CORPORATE SOCIAL RESPONSIBILITY REPORTING AND EXECUTIVE COMPENSATION IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1 Background to the study

The increased interest in the role of business in society today has been prompted by increased attention to the awareness of environmental and ethical and moral issues. It means our society has become increasingly concerned that greater influence and success by local and international organisations has not been equivalent to effort and desire in addressing important social issues including poor treatment of employees and labourers, faulty production output and environmental degradation or resultant pollution by the industries emanating from their activities as it has continuously been reported in the mass media. It is therefore important for all and sundry to realize that the public has countlessly decried the demeaning treatment by organisations and the outcry for increased social responsibility by firms will not disappear if these firms fail to respond appropriately and in a timely manner to the challenges these pose for our societies.

The idea of corporate social responsibility (CSR) is one of the moral and ethical issues encompassing corporate decision making; thus the decision by an organisation to undertake certain activities or refrain from it because they are beneficial or detrimental to society is a central and recurrent question. Notwithstanding, organisations’ desire to legalize their activities is considered to be one of the significant motivations for their CSR performance and is accepted by many researchers (Cho and Patten, 2007; Craig Deegan, 2002; De Villiers and Van Staden, 2009; O’Donovan, 2002; Van Staden and Hooks, 2007). Craig Deegan, 2002, opined that corporate social responsibility reporting is essential for organisations’ long term survival and organisations need to be sure that there are no ‘skeletons in the closet’ which may ultimately be exposed, tarnishing the viability and reputation of the organisation. A company’s profitability, as well as its existence, could be affected by its form of CSR reporting.

In Nigeria the disclosure of CSR in annual reports is not a mandatory process hence acting in a socially responsible manner is not necessarily adequate. Firms are basically required to communicate their deeds or initiatives towards CSR to their stakeholders and this is generally recognized as CSRR or corporate social disclosure (CSD). CSR Reporting (CSRR hereafter) is largely regarded as one of the significant approaches organisations employ to make the general public accept/approve their CSR activities. Corporate social responsibility reporting is a relevant means to guarantee accountability and transparency of accomplishments. Despite variations among countries in different regions of the world, CSRR has increased universally in both complexity and dimension over the past two decades. Although developed countries like the United States of America have introduced mandatory disclosures in the reporting prerequisite which would ensure transparency in corporate activities, in many developing countries like Nigeria, CSR reporting still relies on the voluntary initiatives of the reporting entity.

The challenge therefore is developing effective measures to influence and improve CSRR especially in developing countries. One way to ensure this can be good corporate governance. Bebchuk and Fried (2004) propose that the structure of executive compensation is a direct outcome of a firm’s governance process. Thus, while there are signs that executive compensation as an arm of corporate governance plays significant roles in CSRR; only a handful of research works have been carried out to indicate this relationship. This study makes a critical examination of the contemporary CSRR literature and examines the impact of executive compensation on CSRR in Nigeria. Despite the fact that CSR is becoming more and more important and statutory, research still shows that Corporate Social Responsibility performance and reporting by organisations all over the globe is limited (Catanzariti and Lo, 2011). A possible reason for this occurrence is the probable dearth of ability within the significant decision makers particularly,the board of directors, who are seen to be key players in organisations’ CSR achievements to interpret proper decisions concerning CSR and CSRR.

Assuming that CSRR is an outcome of the boards’ decisions, this study proposes that the influence of Executive compensation on CSRR is very much argued and there is an increasingly high amount of literature highlighting the significance of satisfied executives in boardroom decisions. It is therefore important to note that there has been limited studies with varying results carried out to link executive compensation with the CSRR decision making process. In light of this development, this study seeks to fill these gaps by aiming to delve into the impact of executive compensation and the subsequent effect on CSRR. This is carried out by meticulously reviewing already existing literature, and subsequently providing hints and new ideas to fill the existing gaps in previous research and also to shed more light on how CEO incentives influence their CSR decisions and if this is reflected in organisation’s CSR reporting. In line with this, the study seeks to answer the question;

