This report attempts to critically analyse the research paper: Dunn, P., & Sainty, B. (2009) The relationship among board of director characteristics, corporate social performance and corporate financial performance, International Journal of Managerial, Finance, Vol. 5 No. 4, 2009 pp. 407-423

1. [Assignment - Critical Review] 2013
¹
The Relationship among board of
director characteristics, corporate
social performance and corporate
financial performance
Amany Hamza
Student number: 21202244
Tutor: Sharif Sheriff,
Course: MBA / Research Methods, BA70020E
Word Count: 2000
(Excluding Table of Contents, Acronyms, Cover Page and Appendices)
Date: 08th
November 2013
Figure 1 – CSP and CFP (Source: Google, Adapted for the link between CSP and CG, CFP)

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Table of Contents
1. ACRONYMS.................................................................................................................................3
2. EXECUTIVE SUMMARY ..................................................................................................................3
3. INTRODUCTION ...........................................................................................................................4
4. HYPOTHESES...............................................................................................................................5
4.1. SHAREHOLDER ORIENTATION.................................................................................................5
4.2. BOARD INDEPENDENT ..........................................................................................................5
4.3. FIRM RISK ..........................................................................................................................5
5. METHODOLOGY ..........................................................................................................................6
5.1. MODEL..............................................................................................................................6
5.2. DEPENDENT, INDEPENDENT AND CONTROL VARIABLES ...............................................................6
5.3. SAMPLE SELECTION..............................................................................................................7
6. EMPIRICAL ANALYSES ...................................................................................................................7
7. CONCLUSION ..............................................................................................................................8
8. APPENDICES .............................................................................................................................10
8.1. APPENDIX I.......................................................................................................................10
8.2. APPENDIX II......................................................................................................................11
8.3. APPENDIX III.....................................................................................................................12

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1. ACRONYMS
BoD Board of Directors
CFP Corporate Financial Performance
CG Corporate Governance
CK Corporate Knights
CSP Corporate Social Performance
CSP Score Dependent variable that is taken from the Canadian Social Investment Database as
prepared by JRA which is affiliated with, among others, Kinder, Lydenberg and
Domini (KLD)
CSR Corporate Social Responsibility
EPS The firm’s earnings per share
FP Financial Performance
JRA Janzi Research Associates
ROB The Report on Business
is independent third party assessor of the quality of corporate governance
structures of Canadian Companies, ROB rates the top 300 firms on the TSX across
four areas of corporate governance: shareholder orientation, board composition,
compensation, and disclosure issues
ROE The firm’s return on equity
RP Research Paper
SR firms Firms on the Domini Social Index
TSX Toronto Stock Exchange
2. EXECUTIVE SUMMARY
This report attempts to critically analyse the research paper:
Dunn, P., & Sainty, B. (2009) The relationship among board of director characteristics, corporate
social performance and corporate financial performance, International Journal of Managerial,
Finance, Vol. 5 No. 4, 2009 pp. 407-423.
The first section of this report covers the analysis of the RP as well as the purpose of the RP which is to
investigate the relationship between qualitative measures of the BoD and its CSP. RP examines first the
impact of the board on the CFP as well as its CSP. Then, it examines CSP from the perspective of agency
theory. For the purpose of the RP, it developed CSP score model to test three submitted hypotheses.
The empirical study is using a longitudinal sample of 104 Canadian firms to capture CG impact on the CSP.
Although the sample is small and limited to top Canadian firms listed on TSX, the results are quite robust.
Moreover, a strength (and weakness) of this study is utilising qualitative methodology to identify the
relationship between CSP and CG. The reason for that is that this methodology has been used within only two
empirical studies with respect to the link between CG and financial statement disclosures1
and also earnings
quality2
. The findings illustrate a positive link between CSP-board independence but not in terms of the
shareholder orientation. Another positive link between CSP with both CFP and debt is found. RP concludes
with a strong recommendation for researchers to develop finer measures to capture the quality of CG
structures instead of using the usual suspects.
1
Gleb and Strawser, 2001; Healy et al., 1999; Welker, 1995.
2
Niu, 2006.

