1. Introduction
In recent years, several scholars have mainly emphasized corporate social responsibility based on business grounds and considered corporate social responsibility (CSR) as a useful research area for numerous businesses and academicians, managers, and practitioners. However, despite the importance of CSR and the large number of researches on this topic, there is no universal agreement on how CSR should be conceptualized [
1]. Past literature has indicated that there are numerous theoretical viewpoints and debates explaining the concept of CSR [
2].
Carroll (1991) proposed the primary definition of CSR among the prevailing viewpoint as a concept that incorporates ethical, economic, discretionary, business, and legal anticipation of human societies for business firms by viewing CSR perspectives as not only adding contributions for business purposes but also for the social welfare perspective at large. In the same way, Wood (1991) conceptualized CSR as a firm’s confirmation to specific principles, procedures, and policies as they typically describe the organizations’ responsibility to society [
3]. Mohr, Webb, and Harris (2001) also regarded CSR as the commitment of organizations and business firms to reducing or removing any unsafe business practices and increasing their valuable contributions to society [
4].
In this sense, the existence of CSR depends on an organization’s responsibility when they consider the welfare and beneficial contribution of the society through ethical, economic, and supportive business application practices that might result in favor of the different stakeholders, such as business practitioners, consumers, workers, suppliers, shareholders, and various community groups, as well as the environment [
4]. In short, CSR typically appears through the commitment of organizations and business firms to considering a beneficial contribution to society or any other person who could be affected by their social implements and activities [
5,
6]. Thus, it is imperative to consider being socially responsible for offering a contribution to society rather than just being profit-oriented, such as protecting the environment and making efforts to resolve social problems, as these are the critical indicators for organizations that are being socially responsible.
Organizations can express social responsibility through their different business stakeholders, retailers, suppliers, consumers, and employees by adhering to the policies and ethical standards. Past empirical and theoretical studies have revealed that consumers and other stakeholders are likely to perceive socially responsible firms in a positive light. Organizations can notice this either directly or indirectly from the influence of consumers’ behavior, and corporate identification represents this. Some researchers have identified that CSR has a significant impact on customer satisfaction [
7], including Luo and Bhattacharya (2006), who described that CSR directly affects customer satisfaction [
8]. In addition, investing in corporate social responsibility is considered as the foundation of competitive benefits and a means of enhancing financial performance [
9,
10].
According to Hovey and Li [
11], corporate governance emerged as a high-priority issue after the Asian financial crisis of 1997 as it was considered one of the major causes of the crisis. One of the landmark scandals that contributed to the emergence of corporate governance in China was the discovery of production facilities that never existed, which were falsely declared by the blue-chip company Ying Guang Xia [
12]. Moreover, 2005 was also declared a crucial year for corporate governance because, in that year, company and security laws were significantly amended [
12]. Although a system of corporate governance was developed in the form of standards, rules, and regulations, their enforcement was too weak, ultimately leading to an unfortunate corporate governance scenario in China, even though many laws, standards, etc. were considered adequate by the International Monetary Fund and the World Bank [
13]. Furthermore, based on a research study in 2006, Canada’s Centre for International Governance Innovation (CIGI) declared China as the first Asian nation to develop and adopt corporate governance principles. However, the same organization ranked China as ninth in Asian markets, considering the actual corporate governance work done. Thus, this shows that there is a significant difference between compliance and enforcement of the reforms in China.
The role of monitoring, performed by the board of directors, is an essential tool for control in the corporate governance system, specifically in countries where there are weak external controls. The gender mix of a firm’s board significantly affects the quality of monitoring and leads to better financial performance. The participation of females on boards is taken from part of a “business case”, though related arguments may also be needed to frame this in the scope of ethical considerations. Moreover, the world is attracting more and more research in boardroom gender diversity, but most of the literature is related to the US context. Hence, we discuss the relationship of gender diversity and financial performance in China, which is a country that has almost no female participation in the senior managerial workforce.
In a broader light, we analyze the relationship of corporate governance, CSR and financial performance of listed companies of China. Considering that the globalization of capital markets also has played an essential role in addressing corporate governance regimes, as countries must create a balance between governance principles and the need to ensure gender diversity, aligned with the country’s overall legal and cultural setting. Although Chinese corporations have standard features in corporate governance according to developed markets, they also have some unique features, such as the biggest owners having absolute controlling rights, and the system of two-tier structure of boards having a board of supervisors and board of directors, along with ineffectiveness of independent executive/non-executive directors. The research on boards of corporations in China and their role of voluntary activities may have broad implications for different corporate governance systems, which cannot be obtained merely from the study of advanced market settings [
14].
