4.1. Descriptive Statistics
provides the descriptive statistics of the current study. The mean value of corporate social responsibility disclosure is 32.13%, which is higher than the value of 15% reported by Setiawan et al. [3
] for Indonesian banks over the sample period of 2013 to 2015. On average, this study discloses one-third of the items in the GRI index, implying that corporate social responsibility disclosure in Indonesia is still considered low.
The mean foreign board value in Indonesia is 14.84%, implying that 0.75 out of 5 firm board members in Indonesia is a foreigner. This value is higher than the value of 4.8% reported by Garanina and Aray [21
] in Russia. The proportions of foreign members of the boards of directors and commissioners were not significantly different. The average values of foreign directors and foreign commissioners are 15.79% and 14.05%, respectively. Finally, Table 2
shows that the foreign nationals who hold CEO and chairperson positions on boards of commissioners are 17.01% and 12.47%, respectively.
and Table 2
also provide information regarding the control variables. The average value of the ROA was 7.5742%, with a median value of 7%. On average, the firms in the sample of the study earn a positive profit. Furthermore, the mean value of leverage is 99.2676%. The ratio of debt to equity in the current study is almost equal to 1—most of the companies in the sample of the study are audited by non-Big Four. Non-Big Four firms conducted 65.0794% of the audits and Big Four firms conducted 34.9206% of the audits.
4.2. Regression Results
This section provides the multivariate results using robust panel regressions. It follows the recommendation of [39
] to accommodate the possible existence of a within-cluster correlation by estimating all regressions using the White heteroscedastic-robust and double-clustered fixed-effect model. We performed a series of diagnostic tests prior to the estimations, including the Breusch Pagan LM test, Chow test, Hausman test, normality test, VIF of multicollinearity, autocorrelation, and heteroscedasticity. Table 2
presents the results.
In Hypothesis 1, we assume a positive relationship between foreign ownership and CSR. The result reveals a confirmation of that hypothesis (β = 0.013 SE = 0.007). This suggests that more ownership by foreigners in a company leads to higher CSR activities. Foreign ownership provides firms with more incentive to improve their corporate governance practices [22
] by engaging more CSR. Foreign owners use their discretion to push management to pay more attention to corporate social responsibility and improve the company’s involvement in corporate socially responsibility activities. Therefore, foreign ownership has a positive effect on corporate social responsibility.
The second hypothesis testing (H2: a positive relationship between the foreign board and CSR) reveals a positive relationship between a foreign board and CSR (β = 1.660 SE = 0.813). This implies that firms with more foreigners on the board receive higher CSR than those with few foreigners on the board. Practically, an increase in foreigners on the board leads to an increase of 1.660% of the company’s CSR. This is in line with prior empirical findings, which surmise the positive effect in Russia [21
], Bangladesh [33
], Jordan [32
], and France [13
In terms of the number of foreign directors, our result supports the existence a positive relationship between foreign directors and CSR (H3). Our research shows that foreign directors have a positive relationship with CSR (β = 0.295 SE = 0.103), implying that a company with more foreigners will have a higher CSR. As part of the top management team, foreign directors have the discretion to make strategic decisions regarding corporate social responsibility. Oxelheim and Randøy (2003) point out that foreign directors bring their expertise to improve firm value. Thus, foreign directors also have the discretion to push companies to be more involved in corporate social responsibility.
Foreign commissioners (H4) also positively affect CSR (β = 0.316 SE = 0.103), implying that more foreign commissioners on the board lead to more CSSR activities. Foreign commissioners have a monitoring responsibility to push management to pay more attention to CSR activities. The foreign commissioners, acting in a supervisory role, have a positive effect on CSR performance. Foreign commissioners use their expertise to provide better control and monitoring of CSR. This result is in line with those of previous studies that found positive effects of foreign nationals on company boards [13
We further examined this foreign variable by evaluating the foreign CEO effect (H5). Table 2
reveals a positive relationship between foreign CEOs and CSR, confirming our hypothesis (β = 0.573, SE = 0.262). This implies that the CSR of a company with a foreign CEO outperforms another firm that does not have a foreign CEO, which is in alignment with the findings of previous studies such as Al-Shammari, Rasheed, and Al-Shammari [40
] and Bertrand et al. [14
Additionally, our final hypothesis test also presented a positive relationship between the foreign chairperson and CSR (β = 1.975 SE = 0.496). This indicates there is a significant difference in CSR activities between companies with and without a foreign chairperson. The CSR activities companies with a foreign chairperson outperform those of companies without a foreign chairperson, which is consistent with the previous research of Bertrand et al. [14
In sum, our result confirms that foreign involvement has a positive effect on corporate social responsibility performance. We checked the aspects of foreign ownership and foreign boards. The results of our study provide empirical evidence on the effectiveness of foreign ownership and foreign boards to improve corporate social responsibility performance. Foreign ownership forces management to be more involved in corporate social responsibility activity. This result supports the agency theory that foreign ownership is a corporate governance mechanism that brings more information, which is presented in the corporate social responsibility disclosure from the company to the shareholder. Our study also supports the important role of the foreign board members in improving corporate social responsibility. Foreign board members bring their experience and expertise to the board’s capability. Therefore, foreign boards positively affect CSR disclosure. Additional evaluation through the variables of foreign CEOs, foreign chair people of the board of commissioners, foreign directors, and foreign commissioners confirm the expectation that foreign boards lead to higher CSR.
