. In the
sample, approximately 41 percent of the board
members were identified as insiders, indicating
TABLE I that outside board members were more often in
Characteristics of firms in the sample (n = 98) the majority. Consistent with recent studies (e.g.,
Bilimoria and Piderit, 1994) which report
Variable Mean relatively few women serving on the corporate
boards of Fortune 500 industrial firms, the
Performance average level of representation of women
Sales ($000) 9,858 directors on the corporate boards in this sample
Return on Investment (ROI) 00,18.6 was about 10 percent.
Number of employees 7,128
Board composition Managerial control. The extent of managerial
Age of board members 00,58.8 stock ownership was also operationalized by two
Number of years served 00,09.2 variables. The first measured the percentage of
Size of the board 00,14.1 total stock owned by inside board members,
Corporate philanthropy measured as a percentage of total stock out-
Percentage of net income as standing. The amount of stock owned by a block
charitable contributions 000,1% of insiders would be positively related to their
Board diversity measures ability to influence and control board decisions.
Percentage of insiders on the board 00,41% In this sample, insiders owned an average of 5%
Percentage of women on the board 00,10% of the total stock. The second variable measured
the stock ownership within the board by using
Managerial control measures a ratio of stock owned by outside board members
Percentage of total stock owned
to stock owned by inside board members. The
by inside board members 000,5%
Ratio of stock owned by outside average for this variable was 3.7, indicating that
to inside board members 000,3.7 outsiders controlled almost 4 times the amount
of stock as inside board members.
1600 Betty S. Coffey and Jia Wang
Results
Multiple regression was used to test the com-
peting hypotheses concerning the relationship of
board composition and corporate philanthropy.
The results from this analysis are summarized
in Table II. Of the four independent variables
regressed on charitable contributions, two
variables were significant at the 0.05 level and the
regression model explains 17.8% of the variation
in the level of charitable giving in this sample.
First, the ratio of insiders to outsiders on the
board, proposed as a measure of diversity in this
study, was positively related to charitable contri-
butions. As larger values of this measure indicate
less diversity, this suggests that as the number of
insiders increases so will the philanthropic
behavior of the firm. The estimate suggests that
a unitary increase in this ratio is associated with
a 0.23 percent increase in the percentage of net
income given to charity. This finding does not
support hypothesis 1(a) which anticipated that
outsiders would be more strongly associated with
philanthropic behavior than insiders and is more
consistent with 2(b) which anticipated no rela-
tionship.
Thus, this particular finding runs contrary to
the board diversity thesis, being more consistent
with the managerial control argument. However,
this may be offset somewhat by the nearly
significant positive relationship to women on the
board. Although little attention is ordinarily
TABLE II
Summary of regression results predicting charitable contributions
Independent Variable
Board diversity
Percentage of insiders to outsiders
Percentage of women
Managerial control
Percentage of total stock owned by inside board members
Ratio of stock owned by outside to inside board members
Model information
Intercept
R2
Model F
given to nonsignificant relationships, it would
seem overly arbitrary in this instance to ignore
the relationship. Furthermore, in stepwise regres-
sion this variable was just significant at the 0.10
level. It appears that the two measures of
diversity used in this study may capture
somewhat different facets of diversity. Given the
constrained set of measures, it is certainly possible
that other types of diversity (e.g., age, values,
education) may have led to somewhat different
results.
The second significant finding is that the
percentage of stock owned by insiders, a measure
of managerial control in this study, is positively
related to charitable giving. This finding gives
support to hypothesis 2(a) which anticipated a
positive relationship based on managerial control
reasoning. This may suggest that since outside
board members on average own more stock
than inside members variation in this particular
variable has little impact. Thus, the overall
pattern of findings in this study is clearly more
supportive of the managerial control thesis than
the board diversity thesis.
