Board Composition and Corporate Social Responsibility (Saleh & Jurdi, 2023) - Novelty

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Board composition and corporate Board

composition
social responsibility: uncovering and CSR:
co-option effects
the effects of co-opted directors
Ali I. El Saleh
TWUSUPER, Melbourne, Australia, and
Received 1 February 2023
Doureige J. Jurdi Revised 3 June 2023
Department of Accounting, Data Analytics, Economics and Finance, Accepted 18 June 2023
La Trobe University, Melbourne, Australia
Abstract
Purpose – Prior research shows that co-opted directors adversely impact many corporate outcomes, yet little
is known about these directors’ impact on CSR performance. The authors investigate whether and how
co-opted boards affect the firm’s CSR score and component CSR scores.
Design/methodology/approach – The authors use panel regression models to investigate this study’s
research questions and address endogeneity concerns using the system generalized method of moments
(system GMM) and a quasi-natural experiment.
Findings – The authors report new evidence showing that co-opted boards negatively impact CSR
performance based on the CSR score. Results identify board characteristics that accentuate or moderate the
effect of co-option on the CSR score and show that board independence, the presence of women on the board,
and CEO duality positively and significantly impact the CSR score. These findings are robust across
alternative measures of co-option and in the results of models addressing endogeneity concerns. An extended
analysis utilizing CSR component scores reveals a significant negative impact of co-option on the environment
component score using various measures of co-option and on employee relations, product quality, and human
rights component scores using selected measures of co-option.
Practical implications – Findings have implications for board structuring and composition for firms aiming
at improving their CSR score.
Originality/value – The study provides new evidence on the impact of co-opted boards on CSR performance.
The results help inform stakeholders such as policymakers, executives and directors, shareholders, and capital
market participants on how board composition affects socially responsible activities and performance and
identify CSR component areas that require attention.
Keywords Corporate social responsibility, Co-opted directors, Corporate governance, Board of directors
Paper type Research paper
1. Introduction
The board of directors (BODs) plays a significant role in monitoring a firm’s top management
team (Fama and Jensen, 1983) and guiding a firm’s strategic directions through the decisions
it makes (Schulze et al., 2001; Walsh and Seward, 1990). The board’s composition can
influence firms’ decisions by significantly shaping the form and quality of deliberations
between its members (Malenko, 2014). Firms tend to alter their board composition to achieve
better organizational outcomes (Oh et al., 2019). In recent years, research interest has moved
away from the shareholder theory of corporate governance (Jensen and Meckling, 1976; Fama
and Jensen, 1983) to the stakeholder theory (Freeman, 2010). While the former theory focuses
solely on shareholder wealth maximization, the latter shifts the board’s focus to stakeholders’
wealth focusing on shareholders, investors, customers, employees, and suppliers. The
growing interest in the stakeholder theory of corporate governance has led many authors to
JEL Classification — G30, G34, M14 Journal of Accounting Literature

The authors thank the editors of the journal, Prof. Tom Smith, anonymous referees for their helpful © Emerald Publishing Limited
0737-4607
suggestions and their colleague Ghasan Baghdadi. DOI 10.1108/JAL-02-2023-0019
JAL suggest that corporate governance plays a vital role in ensuring that firms meet corporate
social responsibility (CSR) objectives (Mackenzie, 2007). Walls et al. (2012) argue that the BOD
affects CSR in many ways. The board monitors top managers’ self-serving behaviors,
approves annual budgets for CSR-related spending, and creates separate standing
committees that monitor and govern CSR-related matters. CSR has received substantial
attention from practitioners and academics and is considered one of the most significant and
contentious corporate trends (Harjoto and Jo, 2011). Besides financial performance, firms
have increasingly engaged in CSR activities to satisfy stakeholder demands and societal
expectations (Wang et al., 2016). Stuart et al. (2023) complement Huang and Watson’s (2015)
review article by providing a comprehensive review focusing on CSR disclosure quality, the
evolution of disclosure proxies, and report implications of disclosure quality on user decision-
making.
Several studies have reported significant associations between board composition variables
and firms’ CSR performance (Webb, 2004; Zhang, 2012; Chang et al., 2017) and between
composition variables and firms’ social responsibility reporting (Haniffa and Cooke, 2005; Walls
et al., 2012; Khan et al., 2013; Jizi et al., 2014; Muttakin et al., 2015). Given the board’s strategic role
in shaping corporate strategies and the influence of its composition on socially responsible
policies and practices, it is crucial to investigate whether board composition variables affect the
firm’s CSR score. Our paper addresses this research question by exploring whether and how
board co-option, an alternative measure of board composition first constructed and examined by
Coles et al. (2014), affects a firm’s composite and component CSR scores.
Beginning with the pioneering study of Coles et al. (2014), the literature shows that a
higher proportion of co-opted directors on the board, defined as those appointed after the CEO
assumes office, adversely affects many corporate outcomes. For example, an increase in the
number of co-opted directors weakens the board’s monitoring role and leads to excessive
executive compensation and lower pay-performance sensitivities (Coles et al., 2014), which
contradicts compensation practices employed by socially responsible firms, found less likely
to over or underpay executives by Park et al. (2023). In addition, co-opted directors take more
risk (Lee et al., 2020), and their presence on the board is associated with higher firm default
risk, stock return volatility, fundamental volatility (Baghdadi et al., 2020), and firm crash risk
(Kao et al., 2020).
While the literature has neglected to investigate the relationship between board co-option
and corporate social responsibility, this study fills this gap. We are motivated by findings
reported by Coles et al. (2014), which suggest that co-opted directors sacrifice their fiduciary
duties and lack the necessary independence to carry out expected board duties due to their
allegiance to the CEO involved in their initial appointment. These directors become passive
followers of the CEO, neglecting their responsibilities, thus providing a disutility to proper
board governance and ultimately to firm stakeholders. Recently, Zaman et al. (2021) have
shown that co-opted directors propose fewer board agenda items, attend fewer board
meetings, and receive higher compensation packages than the industry norm.
This study contributes to the literature by investigating whether and how co-opted boards
affect the firm’s CSR score. We employ alternative measures of co-option developed by (Coles
et al., 2014) and examine their association with the CSR score. Our analysis controls for
potential moderating effects of important board variables, including board independence,
CEO duality, tenure, and gender, which may affect executive decisions involving CSR
activities. Also, we extend the investigation to identify co-opted boards’ impact on the CSR
score’s components, capturing scores for the environment, community, employee relations,
diversity, product quality, and human rights.
Results from the baseline model show a negative and significant association between
co-opted boards and the composite CSR score. These results are confirmed using alternative
measures of co-option, such as co-opted independent, tenure-weighted co-option, and non-co-
opted independent, leading us to conclude that co-opted directors do not prioritize socially Board
responsible goals. composition
While the composition of co-opted boards may vary across firms, board characteristics
may accentuate or moderate the effect of co-option on the CSR score. Results show that board
and CSR:
independence, the presence of women on the board, and CEO duality positively and co-option effects
significantly impact the CSR score, and their presence may moderate the adverse effects of
co-option on a firm CSR score.
We also address potential endogeneity concerns, discussed further in Section 4, that may
affect the validity of findings from the baseline model. First, we employ the system GMM
method developed by Arellano and Bond (1991) and report similar findings to the baseline
model in that there is a negative association between co-option and the firm’s composite CSR
score. Second, we use a natural experiment, considered a stand-alone methodology, to
consistently identify a regressor’s effect on the dependent variable (Wintoki et al., 2012).
Gippel et al. (2015) note that a natural experiment can effectively deal with the endogeneity
problem if an identified event is convincingly exogenous, leading to isolating causal links [1].
We use the changes to NYSE listing rules passed in 2003 as an exogenous shock in a quasi-
natural experiment and show that our main results remain robust.
To better understand areas of social responsibility undermined by co-opted directors, we
extend the analysis to components of the composite CSR score. Results show that co-opted
boards adversely affect the environment, employee relations, and product quality scores. The
effect on the environment’s component of the CSR score is consistent across alternative
measures of co-option. Besides, tenure-weighted co-option negatively impacts the CSR score’s
employee relations and human rights components.
Last, we conduct additional tests that address the CSR score’s measurement biases using
the adjusted CSR score proposed by Deng et al. (2013) and consider potential confounding
governance effects captured by a broad governance index, the E-index constructed by
Bebchuk et al. (2009). The results from additional tests confirm that co-opted boards
adversely affect a firm’s CSR score.
This study is organized as follows. Section 2 discusses the related literature and presents
the hypotheses. Section 3 presents the data, variables description, and descriptive statistics.
Section 4 presents the econometric methodology and reports the results. Section 5 concludes
the study.
2. Related literature and hypotheses development