4.3. Robustness Check: Endogeneity
We acknowledge the potential endogeneity concern in this study. For example, some unobservable omitted firm-specific characteristics can simultaneously affect the CSR decision and foreign board composition. CSR activities may also have unobservable constructs even though we follow the empirical procedure from previous research, such as Garanina and Aray [21
]. We performed a robustness check to tackle this issue, and the results are presented in Table 3
First, we re-estimated our model specification using one-year lagging explanatory variables instead of taking their contemporaneous values [41
]. This procedure can tackle the simultaneity issue of endogeneity. The results are shown in Columns (1), (3), (5), (7), (9), and (11) for each independent variable. The hypothesis testing from those columns shows that our main conclusion on the relationship between the foreign variables (foreign-owned, foreign board, foreign directors, foreign commissioner, foreign CEO, and foreign CEO) and CSR remains intact.
Additionally, we follow Williams and Allison [42
] and conduct MLE-SEM to tackle the issue of simultaneity and unobserved measurement errors. The MLE-SEM method is substantially more efficient than the GMM method when the normality assumption is met, the condition of strongly balanced is achieved, and it suffers less from finite sample biases. This approach is also suitable for our sample frame due to short period observations.
Columns (2), (4), (6), (8), (10), and (12) of Table 3
reveal the MLE-SEM results. These show that all regressors have a positive relationship with the CSR, confirming our earlier findings. In other words, if the company has higher foreign-owned, foreign boards, foreign directors, and foreign commissioner characteristics, the CSR increases. It also shows that a company with a foreign CEO or foreign chairperson has higher CSR than those without foreigners.
4.4. Robustness Check: Alternative Measurements
This research measures the “foreignness” by taking the fraction of directors on the board. However, another widely considered approach in the literature is the presence or absence of such board members, as suggested by Stroup [43
] and Masulis et al. [44
]. Given that the existence of any foreign director on the board may affect the CSR activities, we consider taking a binary approach in measuring the “foreignness.” We use a dummy variable, in which we give a score “1” if there is a presence of international board members, and otherwise “0”.
We re-estimate the model using this binary variable, and the results are presented in Table 4
. The findings show that firms with the presence of international board members, either on the board, as directors, or as commissioners, have better CSR activities than firms with the absence of international board members. This lends further credence to our earlier results that their relationships are positive. The consistent results across the four newly constructed independent variables (owners, board members, directors, and commissioners) suggest that foreignness may result in superior CSR activities.
4.5. Robustness Check: Industrial Effect
Our research consists of nonfinancial firms from a large number of industries. Thus, the earlier findings might be the net effect of varying relationships across industries offsetting each other. Hence, we re-estimated our model specification for each industry as a robustness check.
We classified each industry into three categories based on the nature of business and the number of observations. The manufacturing and basic industries dominate our sample. Other firms, such as mining and trading, are classified as one miscellaneous industry. Note that the results shown in Table 5
are not from three estimations. Rather, they are from 18 different estimation models. For brevity reasons, we do not show all the variables (control variables and intercepts). Instead, we summarize the results from the main independent variables and put them in one table. Table 5
reveals the results of the within-industry results.
As expected, the conclusions for each group vary. For the manufacturing industry, all foreign variables have positive effects on CSR, except for foreign commissioners. This implies that the number of foreign commissioners on the board is not significant for CSR activities. Meanwhile, the basic industry results align with our main findings: all foreign variables positively impact CSR. Last, the other industries have interesting results. Only foreign-owned, foreign boards, and foreign CEOs have a positive relationship with CSR. The other foreign variables, such as foreign directors, foreign commissioners, and foreign chairpersons, are not a key factor for CSR.
Our results suggest that foreign ownership and foreign boards have a positive effect on CSR performance. This finding confirms the expectation that foreign ownership will positively impact the company’s decision to be more involved in CSR activities. This result is in line with previous studies, such as Rustam et al. [13
], Hu and Zhu [26
], and Khan et al. [12
]. The positive effect of foreign ownership empirically proves the agency theory. The agency theory predicts information asymmetry between management and stakeholders because management has more access to inside information than stakeholders. Thus, it is important to reduce the level of information asymmetry through greater disclosure. As part of the shareholders, foreign owners can use their discretion to push management to further disclose corporate social responsibility and be more actively involved in corporate social responsibility activities. Foreign owners prefer to maintain their reputations through more corporate social responsibility activities. Foreign ownership will thus improve the corporate social responsibility of the company.
