CASE STUDY
The Moderating Effects from Corporate Governance Characteristics on the Relationship Between Available Slack and Community-Based Firm Performance
Jeffrey S. Harrison • Joseph E. Coombs
Received: 22 December 2010 / Accepted: 13 September 2011 / Published online: 8 October 2011
� Springer Science+Business Media B.V. 2011
Abstract Recent perspectives on community investments
suggest that they are opportunities for firms to create value
for shareholders and other stakeholders. However, many
corporate managers are still influenced by a widely held
belief that such investments erode profits and are therefore
unjustifiable from an agency perspective. In this paper, we
refine and test theory regarding countervailing forces that
influence community-based firm performance. We hypoth-
esize that high levels of available slack will be associated
with higher community-based performance, but that this
relationship will be moderated by three important gover-
nance variables: board independence, investment fund
ownership, and CEO ownership. We find support for our
hypotheses in longitudinal study of a large sample of U.S.
corporations.
Keywords Agency theory � Community-based performance � Corporate governance � Organizational slack � Stakeholder theory
Beyond philanthropy, community investments are increas-
ingly being treated as opportunities to create value for firms
and their stakeholders. This mindset is reflected in a state-
ment by the Social Investment Forum, ‘‘Community
investing, however, is beyond charity and is a sound
investment practice. These investments earn competitive
returns, like non-community development investments, but
also produce a social return that is attractive to investors and
helps communities in need (US SIF 2011).’’ Similarly, Porter
and Kramer (2011) discuss the concept of shared value, in
which societal interests and firm economic interests are in
harmony. The shared-value concept of corporate social
responsibility is based on the idea that societal needs, as well
as conventional economic needs, define markets. According
to Porter and Kramer (2006), serving society’s interests in
creative ways can unlock tremendous innovative potential
and thus enhance a firm’s ability to create value for all of its
stakeholders, including shareholders. In fact, such activities
may lead to a competitive advantage that is genuinely sus-
tainable in the sense that they allow the firm to meet current
needs without compromising the ability to satisfy its future
needs or the future needs of its stakeholders (Porter and
Kramer 2006).
In spite of the attractiveness of this enlightened com-
munity investment philosophy, firms vary greatly in the
amount of attention and resources they devote to stake-
holders in general (Jones et al. 2007) and communities in
particular (Brammer and Millington 2003a). Porter and
Kramer (2011) acknowledge that many firms are ‘‘trapped’’
in an outdated mindset, legitimized by economists, that
suggests that such investments will erode profits. Basically,
many managers believe that their firms receive much less
in financial returns than the value of what they spend in this
area. It is therefore possible to argue, from the perspective
that managers are agents for the shareholders, that invest-
ments in the community are contrary to the best interests of
shareholders and should be kept to a minimum (Henderson
2001; Jensen 2001).
Although community investment programs are increas-
ingly being incorporated into the fabric of planning efforts
J. S. Harrison (&) Robins School of Business, University of Richmond, Richmond,
VA 23173, USA
e-mail: harrison@richmond.edu
J. E. Coombs
School of Business, Virginia Commonwealth University,
Richmond, VA 23284, USA
e-mail: jecoombs2@vcu.edu
123
J Bus Ethics (2012) 107:409–422
DOI 10.1007/s10551-011-1046-z
in many companies (Zappalà and Cronin 2003), these types
of investments are nonetheless discretionary in that usually
they are not required, they tend not to be directly related to
a firm’s day-to-day operations and financial demands and,
as mentioned previously, they run counter to the thinking
of many economists with regard to maximizing financial
performance. As Thompson (1967) explained: ‘‘When the
immutable facts of organizational life have been faced and
the contingencies spelled out, organizations have choices.
It is at these points that discretion makes the difference (p.
99).’’ A variety of individuals and groups influence the way
public corporations exercise discretion. Among the most
influential actors are top managers, board members, and
large shareholders. These actors are likely to have a
noticeable influence on firm decisions in areas that are
highly discretionary, such as community investments. The
present study examines this influence.
Supporting the notion that governance characteristics
can influence investments in social responsibility, Barnea
and Rubin (2010) recently published an important study in
this journal that explored the influence of insider ownership
on whether firms are classified as socially responsible or
socially irresponsible. They argued that insiders such as
corporate managers may have an incentive to increase
expenditures on corporate responsibility beyond profitable
levels because of the good feeling or ‘‘warm glow’’ they
might receive, but that as their level of ownership increases
they will exert their influence to curtail such expenditures
because they will begin to erode their own value (Jensen
and Meckling 1976). Thus, they expect and find a negative
correlation between insider ownership and a positive social
responsibility rating.
Specifically related to community investments, Bram-
mer and Millington (2003a) studied factors influencing the
size of corporate community investments (CCI) in UK
firms committed to making investments in the communities
where they operate. They found that firms that manage
their community investments in a corporate social
responsibility department allocated a percentage of their
income that was over ten times higher than firms that
managed these types of investments through central
administration, with firms that manage the investments in a
public relations department falling somewhere in between.
Placement of the community investment function within
the firm also influenced the preferred types of investments
(i.e., education, arts, economic development, etc.) and was
influenced by the nature of the industry in which the firm
was engaged (i.e., finance, services, utilities, manufactur-
ing). In a different study, Brammer and Millington (2003b)
also found that industry differences influenced charitable
contributions of UK firms. Specifically, charitable contri-
butions were concentrated in socially and environmentally
sensitive industries, suggesting that firms respond to
external stakeholder pressure when determining their
charitable contributions.
The present study builds on the pioneering efforts of
Brammer and Millington (2003a) in examining factors that
influence community-based corporate performance and
Barnea and Rubin (2010), who demonstrated that corporate
governance can have an impact on a firm’s socially ori-
ented investments. Taken together, these studies suggest
that corporate governance characteristics have the potential
to influence community investment decisions. We focus
specifically on community-based performance, as opposed
to overall social responsibility, because investments in the
community are among the most discretionary (least
defensible according to the predominant economic per-
spective). The study is set up as a contest of two opposing
forces. Specifically, we examine the relationship between
available slack (cash balances held by large corporations)
and community-based firm performance. We argue that
financial slack should be positively associated with com-
munity-based performance because it allows a firm to
allocate resources to the community with minimal influ-
ence on day-to-day operations. However, we expect some
corporate governance characteristics to have both a direct
negative effect on community-based performance and a
moderating effect on the relationship between slack and
community-based performance.