2.1 Co-option and CSR score
In a recent pioneering study, Coles et al. (2014) show that co-option limits the monitoring
effectiveness of board directors. Chang et al. (2017) contend that the board’s ability to oversee
the CEO’s self-serving decisions is impaired as ties between the CEO and directors
strengthen. Moreover, CEOs tend to appoint directors who share similar views (Hwang and
Kim, 2009) to theirs and realize benefits due to their loyalty (Coles et al., 2014), thus increasing
their tenure on the board (Jiraporn and Lee, 2018). In addition, a positive relationship exists
between co-option and CEO pay and investment in tangible assets (Coles et al., 2014) and
R&D investments (Chintrakarn et al., 2016).
The effect of co-option on firm CSR composite and component scores is not investigated in
the literature yet. However, there exist two opposing views on CSR and governance in
general. The first view relies on stakeholder theory and the good governance view, which
argue that CSR engagement positively affects shareholder wealth because maximizing
stakeholders’ wealth increases their willingness to support firm operations, which in turn
increases shareholders’ wealth (Edmans, 2011; Deng et al., 2013; Ferrell et al., 2016). The
second view argues that CSR is often a manifestation of firm agency problems. Under this
JAL view, managers choose to engage in socially responsible activities to benefit themselves at the
expense of shareholders (Cheng et al., 2014; Masulis and Reza, 2015). Board co-option could be
considered an indicator of one of the two opposing views on CSR and governance. Given the
empirical evidence on co-option cited above, we view board co-option as an indicator of poor
governance under the good governance view. Hence, our main hypothesis is
H1. A negative relationship exists between the percentage of co-opted directors and the
firm CSR score [2].
Under the agency view, an alternative hypothesis predicts a positive relationship between the
percentage of co-opted directors and the firm’s CSR score.
We use multiple co-option measures and test the following hypotheses based on H1.
H1.1. A negative relationship exists between the percentage of independent co-opted
directors and the firm CSR score.
H1.2. A negative relationship exists between the percentage of tenure-weighted
dependent co-opted directors and the firm CSR score.
H1.3. A negative relationship exists between the percentage of tenure-weighted
independent co-opted directors and the firm CSR score.
We also consider the effect of non-co-opted directors on the CSR score by testing the following
hypothesis.
H1.4. A positive relationship exists between the percentage of non-co-opted directors
appointed before the CEO assumes office and the firm’s CSR score.
2.2 Board characteristics and CSR

The literature has investigated the impact of several board variables on firm CSR
performance and has focused mainly on CSR disclosures. We revisit some of the hypotheses
considered in earlier studies, mainly on reporting CSR performance, and provide new
evidence on board characteristics and the CSR score and components scores.
2.2.1 Independence. Literature often defines board independence to include three
variables: independent directors, outside directors, or non-executive directors. Several
studies report a positive association between outside directors and CSR. Ibrahim and
Angelidis (1995) argue that outside directors respond to society’s needs and are concerned
about the discretionary aspects of CSR in the firm. Jo and Harjoto (2012) claim that
independent directors’ internal and external monitoring roles may improve the firm’s CSR
engagement. Barako and Brown (2008) report a positive relationship between non-executive
directors and CSR reporting. Dunn and Sainty (2009) find a positive relationship between
independent directors and corporate social performance. The two latter studies suggest that
independent directors provide greater management oversight. Contrarily, Haniffa and Cooke
(2005) find a negative relationship between independent directors and corporate social
disclosures due to the lack of sufficient experience and knowledge of independent directors
about societal concerns or indifference to them [3]. Other recent studies have shown that
board independence does not affect CSR reporting; for instance, Rao and Tilt (2016) find that
non-executive/independent directors do not affect decisions concerning CSR disclosure.
Given the mixed evidence in the literature, we test the following hypothesis.
H2. There is no relationship between the percentage of independent directors on the
board and the firm’s CSR score.
2.2.2 Director tenure. The effect of director tenure, defined as the length of a director’s
experience on firm boards, on CSR performance is inconclusive, as some studies suggest.
On the one hand, Rao and Tilt (2016) and Handajani et al. (2014) find a negative association Board
between board tenure and CSR disclosure and show that long-tenured directors produce a composition
lower level of CSR disclosure and have less effective oversight over executives. On the other
hand, Kr€uger (2009) documents a positive effect of tenure on CSR ratings and argues that
and CSR:
long-tenured directors gain sufficient knowledge and experience, facilitating socially co-option effects
responsible decisions to benefit stakeholders. However, Hafsi and Turgut (2013) find no
effect of tenure on CSR performance. The authors argue that longer tenure leads to
developing friendly ties between directors and management, which makes the former avoid
discussing firm social responsibility matters seen as controversial by management. Given
mixed evidence between tenure and CSR score, we test the following hypothesis.
H3. There is no relationship between the length of directors’ experience in total and the
CSR score.
2.2.3 Multiple directorships (director busyness). Few studies have investigated the impact of
multiple directorships on CSR performance. Haniffa and Cooke (2005) find a positive
relationship between the level of CSR reporting and the number of directorships. The authors
argue that multi-directorships contribute to balancing firms’ operations and societal
concerns. Rupley et al. (2012) and Elsakit and Worthington (2014) argue that directors serving
on multiple boards have a broader exposure to environmental reporting requirements and
engage in recurring discussions on social and environmental disclosure across different
boards, which improves the quality of corporate social disclosures. Similarly, Rao and Tilt
(2016) argue that directors gain experience and knowledge from sitting on multiple boards
and can better influence management decisions to benefit stakeholders and improve CSR
disclosure. We examine the association between the number of multiple directorships on a
board and the CSR score by testing the following hypothesis.
H4. There is a positive association between multiple directorships and the CSR score.
2.2.4 Gender. Hillman et al. (2002) argue that female directors support community activism
more than male directors. Garcıa-Sanchez (2021) shows that female directors commit more to
socially responsible activities and the interest of stakeholders than male directors. Indeed, the
presence of female directors on boards may promote and address CSR issues and thus
increase strength ratings for CSR (Bear et al., 2010), provide higher levels of charitable giving
(Wang and Coffey, 1992) and higher levels of environmental CSR (Post et al., 2011). The
presence of female directors on the board also enhances decision-making (Daily and Dalton,
2003), enabling more effective monitoring of management (Hillman and Dalziel, 2003),
providing effective communication among board members through participation (Eagly and
Carli, 2003), and encouraging more open discussions (Bear et al., 2010). In line with the above
studies, Rao and Tilt (2016) document evidence that the presence of female directors is
associated with higher levels of CSR reporting, suggesting that women and men value
socially responsible activities differently. We test for the impact of the female directors
serving on the board on the CSR score using the following hypothesis.
H5. There is a positive relationship between the number of female directors on a board
and the CSR score.
2.2.5 CEO duality. Some studies in the literature adopt the view that the position of chair and
CEO should be separated to improve governance quality. Gul and Leung (2004) argue that
combining the CEO and chairman positions limits the board’s independence, adversely
affecting directors’ monitoring management and leading to lower corporate disclosure
(including CSR). Managers and directors tend not to oppose powerful CEOs’ decisions to
retain their positions (Dey, 2008). Hence, CEOs who act as chairs tend to hide important
information from directors and non-executives (Haniffa and Cooke, 2005) and are less likely to
JAL care about public accountability and legitimacy (Muttakin et al., 2018). However, Jizi et al.
(2014) find that CEO duality positively impacts CSR disclosure. They argue that powerful
CEOs may promote transparency about CSR activities to gain more success and increase
their earnings or tenure prospects, appease personal moral concerns, or reduce the
disciplinary effects of financial or goods markets and regulators and the monitoring effects of
the BoD. Given the mixed evidence, we test the following hypothesis.
H6. There is no relationship between CEO duality and the CSR score.
3. Data, variables description, descriptive statistics, and correlation matrix

3.1 Data sources
Our dataset is obtained from several sources. First, firm financials are obtained from
Thomson Reuters Worldscope, accessible via the Wharton Research Data Services (WRDS)
platform. Second, firm CSR scores are obtained from MSCI ESG KLD Stats. Third, board
co-option data is made publicly available on Dr Lalitha Naveen’s website and has been
recently updated up to 2018 [4]. Fourth, board variables are obtained from MSCI GMI Rating.
After matching the data from all four databases, we obtain a final sample which consists of
16,041 firm-year observations from 2001 to 2018, representing 1,617 unique U.S. firms.
3.2 Measuring the CSR score

We follow the literature in constructing the CSR score using KLD Stat, which provides
numerical values for the numbers of strengths and concerns of the firm for the following
categories: community, diversity, human rights, employee, product, and environment (see,
e.g. El Ghoul et al., 2011; Kim et al., 2012; Jha and Cox, 2015; McGuire et al., 2012). For each
firm-year, we first subtract the number of concerns from the number of strengths in each
category. Then, we add up the score of each category to construct a composite CSR score that
takes values between 9 and 18.
3.3 Co-option measures