Discussion and conclusion
This study tested two competing theses about
the relationship between board composition and
corporate philanthropy. The results found that
the managerial control thesis better predicted the
Beta Std. error p-value
00.236 0.115 0.045
01.374 0.838 0.105
01.507 0.578 0.011
–0.002 0.004 0.771
00.646
00.178
03.891 0.006
 Board Diversity and Managerial Control as Predictors of CSP
relationship among the variables. In retrospect, it
seems that the ratio of inside board members to
outside board members, which was used as a
measure of diversity, may also speak to the man-
agerial control construct. Thus, it appears that
this study underscores the importance of man-
agerial control in influencing corporate alloca-
tions to charitable donations more than it casts
doubts on the merits of having outsiders on the
board.
The results of this study would appear to
justify a reexamination of key assumptions about
corporate philanthropic behavior. The manage-
rial control thesis, which received support in this
study, suggests that a substantial component of
charitable giving can be ultimately traced to
instrumental motives. Taking this a step further,
it would also appear that some of this instru-
mentality may be personal, bearing little rela-
tionship to corporate performance. This
argument is consistent with previous empirical
findings. In a survey asking why companies give
money to charitable organizations, Galaskiewicz
(1985) reported that over 67 percent of the firms
surveyed identified moral obligations as a major
reason for making charitable contributions. This
is not to suggest that the donations do not lead
to social goals; however, it does suggest that
corporate donations are not always gifts devoid
of expectations of reciprocity. Secondly, chari-
table donations need not always be in the cor-
poration’s best interests. Thirdly, managers may
be major beneficiaries of philanthropy, although
these benefits may be largely noneconomic.
Another implication of this study is that one
of the most popular recommendations for
improving social performance of the firm,
increasing the number of outsiders on the board,
may actually have little effect on philanthropic
behavior. This implication is particularly dis-
couraging in an era of increasing social needs
when government’s commitment to social
programs in the United States is waning. The
findings also raise similar concerns as previous
research (e.g., Johnson, 1990; Neff, 1989) which
challenge the prevailing outsider dominance
perspective. Corporate governance researchers
remain unconvinced that firms actually benefit
from an increased number of outsiders on boards.
1601
Research yields mixed results and overall findings
seem to suggest that inside directors, not outside
directors, are essential to firm performance (e.g.,
Cochran, Wood and Jones, 1985; Kesner, Victor
and Lamont, 1986; Singh and Harianto, 1989;
Vance, 1955, 1964). These inconclusive results
suggest the need for further investigation of board
composition and philanthropic behavior.
This study amplifies the importance of more
complicated questions including: What is cor-
porate social performance? and, What is the
relationship between corporate morality (ethics),
acknowledging social responsibilities (obliga-
tions), and managing strategic constituencies for
corporate performance (stakeholder manage-
ment)? This study provides support for a multi-
dimensional conceptualization of corporate social
performance. In future studies, researchers could
proceed along several lines. Other operational-
izations of managerial control and board diver-
sity should be examined. For example, diversity
may be measured in other cognitively based ways,
such as by measuring the value orientation of
board members. Actual measures of how active
or passive the board is, and especially outsiders,
would be recommended. Also, future studies
should measure the intervening variables sug-
gested by the theoretical questions which remain
unanswered. Researchers should utilize
approaches which permit the application of more
advanced methodologies, such as covariance
structure modeling. Additional research is needed
to examine the relationship of managerial control
and board diversity with other dimensions of
Wartick and Cochran’s CSP model (1985) or
Wood’s CSP model (1991). As extensions of
Carroll’s model of corporate social performance,
these CSP models “add significantly to our
appreciation of what is involved as we strive to
think of CSP as a dynamic and multifaceted
managerial concept” (Carroll, 1996, p. 51).
Finally, corporate philanthropy is not as
extensively developed in most countries as in
the United States, but international companies
are beginning to expand their philanthropic
interests in response to the challenges of a rapidly
changing corporate environment. If business
firms expect that the well-being of both the
company and the community may be enhanced
1602 Betty S. Coffey and Jia Wang
by corporate philanthropy, then researchers
should continue to examine the impact of boards
of directors on corporate performance.
Acknowledgement
The authors thank Gerald E. Fryxell and the
anonymous reviewers for their very helpful
comments.
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