This research provides two key contributions to the field.
First, we combine elements of agency theory, stakeholder
theory, and the literature on slack resources to provide a
new perspective to our understanding of community-based
firm performance. Second, we make a contribution to
corporate governance research by demonstrating that gov-
ernance mechanisms (board composition, professional
investment fund ownership, CEO ownership) mitigate the
relationship between slack and community-based firm
performance. In particular, we demonstrate that board
composition, professional investment fund ownership, and
CEO ownership decrease the affect of available slack (e.g.,
cash) on community-based firm performance.
In the larger scheme of things, these finding are a little
disappointing. They demonstrate that although there is
increasing support for a more enlightened perspective on
investing in communities as a source of shared value cre-
ation (Freeman et al. 2007; Porter and Kramer 2006, 2011),
those who govern larger corporations may still be stuck in
the mindset that such investments are not in the interests of
shareholders (Porter and Kramer 2011). Carroll (1979)
argued that the social responsibility of firms includes a
responsibility to earn profits, but also includes legal, moral,
and discretionary responsibilities (see also Schwartz and
Carroll 2003). Our evidence suggests that even when large
firms have slack resources that could be used for discre-
tionary community building activities with a minimal
410 J. S. Harrison, J. E. Coombs
123
influence on existing operations, there is still a tendency to
curtail such investments for economic reasons. Thus, the
priority is on the bottom (economic) portion of Carroll’s
(1979) pyramid of social responsibility.
Our paper proceeds as follows. First, we discuss the
factors that influence the amount of resources firms allocate
to their communities. We begin by reviewing why firms
might be inclined to make such investments, followed by
an explanation for why they may not be viewed favorably
by shareholders and those who represent their interests
such as the board of directors and institutional sharehold-
ers. We test our hypotheses longitudinally on a large
sample of firms and conclude by discussing how our results
affect theory development and practice.
The Community as a Primary Stakeholder
Stakeholders are groups and individuals who can affect, or
are affected by, the strategic outcomes of a firm (Freeman
1984; Jones and Wicks 1999). The primary stakeholders of
a firm, those that are most influential in determining
whether a firm can achieve and sustain high performance,
include customers, employees, suppliers, financiers, and
communities (Freeman et al. 2007). Regarding the debate
concerning whether communities are primary stakeholders,
Freeman et al. (2007) explain: ‘‘At least in a relatively free
and open society, however, community must also be on
that short list of primary stakeholders. The litany of com-
munity members using the political process to regulate the
firm is long and dreary, and it exists largely because our
framework of business has ignored community as an
important stakeholder (8).’’
We understand that the concept of community can be
very broad (Dunham et al. 2006). Indeed, all of the
stakeholders that interact with a firm might be considered a
part of the firm’s community. However, in this empirical
study we define the concept in terms of more narrowly
identified and easily observable phenomena such as phi-
lanthropy, relations with indigenous peoples, support for
housing and education, and similar factors. These phe-
nomena fall into the category of ‘‘community building’’
(Freeman et al. 2007, p. 68). Community building is a
stakeholder management capability, based on the notion
that firms should help build and support communities
where their employees live and work. Firms with this
capability take community into account when they make
investment and employment decisions. The outcomes from
such activities provide value to employees as well as other
stakeholders because they are able to live and work in a
good community. In addition, firms may enjoy advantages
stemming from a good reputation that can have positive
effects on sales, the ability to attract stakeholders to engage
in new deals and contracts, attraction of high-quality
employees, legislation and regulation that takes firm
interests into account, and even a more attractive stock in
the eyes of investors who make their decisions, in part,
based on the firm’s record of social responsibility (Bar-
ringer and Harrison 2000; Fombrun and Shanley 1990;
Harrison and St. John 1996; Jones 1995; Moskowitz 1972;
Porter and Kramer 2006; Turban and Greening 1996). On
the down side, a firm that neglects its perceived responsi-
bilities to the community may face value destroying out-
comes such as legal suits, adverse regulation, consumer
boycotts, strikes, walkouts, and bad press (Harrison and St.
John 1996). Avoiding these outcomes reduces expenses as
well as risks associated with variations in returns, thus
enhancing firm value (Graves and Waddock 1994).
An instrumental stakeholder perspective supports the
idea that attending to the interests of stakeholders helps a
firm achieve other goals such as profitability or shareholder
wealth (Donaldson and Preston 1995; Jones 1995). Some
fairly strong evidence now exists that firms that allocate
attention and value broadly among their primary stake-
holders also enjoy higher financial performance (Berman
et al. 1999; Choi and Wang 2009; Hillman and Keim 2001;
Preston and Sapienza 1990; Sisodia et al. 2007). None-
theless, it is difficult to determine the influence of com-
munity-based firm performance on financial performance
because most of the existing empirical work combines
community-based performance with other measures into an
overall measure of stakeholder-based performance (i.e.,
Cochran and Wood 1984; Griffin and Mahon 1997;
McWilliams and Siegel 2001; Ruf et al. 2001; Stanwick
and Stanwick 1998; Waddock and Graves 1997). A few
studies that have treated community-based performance as
a separate variable have found inconclusive results. Two
studies found no relationship between community-based
performance and financial performance (Agle et al. 1999;
Berman et al. 1999), while a third found a positive rela-
tionship for only one of four financial performance mea-
sures (Hillman and Keim 2001).
