Art-based initiatives and corporate governance of financial institutions: European evidence following the revised OECD corporate governance framework

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Art-based initiatives and corporate governance of financial institutions: European evidence following the revised OECD corporate governance framework Domenico Campaa, , Evy Wilhelmina Anna Zijlmansb ⁎

a b

International University of Monaco, INSEEC U Research Center, 2, Avenue Albert II, 98000, Monaco School of Business, Trinity College Dublin, College Green, Dublin 2, Ireland

ARTICLE INFO

ABSTRACT

Keywords: Corporate governance ABI disclosure Agency theory Legitimacy theory Stakeholder theory

Financial institutions and the arts have been a historical and natural duo since the Middle Ages, when bankers supported the arts sector and artists. This paper investigates the corporate governance (CG) characteristics of today’s financial institutions that engage more extensively with art-based initiatives (ABI). Using a sample composed of the 42 largest European listed financial institutions and manually collected ABI information, the results indicate that, overall, companies with higher levels of CG quality or higher proportions of female directors and entities with greater ownership dispersion, engage more extensively with ABI. This evidence shows that firms with well-implemented CG structures and especially those with a significant presence of women on the board, are more likely to support initiatives aimed at developing and/or preserving cultural heritage. The findings have implications for the arts sector because they provide arts institutions with a better understanding of the companies and people within them that could be their best interlocutors when developing long-term partnerships. They may also encourage “artssensitive” investors to target their investment decisions towards institutions with some specific CG attributes.

1. Introduction This paper investigates the corporate governance (CG) structure of financial institutions that are more involved in art-based initiatives (ABI). The term “art-based initiatives” is originally derived from Schiuma (2011). While Schiuma (2011) applies this concept by referring to the usage of arts within the organizational context, for the purpose of this research, ABI will also encompass external implementation in society, such as sponsorship and community-based initiatives. Accordingly, we use the definition of ABI derived by the European Commission, which states that ABI, like any other corporate social responsibility (CSR) activity, include concepts “whereby companies integrate social […] concerns in their business operations and in their interaction with their stakeholders on a voluntary basis” (European Commission, 2011:3). Indeed, this definition allows us to take into account the concern that dealing with the arts can also be related to economic motivations since, for example, entities can own artworks because of their ⁎

Corresponding author. E-mail addresses: [email protected] (D. Campa), [email protected] (E.W.A. Zijlmans).

https://doi.org/10.1016/j.poetic.2018.12.003 Received 19 March 2018; Received in revised form 5 December 2018; Accepted 6 December 2018 0304-422X/ © 2018 Elsevier B.V. All rights reserved.

Please cite this article as: Campa, D., Poetics, https://doi.org/10.1016/j.poetic.2018.12.003

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potential market value (Deloitte, 2017). Thus, we use a narrow definition of the arts in this paper, which excludes general historical, (e.g., historical museums), sociocultural, (e.g., supporting literacy in developing countries) and general cultural, (e.g., preservation of World Heritage sites) connotations as well as non-social corporate practices, (e.g., art insurance and artworks as financial assets).1 The focus on financial institutions is instead driven by the fact that, historically, they have had a privileged link with the arts since the Middle Ages (Iqbal, 2009). Originating from religious motivations, when the first bankers supported the arts as a way to atone for the sin of having become rich by lending money with interest (which was seen as a sin by the Christian religion at that time), support for the arts was later used for elevating the social status of bankers, as in the case of the Medici, who funded the arts as a way to obtain public prominence, access and power, and finally, noble status (Iqbal, 2009). Late last century, the relationships between banks and arts organizations evolved and were included within the “strategic arts and cultural management” (McNicholas, 2004:66) of firms and associated with the growing CSR strategies of business entities (Bulut & Bulut Yumrukaya, 2009), especially in the aftermath of the financial crisis when financial institutions increased their focus on the disclosure of CSR initiatives in order to rebuild stakeholder confidence (Jizi, Salama, Dixon, & Stratling, 2014) and to meet society’s growing social expectations (Bonet & Négrier, 2018). Indeed, the level of professionalism in financial institutions’ engagement with the arts has increased over time (McNicholas, 2004). Lewandowska (2016) identifies a transactional-oriented and a partnership-oriented approach to explain how arts and business organizations interact nowadays. The former evolves around pure sponsorships, seen as merely business-related transactions that are tax deductible like any other advertising expense (Lewandowska, 2016). However, classic forms of sponsorship are losing their impact on consumers, who, for example, no longer react significantly to corporate logos in arts events (Carrillat & d’Astous, 2012). As a consequence, since the turn of the century there has been a shift towards a more partnership-oriented approach to cultural institutions (Lewandowska, 2016; McNicholas, 2004). This means that corporate entities do not merely finance events created and developed by arts organizations, but they become partners and exchange their know-how to jointly create events. This new approach has mutual benefits for both the arts organizations and the business entities. The former organizations do not dilute their autonomous nature by engaging with commercial entities but, at the same time, they receive financial and managerial resources that otherwise would not have been available to them. The latter, instead, acquire skill-sets and creative inspiration from arts institutions (Comunian, 2009; Lewandowska, 2015) as well as an effective way to improve their image and reputation (McNicholas, 2004). In addition, entities that engage in social initiatives observe higher financial performance, greater productivity and better attraction and retention of talents (Dhaliwal, Li, Tsang, & Yang, 2014) and, moreover, dealing with arts stimulates the intellects of employees who become inspired by the artists’ curiosity and their innovative ways of expressing ideas (Lewandowska, 2015). Hence, while the traditional principle of “art for art’s sake” would assume that arts institutions and artists should not be overly dependent on business if they are to be viewed as legitimate (Bourdieu, 1979), financial crises and GDP declines have constantly decreased the public support to the arts sector (Getzner, 2015; McDonnell & Tepper, 2014; Noonan, 2015; Rössel & Weingartner, 2015) and have increasingly incentivized arts institutions to collaborate with businesses (Schwaiger, Sarstedt, & Taylor, 2010). Accordingly, given the importance of arts and business collaborations and inspired by studies that have examined the relationship between CSR initiatives and CG features, this paper seeks to make two major contributions. Firstly, it links ABI and CG to highlight the features of the entities that are more inclined to engage with the arts, thus providing arts institutions with a better understanding of the institutions that could be their best interlocutors when developing long-term partnerships. Secondly, it focuses on financial institutions, historically important for arts organizations but constantly ignored by the extant literature on the grounds that their inclusion in multi-industry samples leads to comparability issues (Ntim & Soobaroyen, 2013a). Using a sample composed of the 42 largest European listed financial institutions, data from 2004 to 2013, (i.e., 420 firm-year observations) and manually collected ABI disclosure information, this research finds that, overall, companies with higher levels of CG quality or higher proportions of female directors and entities with greater ownership dispersion, engage more extensively with ABI. The results also suggest that economic shocks have an influence on the relationships between CG and ABI disclosure: the overall CG structure of firms became particularly relevant after the financial crisis when financial institutions were under higher levels of scrutiny by stakeholders. However, the presence of female directors is positively related to ABI under any scenario. The findings highlight the CG features that are more likely to support initiatives aimed at developing and/or preserving cultural heritage. They can suggest to arts institutions potential partners willing to support ABI. The results may also encourage “art-sensitive” investors to target their investment decisions towards institutions with some specific CG attributes. Finally, the longitudinal time horizon provides researchers and practitioners with insights into the development of the ABI-CG link within European financial institutions. The rest of the paper is structured as follows. Section 2 frames the study in the context of the extant literature and develops the hypotheses. Section 3 describes the sample and the methodology. Section 4 provides the main empirical results and some additional tests. Section 5 concludes the paper, highlighting its main implications and limitations.