Our study makes a number of contributions. First, the present study is the first one that examines the moderating role of CSR on corporate governance and firms’ financial performance. It is not only relevant for Chinese companies but also relevant for foreign and potential investors who are planning investing in Chinese firms. Second, there is a huge volume of research investigating the impact of female directors on firms’ performances with primary data, so papers utilizing secondary data in China are still limited. Third, since endogeneity is a severe issue in corporate governance studies, we utilize the two-stage least squares (2SLS) estimator to address the potential endogeneity problem in our analyses and provide a robustness check.
Our study is based on a 3400 firm sample of observations and covers a period from 2009–2018. Our results show that female directors on boards are improving firms’ financial performance, measured through ROA and ROE, and that CSR moderates the relationship between female directors and firms’ financial performance in the Chinese market context. Furthermore, we also found that foreign institutional shareholders have a positive impact on firms’ financial performance and that CSR moderates the relationship between foreign institutional shareholders and firms’ financial performance. The remaining paper is presented as follows:
Section 2 shows the review of the literature, the theoretical basis, and develops our hypothesis;
Section 3 explains our sample and research methods;
Section 4 shows our empirical results; and the last section presents the final thoughts and future research.
5. Final Thoughts and Future Research
In this research study, we contributed to the literature on corporate governance, CSR, and financial performance. In particular, many other studies have only focused on a few economies. Accordingly, this paper suggested exercising caution while generalizing the results. Hence, this study offers new insights into corporate governance, CSR and financial performance by using data from listed firms in China. The research finding also shows that the presence of females on boards has a significant positive effect on firms’ financial performances, and that CSR moderates the relationship between female directors and firms’ financial performances. This further means that Chinese companies should focus on the balance between male and female members on the board, rather than only males. This research also implies that greater gender diversity is beneficial, and investors will value the contributions made by women directors. The research findings also show that foreign institutional investors have a significant direct relationship with firm performance and that CSR moderates the relationship between foreign institutional shareholders and firm performance.
It also encouraged foreign investors to forward more of their resources to the firms already possessing some investments. CSR fully moderate the relation between corporate governance and firm financial performance. The presence of females on boards of limited companies in China is always a hot topic and point of discussion between academic researchers and policymakers, as historically there has been a low percentage of women on boards. Women generally do better than men academically and make crucial household decisions. Hence, their small representation at boards of Chinese companies is surprising.
Additionally, the EU Parliament approved a bill which will require the large companies of the EU to fill 40% of the non-executive director’s posts with women by 2020. Our findings are valuable to policymakers in emerging markets, especially in China, for evaluating and identifying essential drivers of foreign institutional investors. In the case of emerging markets, our findings also have demonstrated the sensitivity of foreign institutional investors to business cycles. In addition, the research also shows the sensitive nature of foreign investment in the Chinese market. The ownership structure is also a critical attraction factor for foreign investors. Eventually, the increasing significance of foreign capital and uneven attraction of foreign capital by some firms is making it essential for corporations to fully understand the factors that shape the decisions of foreign investors. Hence, it is also found that stocks with higher foreign ownership perform better than ones with low foreign ownership [
102]. The effect of CSR on corporation performance in developed market contexts is studied extensively. However, the studies show mixed findings on the relationship between corporate performance and CSR. This research study adds new insights into the role of CSR by shedding light on variables in the Chinese background setting. The results show that the more consistent and appropriate the corporations’ social actions, the more it will have a positive impact on performance.
These findings are advantageous for government departments in emerging countries to encourage CSR practices, and for marketing practitioners and participants to change the attitude towards CSR implications. This study highlighted the problems of the foreign institutional investors’ scheme, which was the main contribution to the financial market reform of China after 2003. In addition to scientific knowledge, these findings offer significant implications to corporate affairs executives and managers, practitioners, academicians, state officials and policymakers, and might help China to extend its market liberalization to global markets. This research also contributes to the existing body of literature, which has investigated the moderated effect of CSR on the relationship between corporate governance and firm financial performance in the Chinese market.
Our study has some limitations. First, we cannot control all variables that may affect the analysis. Second, a limited period sample may restrict the generalizability of the results. CSR actions usually take time before they have some results in the market. Then, future studies will determine whether this study may generalize to other contexts. Third, one of the important topics for future research would be the relationship of corporate performance, female members’ ties to the owners, and qualifications of female board members.