Our results also support the legitimacy theory in corporate social responsibility activity. Foreign owners apply more pressure than other shareholders to perform well. Foreign ownership is perceived as the better institution to apply corporate social responsibility mechanisms. As Deegan [45
] and Islam [46
] pointed out, a company will react to external pressure. In this case, foreign ownership brings more experience as a global company. Thus, it is expected that the company will absorb the best practices from other countries. Foreign owners use their discretion to achieve better corporate social responsibility. Our result confirms previous studies [12
] that foreign ownership improves CSR performance.
Our results also provide evidence regarding the important role of the foreign board members in CSR performance. Foreign board members have incentives to prove themselves capable board members. They will maintain their reputation as foreign nationals who hold board member positions. In line with the agency theory perspective, foreign board members, as part of corporate governance mechanisms, use their discretion to monitor management with respect to corporate social responsibility activities.
Moreover, our study provides further evidence concerning the board of commissioners and directors, because Indonesia uses the two-tier board system. In Indonesian companies, the board of commissioners functions as a supervisory board, and the board of directors has to manage the company operations. First, our study checks the role of foreign nationals in the top position on both boards. With a foreign CEO, shareholders pay more attention to firm performance. Foreign CEOs are expected to deliver higher performance and more compliance with social responsibility. Foreign CEOs need to gain legitimacy from society and shareholders. Thus, foreign CEOs boost firm performance through corporate social responsibility. Foreign CEOs have improved CSR performance. Our result is in line with the previous study of Bertrand et al. [14
], who found that foreign CEOs positively affect corporate social responsibility using cross-country data. A firm with a foreign CEO outperforms a firm without a foreign CEO.
Furthermore, our study checks the effect of a foreign chairperson of the board of commissioners on corporate social responsibility. As the chairperson of the supervisory board, a foreign chairperson is responsible for maintaining the firm reputation, and yet, he or she also has a reputation to establish and uphold. Our results provide empirical evidence to support this expectation. Foreign chairpersons have improved firm CSR performance. Both foreign CEOs and foreign chairpersons use their experience and expertise to positively impact corporate social responsibility performance. They maintain their reputation to gain legitimacy. Our results also confirm the expectation that foreign CEOs and foreign chairpersons have improved CSR disclosure [14
] and reduced information asymmetry.
Our study also checks the effect of foreign commissioners and foreign directors on corporate social responsibility. Foreign commissioners as part of the supervisory board have a responsibility to monitor the management team. It is expected that foreign commissioners bring more expertise to accelerate the company to adopt the best practices in corporate social responsibility. As suggested by the legitimacy theory, foreign commissioners respond to expectations from shareholders to improve CSR performance. Our result confirms the expectation that foreign commissioners have a positive impact on CSR performance. Thus, our study is in line with those of previous studies that found positive impacts of foreign directors on CSR [13
Furthermore, our study also checked how foreign nationality directors affect CSR performance. Foreign directors, as part of the board of directors, have a responsibility to manage firm operations. Thus, foreign directors should respond to shareholder expectations regarding CSR activity. A foreign director is expected to have more knowledge and information regarding the best CSR practices of other countries. Foreign directors transmit this knowledge to their companies [16
As an additional note, legitimacy theory argues that CSR activities might be influenced by firm characteristics such as size, profitability, and leverage [47
]. Smaller firms (or lower profitability) will have a lower CSR activity from larger (or higher profitability) firms, which was revealed in our earlier findings (see Table 2
). Therefore, one intriguing question remains: would these firm characteristics strengthen/weaken the international board members’ effects on CSR? We re-estimated all the possibilities following Brambor et al.’s [48
] procedure although it violated the moderation criterion and was beyond our main research objectives. Note that Dawson [49
] and Balli and Sorensen [50
] argue that introducing an interaction term needs to fulfill the theoretical requirement: mixed findings. However, the literature in this area has a consensus: firm characteristics and board members are critical factors in increasing CSR activities [47
Nevertheless, we still re-estimated and found that the interactions between each international board member constructs (BOD, directors, commissioners, CEO, and chairperson) and the firm characteristics have no significant relationship with CSR activities. It implies that the international board members’ effect on CSR activities is not due to their firm characteristics. The presence of international board members has a positive relationship with CSR no matter the size of the firms. It also implies that larger firms have higher CSR activities regardless of whether they have international board members or not. The descriptive statistics in Table 6
strengthen our arguments.