Because a positive link between community-based per-
formance and financial performance is not well established
and because resource allocations to the community tend to
be more discretionary than resource allocations to day-to-
day operations and satisfaction of debt obligations, the
community-based performance construct is well suited to
our investigation. First, a firm with low financial slack may
be more hesitant to make community investments than is a
firm that is flush with cash because they may find it difficult
to justify these investments from a purely financial per-
spective (Porter and Kramer 2011). Second, investments in
the community can absorb lots of slack when such
investments are available. Finally, the fact that investments
of this type are hard to defend from a pure shareholder
Slack, Governance, and Community-Based Performance 411
123
perspective allows us to examine the moderating influence
of corporate governance.
Available Slack and Community-Based Firm
Performance
Barnea and Rubin (2010) found a negative relationship
between debt servicing obligations (leverage) and whether
the organization was classified as socially responsible.
Leverage is one of several measures of the organizational
slack construct. Organizational slack refers to resources
available to the firm that are not needed for proper func-
tioning of the organization (Bourgeois 1981; Cyert and
March 1963). It falls into two broad categories: unabsorbed
and absorbed (Singh 1986; Tan and Peng 2003). Unab-
sorbed slack refers to currently uncommitted resources.
Because they are uncommitted, these resources are easy to
redeploy to other places in the organization. On the other
hand, absorbed slack refers to excess costs found in orga-
nizations. Re-deployment of absorbed slack to other uses is
more difficult because in involves cutting costs in one area
to move resources to other areas. In this study, we are
interested in unabsorbed slack because of its direct influ-
ence on managerial discretion (however, we also control
for absorbed slack).
The most fluid unabsorbed slack is sometimes referred
to as available slack. Typically available slack is opera-
tionalized by measuring a firm’s liquid assets (Bromiley
1991; Cheng and Kesner 1997; Davis and Stout 1992).
Because cash is the most fluid and flexible financial
resource a firm possesses, we believe it most closely fits
with the concept of management discretion that is central
to the theory we have discussed. Dittmar and Mahrt-Smith
(2007) focused on cash, explaining that ‘‘cash reserves are
easily accessible by management with little scrutiny and
much of their use is discretionary (600).’’ George (2005),
who used cash as a measure of ‘‘high discretion’’ slack, put
it this way: ‘‘Cash is the most easily deployed resource and
provides managers the greatest degree of freedom in allo-
cating it to alternate uses (666)’’. Cash is also an appro-
priate measure because high levels of cash may be an
indication of an agency problem (Davis and Stout 1992;
Dittmar and Mahrt-Smith 2007; Pinkowitz et al. 2006).
Thus, this operationalization is most useful when we dis-
cuss (and measure) the influence of corporate governance.
As Barnea and Rubin (2010, p. 74) put it, ‘‘Over-invest-
ment is relatively easy when firms have a lot of cash in
place.’’ In summary, because resource allocations to the
community tend to be more discretionary than regular day-
to-day resources allocations and because large cash bal-
ances greatly increase managerial discretion, we predict the
following:
Hypothesis 1 A positive relationship exists between
available slack (cash) and community-based performance.
Agency Theory, Corporate Governance,
and Community-Based Performance
Although available slack may encourage firms to invest
resources in their communities, such investments may not
always be considered attractive from a shareholder per-
spective. Jensen (1989) argues that available slack is a
‘‘central weakness and source of waste in the public cor-
poration (66).’’ For instance, in a situation with high
available slack, managers may allocate resources to uses
that they find personally satisfying but which have no or
very little positive impact on the economic performance of
the firm. Similarly, Bourgeois (1981) noted: ‘‘On the one
hand, slack can provide resources for creative behavior; or
slack can provide opportunities for coalition members to
engage in…non-optimizing behaviors (34).’’ Traditional agency theory deals with the responsibilities
of managers to act as trustworthy agents for shareholders
(Jensen and Meckling 1976). Managers, as agents for
shareholders, have a moral obligation to behave in share-
holders’ best interests, but sometimes they do not. When
this happens, an agency problem is said to exist (Fama and
Jensen 1983a, b). Numerous scholars have argued for or
found evidence that high slack is evidence of an agency
problem (Davis and Stout 1992; Dittmar and Mahrt-Smith
2007; Kalcheva and Lins 2007; Pinkowitz et al. 2006).
Managers prefer slack because it provides them with a
buffer against poor performance and an opportunity to
spend resources on perquisites such as jets and low-return
pet projects, to engage in excessive diversification and
empire building, or to participate in on-the-job shirking
(Dittmar and Mahrt-Smith 2007; Jensen 1986). However,
low slack is more attractive from a shareholder perspective
because it can prevent managers from engaging in these
types of behaviors (Grossman and Hart 1982; Harris and
Raviv 1991; Jensen and Meckling 1976).
Daily et al. (2003) define governance as ‘‘the determi-
nation of the broad uses to which organizational resources
will be deployed and the resolution of conflicts among
myriad participants in organizations (371).’’ Their defini-
tion contains a resource allocation component, which
suggests that slack may be a relevant construct. It also
contains the central stakeholder concept of balancing the
competing interests of stakeholders (Preston and Sapienza
1990). Following from this definition, we believe that
corporate governance systems should be expected to have
an influence on the relationships between organizational
slack and stakeholder-based performance.
Daily et al. (2003) also suggest that agency theory is the
‘‘overwhelmingly dominant’’ theoretical perspective used
412 J. S. Harrison, J. E. Coombs
123
in corporate governance studies. What is most pertinent to
our study is the widely held belief that particular gover-
nance mechanisms may work to motivate managers to be
more protective of shareholder interests (i.e., Dalton et al.
1998; Shleifer and Vishny 1997). Since many managers
believe that community investments are poor economic
investments (Porter and Kramer 2011), we expect that
characteristics frequently associated with effective gover-
nance may lead to reduced investments in this area, even in
the presence of substantial available slack. More specifi-
cally, we believe that governance should moderate the
relationship between slack and community-based perfor-
mance. Support for this perspective is found in research by
Dittmar and Mahrt-Smith (2007), who concluded that the
‘‘negative impact of large cash holdings on future operating
performance is cancelled out if the firm is well governed
(599).’’ Similar results were reported by Kalcheva and Lins
(2007). The governance mechanisms we have adopted for
this study represent three different approaches to aligning
the interests of managers and shareholders: boards of
directors, institutional investors, and chief executive officer
(CEO) ownership.
