CORPORATE SOCIAL RESPONSIBILITY AND STRATEGIC RISK
MANAGEMENT: AN EMPIRICAL INVESTIGATION OF
REINSURANCE AND PHILANTHROPY?
INTRODUCTION
Corporate social responsibility (CSR)1 has been a topic of significant strategic management
interest over the last two decades (e.g., see Lev et al., 2010; Barnett and Salomon, 2012). In
particular, the link between CSR and risk has received considerable attention in recent years
(e.g. Godfrey et al., 2009; Jo and Na, 2012). In this study we advance this literature by
providing one of the first systematic and empirical analysis of the relationship between CSR
and risk. To this end, we focus on the insurance (non-life) industry – one of the most
important industries in the world and for the UK economy, generating more than £47 billion
(US$76 billion) in annual net (of reinsurance) premiums (Association of British Insurers,
2011). Using the insurance industry allows us to capture a monetary proxy for ‘risk’ in terms
of reinsurance, which is the strategic risk transfer function in international insurance markets
(Adams et al., 2012). Further, the insurance industry has long had an indirect interest in the
CSR (e.g., environmental protection) activities of its corporate clients (e.g., oil and gas
companies) as part of its routine underwriting and risk management activities (Hsu, 2012).
However, in recent years As such it is a key strategic risk management technique used in the
insurance industry (Abdul Kader et al., 2010). To examine the relations between risk and
CSR, we utilize a dynamic panel data research design using data for the 12 years 1999 to
2010 drawn from the United Kingdom’s (UK) non-life (property-liability) insurance industry.
In line with prior research (e.g., Godfrey et al., 2009), we treat CSR as the dependent variable
of analysis and argue that CSR activity is closely linked with the risk management strategies
of insurance firms. We follow recent research (e.g., Brammer and Millington, 2004; 2008;
Lev et al., 2010) and use charitable donations as our measure of CSR. We consider that
corporate charitable giving is a good proxy in the context of the UK as it constitutes a ‘clean’
measure of CSR. Moreover, unlike other countries such as the US, corporate donations in the
UK tend to be made directly by companies rather than through intermediary philanthropic
foundations (Brammer and Millington, 2008, p. 1326). Further, to the extent that corporate
giving can be likened to ‘brand (reputation) insurance’ (Godfrey, 2005) it performs a strategic
function that is likely to be valued by reinsurance companies and other stakeholders (e.g.,
policyholders, investors, and industry regulators) who are primarily concerned with the longterm solvency of insurance companies2. As with other companies operating in the financial
services sector, the products of insurance companies are essentially ‘promissory contracts’
that give policyholders fixed claims to indemnification against pre-specified losses to
productive assets. Therefore, we use reinsurance as our main independent variable, which, as
a pure indemnity mechanism, cannot be used for speculation (unlike financial risk tools such
as derivatives) (e.g., see Zou and Adams, 2008). This means that we offer a potentially robust
test of the reinsurance-CSR relation compared with other research that uses other risk
management data such as derivatives.
1
Godfrey, Merrill and Hansen (2009, p.427) argue that CSR is a (potentially costly) discretionary strategic
activity taken by corporate managers to improve wider societal conditions beyond the narrow economic
function of the business entity.
2
Abdul Kader et al. (2010) note that the decision of insurance company managers to purchase reinsurance is
influenced by strategic solvency, underwriting, and tax management considerations that involve trade-offs
(choices) that can vary across time. However, their evidence suggests that in the main strategic solvency
management considerations tend to dominate the reinsurance buying decisions of insurance companies.