We follow Coles et al. (2014) in defining board co-option. The degree of board co-option is the
proportion of directors elected after the CEO assumes office:
We use four measures of co-opted boards as follows.
(1) Co-opted: is the proportion of co-opted Directors relative to the total board size. This
variable, therefore, ranges from 0 to 1, with a higher value indicating more co-option.
(2) Co-opted independent: the number of co-opted independent directors/Board Size.
(3) Tenure weighted (TW) Co-option: is the sum of the tenure years of co-opted directors
divided by the total tenure years of all directors. It is expected that as the
independence and tenure of co-opted directors increase, their influence on board
decisions also increases.
(4) Non-Co-Opted independent: is the number of independent directors already on the
board before the CEO assumed office/Board Size. This measure is expected to reflect
the opposite impact of co-opted directors’ measures. These measures can also vary
from 0 to 1, with a higher value representing more co-option.
3.4 Board characteristic variables

We use five main variables that describe board characteristics following existing literature.
These variables are.
(1) Board independence: the percentage of independent directors measured as the Board
proportion of independent/non-executive/outside directors to the total number of composition
directors on the board (Chen and Jaggi, 2000; Eng and Mak, 2003; Donnelly and
Mulcahy, 2008).
and CSR:
co-option effects
(2) Tenure: the years each board member has served as a director for their current firm
(Knight et al., 1999).
(3) Directors’ busyness: the percentage of directors serving on more than one board to the
total number of directors on the board (Rupley et al., 2012).
(4) Female director: the percentage of female directors on the board to the total number of
directors on the board (Adams and Ferreira, 2009; Huse and Solberg, 2008).
(5) CEO duality: refers to the situation where the CEO is also the chair of the board
(Gul and Leung, 2004).
3.5 Control variables

We control for the board size, director outside related, director problem, director failure, board
meetings, director age, firm size, firm age, firm leverage, and firm profitability. Control
variables are defined following previous literature (see, e.g. Haniffa and Cooke, 2005; Cheng
et al., 2008; Bear et al., 2010; Muttakin et al., 2018). Detailed variable definitions are provided in
Appendix. The summary statistics of the data sample are presented in Table 1.
Panel A of Table 1 provides descriptive statistics for the composite CSR composite score
and its component scores. The mean and standard deviation of the CSR composite score are
0.105 and 2.343, respectively; the score ranges between 9 and 18. For CSR, the
environment component score has the highest mean of 0.107, followed by the community and
diversity scores, with means of 0.072 and 0.032, respectively. The employee, human rights,
and product components have a negative mean of 0.016, 0.044, and 0.159, respectively.
The diversity component score has the highest standard deviation, whereas the human rights
component score has the lowest.
Panel B of Table 1 provides the descriptive statistics of co-option measures and board
composition variables. The mean of the co-opted variable in our sample is 0.425, which
indicates that, on average, 42.5% of firm directors get appointed after the CEO assumes
office. The mean of TW co-opted suggests that the influence of co-opted directors is 18.9%
after accounting for their tenure on the board. Only 29.1% of these co-opted directors are
independent. The average of non-co-opted independent directors is 0.587, indicating that
almost 58.7% of directors were appointed before a CEO had assumed office. The average of
independent directors on the board is 0.839. Panel B also shows that, on average, 13.2% of
directors have more than 15 years of tenure. Only 10.7% of directors are female. In addition,
CEO-chair duality is observed in 52.3% of firms, and only 1.8% of directors serve on four or
more boards. On average, nine directors serve on the board, with 12.4% of outside directors
having a significant relationship with the firm. Estimates show that 2.9% of directors have
been involved in problems such as bankruptcy. Furthermore, BODs maintain regular
meetings, with an average of 8 meetings per year, and nearly 1% of the directors serving on
these boards have failed to attend these meetings. Panel C presents summary statistics for
firms’ financial characteristics in the sample. The average total assets are approximately 20.6.
The mean value of firms’ age, ROA, and leverage is 3.4 years, 0.018, and 0.195, respectively.
3.6 Correlation matrix

We report the correlations between variables in Table 2. Most correlations are below 0.5. The
correlations between co-option variables are high and range from 0.912 to 0.878. There is a
JAL Variable N Mean SD Min Median Max
Panel A: Corporate social responsibility scores

CSR score 20,162 0.105 2.343 9.000 0.000 18.000
CSR component score - environment 20,162 0.107 0.771 4.000 0.000 6.000
CSR component - community 20,162 0.072 0.503 2.000 0.000 4.000
CSR component - human rights 20,162 0.044 0.262 2.000 0.000 2.000
CSR component - employee 20,162 0.016 0.996 4.000 0.000 8.000
CSR component - diversity 20,162 0.032 1.310 3.000 0.000 7.000
CSR component – product quality 20,162 0.159 0.622 4.000 0.000 2.000
Panel B: Boards characteristics
Independent variables
Co-opted 16,654 0.425 0.348 0.000 0.375 1.000
Co-opted Independent 16,654 0.291 0.255 0.000 0.250 0.900
TW Co-option 16,654 0.189 0.224 0.000 0.105 0.866
Non-Co-opted Independent 16,654 0.587 0.252 0.048 0.625 0.917
Independence 16,041 0.839 0.086 0.250 0.875 1.000
Tenure 16,041 0.132 0.172 0.000 0.077 1.000
Female Director 16,041 0.107 0.102 0.000 0.111 0.750
CEO Duality 16,684 0.523 0.499 0.000 1.000 1.000
Directors’ busyness 16,041 0.018 0.049 0.000 0.000 0.667
Control variables
Board size 22,362 9.003 2.343 3.000 9.000 37.000
Directors Outside Related 16,041 0.124 0.152 0.000 0.091 0.889
Directors Problem 16,041 0.029 0.074 0.000 0.000 0.909
Directors Failed 16,041 0.010 0.039 0.000 0.000 0.923
Board Meetings 18,853 8.038 3.981 1.000 7.000 53.000
Director Age 22,486 61.479 9.661 31.000 62.000 95.000
Panel C: Firm characteristics
Firm Size 20,187 20.650 2.253 4.942 20.614 30.130
Firm age 15,385 3.409 0.959 0.000 3.434 5.537
Firm ROA 21,282 0.018 0.153 0.601 0.046 0.249
Firm leverage 21,282 0.195 0.197 0.000 0.156 0.770
Note(s): This table presents the summary statistics for sample CSR scores, co-option measures, board
Table 1. characteristics, and firm characteristics variables
Summary statistics Source(s): Table by author
negative correlation between the CSR score and all co-option variables, which indicates that
firms with more co-opted directors are less concerned about CSR activities. In contrast, the
positive correlation between non-co-opted independent directors and the CSR score suggests
otherwise. We further investigate these findings in the following sections.
4. Results
4.1 Baseline model results
To examine the relationship between the CSR score and board co-option, we estimate the
following baseline regression model,
CSR scorei;t ¼ α þ βc Board Co optioni;t þ γ Xi;t þ εi;t (1)
where Board Co-option is one of the following variables, Co-opted, Co-opted independent,
TW-Co-opted, or non-Co-opted independent for firm i during year t. We control for the
[1] [2] [3] [4] [5] [6] [7] [8] [9] [10] [11] [12] [13] [14] [15] [16] [17] [18] [19] [20]
[1] CSR score 1.000