Prior research has highlighted the importance of board
independence as a measure of board effectiveness (Dalton
et al. 1998; Kassinis and Vafeas 2002). Underlying this
perspective is the assumption that boards have the power to
influence firms’ decisions and strategies, thereby influenc-
ing firm performance (Hillman et al. 2001). Researchers
have generally found support for this assumption (Hill and
Snell 1988; Judge and Zeithaml 1992; Zahra and Stanton
1988). Boards may exercise their influence and control in
an effort to ensure that management acts in the best
interests of shareholders (Baysinger and Hoskisson 1990;
Berle and Means 1932; Jensen and Meckling 1976; Pfeffer
and Salancik 1978; Walsh and Seward 1990). Boards that
consist largely of independent (non-employee) directors
are better able to influence and monitor management
actions to ensure that they are in accordance with share-
holders’ interests (Baysinger and Butler 1985; Dalton and
Kesner 1987).
In executing their role as monitors, boards may perceive
that expenditures on community unnecessarily decrease
returns to shareholders and may then use their influence to
minimize or terminate these investments. Boards with more
of an external composition, then, are expected to support
shareholder interests above those of other stakeholders
(Jensen and Meckling 1976). More formally:
Hypothesis 2a The percentage of outsiders on the board
decreases the effect of available slack on community-based
performance.
Institutional investors, which own two thirds of United
States equities (Bogle 2005) and account for approximately
three quarters of equities traded on the New York Stock
Exchange (Karmel 2004), are becoming more vocal in
influencing top managers both through boards and directly
(Barnard 1991; Useem 1996). These investors are holding
the board more accountable for organizational performance
and other outcomes (Chatterjee and Harrison 2001). In
fact, some large shareholders are targeting individual
directors for removal from the board if they do not measure
up in terms of commitment, independence, involvement,
and ownership (Byrne et al. 1997). However, institutional
owners vary according to their investment horizons (Bu-
shee 1998; Neubaum and Zahra 2006). More specifically,
professional investment fund managers (mutual fund and
investment bank managers) have a short-term orientation
(Bushee 1998; Johnson and Greening 1999) while pension
fund managers have a longer-term perspective (Gilson and
Kraakman 1991; Johnson and Greening 1999; Kochhar and
David 1996). Our focus is on the short-term focus of
professional investment fund managers because these
managers may encourage firms they invest in to adopt
polices and practices designed to maximize short-term
profitability (Chaganti and Damanpour 1991; Hoskisson
et al. 2002).
The primary objective for professional investment fund
managers is ensuring high current returns because their
own reward systems are closely tied to quarterly perfor-
mance (Johnson and Greening 1999; Starks 1987) and
because they may be replaced due to poor short-term fund
performance (O’Barr and Conley 1992). Through their
investments these managers may also hold large blocks of
stock that are difficult to sell quickly (Johnson and
Greening 1999). This short-term orientation coupled with
the difficulty of selling large blocks of stock may empha-
size strategies and policies associated with short-term
returns. Under these conditions, professional investment
fund managers likely view community-based expenditures
as unnecessary and a drain on the returns from their
investments. Instead, these managers may prefer slack
resources be invested in projects providing faster returns
such as international diversification or new technology
acquisition (Kochhar and David 1996). These observations
suggest the following hypothesis:
Hypothesis 2b Professional investment fund ownership
decreases the effect of available slack on community-based
performance.
Jensen and Meckling (1976) referred to agency theory as
‘‘a theory of ownership’’ (p. 309). Insider stock ownership,
or more specifically for our purposes, CEO stock owner-
ship, is cited as a mechanism for aligning the interests of
shareholders and managers (Barnea and Rubin 2010; Dal-
ton et al. 2003; Jensen and Meckling 1976; Kacperczyk
2009). Agency theory suggests that CEOs having
Slack, Governance, and Community-Based Performance 413
123
significant human capital tied to their firms are likely be
risk averse compared to shareholders who are able to
diversify their stock portfolios (Beatty and Zajac 1994).
CEO stock ownership, then, may be a means of altering
CEO decision-making such that they focus their intentions
on maximizing stockholder wealth (Jensen and Meckling
1976).
While greater levels of stock ownership are expected to
align CEO interests with those of stockholders, low CEO
ownership levels have been associated with the transfer of
firm resources to executive perquisites (Jensen and Mec-
kling 1976), shirking behavior (Demsetz and Lehn 1985),
and other outcomes such as excessive investments in pet
projects and other activities not in shareholders’ interests
(Jensen 1986; Shleifer and Vishny 1997). It seems likely
that investments in community-based activities would be
considered among pet projects and other activities not in
shareholders’ interests. From an agency theory perspective,
we would expect that CEOs owning a larger portion of
stock in their companies would be more likely to place the
interests of shareholders (their own interests) above those
of other stakeholders (McGuire, Dow and Argheyd 2003).
We focus on CEO ownership as opposed to the ownership
of all insiders (Barnea and Rubin 2010) because the CEO is
the person with the most influence on decisions to invest in
the community. This logic leads us to hypothesize:
Hypothesis 2c CEO stock ownership decreases the effect
of available slack on community-based performance.
Methodology
Our sample is derived from the Kinder, Lydenberg,
Domini, and Company (KLD) Socrates database. KLD is a
social equity fund advisor. Analysts at KLD base their
evaluations on ongoing reviews of thousands of global
news sources, surveys, and even on-site visits (Berman
et al. 1999). The database includes all firms included in the
Standard and Poor’s 500. In addition, KLD recently added
data for many more firms, resulting in a database that
contains data on over 3,000 U.S. corporations. The KLD
database is considered to be the most comprehensive social
performance database available for U.S. corporations and
is a primary data source used in stakeholder-based research
(Berman et al. 1999; Coombs and Gilley 2005; Graves and
Waddock 1994; Hillman and Keim 2001; Johnson and
Greening 1999; Turban and Greening 1996; Waddock and
Graves 1997). Sharfman (1996) established the construct
validity of the KLD measures while Waddock (2003)
referred to the KLD measures as the ‘‘de facto’’ standard
for research on the topic. Similarly, Barnea and Rubin
(2010), who explain why ‘‘it is extremely hard to quantify
the amount of CSR spending of US companies (p. 71),’’
state that the vast majority of these types of studies make
use of KLD data.