1
To frame our research we follow Hill and Jones (1992), Adams and Hardwick (1998), and
Brammer and Millington (2004), and utilize a stakeholder theory perspective. Stakeholder
theory focuses on the role of managers in interacting with various stakeholder groups and
balancing their (often conflicting) claims to ensure that the firm is financially successful and
remains a ‘going concern’ (Adams and Hardwick, 1998). Stakeholder theory is a particular
compelling conceptual lens through which to frame our study as the insurance industry has a
multiplicity of internal and external constituents, including policyholders, investors,
managers, employees, and industry regulators (Bhambri and Sonnenfeld, 1988). Indeed,
stakeholder theory explicitly acknowledges the heterogeneity of corporate and institutional
stakeholders, and as a conceptual framework it accords with recent advances in corporate
governance research (Hambrick et al., 2008, pp. 383-384). The use of stakeholder theory is
further underpinned by prior studies that highlight the important function of the Chief
Executive Officer (CEO) and other board members in making resource decisions including
expenditures on philanthropic ventures. For example, Lan and Heracleous (2010, pp. 303305) suggest that the corporate board acts as a ‘mediating hierarch’ of stakeholders’ resource
demands rather than purely a monitoring and control mechanism protecting shareholders’
economic interests as ascribed by conventional agency theory. Recent research (e.g., Godfrey
et al., 2009; 2010) also argues that in the face of resource-competing sectional interests, CSR
engagement can help managers of firms signal ‘moral capital value’ that might appease and
assure stakeholders in the event of a severe ‘shock event’ such as a major governance failure
(fraud). Therefore, in our view stakeholder theory has conceptual appeal for the conduct of
the present study.
Our research makes three major contributions. First, we advance the management literature
that views CSR activity as an integral part of organizational strategy and governance.
Specifically, while recent studies (e.g. Hambrick et al., 2008; Walls et al., 2012) emphasize
that the CSR function is an integral part of ‘good’ corporate governance our study is the first
to test the influence of reinsurance – a commonly used risk management tool in the insurance
industry – on corporate donations - a common indicator of CSR behavior. This attribute
enables stakeholders (e.g., investors, industry regulators, and policymakers) to better
understand the managerial motives for, and economic value of, CSR activities, and thereby,
help them to make better-informed judgements as to the future contributions of business to
economy and society. This is particularly apt in the case of the insurance industry, which is
an important industrial sector in most developed economies (e.g., see Webb and Pettigrew,
1999; Hsu, 2012). Second, our focus on the insurance industry provides a ‘natural control’
against the potentially confounding effects that can arise in cross-sectional industry studies of
CSR (e.g., as a result of different managerial motives and environmental exigencies) (e.g.,
see Brammer and Millington, 2008; Godfrey et al., 2010). This advantage again enables us to
conduct a robust test of our research hypotheses. Third, we use two-stage econometric
procedure. We first conduct a Probit analysis to examine the likelihood of corporate
charitable giving, and second, we adopt a dynamic panel research design that employs
Generalized Method of Moments (GMM) (Arellano and Bond, 1991) to test changes in the
amount of charitable donations made by insurance firms over time. These econometric
procedures allow us to adopt a time-series perspective to charitable giving that is often
missing in prior strategic management research (Brammer and Millington, 2008) as well as
control for possible two-way causality (endogeneity) that can arise in corporate governancerelated research (e.g., Jo and Harjoto, 2011).
CONCEPTUAL FRAMEWORK AND HYPOTHESES DEVELOPMENT
2
In this part of the paper we formulate a set of testable hypotheses regarding the relation
between reinsurance and corporate philanthropy. In addition, we develop a hypothesis related
to how board composition may influence and moderate this interaction.
Figure 1: The Reinsurance-Board-CSR Relation: A Conceptual Framework
Board
composi on
H2
Reinsurance
Corporate
philanthropy
H1a/b
Hypothesized rela ons
Control variables
•
•
•
•
•
Firm size
Ownership structure
Profitability
Leverage
Firm age
Our conceptual framework (see Figure 1) draws upon previous work in both the insurance
and CSR fields. More specifically, we advance the work of Godfrey (2005), Godfrey et al.