1.2 Statement of Research Problem

The concept of corporate social responsibility and executive compensation over the years has been a topical issue in academic discourse. According to Jooh, Niranjan & Roh (2010) current business researches have emphasized the sustainability concept due to the fact that business must meet their corporate social responsibility duties to the society alongside creating value for their shareholders in order to make a sustainable world. The performance of every firm is vital and key to its continued existence. Several factors affect the performances of a firm amongst which are executive compensation and corporate social responsibility. Several scholars have argued on the effect of CSR on performance of firms. They argue that firms who engage in CSR are seen socially responsible by the society and this increases their legitimacy, reputation as well as patronage leading to a positive spillover effect on performance. Jooh et al. (2010) further argued that engaging beyond compliance is ethically desirable even if it takes away resources from firm’s immediate needs. However, Hull and McShane (2008) argue that there are enormous costs involved in engaging in social responsibility which may affect the performance of the organisation.

Numerous researches have been carried out on the impact of CSR on firm performance with conflicting findings (Fauzi, 2009; Cheriuyot, 2010; Obusubiri, 2006; Margolis and Walsh, 2001; Osisioma, Nzewi & Paul, 2015; Mutuku, 2005). Also, the issue of the effect of executive compensation on firm performance has been researched upon resulting in vague and inconclusive findings revealing diverse patterns a in different cultures and industries (Gore, Matsunaga, & Yeung, 2003; Nyeoga, Tarus & Basweti, 2014; Aduda, 2011; Mohammad, 2015; Sigler, 2011). Executive compensation comprises the total remuneration paid to executives. Proper remuneration of executives helps align executive goals with management goals. Compensation such as stock options and cash bonuses help motivate employees to maximize shareholders wealth. Lack of proper compensation package could cause agency conflict whereby managers end up pursuing their interest at the expense of shareholders. Compensation issues have not received the needed attention in Nigeria, compared to developed economies. However, the effect of executive compensation on firm performance is still a subject of debate and far from conclusive. Very little attention has been given to this area of discourse by corporate directors, academics, regulators and financial economist as evidenced by paucity of literature. This study therefore seeks to fill these gaps in literature.

Consequently, drawing from the inconclusiveness of this area of academic discourse as well as paucity of literature, the following research questions was be asked in this study

1. What is the impact of executive compensation on corporate social responsibility reporting in Nigeria?

2. What is the impact of firm  on firm performance?

Objective of the Study

The objective of this study is to find out the relationship between Executive compensation and corporate social responsibility reporting in Nigeria thereby determining the impact of executive compensation on CSRR.

The specific objectives are to:

1. examine the effect of executive compensation on corporate social responsibility reporting in Nigeria.

2. ascertain the impact of firm size on firm performance

1.4. Statement of Research Hypotheses

The following hypothesis stated in null form was tested in this study.

1. Executive compensation does not have significant effect on corporate social responsibility reporting in Nigeria.

2. Firm size have no significant impact on firm performance

1.5. Scope of the study

This study examines corporate social responsibility, executive compensation and firm performance. In terms of geography, the study was limited to Nigerian firms quoted on the Nigerian Stock Exchange. The study time frame was for a period of six years (2009-2015). The period was chosen as a result of availability of data.

1.6 Significance of the study

Corporate social responsibility and executive compensation policy are very vital to organisational success.  The performance of any firm to a large extent rest on the effectiveness of reward system as well as its CSR. The justification for this study stems from the fact that the study was able to examine the joint effect of corporate social responsibility and executive compensation on firm performance This study will prove very useful to policy makers as well as accounting practitioners as it will make them better informed on the effectiveness of their executive compensation policies, their CSR as well as what drives firms performance.

Another significance of this study is that it contributes to existing body of knowledge on the subject matter and also would assist prospective researchers who would want to conduct further research in this area by providing a basis for them to carry out their research.

1.7. Limitations of the study

A limitation encountered in this study was in the area of data as data were not available for all quoted banks in Nigeria. This therefore restricted the study to make use of the number of banks available for the time period under consideration therefore reducing the sample size. Also imprecise measurement of variable as there is no uniform way of measuring a particular variable.

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