Firm-level financial and control variables were collected
from the Compustat database. Governance data came from
Compact Disclosure. Complete data for our variables were
available for 1060 firms from a total of 44 two-digit SIC
code industries. Firms in the database had between 1 and
11 years of data, resulting in an unbalanced panel data set.
Dependent Variable
Our community-based performance variable is derived
from ratings data in the KLD database (Berman et al. 1999;
Hillman and Keim 2001; Johnson and Greening 1999;
Waddock and Graves 1997). After examining public
records, surveys, and firm facilities (Berman et al. 1999),
KLD analysts give each firm a ‘‘strength’’ and a ‘‘concern’’
score for the community relations dimension. The dimen-
sions associated with strengths regard various types of
charitable giving, support for housing and education, strong
indigenous people’s relations, volunteer programs and
other notably positive community activities, whereas the
weaknesses concern areas such as investment controversy,
negative economic impact, poor indigenous peoples rela-
tions, tax disputes, and other concerns.
The ratings provided by KLD can be converted into
classifications that indicate the seriousness of strengths or
concerns, with a blank indicating no special concerns or
strengths. Based on prior research we coded a blank as 0, a
moderate strength as 1, a strong strength as 2, a moderate
concern as -1, and a strong concern as -2 (Coombs and
Gilley 2005; Johnson and Greening 1999; Turban and
Greening 1996). The community-based performance mea-
sure is the sum of each firm’s concern and strength ratings.
Although Mattingly and Berman (2006) prefer measuring
concerns and strengths separately rather than in a summary
measure, we believe that a summary measure is better
suited to our theory because the weaknesses offset the
strengths, providing a more accurate picture of the firm’s
support of the community. For instance, a firm could score
high on strengths in spite of some looming weaknesses.
This situation would paint an inaccurate picture of the
firm’s real community performance, which could add dis-
tortion to our empirical models and provide a false negative
in terms of our statistical tests. In addition, we feel com-
pelled to remain consistent in our measurements with most
of the other stakeholder-based performance studies.
Primary Variables
We collected data for three governance variables repre-
senting different types of governance. Board independence
414 J. S. Harrison, J. E. Coombs
123
is measured as the percentage of outsiders on the board.
Board independence data was collected from Compact
Disclosure. Professional investment fund ownership is the
proportion of stock owned by investment management
funds (mutual funds, investment banks). Following John-
son and Greening (1999), we collected Professional
investment fund investment data from annual versions
(1990–2004) of the Spectrum ownership database included
as part of Compact Disclosure. We used annual editions of
the Investment Company Institute’s Directory of Mutual
Funds to identify mutual funds. We identified investment
banks by cross-referencing Compact Disclosure and
Compustat data. CEO ownership is the proportion of stock
owned by the CEO and was collected from the Execucomp
database.
Consistent with our theory, we use cash as our measure
of available slack (scaled in 100 mm). Because cash is the
most fluid and flexible financial resource a firm possesses,
we believe it most closely fits with the concept of man-
agement discretion that is central to the theory we have
discussed in this paper. As we explained in our theory
section, cash is the most easily deployed resource available
to management and its use typically is not subject to much
scrutiny (Barnea and Rubin 2010; Dittmar and Mahrt-
Smith 2007; George 2005). In addition, high levels of cash
may be evidence of an agency problem (Davis and Stout
1992; Dittmar and Mahrt-Smith 2007; Pinkowitz et al.
2006).
We considered adjusting cash by firm size or current
assets, but decided against it because larger firms hold a
proportionally smaller amount of cash (Dittmar and Mahrt-
Smith 2007), possibly because the scope of their operations
helps to smooth out some of the financial volatility and
possibly also because they have greater access to financial
markets in the event of an unexpected contingency. In this
sense, cash is already partially adjusted for size. Of course,
we also added a size variable to each of our models, which
helps to eliminate performance variance that is explained
purely by size. We also examined common transformations
for this variable, but discovered that the direct linear
relationship was the more powerful predictor. Consistent
with Aiken and West (1991), we mean centered our inde-
pendent variables prior to creating interaction terms.
Control Variables
Nine control variables were used in the analyses: firm
size, return on sales, shareholder returns, R&D intensity,
advertising intensity, diversification, recoverable slack,
potential slack, and pension fund ownership. Prior
research has hypothesized or reported a significant rela-
tionship between firm size and stakeholder-based perfor-
mance (Johnson and Greening 1999). We therefore
include a widely used measure of size, the natural loga-
rithm of sales, to control for this potential relationship. In
addition, research suggests that firm performance influ-
ences stakeholder performance (Graves and Waddock
1994). To control for this influence, we include two
performance control variables, return on sales and
shareholder return, due to the multi-dimensional nature
of firm performance (Venkatraman and Ramanujam
1986).
We also added three other variables that might be
expected to influence stakeholder-based performance. Firm
research and development (R&D) activities can influence
stakeholder-based performance with regard to products and
the environment. We added R&D intensity to control for
these influences and measured it as R&D expenditures
divided by sales. A firm’s advertising can influence the
way a firm is perceived and can also communicate to the
market some of the activities the firm is pursuing that are
favorable from a stakeholder perspective. Consequently,
we added advertising intensity, which is the ratio of
advertising to sales. Because the reporting of R&D and
advertising expenses is a legal requirement for large cor-
porations and because Compustat is very careful to tran-
scribe all available data from financial statements, we
made the assumption that firms that did not report one of
these expenses for a particular year did not have any
expenditures in that year (Miller 2006). We also included a
measure of diversification because firms that are highly
diversified serve many more constituencies and therefore
may not be able to devote sufficient resources to any one
stakeholder. We used the entropy index to measure total
diversification. Hoskisson et al. (1993) established the
construct validity of this widely used diversification
measure.