[2] Co-opted 0.010 1.000
[3] Co-opted 0.028 0.878 1.000
Independent
[4] TW Co- 0.018 0.867 0.864 1.000
option
[5] non-Co- 0.090 0.815 0.912 0.784 1.000
opted
Independent
[6] 0.200 0.011 0.003 0.014 0.331 1.000
Independence
[7] Tenure 0.073 0.059 0.075 0.087 0.030 0.266 1.000
[8] Female 0.404 0.060 0.050 0.054 0.020 0.202 0.135 1.000
Director
[9] CEO 0.075 0.008 0.025 0.007 0.013 0.067 0.148 0.008 1.000
Duality
[10] Directors’ 0.061 0.022 0.021 0.035 0.008 0.064 0.076 0.020 0.005 1.000
busyness
[11] Board 0.386 0.045 0.033 0.041 0.062 0.282 0.033 0.304 0.071 0.062 1.000
size
[12] Directors 0.043 0.023 0.022 0.033 0.051 0.083 0.131 0.100 0.014 0.007 0.033 1.000
Outside
Related
[13] Directors 0.044 0.008 0.015 0.034 0.005 0.049 0.022 0.000 0.021 0.084 0.060 0.021 1.000
Problem
[14] Directors 0.024 0.009 0.006 0.022 0.011 0.050 0.008 0.049 0.043 0.014 0.024 0.066 0.037 1.000
Failed
[15] Board 0.004 0.028 0.041 0.036 0.004 0.103 0.159 0.023 0.133 0.055 0.002 0.012 0.079 0.021 1.000
Meetings
[16] Director 0.030 0.012 0.034 0.011 0.035 0.027 0.159 0.001 0.050 0.008 0.117 0.007 0.059 0.002 0.043 1.000
Age
[17] Firm Size 0.270 0.023 0.003 0.013 0.028 0.111 0.019 0.115 0.100 0.070 0.321 0.019 0.050 0.037 0.003 0.037 1.000
[18] Firm age 0.164 0.077 0.083 0.077 0.100 0.100 0.204 0.162 0.104 0.048 0.237 0.025 0.041 0.089 0.068 0.125 0.147 1.000
[19] Firm 0.074 0.050 0.056 0.047 0.032 0.042 0.096 0.004 0.103 0.024 0.030 0.022 0.012 0.046 0.121 0.002 0.373 0.105 1.000
ROA
[20] Firm 0.061 0.014 0.037 0.022 0.063 0.089 0.035 0.094 0.020 0.095 0.158 0.058 0.060 0.019 0.081 0.013 0.256 0.103 0.028 1.000
leverage
Note(s): This table presents the correlation matrix for the variables used in this study
Source(s): Table by author
and CSR:
Board
composition
co-option effects
Correlation matrix
Table 2.
JAL board and firm characteristics by including variables in (X) such as director busyness,
the board size, director outside related, the director failed, director problem, director age,
board meetings, and the firm’s size, age, leverage, and ROA. εit is the error term. We use a
fixed-effects panel regression model to account for cross-sectional variation across firms
and include time-fixed effects to account for intertemporal variation [5]. We also use
clustered standard errors to address potential dependencies across firms and time
(Petersen, 2009).
Table 3 shows the results of estimating Eq. (1). All four board co-option variables in
columns 1 to 4 are statistically significant at the 5% level. Results in columns 1 to 3 show a
negative association between board co-option variables and the CSR score. A 1% increase in
co-option reduces the CSR composite score, on average, by 35.1%, 57.9%, and 65.7%, as
shown in columns 1, 2 and 3 of Table 3, respectively. These results are consistent with our
main hypotheses H1 and H1.1, H1.2, and H1.3, which use three different measures of
co-option, suggesting that co-opted boards avoid pursuing goals that improve the CSR score.
We also find an opposite relationship between non-co-opted independent directors and the
CSR score, as shown in column 4 of Table 3, confirming hypothesis H1.4. Estimates show that
a 1% increase in non-co-opted independent directors leads to an increase in the CSR score by
63.1%. Overall, these results add a piece of new evidence on the relationship between co-
option and firm CSR performance to findings in the existing literature, which report adverse
corporate outcomes and poor governance of board co-option (see Coles et al., 2014; Chang
et al., 2017; Lee et al., 2020; Baghdadi et al., 2020; Kao et al., 2020).
Table 3 also identifies important board characteristics that affect the CSR score. Results
show positive and statistically significant coefficients for director independence, female
directors, and CEO duality variables across all models (columns 1 to 4). Therefore, we reject
H2 and H6 and find consistent results with H5. These findings complement results reported in
other studies investigating the relationship between board composition and CSR engagement
and offer new evidence on whether board structure and composition moderate the effects of
co-option on CSR performance. For example, Ibrahim and Angelidis (1995) argue that
independent directors are more responsive to society’s needs and are more concerned about
the discretionary aspects of a firm’s CSR activities. In addition, independent directors possess
internal and external monitoring abilities, which enhance the firm’s CSR engagement (Jo and
Harjoto, 2012) and play a proactive role in improving the board’s quality and strengthening
the firm’s corporate social performance (Dunn and Sainty, 2009). Our results also align with
Bear et al. (2010) findings, which show that the presence of female directors on boards may
promote and address CSR issues and thus increase strength ratings for CSR. The results add
to the findings of Jizi et al. (2014), who find a similar association between CEO duality and CSR
disclosure and conclude that powerful CEOs may promote transparency about CSR activities
to become more successful, increase their pay or tenure prospects, appease personal moral
concerns, and reduce the supervision and control exerted by the BODs. Therefore, firms’ CSR
score increases with an increase in the number of independent directors, the number of female
directors, and CEOs who are also chairman on the board. In addition, the coefficient estimate
of board size is positive and significant at the 1% level. Previous studies have shown that
larger boards have the advantage of additional experience, knowledge, skills, and diverse
values, which becomes helpful in making complex decisions like those around CSR
(Handajani et al., 2014; Jizi et al., 2014). In contrast, the coefficient for “directors outside
related” is negative and significant at the 1% level across all models (columns 1 to 4),
implying that an increase in the percentage of independent directors on a given board who
had or have had a significant relationship with the company will have a negative impact on
the CSR score of these firms. With respect to firm-level control, variables such as firm size and
leverage across all models and age in model 1 are positively associated with the CSR score.
(1) (2) (3) (4)
Board
composition
Co-opted 0.351** and CSR:
2.099
Co-opted Independent 0.579** co-option effects
2.324
TW independent Co-option 0.657**
2.388
Non-Co-opted Independent 0.631**
2.562
Independence 1.849*** 1.963*** 1.988*** 1.368*
2.755 2.930 2.971 1.945
Tenure 0.408 0.384 0.396 0.379
1.145 1.071 1.100 1.057
Female Director 8.443*** 8.255*** 8.250*** 8.258***
12.106 11.788 11.768 11.789
CEO Duality 0.262** 0.240* 0.245* 0.246*
2.034 1.864 1.899 1.915
Directors’ busyness 1.841 1.695 1.739 1.779
1.246 1.155 1.179 1.213
Board size 0.307*** 0.305*** 0.305*** 0.304***
8.567 8.502 8.499 8.487
Directors Outside Related 0.718*** 1.333*** 1.344*** 1.334***
2.839 4.545 4.588 4.544
Directors Failed 1.101 1.481 1.433 1.490
0.685 0.957 0.925 0.964
Director Age 0.001 0.003 0.002 0.003
0.155 0.490 0.434 0.472
Directors Problem 0.584 0.628 0.652 0.637
0.832 0.939 0.973 0.956
Board Meetings 0.004 0.003 0.003 0.002
0.308 0.232 0.254 0.176
Firm Age 0.121* 0.094 0.094 0.090
1.715 1.345 1.343 1.279
Leverage 0.015*** 0.014*** 0.014*** 0.014***
15.787 14.363 14.450 14.326
ROA 0.000 0.008 0.007 0.008
0.013 0.330 0.282 0.350
Firm Size 0.204*** 0.203*** 0.201*** 0.204***
4.654 4.627 4.594 4.637
Constant 9.226*** 9.720*** 9.765*** 9.756***
9.427 10.036 10.072 10.065
Firm and Year FE YES YES YES YES
Adjusted R2 0.281 0.298 0.297 0.298
Observations 4,173 4,173 4,173 4,166
Note(s): This table presents regression results on the relation between board co-option, board characteristics,
and the CSR score. Detailed variable definitions are provided in Appendix. All regressions control for firm and Table 3.
year fixed effects. Standard errors are corrected for clustering at the firm level, and t-statistics are reported Co-option, board
below the coefficients. ***, **, * denote significance at the 1%, 5%, and 10% level, respectively characteristics, and
Source(s): Table by author CSR score
4.2 Addressing potential endogeneity