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The last section outlines the overall conclusion which includes my critique and general observations.
3. INTRODUCTION
The notion of CPS encompasses the dimensions of community relations, workplace, the environment and the
society at large. This RP ties up the integration of the societal concerns into business practices to the
characteristics of the CG. Prior work3
documents that board independence is strongly correlated with the CSP.
In the same vein, positive association is noted4
between investor ownership and CSP. However, counter
arguments have prevailed unclear impact of the BoD shareholder orientation has on CSP, while the
managerial ownership –CSP link is less clear (see Appendix I).
With regards to the impact of the CG structures on the CFP, agency theory claims that there should be a direct
link between the strength of CG and the CFP; it has parallels to strong independent Boards. Moreover,
compensating directors with equity should further enhance the Board and the common shareholder
relationship5
(see Appendix I). Thus, independent board with a shareholder orientation view should be closely
interrelated to CFP.
In examining the CSP-CFP link, empirical research has generated mixed results. In Roman et al (1999) review of
51 exploratory studies, 32 studies posit a positive CSP-CFP correlation, about 5 with a negative correlation and
14 resulted in hybrid correlation or no correlation was found. Thus, this CSP-CFP model resulted in a
fragmented literature in this area, and this could be because of flawed investigations.
The holistic view of CSP captures the principles of CSR and the processes of CS responsiveness towards
different societal actors over the long term. Hence, the integration of CSP into governance systems
incorporates a long term perspective. In this sense, CG is driven by long term commitment to serve corporate
purposes by providing a structure which creates sustainable business. Similarly, short term executive
compensation contracts do not imply a strong CSP (McGuire et al, 2003).
Agency theory’s contention addresses interest conflicts between managers and investors. This potential
conflict derived from keeping management divorced from ownership. Thereof, shareholder value capitalism is
based on the duty of the BoD to align the interests of management with those of shareholders through the
use of stock-based compensation. Hence, well governed corporations will contribute to sustainable improved
performance.
Nonetheless, another issue6
within the agency theory is the adverse selection problem of the right business
investment for the bondholders. In seeking to lessen this issue, some researchers7
find that firms can alleviate
the debt risk by spurring corporate citizenship view. Contradictory to that, McGuire et al (1988) note adverse
link between the risk and CSP. Either way, CPS may act as a signal to external parties about the quality of
management.
3
Studies by: Ibrahim and Angelidis, 1995; Johnson and Greening, 1999; Wang and Dewhirst, 1992.
4
Consensus by: Cox et al., 2004; Johnson and Greening, 1999; Graves andWaddock, 1994; Neubaum and
Zahra, 2006
5
Consensus by: Hillman and Dalziel, 2003.
6
Issue noted by: Defond and Jiambalvo, 1994
7
Consensus: Cahan and Malone, 1995; Graves and Waddock, 1994; Husted, 2005; Orlotizky and Benjamin, 2001

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Firms with more independent boards of directors
wil have better corporate social performance than
firms with less independent Boards of Directors.
H2
4. HYPOTHESES
This RP so far provides in depth picture of the impact of CG on CSP. This impact is gauged with qualitative
measures of shareholder orientation and board independence.
4.1. SHAREHOLDER ORIENTATION
The study highlights the assumption of agency theory that a more close association incurs between
investors and managerial ownership. Abreast with this speculation, director ownership is positively
related to CFP. This is in compliance with the findings that top-performing firms have boards with a large
ownership interest. However, it is not clear if the shareholder orientation and CSP should be positively
correlated as well. In contrast, researchers confirm a positive relationship between CSP8
and institutional
investors. This is quite unlike the link between CSP and managerial ownership, which only incurs in some
aspects of CPS. Moreover, Frye et al (2006) deem compensating management with stock may induce
them to squander corporate resources to benefit themselves.
The findings of a matched sample of 400 SR firms with another 400 of non-SR firms indicate that there is
no impact of stock options on CEOs at SR firms to take on more risks though they have an impact on the
latter in order for CEOs to increase their personal wealth.
4.2. BOARD INDEPENDENT
External independent directors can be appointed to the Board to better monitor management in order to
tackle management opportunistic behaviour. They, in turn, promote a broader stakeholder orientation
and their interests, thus, are more closely aligned with the interests of the other investors9
.
4.3. FIRM RISK
Risk is associated with issuing debt instruments because of the asymmetric information in this regards.
Hence, the engagement in socially responsible activities to signal to bondholders its business credence will
reduce the inherent risk (See Appendix I).
8
Consensus: Cox et al., 2004; Graves and Waddock, 1994; Johnson and Greening, 1999; Neubaum and Zahra, 2006
9
Consensus: Jensen and Meckling, 1976; Zahra and Pearce, 1989
The degree of shareholder
orientation of the BoD will have no
effect on the CSP of the firm.
H1
Fig. 3: Hypothesis 2
Fig. 2: Hypothesis 1