Available slack levels are likely to be related to other
types of financial slack. To better isolate the direct influ-
ence of available slack on community-based performance,
we controlled for two other commonly mentioned types of
slack. To measure potential slack we used the equity-to-
debt ratio, which has also been widely used in slack
research (Bromiley 1991; Cheng and Kesner 1997; Palmer
and Wiseman 1999). Although it does not provide the same
level of liquidity as available slack, a high equity-to-debt
ratio is an indication of substantial borrowing power. This
variable is also important in light of the findings of Barnea
and Rubin (2010) that leverage has a negative influence on
corporate social responsibility rankings. Although we
included this variable as it has been used in past research,
we note that it is also the inverse of a common measure of
leverage (debt-to-equity) and thus serves to control for the
influences documented previously.
We also included a measure of recoverable (or absor-
bed) slack, defined as selling, general, and administrative
Slack, Governance, and Community-Based Performance 415
123
expenses (SGA) divided by firm sales, which is the mea-
sure most widely used for this construct (i.e., Bromiley
1991; Palmer and Wiseman 1999; Reuer and Leiblein
2000; Singh 1986). This form of slack is referred to as
recoverable because, in theory, a firm’s managers could
eliminate excess costs and reallocate the savings to other
resource areas within the firm. Lastly, pension fund own-
ership is the proportion of stock owned by pension funds.
Following Johnson and Greening (1999), we collected
pension fund data from annual versions (1990–2004) of the
Spectrum ownership database included as part of Compact
Disclosure. We used annual editions of Pensions &
Investments to identify pension funds.
Several other industry and firm-level control variables
used in prior research were included in our study to increase
confidence in our findings. Consistent with Hillman and
Keim (2001), industry dummy variables were created at the
two-digit SIC code level because prior research has shown a
relationship between industry affiliation and stakeholder
management (Brammer and Millington 2003a, b; Coombs
and Gilley 2005; Hillman and Keim 2001; Hillman et al.
2001; Waddock and Graves 1997).
Endogeneity and Reverse Causality
Kacperczyk (2009) has recently noted that prior empirical
work on the relationship between effective governance and
corporate attention to stakeholders has been ‘‘plagued by
concerns about endogeneity’’ (p. 267). More specifically,
the central concern regards reverse causality, where sig-
nificant relationships between governance and corporate
attention to stakeholders may result not only from gover-
nance’s influence on attention to stakeholders, but because
firms’ stakeholder relationships shape the firm’s gover-
nance mechanisms. Kacperczyk (2009) emphasized that if
not addressed, endogeneity resulting from reverse causality
may bias regression coefficients such that non-significant
relationships are reported as significant or significant
relationships are reported to be non-significant (Woolridge
2001). Although a 1-year lag, coupled with our longitudi-
nal research design, provides some assurance that reverse
causality is not significantly affecting our results (Benner
and Tushman 2002), we followed the process outlined by
Hillman and Keim (2001) and found little evidence of a
recursive relationship in a series of additional analyses
designed specifically to test for reverse causality. More
specifically, we found no significant relationship between
community performance at time t and any of our gover-
nance or slack variables at time t ? 1. The only significant
recursive relationship we identified was between commu-
nity performance and advertising intensity. Thus, we con-
clude that our data is not biased by endogeneity resulting
from reverse causality.
Estimation Methods
An unbalanced panel data set was developed and analyzed
for the period 1990–2004. Due to the likelihood that both
firm-specific and time-specific effects are present, we use a
panel estimation procedure (Chamberlain 1982) including
a White (1980) heteroskedasticity-consistent variance–
covariance matrix. We were unable to use a fixed-effects
specification (Greene 1995) because our industry control
variables are invariant over time. We therefore used a
random-effects model (Greene 1995) with the firm as the
primary stratification variable. Our panel data set included
a total of 4781 observations. As Bergh (1993) suggested,
we included year dummy variables to eliminate year-spe-
cific heterogeneity. We lagged the stakeholder-based per-
formance measures 1 year due to the time it takes for
managers to respond to influences associated with slack
and the control variables.
Results
Table 1 reports descriptive statistics and correlations for
the variables included in this study. The results for our tests
of Hypotheses 1 and 2 are shown in Table 2. Both dis-
played models have variance inflation factors below 4.0,
supporting the conclusion that multicollinearity is not a
problem in our data set (Hair et al. 1995).
Model 1 in Table 2 presents our control variable results.
Pension fund ownership has a direct and significant nega-
tive effect on community-based performance in this model,
supporting the view that pension fund owners, despite their
longer-term investment perspective, still may influence
management to minimize community-based investments.
Also, the relationship between community-based perfor-
mance and advertising intensity is positive and highly
significant, perhaps an indication that firms that do a lot of
advertising would also tend to be more sensitive to the
attitudes of members of the community regarding their
firm.
Model 2 presents the results for Hypotheses 1. As we
expected based on our theory, available slack has a
strongly positive relationship with community-based per-
formance. Thus, Hypothesis 1 is supported.
Model 3 presents results for our Hypotheses 2a, 2b, and
2c. Hypothesis 2a argued the percentage of outsiders on the
board would decrease the effect of available slack on
community-based performance. Hypothesis 2b stated pro-
fessional investment fund ownership decreases the effect of
available slack on community-based performance while
Hypothesis 2c argued CEO ownership would similarly
moderate the relationship between available slack and
community-based performance. The empirical results
416 J. S. Harrison, J. E. Coombs
123
support each of our hypotheses. In support of Hypothesis
2a, we found a negative and significant interaction between
the percentage of outsiders on the board and available
slack. Supporting Hypothesis 2b, the coefficient for the
interaction of professional investment fund ownership and
available slack is negative and significant. Consistent with
Hypothesis 2c, CEO ownership decreases the effect of
available slack on community-based performance. Thus,
each of our governance variables moderates the influence
of cash on community-based performance. Furthermore,
the signs are all negative, indicating a lessening of the
influence of cash in this relationship. Specifically, Figs. 1,
2, and 3 show support for the decreasing effects presented
in Hypotheses 2a, 2b, and 2c, respectively.T a
b le
1 D
e sc
ri p
ti v
e st
a ti
st ic
s a n
d c o
rr e la
ti o
n c o
e ffi
c ie
n ts
M e a n
S D
1 2
3 4
5 6
7 8
9 1
0 1
1 1
2 1
3
1 .
