The Effect of Corporate Governance on Corporate Social Responsibility: Evidence from Sri Lanka

Abstract

Motivated by the stakeholder theory and legitimacy theory, this study looks at the causal effect of Corporate Governance (CG) on Corporate Social Responsibility (CSR). The study utilized a sample of 100 companies listed at the Colombo Stock Exchange during 2017 and 2018. The sample excluded banking, finance and insurance and investment trusts sectors due to its’ inherent nature of being highly regulated. This research was conducted in two parts. First the empirical association between CG and CSR was studied based on secondary data gathered from annual reports. CG and CSR was measured based on disclosure indexes. Further, firm size, profitability, and firm age were used as control variables. Secondly, five in depth interviews were carried out to uncover the nature of the relationship between CG and CSR. The interviewees included senior managers attached to the accounting function or CSR program of five companies of the selected sample. The results from the regression analysis shows a significant positive relationship between CG and CSR. This implies CSR increases as governance quality improves. The in-depth interviews with top managers complemented this result. Accordingly, all the managers conceive CG as an essential component for a successful CSR drive. The findings from the study implies that Sri Lanka is moving towards counterbalancing the dominance given to CG by giving some attention to CSR. This study makes two important theoretical contributions. First, it adds to the limited number of studies that has been done in the Sri Lankan context to determine the relationship between CG and CSR. Secondly, it gives a basis to the future researchers to explore the nature and the extent of the relationship between CG and CSR in a deeper level. Finally, the researcher expects the findings will have a practical implication for future policies in CSR and CG.