(2010) and Brown (2006) and develop two alternative test hypotheses, which argue that there
is a negative/positive relation between the levels of reinsurance and corporate donations. In
addition, we draw on the work of Hambrich et al. (2008), Barnea and Rubin (2010), and
Walls et al. (2012) to argue that the relation between reinsurance and corporate philanthropy
is moderated by board composition.
Reinsurance-Corporate Donations Relation
There are two main views on the relation between reinsurance and corporate philanthropy.
On the one hand, as corporate philanthropic investment and reinsurance perform similar
functions in mitigating market imperfections (e.g., information asymmetries and agency
problems) a substitutive relation could exist between the amount of reinsurance purchased by
primary insurance carriers and the level of charitable giving. In other words, reinsurance
spending is predicted to negatively influence the amount of funds invested in corporate
philanthropy. As noted earlier, reinsurance is the primary and all-pervasive strategic risk
management device used in the non-life insurance industry. This reflects not only its
historical role as a strategic risk transfer mechanism in the insurance industry (Adams et al.,
2012) but also the existence of a deep and active international reinsurance market that
effectively matches supply with demand (Froot and O’Connell, 2008). Nevertheless,
reinsurance is potentially costly and so represents an opportunity loss to shareholders unless
it preserves or adds to value to the insurance firm and concomitantly advances the economic
interests of other resource-competing stakeholders such as policyholders and industry
regulators. As CSR activities perform a similar ‘insurance protection’ function in the non-life
insurance industry as reinsurance, stakeholder theory implies that the board of directors as a
‘mediating hierarch’ of stakeholder resources will trade-off reinsurance spending against
investment in CSR projects (e.g., see Lan and Heracleous, 2010). This reasoning suggests a
3
negative relation between reinsurance and corporate donations. Consequently, we hypothesis
that:
HYPOTHESIS 1a: There is a substitutive (negative) relation between reinsurance and
corporate donations.
On the other hand, the empirical linkage between reinsurance and corporate donations
could be complementary in the face of market imperfections. More specifically, insurers may
use reinsurance as a claims contingent capital alternative to holding equity and reserves
(Abdel Kader et al., 2010). This has two potential advantages for non-life insurance firms.
First, reinsurance tends to be cheaper than such alternative sources of external capital; and
second, reinsurance can help stabilize period earnings and reduce future taxes - particularly
under the progressive corporate tax codes that exist in developed economies such as the UK
and US (Abdul Kader et al., 2010). As such, reinsurance not only operates as a risk
management tool, but also adds value for shareholders by reducing earnings volatility and
providing a tax shield benefits. In turn, this may encourage primary insurers to increase their
investment in CSR activities (Hsu, 2012). Therefore, an alternative hypothesis is:
HYPOTHESIS 1b: There is a complementary (positive) relation between reinsurance
and corporate donations.
Board Composition and Moderating Effects
Board composition could influence the relation between reinsurance and corporate
philanthropy, as risk management is an integral part of the corporate governance nexus of
insurance firms (e.g., see Harjoto and Jo, 2011). Indeed, research suggests that board
composition plays a significant role in shaping the financial strategies in the insurance
industry (Hardwick et al., 2011). Therefore, we use a range of board level variables to capture
the variety and nuances of board composition. These include board size, the proportion of
outside (non-executive) board members, Chief Executive Officer (CEO)/Chairman
separation, and the degree of female and professional representation on the board. We argue
that these variables directly influence propensity to financially support philanthropic causes,
but also moderate the relation between reinsurance and corporate philanthropy.
PRELIMINARY FINDINGS
Preliminary results indicate that reinsurance is positively related to the decision to donate to
charities as suggested by our alternative hypothesis. This suggests that reinsurers could play
an hitherto unrecognised but nonetheless important role in promoting strategic CSR decisions
in the insurance industry. Additionally, governance variables such as the size of the board and
the proportion of outsider membership are, as we expected, positively related to the corporate
decision to make charitable contributions, and also moderates the relationship between
reinsurance and donations.
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