F ir
m si
z e
7 .9
0 1
.4 1
2 .
R e tu
rn o
n sa
le s
0 .0
4 0
.7 7
0 .0
5
3 .
S h
a re
h o
ld e r
re tu
rn 1
7 .0
2 5
5 .1
1 0
.0 1
0 .0
5
4 .
R &
D in
te n
si ty
0 .0
2 0
.0 6
- 0
.1 6
- 0
.0 8
0 .0
4
5 .
A d
v e rt
is in
g in
te n
si ty
0 .0
1 0
.0 3
0 .0
3 0
.0 2
0 .0
0 -
0 .0
1
6 .
D iv
e rs
ifi c a ti
o n
2 .8
5 7
0 .6
3 -
0 .0
0 0
.0 1
- 0
.0 0
- 0
.0 2
- 0
.0 2
7 .
R e c o
v e ra
b le
sl a c k
0 .1
7 0
.2 5
- 0
.2 5
- 0
.1 7
0 .0
1 0
.3 9
0 .2
3 -
0 .0
2
8 .
P o
te n
ti a l
sl a c k
1 .1
9 4
.9 5
- 0
.2 5
- 0
.1 0
0 .0
2 0
.1 7
0 .0
2 -
0 .0
1 0
.7 1
9 .
P e n
si o
n fu
n d
o w
n e rs
h ip
0 .0
6 0
.0 8
- 0
.0 4
- 0
.0 3
0 .0
2 -
0 .0
0 -
0 .0
7 0
.0 2
- 0
.0 2
- 0
.0 3
1 0
. P
e rc
e n
ta g
e o
f o
u ts
id e rs
o n
th e
b o
a rd
0 .7
7 0
.1 3
0 .1
9 0
.0 1
- 0
.0 0
- 0
.0 1
- 0
.0 7
0 .0
3 -
0 .1
0 -
0 .1
5 0
.1 1
1 1
. P
ro fe
ss io
n a l
in v
e st
m e n
t fu
n d
o w
n e rs
h ip
0 .0
6 0
.0 8
- 0
.2 2
0 .0
0 0
.0 1
- 0
.0 1
- 0
.0 4
0 .0
3 0
.0 5
0 .0
1 0
.0 6
0 .0
1
1 2
. C
E O
o w
n e rs
h ip
1 .6
0 4
.8 7
- 0
.1 1
0 .0
2 0
.0 2
- 0
.0 4
0 .1
0 -
0 .0
2 0
.0 4
0 .0
7 -
0 .0
7 -
0 .2
2 -
0 .0
1
1 3
. A
v a il
a b
le sl
a c k
5 6
6 .3
4 1
7 7
3 .3
0 0
.4 4
0 .0
1 0
.0 3
0 .0
9 0
.0 3
- 0
.0 2
- 0
.0 3
- 0
.0 4
- 0
.0 8
0 .0
5 -
0 .1
2 -
0 .0
2
1 4
. C
o m
m u
n it
y 0
.2 9
0 .7
1 0
.2 3
0 .0
2 0
.0 2
0 .0
1 0
.1 7
- 0
.0 2
0 .0
5 -
0 .0
4 -
0 .0
7 0
.0 7
- 0
.1 3
- 0
.0 0
0 .2
2
C o
rr e la
ti o
n s
g re
a te
r th
a n
o r
e q
u a l
to 0
.0 2
o r
le ss
th a n
o r
e q
u a l
to -
0 .0
2 a re
si g
n ifi
c a n
t a t
th e
0 .0
5 le
v e l
Table 2 Effect of available slack and corporate governance on community-based performance
Model 1 Model 2 Model 3
Control variables
Firm size 0.11*** 0.09*** 0.09***
Return on sales 0.00 0.00 0.00
Shareholder return 0.01 0.00 0.00
R&D intensity 0.23 0.17 0.17
Advertising intensity 1.24** 1.27** 1.19*
Diversification -0.00 -0.00 -0.00
Recoverable slack 0.12 0.11 0.11
Potential slack -0.01 -0.01 -0.01
Pension fund ownership -0.24** -0.22 �
-0.23 �
Primary variables
Percentage of outsiders on the
board
0.14 0.15 0.12
Professional investment fund
ownership
-0.21 �
-0.20 -0.35**
CEO ownership -0.00 -0.00 -0.00
Available slack 0.06*** 0.04**
Interaction effects
Available slack 9 outsiders on
the board
-0.02**
Available slack 9 professional
investment fund ownership
-0.05**
Available slack 9 CEO
ownership
-0.06**
F 16.75*** 17.60*** 17.56***
Adj-R2 0.17 0.19 0.20
N 4781 4781 4781
Note: Industry and year dummy variables were omitted for presen- tation clarity �
p \ 0.10 * p \ 0.05 ** p \ 0.01 *** p \ 0.001
Slack, Governance, and Community-Based Performance 417
123
Discussion
This study demonstrates a positive and significant rela-
tionship between the most available form of slack and
community-based performance. It both confirms and
extends findings by Barnea and Rubin (2010) that firms
with a high level of insider ownership were less likely to
have high social responsibility rankings. It also builds from
the pioneering work of Brammer and Millington (2003a),
who found that management structure can influence the
levels and types of community involvement. Our study
focuses on how financial slack and three important
corporate governance characteristics are associated with
community-based performance in a large sample of cor-
porations over several years. Of particular importance, and
unique to this study, we find that board independence
moderates the relationship between slack and community-
based performance. The other two governance variables,
CEO ownership and investment fund ownership, demon-
strate similar results. Thus, we have identified a set of
countervailing forces.