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Firms with high debt ratios will have better
corporate social performance than firms with
low leverage ratios.
H3a
The findings from Fortune 500 corporate reputation scores10
show a positive relationship between
performance and social responsibility scores, while revealing that there is a negative relationship
between leverage and social performance. The findings propose that firms with high performance and
low debt are more economically viable to afford participating in social activities.
5. METHODOLOGY
5.1. MODEL
The CSP score model that is used to test these hypotheses is:
5.2. DEPENDENT, INDEPENDENT AND CONTROL VARIABLES
CSP score is the dependent variable, where JRA rates the largest 300 firms listed on TSX by using KLD’s11
multidimensional construct, fig.7. Aggregated CSP score is weighted based on its relative importance to
the five stakeholders’ domain, fig. 8. The top 50 firms’ names and scores are published annually since
2002 in CK, though for 2003 only the rankings were disclosed.
10 By: McGuire et al. , 1988.
11
Kinder, Lydenberg and Domini is a financial advisory firm specializing in the assessment of corporate social performance.
CSP score
f (shareholder orientation, board independence,
leverage, controls).
Fig. 6: CSP model
Fig. 4: Hypothesis 3a
Firms with high leverage ratios will have poorer
corporate social performance scores than firms
with low leverage ratios.
H3b
Fig. 5: Hypothesis 3b

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Corporate
governance
Community
relations
International
relationships
Environment
Workplace
diversity
Product safety
and business
practices
Employees’
relations
Share
performance
Fig. 8: Stakeholder groups
nature Employees
Shareholders
On the other hand, the annual ratings for the independent variables, shareholder orientation and board
independency, are compiled by the ROB12
. The orientation variable is scored out of a possible 24 points
with regard to stock option criteria, while the independence’s score is out of a possible 40 points in terms
of board composition (See Appendix II). The Debt ratio, another independent variable, is measured as the
ratio of long-term debt to total assets. Compustat is used to obtain financial statement data.
In line with prior studies, the RP controls for firm Frequency, firm size (which measures by the log of total
assets), and for the financial performance (EPS, ROE).
5.3. SAMPLE SELECTION
The supporting evidences are derived from a sample composed of the 50 best Canadian companies over
multiple industries (See Appendix III, Table III). Data are collected from the period of 2002 to 2006. While
JRA ranking excluded 2003 because actual score was unavailable, also out of the total sample of 200
observations only 174 firms (See Appendix III, Table I, is the final sample because 19 do not have ROB
scores and 7 firms have incomplete financial data. 104 unique firms (See Appendix III, Table II) reflect the
number of times that each firm was rated in the top 50 firms over the 5 years.
6. EMPIRICAL ANALYSES
First, the correlation matrix and statistics (See Appendix III, Table IV) provide support for H1, H2, and H3a. The
results show the CSP score highly correlated with Independence and Leverage but not with Orientation.
Fig. 7: multidimensional nature of CSP