The estimates of Eq. (1) are subject to potential endogeneity bias due to unobserved
heterogeneity across firms or unobserved firm-specific factors simultaneously impacting
board co-option and firm CSR activities and performance. Since CSR performance is impacted
JAL by board composition, firms aiming to improve or maintain a high CSR score are more likely
to appoint new board members who support socially responsible activities that interest the
firm and its shareholders. The presence of simultaneity or reverse causality between
governance variables and CSR score biases fixed effects estimates in Table 3.
The endogeneity problem is well-known in the corporate finance and governance
literature as a problem that undermines causal inference (e.g. Roberts and Whited, 2012;
Wintoki et al., 2012; Gippel et al., 2015). For instance, Wintoki et al. (2012) show that
unobserved firm-specific factors simultaneously determine firm performance and
governance variables and that changes to governance variables are determined by past,
present, and expected firm characteristics. The authors propose using a dynamic panel
generalized method of moments (GMM) to alleviate endogeneity concerns. We follow a
similar approach and estimate a system GMM to address endogeneity concerns. In addition,
we also employ a quasi-natural experiment to better understand the causal links between
board co-option and the CSR score [6].
4.2.1 System GMM. As discussed earlier, we believe that an endogenous relationship
exists between the CSR score and co-option and other board or governance variables. To
address endogeneity issues, we use the Arellano and Bover (1995) and Blundell and Bond
(1998) system generalized method of moments (GMM), which improves the efficiency of the
difference GMM estimator proposed by Arellano and Bond (1991). This method addresses
various endogeneity problems caused by unobserved heterogeneity, simultaneity, and the
endogenous relationship between lagged values of the left-hand side variable and regressors
(see, Roodman, 2009; Wintoki et al., 2012) [7]. Hence, we estimate the following model,
CSRscoreit ¼ α þ δ CSRscorei;t−1 þ βc Board Co optioni;t þ γ Xi;t þ εit (2)
where CSRscorei;t is the CSR score of the firm i in year t; Board Co−optioni;t is one of the co-
option variables, namely co-opted, co-opted independent, TW co-option, and non-co-opted
independent and board characteristics, namely independence, tenure, female directors, and
CEO duality. We use a set of control variables (X) which include board composition variables
and firm characteristics similar to Eq. (1). εit is the error term that includes unobserved firm
effects and idiosyncratic error. We assume all the independent variables except the CEO
duality and year dummy variables are endogenous. The model in Eq. (2) is estimated using a
one-step system GMM with standard errors robust for heteroskedasticity and serial
correlation within individuals. Table 4 reports the results.
These results show that the one-year lagged CSR score coefficient is significant and
positive at the 1% level, indicating the persistence of the CSR score and justifying the use of a
dynamic model. Importantly, we can confirm the results from the baseline model after
addressing endogeneity concerns that a negative association exists between co-option
measures and CSR score in models 1, 2, and 3, which is consistent with our main hypothesis
H1 and the corresponding hypotheses H1.1, H1.2, and H1.3 which use three different
measures of co-option. We also confirm a positive association between non-co-opted
independent and CSR score in model 4, consistent with hypothesis H1.4. The coefficient
estimates of co-option variables are statistically significant at varying significance levels.
Results also show statistically significant (5% or 1% levels) positive associations between
the coefficients of female directors (consistent with H5), CEO duality (reject H6), and the CSR
score across all models in Table 4, confirming findings of the baseline model. However, we
reject H4 as the coefficient of director busyness is negative and weakly statistically
significant at the 10% level. This finding indicates that firm CSR undertakings and
performance require more attention from busy directors despite their exposure and
experience from multiple directorships. Unlike the results from the baseline model, we do not
reject H2. The ineffective impact of independent directors on the CSR score could be due to the
(1) (2) (3) (4)
Board
composition
Lag (CSRSCORE) 0.554*** 0.549*** 0.549*** 0.565*** and CSR:
11.603 11.548 11.748 11.236
Co-opted 0.877** co-option effects
2.348
Co-option Independent 1.050**
2.045
TW independent Co-option 1.068*
1.776
Non-Co-opted Independent 2.564***
2.846
Independence 1.157 1.039 1.133 1.130
0.479 0.439 0.469 0.429
Tenure 0.706 0.754 0.823 0.731
0.958 1.036 1.132 0.970
Female Director 4.995*** 5.293*** 5.319*** 5.264***
4.071 4.280 4.349 4.033
CEO Duality 0.550** 0.546** 0.536** 0.510**
2.456 2.452 2.392 2.312
Directors’ busyness 7.180* 7.869* 7.039* 8.152*
1.674 1.811 1.681 1.807
Board size 0.211** 0.207** 0.195** 0.197**
2.474 2.508 2.324 2.267
Directors Outside Related 0.687 0.690 0.631 0.696
0.913 0.912 0.834 0.901
0.576 0.546 0.429 1.006
Director Age 0.007 0.007 0.005 0.008
0.518 0.535 0.372 0.528
0.704 0.966 1.051 0.888
Board Meetings 0.018 0.027 0.030 0.042
0.336 0.503 0.546 0.729
Firm Age 0.223* 0.203 0.229* 0.193
1.706 1.578 1.763 1.428
Leverage 1.457 1.536* 1.588* 1.873*
1.598 1.684 1.774 1.901
ROA 0.170 0.107 0.122 0.118
0.769 0.590 0.652 0.604
Firm Size 0.167** 0.152* 0.167** 0.147
1.975 1.745 1.982 1.615
Constant 7.812*** 7.169*** 7.643*** 6.949***
3.127 2.798 3.050 2.619
- AB AR (1) test statistic 7.568 7.624 7.614 7.382
p-value of AR (1) statistic 0.000 0.000 0.000 0.000
- Hansen J statistic 123.5 124.9 125.3 111.3
p-value Hansen J statistic 0.235 0.210 0.203 0.474
Number of instruments 132 132 132 130
Number of groups 1,234 1,234 1,234 1,231
Observations 4,030 4,030 4,030 4,023
Note(s): This table report results from the system GMM estimation of Eq. (2) and the corresponding
diagnostic tests and their p-values. These tests include the Arellano-Bond AR (1) and AR (2) serial correlation
tests and the Hansen J-test of over-identifying restrictions. Standard errors are corrected for clustering at the
firm level. ***, **, and * indicate statistical significance at the 1%, 5%, and 10% levels, respectively Table 4.
Source(s): Table by author System GMM results
JAL limited monitoring role of these directors in the presence of co-option (Coles et al., 2014), which
constrains deliberations that convince management to improve CSR engagements. The
results also show that the coefficients of board size, as well as firm financial variables such as
leverage, size, and age, are statistically significant at varying levels across some models.
In addition, we evaluate the validity of the GMM estimator by reporting results for the
following tests. The first two tests include the first-order AR(1) and second-order AR(2) serial
correlation in the residuals’ first and second differences, respectively, under the null of no
serial correlation. The third test is the Hansen J-statistic test for the validity of instruments,
which is necessary to check for overidentification since the system GMM uses multiple lags of
variables as instruments. The J-statistic is χ 2 distributed under the null hypothesis of the
validity of instruments with degrees of freedom equal to the number of overidentifying
restrictions. The results show that the second-order serial correlation, AR(2), is not present
across all four models in Table 4, which satisfies Arellano and Bond’s (1991) requirements for
a system GMM that there should be no serial correlation beyond the first lag. The Hansen
J-statistics test for overriding restrictions does not reject the null hypothesis that the
instruments are valid. In addition, we account for potential bias in estimates arising from
instrument proliferation in a system GMM (Roodman, 2009) and report the number of
instruments used by each model, which is small relative to the number of groups [8].
4.2.2 Quasi-natural experiment. In addition, we conduct a quasi-natural experiment to
address the endogeneity problem and investigate the impact of co-option on the CSR score
using a modified difference in difference (DiD) approach. This method is more likely to show a
causal effect than merely an association between variables of interest around an exogenous
event (Guo and Masulis, 2015; Guo et al., 2015). We exploit changes to listing rules announced
by the NYSE in 2003, aiming at improving independent oversight of management and
executive board activities in a quasi-natural experiment. Implementing these rules affected
the composition of the BODs and required the appointment of new independent directors to
make up the majority of the board [9]. Firms were allowed to comply with these rules by 31
December 2005 [10]. The exogenous effect of these rules led several firms to increase the
number of independent directors on the board. These firms did not have a majority of
independent directors on their boards in the pre-NYSE implementation period and have
appointed new independent directors to comply with the introduced rules (Linck et al., 2009).
We identify appointed independent directors when the CEO has been in office and
conjecture that these independent directors are co-opted. Indeed, Coles et al. (2014) find that
co-opted independent directors are not independent in their monitoring role on the board.
Instead, they act as if they were co-opted directors. Therefore, it is reasonable to argue that
NYSE listing requirements qualify as a quasi-natural experiment that captures an exogenous
increase in co-opted independent directors in particular and co-option in general.
We conduct a modified DiD analysis following Coles et al. (2014), which isolates the effect
of exogenous changes in rules on the left-hand-side variable [11]. We hypothesize that the
NYSE new listing rule implementation results in more co-opted directors, leading to a decline
in the firm’s CSR score. Hence, we estimate the following model,
CSR scorei;t ¼ α þ β1 Co optioni;t þ β2 post NYSE 3 Co optioni;t þ
β3 Noncompliant 3 Co optioni;t þ β4 post NYSE 3 Noncompliant 3 Co optioni;t þ
β5 Post NYSEi;t þ β6 Noncomplianti;t þ Controlsi;t þ εi;t
(3)
where Co_option is defined as in the baseline regression, post-NYSE is an indicator variable

equal to one from 2005 to the end of the sample period, and zero otherwise [12]. Non-compliant
is an indicator variable equal to one if the firm is not compliant with the NYSE 2003 listing
rule before 2005 and zero; otherwise, the independent directors appointed to the board are less
than 50% of board members. We include the set of control variables used in the baseline Board
regression model. To capture the effect of the exogenous increase in the co-option variables on composition
the CSR score, we use the clean estimate approach suggested by Coles et al. (2014). That is, we
take the sum of coefficients for the three variables Co-option, Co-option 3 Non-compliant, and
and CSR:
Co-option 3 post-NYSE 3 Non-compliant to obtain a clean estimate of the effect (i.e. a linear co-option effects
combination of the three parameters β1þ β3 þ β4) [13]. The model in Eq. (3) is estimated using
firm and year fixed effects. Clustered standard errors are used at the firm level. Results are
reported in Table 5.
These results show that the clean estimate is negative and statistically significant at the
5% level when co-opted, co-opted independent, and TW co-option variables are used,
suggesting an exogenous increase in co-option negatively affects firms’ CSR score. However,
an opposite result is found when testing the non-co-opted independent directors’ effect on the
CSR score. These results are consistent with our main contention in H1 and hypotheses H1.1,
H1.2, H1.3, and H1.4, confirming previously discussed findings, leading us to believe that the
relationship between co-option and the CSR score is likely causal.
4.3 Co-opted boards and CSR component score analysis