Our findings build on and extend studies of slack. Our
models support the idea that firms with high slack are more
likely to invest in areas that tend to be more discretionary
in nature (Nohria and Gulati 1996). To the extent that
community-based investments can enhance a firm’s moral
capital (Godfrey 2005) and encourage stakeholders to give
the firm ‘the benefit of the doubt’, slack expended on the
firm’s community may insulate it from some future con-
tingencies that might otherwise harm the firm. Thus, slack
may be used to create a buffer against future uncontrollable
contingencies (Milliken and Lant 1991; Thompson 1967).
On the other hand, advocates of agency theory explicitly
challenge the view that slack is beneficial in firms, sug-
gesting instead that slack is used by managers to achieve
their own personal goals, which may include excessive
diversification, empire building, and shirking (Demsetz and
Lehn 1985; Jensen and Meckling 1976; Tan and Peng
2003). To ensure management acts on behalf of share-
holders, agency theorists suggest a number of mechanisms,
of which we examined three. Our results support an agency
theory perspective because board composition, profes-
sional investment fund ownership, and CEO stock owner-
ship all weakened the relationship between available slack
and community investment. The results suggest that these
governance mechanisms work to control management
-0.35
-0.3
-0.25
-0.2
-0.15
-0.1
-0.05
0
Low Cash High Cash
C om
m u
n it
y
Low Percentage
Outsiders on the Board
High Percentage
Outsiders on the Board
Fig. 1 The moderating influence of percentage of outsiders on the board on the relationship between available slack and community-
based firm performance
-0.3
-0.25
-0.2
-0.15
-0.1
-0.05
0
Low Cash High Cash
C om
m u
n it
y
Low Professional
Investment Fund
Ownership
High Professional
Investment Fund
Ownership
Fig. 2 The moderating influence of professional investment fund ownership on the relationship between available slack and commu-
nity-based firm performance
-0.35
-0.3
-0.25
-0.2
-0.15
-0.1
-0.05
0
Low Cash High Cash
C om
m u
n it
y
Low CEO Ownership
High CEO Ownership
Fig. 3 The moderating influence of CEO ownership on the relation- ship between available slack and community-based firm performance
418 J. S. Harrison, J. E. Coombs
123
actions when those actions pertain to investing slack
resources in the community (Kacperczyk 2009).
It is important to note that although our results support
an agency perspective on community-based performance,
they are contrary to recent work that advocates for and, in
some cases, finds that firms are involved in more com-
munity building activities. In other words, although agency
theory has helped us make predictions with regard to how
organizational decision makers respond to the influences of
slack and three components of corporate governance when
making community investment decisions, we acknowledge
that those decisions may not be optimal from a total value-
creation perspective. The executives making those deci-
sions likely are influenced by existing economic arguments
primarily based on agency theory that suggest that alloca-
tions of resources to the community are poor financial
investments (Henderson 2001; Jensen 2001; Porter and
Kramer 2011). In contrast, stakeholder theory discusses
these sorts of investments as community building (Freeman
et al. 2007), and suggests that they can lead to positive
outcomes such as creation of a good community in which
to work and live, a strong reputation that can enhance sales
and the ability of the firm to retain existing and build new
business relationships, attraction of high-quality employ-
ees, favorable legislation and regulation, a stock that is
attractive to socially conscious investors and avoidance of
negatives such as boycotts, strikes, and bad press. Our
results suggest that the executives have not yet embraced a
shared-value approach to management in which societal
interests and firm economic interests are in harmony (i.e.,
Freeman et al. 2007; Porter and Kramer 2011). Conse-
quently, these executives may actually be limiting the
value-creating potential of their firms.
In spite of its potential contributions, this study has
several limitations. Perhaps the most obvious limitation is
that we were not able to measure actual dollar resource
allocations associated with community investments. As we
mentioned previously, our assumption is that allocations of
attention and resources will be reflected in the data that
KLD collects on corporate activities with regard to their
communities. Barnea and Rubin (2010) explain why it is
hard to quantify these types of investments, and we concur;
however, future research may be able to address this
weakness by developing alternative measure of community
performance associated with identifiable firm investments
and through use of richer data sources such as cases.
We also acknowledge that our study applies only to
large, public U.S. corporations. Non-U.S. firms may be
subject to a much different set of influences with regard to
stakeholder management. Brammer et al. (2009) demon-
strate the importance of context in studies of this type.
They discover that charitable giving varies depending on
the country of interest. Specifically, they find a positive
impact on charitable giving in those countries that lack
political rights and/or civil liberties. Zappalà and Cronin
(2003) also provide evidence that suggests that countries
make a difference when examining this topic. Their study
finds that top Australian companies are engaging in a very
high level of corporate community involvement, including
an increased use of partnerships with non-profits. These
findings suggest that company norms, government and
stakeholder pressures within countries can influence orga-
nizational practices. The importance of a more global
perspective is supported by Carroll (2004), who argued that
the world stage is becoming an important venue for social
responsibility debates.
Future research could extend the theory developed in
this paper to smaller public or private firms. Zappalà and
Cronin (2003) discovered that firm size was influential in
determining the level of corporate community involve-
ment, suggesting that size could indeed be an important
factor in this discussion. Case-based research involving
firms of a variety of sizes as well as from a variety of
regions and countries would provide richer data regarding
the impact of geographical context on community invest-
ments. For instance, it would be interesting to examine
managers’ intentions regarding why they did or did not
make community investments. It is possible that these
investments may have been initiated to develop moral
capital as insurance against future contingencies or possi-
bly, as agency theorists suggest, for pet projects. Case-
based or even survey research could overcome this concern
by examining why managers decide to make community
investments.
In conclusion, this study integrated theory from stake-
holder theory, agency theory, finance and strategic man-
agement to explain the relationship between organizational
slack and community-based performance. We found a
positive relationship between available slack, measured as
cash held, and community-based performance. More
importantly, we found that board independence, investment
fund ownership and CEO ownership moderate the rela-
tionship between available slack and community-based
performance.
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