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Second, multiple regressions results for Model 1 (See Appendix III, Table V) reveal a positive association
between CSP and CFP. This is consistent with prior studies13
. However, the CSP-Frequency link is not
statistically related. Moreover, the coefficients of control variables in Model2 are in line with the results of
Model1. Also the coefficients and statistics results of the three independent variables are in accord with those
of Model1. The empirical analyses, thus, support hypotheses H1, H2, H3a.
The results show that strong positive CSP is embedded within a highly independent board, whereas board
shareholder orientation is not related to CSP. This is consistent with stakeholder theory, hence supporting the
holistic view of CSP. With regards to the link between firm risk and FP to CSP, this study finds similar results of
other studies.
7. CONCLUSION
By using a set of qualitative characteristics, this investigation can make a salient contribution to further
develop the understanding of the relationship between CG and CSP. The data is analysed by an inductive
research strategy which uses interpretivist approach to explore the degree of board independency and its
level of shareholder orientation in relation to the CSP. Nonetheless, despite using qualitative research instead
of the dominant quantitative method in this strand, the results demonstrate consistency with other two
qualitative empirical studies with respect to the link between CG and financial statement disclosures14
and
also earnings quality15
.
The negative correlation between a board with shareholder orientation and CSP supports the broad notion of
CSP. Hence CSP is geared towards the Stakeholder theory, which is the emerging view of socialised
capitalism16
. This offers ground for speculation on the validity of the claim of H1.
Using a strong independent board view does not only lead to strong CSP, but it can steer CEOs towards good
management practices to tackle managerial capitalism. Hence it relates to serving many actors and this leads
to holistic view of CSP. This represents a coherent construct of the RP.
Furthermore, it is important to take into account that the independent variable, Leverage, is compiled for the
five-year period 2002 to 2006. Thus, the ratios of debt took place in the context of economies of pre-
recession; therefore there is a possibility for the ratios of 2007 onwards to be volatized. Further work is
recommended to examine H3 in the light of these changes.
The use of multidimensional measurements by JRA, KLD and ROB reflect the internal reliability of the sample.
However, by limiting the sample to Canadian companies, the results might not be valid for companies outside
the Canadian governance tradition because of the differences in the legal and cultural environments. Hence,
further studies should consider an international sample to reflect transferability criteria.
The small size of the sample could be convenient to limit errors in the early stage of using qualitative
approach in such strand. But it is recommended to consider a large sample for further insights into firms with
medium and low CSP scores.
Further studies with detailed CSP score instead of the aggregated used one may highlight the unique CS
dimension of each firm to develop better understanding and promote the scope of CSR.
13
Cox et al., 2004; Johnson and Greening, 1999; McGuire et al., 1988
14
Gleb and Strawser, 2001; Healy et al., 1999; Welker, 1995.
15
Niu, 2006.
16
Kakabadse et al. (2010) suggests a fundamental shift in the investment time horizon from shorter to longer term
and build around stakeholders.

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This study sheds a light on the role of the board in the CSP-CFP which has been ignored in prior studies. The
model used results in a positive link between both. Hence it paves a strong way for further research in this
link.
RP proposes that CSP is similar to CFP in terms of not having long-term view. This emanates from the
frequency findings of the sample. Although good performance in one year does not mean same results in
following year, still long term performance is necessary to leverage stability which is the main perspective for
CFP strategies. Though short term view can be defined as tactics, stable business cannot merely rely on it.
Hence this creates avenues for future studies to parse CSP from permanent, transitory and price irrelevant
persistence.

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8. APPENDICES
8.1. APPENDIX I
Domains
Influential
authors/Period
CSP
Influential
authors/Period
CFP
CG Structures
1.Independent
BoD
Ibrahim and
Angelidis, 1995;
Johnson and
Greening, 1999;
Wang and
Dewhirst, 1992
a strong link
between board
independence and
CSP
Beasley, 1996; Bujaki
and McConomy, 2002;
Core et al., 1999;
Kosnik,
1987
Strong association
between strong
independent
board-CFP
Hillman and Dalziel,
2003
Board with
shareholder
orientation should
further enhance
the Board and
common
shareholder link
2.Managers
Johnson and
Greening, 1999
Managerial
ownership is only
related to some
aspects of CSP
McGuire et al,
2003
Short term
executive
compensation
contracts is not
related to strong
CSP.
Institutional
Investors
Cox et al., 2004;
Johnson and
Greening, 1999;
Graves and
Waddock, 1994;
Neubaum and
Zahra, 2006
Positive Investor
ownership-CSP
association
Debt
instruments/
Firm risk
Cahan and
Malone, 1995
Strong link
between socially
responsible
behaviour and the
level of voluntary
disclosures
McGuire et al, 1988-
using Fortune 500
corporate reputation
scores
A positive link
between
performance-social
responsibilities
scores.
McGuire et al,
1988-using
Fortune 500
corporate
reputation scores
A negative link
between firm risk
and social
responsibility
scores

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8.2. APPENDIX II

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8.3. APPENDIX III