This section identifies whether co-opted boards care about socially responsible activities
(environment, community, employee relations, diversity, product quality, and human rights)
represented in the CSR score. We test the hypotheses discussed in Section 2 by considering
each CSR component score instead of the composite CSR score [14]. Hence, we regress each
CSR component score on different measures of co-option, board characteristics, and other
control variables. Results are reported in Tables 6–9 and are summarized as follows.
Results in Table 6 are consistent with the contention for hypothesis H1.1 in that a negative
association exists between co-option and the environment and product quality CSR
component scores with statistically significant coefficients at the 1 and 10% levels,
respectively. Similar statistically significant associations are confirmed between other
measures of co-option and the “environment” component, as reported in Tables 7 and 8,
consistent with H1.2 and H1.3. Table 8 also shows results consistent with H1.3 in models
employing the “employee relations,” “product quality,” and “human rights” component
scores.
Co-opted TW Non-co-opted
Co-opted independent Co-option independent
(1) (2) (3) (4)
Clean estimate: β1þ β3þ β4 8.274** 5.679** 21.610** 4.478**

2.130 2.150 2.130 2.410
All Board characteristics and YES YES YES YES
Controls
Adjusted R2 0.301 0.302 0.302 0.302
Observations 4,173 4,173 4,173 4,173
Note(s): This table reports the modified difference-in-difference analysis of co-option on CSR score around the
passage of mandated changes to the NYSE/NASDAQ listing requirements. We use the clean “estimate”
approach as per Coles et al. (2014) to allow for the possibility that NYSE and associated listing provisions
directly affect CSR score. The table provides the “clean” estimates for the full sample period from 2000 to 2018.
Detailed variable definitions are provided in Appendix. All regressions include firm and year fixed effects. The Table 5.
t-statistics are reported under the coefficient estimates. ***, **, * denote significance at the 1%, 5%, and 10% Estimates of the clean
level, respectively effects of co-option –
Source(s): Table by author full sample
JAL Employee Product Human
Environment Community Diversity relations quality rights
(1) (2) (3) (4) (5) (6)
Co-opted 0.200*** 0.010 0.015 0.103 0.061* 0.013

3.178 0.301 0.214 1.546 1.754 1.019
Independence 0.254 0.241** 1.144*** 0.055 0.038 0.026
0.974 2.083 4.041 0.218 0.232 0.636
Tenure 0.282** 0.024 0.159 0.098 0.042 0.020
2.137 0.413 1.122 0.698 0.606 0.813
Female Director 1.048*** 0.644*** 5.240*** 1.092*** 0.086 0.035
4.189 5.779 18.135 4.247 0.721 0.713
CEO Duality 0.079* 0.045** 0.157*** 0.030 0.024 0.010
1.695 2.011 3.153 0.618 0.872 1.175
Directors’ 0.224 0.240 0.875 0.334 0.215 0.262***
busyness
0.489 0.847 1.322 0.558 0.772 2.612
All controls YES YES YES YES YES YES
Year and firm YES YES YES YES YES YES
FE
Adjusted R2 0.162 0.131 0.390 0.180 0.043 0.012
Observations 3,307 4,173 4,173 4,173 4,173 4,173
Note(s): This table presents regression results on the relation between board co-option using the Co-opted
variable, board characteristics, control variables, and the CSR score. Detailed variable definitions are provided
in Appendix. All regressions control for firm and year fixed effects. Standard errors are corrected for clustering
Table 6. effects at the firm level. The t-statistics are reported under the coefficients. ***, **, * denote significance at the
Co-option and CSR 1%, 5%, and 10% level, respectively
components Source(s): Table by author
While these results show that co-opted boards undermine valuable choices of socially
responsible activities, leading to detrimental CSR component scores, the board’s composition
may still moderate the effects of co-option on CSR component scores. Estimates in Tables 6–8
show results consistent with H5 in that positive and statistically significant associations exist
between Female directors and CSR component scores on the “environment,” “community,”
“diversity,” and “employee relations.” A similar statistically significant association is found
between CEO duality and “community,” “diversity” component scores, and the
“environment” score, thus rejecting H6. Independence is positively associated with the
“community” and “diversity” component scores, rejecting H2. We also report a positive and
statistically significant association between director busyness and the “human rights”
component scores, consistent with H4. In contrast, we reject H3 and report a negative
association between tenure and the “environment” component score.
These results reinforce the importance of gender diversity on the board and add new
insights to existing findings in the literature by identifying areas of concern and influence
that female directors impact while serving on the board. Kr€ uger (2009), for example, indicates
that companies with a higher fraction of female directors tend to be more generous towards
communities and pay more attention to the welfare of a firm’s natural stakeholders (e.g.
communities, employees, or the environment). Our results also complement findings reported
by Pucheta-Martinez and Gallego-Alvarez (2019), who document a positive association
between CEO duality and CSR disclosure communicated by firms about their CSR activities
in that we identify specific areas of corporate social responsibility that are impacted by the
decisions of CEOs who chair the board. This finding may suggest that dual CEOs engage in
opportunistic activities to improve their reputation by empowering activities that improve
Employee Product Human
Board
Environment Community Diversity relations quality rights composition
(1) (2) (3) (4) (5) (6) and CSR:
Co-opted 0.308*** 0.019 0.092 0.142 0.085 0.018 co-option effects
independent
3.165 0.426 0.925 1.381 1.397 0.885
Independence 0.267 0.237** 1.137*** 0.060 0.041 0.027
1.020 2.054 4.044 0.239 0.251 0.661
Tenure 0.281** 0.022 0.163 0.098 0.042 0.020
2.129 0.384 1.151 0.695 0.606 0.817
Female Director 1.042*** 0.647*** 5.246*** 1.087*** 0.083 0.034
4.161 5.826 18.123 4.233 0.697 0.701
CEO Duality 0.076 0.045** 0.157*** 0.029 0.024 0.011
1.638 2.007 3.148 0.605 0.889 1.182
Directors’ 0.229 0.241 0.876 0.329 0.218 0.261***
busyness
0.502 0.852 1.324 0.552 0.781 2.603
FE
2
Adjusted R 0.162 0.131 0.390 0.180 0.043 0.012
Observations 3,307 4,173 4,173 4,173 4,173 4,173
Note(s): This table presents regression results on the relation between board co-option using the Co-opted
independent variable, board characteristics, control variables, and the CSR score. Detailed variable definitions
are provided in Appendix. All regressions control for firm and year fixed effects. Standard errors are corrected
for clustering effects at the firm level. The t-statistics are reported under the coefficients. ***, **, * denote Table 7.
significance at the 1%, 5%, and 10% level, respectively Co-opted independent
Source(s): Table by author and CSR components
the “environment,” “community,” and “diversity” component scores, given the interest of
various stakeholders in CSR activities. Besides, busy directors serving on more than four
boards appear to be concerned about issues related to fundamental human rights, including
labor rights (adult or child), equity, and diversity, and in that, they seem to serve a cause that
may improve their firm’s image. With respect to tenure, Patro et al. (2018) show that the
impact of tenure on CSR performance is a tradeoff between experience and independence.
The authors do not find a significant association between insider director tenure and CSR
performance. However, our results indicate that longer tenure impairs firm responsibilities
towards the environment in a similar manner to co-opted directors, possibly because tenured
directors advocated short-termism or short-term financial performance of the firm. Lastly,
contrary to the previous results on co-option, Table 9 shows a positive association between
non-co-opted independent directors and the environment component CSR score, consistent
with H1.4. Other board characteristic associations with component scores are, in several
cases, similar to those reported in Tables 6–8.
4.4 Robustness check and other results

4.4.1 The adjusted CSR score. Manescu (2009) indicates that the number of strengths and
concerns of indicators for CSR component scores varies considerably across individual
components and time, complicating the comparison of scores. Deng et al. (2013) propose a
procedure to adjust the CSR score, which gives equal weights to CSR components but not to
individual indicators, mitigating bias caused by an indicator of social performance in firms.
JAL Employee Product Human
Environment Community Diversity relations quality rights
(1) (2) (3) (4) (5) (6)
TW 0.337*** 0.016 0.029 0.274*** 0.154** 0.037*

Independent
Co-option
3.388 0.275 0.233 2.612 2.208 1.663
Independence 0.273 0.239** 1.148*** 0.061 0.041 0.027
1.046 2.067 4.065 0.241 0.256 0.659
Tenure 0.288** 0.022 0.156 0.108 0.037 0.018
2.173 0.383 1.098 0.765 0.527 0.751
Female Director 1.035*** 0.647*** 5.234*** 1.095*** 0.087 0.035
4.136 5.816 18.093 4.275 0.732 0.725
CEO Duality 0.079* 0.045** 0.157*** 0.031 0.023 0.010
1.700 2.014 3.147 0.637 0.854 1.162
Directors’ 0.260 0.242 0.872 0.349 0.207 0.264***
busyness
0.563 0.856 1.319 0.585 0.744 2.628
FE
2
Adjusted R 0.161 0.131 0.390 0.181 0.045 0.013
Observations 3,307 4,173 4,173 4,173 4,173 4,173
Note(s): This table presents regression results on the relation between board co-option using the TW
Independent Co-option variable, board characteristics, control variables, and the CSR score. Detailed variable
Table 8. definitions are provided in Appendix. All regressions control for firm and year fixed effects. Standard errors are
TW independent co- corrected for clustering effects at the firm level. The t-statistics are reported under the coefficients. ***, **, *
option and CSR denote significance at the 1%, 5%, and 10% level, respectively
components Source(s): Table by author
Following Deng et al. (2013), we estimate Eq. (1) using the adjusted CSR score. Table 10
reports robust results employing the adjusted CSR score confirming that the presence of
co-opted directors on the board has an adverse impact on the firm’s adjusted CSR score.
These results are consistent with the contention of H1.1, H1.2, and H1.3 using the adjusted
CSR score. They are also consistent with H1.4, indicating a positive association exists
between the percentage of non-co-opted directors appointed before the CEO assumes office
and the firm’s CSR score.
4.4.2 Confounding governance effects. We also investigate other governance mechanisms
as potential confounders that may influence the reported relationship between co-option and
the CSR composite scores. Gompers et al. (2003) construct a broad governance index (G-index)
from 24 antitakeover provisions to measure managerial entrenchment. Bebchuk et al. (2009)
modified the G-index to include only those provisions that could be used to measure CEO
entrenchment and construct the E-index [15]. The authors argue that the E-index captures the
economic effects of the G-index with lower noise. Coles et al. (2014) predict that co-opted
boards are likely to retain a CEO following poor performance and increase remuneration,
irrespective of whether the CEO acts in the best interest of shareholders. We control for
managerial entrenchment using the E-index and estimate Eq. (2). Results reported in Table 11
are consistent with H1.1, H1.2, H1.3, and H1.4, confirming findings from the baseline model.
They also show a negative association between managerial entrenchment and the composite
CSR score.
Employee Product Human
Board
Environment Community Diversity relations quality rights composition
(1) (2) (3) (4) (5) (6) and CSR:
Non-Co-opted 0.335*** 0.028 0.101 0.138 0.083 0.019 co-option effects
Independent
3.448 0.605 1.013 1.330 1.372 0.924
Independence 0.048 0.212* 1.036*** 0.063 0.036 0.009
0.174 1.694 3.423 0.233 0.222 0.203
Tenure 0.278** 0.023 0.164 0.094 0.043 0.020
2.106 0.396 1.161 0.668 0.615 0.821
Female Director 1.047*** 0.648*** 5.245*** 1.087*** 0.083 0.034
4.181 5.834 18.110 4.230 0.696 0.702
CEO Duality 0.078* 0.046** 0.159*** 0.031 0.024 0.010
1.671 2.029 3.188 0.643 0.876 1.174
Directors’ 0.266 0.251 0.880 0.361 0.213 0.263***
busyness
0.587 0.885 1.331 0.602 0.762 2.609
Year and firm FE YES YES YES YES YES YES
Adjusted R2 0.162 0.131 0.391 0.180 0.043 0.012
Observations 3,300 4,166 4,166 4,166 4,166 4,166
Note(s): This table presents regression results on the relation between the Non-Co-opted independent
variable, board characteristics, control variables, and the CSR score. Detailed variable definitions are provided
in Appendix. All regressions control for firm and year fixed effects. Standard errors are corrected for clustering Table 9.
effects at the firm level. The t-statistics are reported under the coefficients. ***, **, * denote significance at the Non-co-opted
1%, 5%, and 10% level, respectively independent and CSR
Source(s): Table by author components
5. Conclusion
Motivated by the recent literature on co-option and the growing interest in CSR, our study
examines the effect of co-opted directors on firm CSR scores. Co-opted directors are those
appointed after the CEO assumes office. Prior research shows that co-opted directors
adversely impact many corporate outcomes. Specifically, Coles et al. (2014) find that co-opted
directors practice less monitoring of the firms’ activities. We show that the proportion of
co-opted directors on the board significantly negatively impacts the CSR score. We explore a
comprehensive set of board characteristics (independence, tenure, female director, CEO
duality, and busyness) and analyze their impact on the CSR score. The results show strong
evidence that board independence, the presence of female directors on the board, and CEO
duality have a significant positive impact on the CSR score of firms. We also find evidence
that larger boards improve the CSR composite score.
Then, we address the endogeneity concerns using a system GMM and confirm the
negative association between co-option and the CSR composite score. Using a quasi-natural
experiment based on NYSE listing rules as an exogenous regulatory shock, we show that the
relationship between co-option and the CSR score is likely causal. Furthermore,
disaggregating the CSR score into its component scores reveals that co-opted boards’ most
pronounced negative impact is on the environment, with similar effects on employee
relations, product quality, and human rights. Uncovering the reasons for such effects on
component scores is kept for future research.
The findings of this study have important policy implications for firm governance. In
particular, researchers, corporate boards, shareholders, and regulators should pay more
JAL (1) (2) (3) (4)
Co-opted 0.039**
2.099
Co-opted Independent 0.064**
2.324
2.388
Non-Co-opted Independent 0.070**
2.562
Independence 0.205*** 0.218*** 0.221*** 0.152*
2.755 2.930 2.971 1.945
Tenure 0.045 0.043 0.044 0.042
1.145 1.071 1.100 1.057
Female Director 0.938*** 0.917*** 0.917*** 0.918***
12.106 11.788 11.768 11.789
CEO Duality 0.029** 0.027* 0.027* 0.027*
2.034 1.864 1.899 1.915
Directors’ busyness 0.205 0.188 0.193 0.198
1.246 1.155 1.179 1.213
Board size 0.034*** 0.034*** 0.034*** 0.034***
8.567 8.502 8.499 8.487
Directors Outside Related 0.080*** 0.148*** 0.149*** 0.148***
2.839 4.545 4.588 4.544
0.685 0.957 0.925 0.964
Director Age 0.000 0.000 0.000 0.000
0.155 0.490 0.434 0.472
0.832 0.939 0.973 0.956
Board Meetings 0.000 0.000 0.000 0.000
0.308 0.232 0.254 0.176
Firm Age 0.013* 0.010 0.010 0.010
1.715 1.345 1.343 1.279
Leverage 0.002*** 0.002*** 0.002*** 0.002***
15.787 14.363 14.450 14.326
ROA 0.000 0.001 0.001 0.001
0.013 0.330 0.282 0.350
Firm Size 0.023*** 0.023*** 0.022*** 0.023***
4.654 4.627 4.594 4.637
Constant 1.025*** 1.080*** 1.085*** 1.084***
9.427 10.036 10.072 10.065
Adjusted R2 0.281 0.298 0.297 0.298
Observations 4,173 4,173 4,173 4,166
Note(s): This table presents regression results on the relation between board co-option, board characteristics,
and the adjusted CSR score constructed following the procedure proposed by Deng et al. (2013). All regressions
Table 10. control for firm and year fixed effects. Standard errors are corrected for clustering effects at the firm level. The
Co-option, board t-statistics are reported below the coefficients. ***, **, * denote significance at the 1%, 5%, and 10% level,
characteristics, and the respectively
adjusted CSR score Source(s): Table by author
attention to co-opted directors, as identified by measures proposed by Coles et al. (2014), as the
presence of these directors discourages firm CSR commitments. Firms motivated to improve
CSR may structure the board by appointing members who advocate firm policies that
(1) (2) (3) (4)
Board
composition
Lag (CSRSCORE) 0.544*** 0.539*** 0.543*** 0.555*** and CSR:
9.642 9.510 9.924 9.280
Co-opted 1.028*** co-option effects
2.620
Co-option Independent 1.520***
2.827
2.171
Non-Co-opted Independent 2.911***
3.177
E-index 0.026* 0.027** 0.024* 0.028**
1.946 2.014 1.838 2.045
Independence 0.682 0.928 1.035 2.991
0.286 0.390 0.433 1.121
Tenure 1.056 1.183 1.276* 1.174
1.399 1.561 1.693 1.504
Female Director 5.090*** 5.316*** 5.385*** 5.368***
3.971 4.036 4.224 3.834
CEO Duality 0.597*** 0.603*** 0.602*** 0.575**
2.656 2.676 2.671 2.564
Directors’ busyness 6.879 7.648 6.256 8.205*
1.465 1.628 1.406 1.697
Board size 0.245*** 0.234*** 0.225*** 0.226**
2.839 2.811 2.666 2.550
Directors Outside Related 0.613 0.615 0.572 0.581
0.999 1.001 0.932 0.934
0.201 0.176 0.169 0.893
Director Age 0.011 0.013 0.009 0.013
0.783 0.907 0.637 0.897
0.189 0.376 0.565 0.360
Board Meetings 0.028 0.019 0.013 0.005
0.538 0.371 0.253 0.084
Firm Age 0.163* 0.151 0.173* 0.121
1.651 1.512 1.713 1.142
Leverage 1.567* 1.644* 1.650* 2.097**
1.734 1.809 1.869 2.027
ROA 0.037 0.023 0.005 0.029
0.287 0.173 0.041 0.201
Firm Size 0.125 0.110 0.127 0.086
1.551 1.313 1.590 0.963 Table 11.
Constant 5.813** 4.980* 5.410** 4.754* Co-option, board
2.286 1.933 2.151 1.782 characteristics,
- AB AR (1) test statistic 6.909 6.733 6.713 6.760 managerial
entrenchment, and the
(continued ) CSR score
JAL (1) (2) (3) (4)

- Hansen J statistic 112.100 111.500 112.000 99.060
p-value Hansen J statistic 0.300 0.313 0.301 0.591
Number of instruments 126 126 126 124
Number of groups 1,224 1,224 1,224 1,221
Observations 3,173 3,173 3,173 3,166
Note(s): This table report results from the system GMM estimation of Eq. (2) and the corresponding
diagnostic tests and their p-values. These tests include the Arellano-Bond AR (1) and AR (2) serial correlation
tests and the Hansen J-test of over-identifying restrictions. Standard errors are corrected for clustering at the
firm level. ***, **, and * indicate statistical significance at the 1%, 5%, and 10% levels, respectively
Table 11. Source(s): Table by author
enhance corporate social responsibility. Our results unravel a positive role of board size and
composition variables such as female directors and CEO duality, which moderate co-option
effects in favor of corporate social responsibility. Furthermore, at a broader level, the pursuit
of the United Nations Agenda 2030 advocates a balanced development between economic,
social, and environmental sustainability (ESG). Such an agenda requires active support from
the corporate sector and other actors, as well as enablers of governance structures and CSR
frameworks that facilitate achieving Sustainable Development Goals.
Notes
1. To address the endogeneity issue, Heider and Ljungqvist (2015) conducted a natural experiment
using many exogenous shocks (changes in state taxes). Nguyen and Nielsen (2010) investigate the
impact of independent directors on firm value. The authors use the sudden death of independent
directors as an exogenous event to address endogeneity concerns.
2. For brevity, the CSR score denotes both composite CSR scores or a CSR component score.
3. Stuart et al. (2023) review 592 articles on CSR disclosure and their synthesis into the accounting
literature. The authors review the effects of corporate governance on CSR disclosures and
performance.
4. We thank Dr Lalitha Naveen for making co-option data publicly available on her webpage at
Temple University. The original dataset used by Coles et al. (2014) was updated during 2022 to
include observations till 2018. We use the updated dataset in our analysis.
5. We use the Hausman test to assess whether fixed effects or random effects are appropriate for
estimating the panel regression and find evidence to support the former.
6. We use the Durbin and Wu-Hausman test for endogeneity and reject the null hypotheses of no
endogeneity at the 1% level for the co-opted, co-opted independent, and non-co-opted independent
variables. Results are not reported for brevity.
7. Roodman (2009) provides a detailed discussion on estimating a system GMM using Stata. Wintoki
et al. (2012) show that ignoring dynamic relationships between lagged left hand side variables
(performance) and regressors (current governance variables) lead to biased estimates and illustrate
how a system GMM addresses this bias in addition to the bias arising from unobserved
heterogeneity and simultaneity.
8. We use xtabond2 in Stata to estimate the model and select the “collapse” option to limit instrument
proliferation (Roodman, 2009).
9. Refer to the Securities and Exchange Commission press release 34–48745, November 4, 2003. Board
https://www.sec.gov/rules/sro/34-48745.htm
composition
10. Refer to paragraph 14, “Proposed Implementation of New Requirements” under section B “NYSE and CSR:
Proposals” of the description of the NYSE and Nasdaq Proposals of the NASD and NYSE
Rulemaking:Relating to Corporate Governance available on www.sec.gov/rules/sro/34-48745.htm co-option effects
11. The authors argue that using a typical difference-in-differences approach is problematic since other
regulations and political pressures arising from SOX may affect board monitoring through various
channels.
12. According to NYSE rules, firms were required to adopt these changes during their first annual
meeting after January 15, 2004, but no later than October 31, 2004. Firms with classified boards were
given until the second annual meeting but not past December 31, 2005, to comply with the
requirements. Thus, we refer to the period following the proposal of the new stock exchange rules
(2005–2010) as the post-NYSE period.
13. For a detailed discussion of the “clean” estimate approach see Coles et al. (2014).
14. For example, for the environment components score, H1: A negative relationship exists between the
percentage of co-opted directors and the firm CSR environment component score. We replace the
CSR composite score by each of the CSR component scores for every component.
15. The six provisions included in the E-index include four that set constitutional limits to shareholder
voting, supermajority requirements for charter amendments, supermajority requirements for
mergers, staggered boards, and limits to shareholder amendments of the bylaws and two to increase
the costs of a hostile takeover (poison pills and golden parachutes).
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Corresponding author
Doureige J. Jurdi can be contacted at: d.jurdi@latrobe.edu.au
JAL Appendix
Variables Measurement
Dependent variables
CSR A composite score of the total number of strengths minus the total number of
concerns from all the aspects of CSR in a given year t for firm i
CSR COM The total number of strengths minus the total number of concerns within the
community aspects of CSR in a given year t for firm i
CSR DIV The total number of strengths minus the total number of concerns within the
workforce diversity aspects of CSR in a given year t for firm i
CSR EMP The total number of strengths minus the total number of concerns within the
employee relation aspects of CSR in a given year t for firm i
CSR ENV The total number of strengths minus the total number of concerns within the
environmental aspects of CSR in a given year t for firm i
CSR HUM The total number of strengths minus the total number of concerns within the human
rights aspects of CSR in a given year t for firm i
CSR PRO The total number of strengths minus the total number of concerns within the
product quality aspects of CSR in a given year t for firm i
Independent variables
Co-opted The percentage of co-opted directors who joined the board after the CEO assumed
office is calculated as per Coles et al. (2014) for firm i in year t
Co-opted Independent The percentage of co-opted independent directors who joined the board after the
CEO assumed office is calculated as per Coles et al. (2014) for firm i in year t
TW Independent Co- The sum of tenure of co-opted directors divided by the sum of (Tenure-Weighted Co-
option option) tenure of independent directors calculated as per Coles et al. (2014) for firm i
in year t
Non-Co-opted The percentage of non-co-opted directors who joined the board before the CEO
Independent assumed office is calculated as per Coles et al. (2014) for firm i in year t
Independence The percentage of directors who are independent
Tenure The percentage of directors who have more than 15 years of experience
Female Director The percentage of directors who are female
CEO Duality A dummy variable equals 1 if CEO is also chairman of the board and 0 otherwise
Director Busyness The percentage of directors who serve on 4 or more other boards
Control Variables
Board Size The number of directors on the board
Directors Outside The percentage of independent directors on a given board who had or have had a
Related significant relationship with the company
Directors Problem The percentage of directors who have been personally involved in problems such as
bankruptcies, fraud, major litigation, etc
Directors Failed The percentage of directors who have failed to meet the board’s minimum
attendance standards
Board Meetings The number of board meetings
Director Age The age of a given director
Firm Size The natural log of total assets
Firm Age The natural log of the number of years the firm has been in the business
Firm ROA The net income/total assets
Table A1. Firm Leverage Total debt/total assets
Variable definitions Source(s): Appendix by author

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Board composition and corporate Board

La Trobe University, Melbourne, Australia

JEL Classification — G30, G34, M14 Journal of Accounting Literature

2. Related literature and hypotheses development

2.2 Board characteristics and CSR

3. Data, variables description, descriptive statistics, and correlation matrix

3.2 Measuring the CSR score

3.3 Co-option measures

3.4 Board characteristic variables

3.5 Control variables

3.6 Correlation matrix

Panel A: Corporate social responsibility scores

[1] CSR score 1.000

4.2 Addressing potential endogeneity

where Co_option is defined as in the baseline regression, post-NYSE is an indicator variable

4.3 Co-opted boards and CSR component score analysis

Clean estimate: β1þ β3þ β4 8.274** 5.679** 21.610** 4.478**

Co-opted 0.200*** 0.010 0.015 0.103 0.061* 0.013

4.4 Robustness check and other results

TW 0.337*** 0.016 0.029 0.274*** 0.154** 0.037*

p-value of AR (1) statistic 0.000 0.000 0.000 0.000

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Clean estimate: β1þ β3þ β4 8.274 5.679 21.610 4.478

TW 0.337* 0.016 0.029 0.274* 0.154** 0.037*