1 This paper focuses on initiatives aimed at supporting, for example, theatrical shows, museums, galleries and exhibitions (including museums of arts, except for history, war, financial museums and organizational or financially related exhibitions), poetry and poems, building and preservation of libraries and cultural heritage (excluding general and organizational connotations, such as “corporate culture” and “remuneration culture”), music-related initiatives such as orchestras, operas, concerts and ballets and the production of films.

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2. Literature review 2.1. ABI and CG theories Firms were involved in ABI long before the term CSR came into existence. Since companies are facing an increasing emphasis on CSR, the links between ABI and CSR have been highlighted more recently (Bulut & Bulut Yumrukaya, 2009; Marquis, Glynn, & Davis, 2007). The link between ABI and CG can be explored under various theoretical frameworks, particularly agency theory, legitimacy theory and stakeholder theory (Giannarakis, 2014; Haji, 2013; Ntim & Soobaroyen, 2013a). Agency theory regards governance mechanisms as tools that monitor the commitment of managers to run the firm in the interests of the principals. These mechanisms are also referred to as “agency costs” because the benefits of increased control do not flow entirely to the principals (Jensen, 2002). ABI can be seen as an agency cost, mainly because arts events have been linked to networking possibilities for managers and directors, rather than to bottom-line profitability (Brown, Helland, & Smith, 2006:863). However, contrary to the assumption that CSR is a significant agency cost that does not directly benefit shareholders, Brown et al. (2006) found that giving to the arts could enhance shareholder value, especially since firms in the same industry tend to imitate each other’s giving practices. Nonetheless, interpreting the CSR-CG link from an agency perspective has been criticized (Davison, 2007; Mallin, Michelon, & Raggi, 2013) as it simplifies CSR policies to mere compliance with CG codes, in order to reduce the exposure to future risks in the interests of the shareholders (Freeman, 1984). Legitimacy theory presupposes that firms seek to comply with society’s expectations (Castelo Branco & Lima Rodrigues, 2006). Because firms are generally dependent on their environment for legitimacy, social disclosure can be seen as a strategic decision which potentially neutralizes criticism. It is argued that community isomorphism, i.e., the influence of society on the level of corporate social initiatives within communities, considerably influences the social strategies of financial institutions (Marquis et al., 2007). Due to their public role and social impact, financial institutions have a great incentive to project a good corporate image through voluntary disclosure of social initiatives (Castelo Branco & Lima Rodrigues, 2006; Young & Marais, 2012). Additionally, the dissemination of a good image reduces corporate risk (Ntim, Lindop, & Thomas, 2013). Given that legitimacy is based on perceptions, the disclosure of social initiatives is crucial in order to have an impact on society (Chan, Watson, & Woodliff, 2014) and, indeed, ABI disclosure ensures that a firm looks good or appears to be socially responsible (Comunian, 2009). Finally, stakeholder theory focuses on the interactions between companies and a particular set of firm-dependent stakeholders (Freeman, 1984), such as employees, customers, competitors, governments, lenders, suppliers, investment analysts and community representatives (Evan & Freeman, 1988). Legally, a firm is primarily accountable to its shareholders. However, compliance with a “stockholder view” is a narrow managerial approach that does not consider firms’ social responsibilities (Evan & Freeman, 1988) and denies that key stakeholders’ interests and power should be reflected in the governance structure of companies, to avoid pressure that could generate costs (Zattoni, 2011). In line with this theory, corporations engage with the arts in order to meet the interests of specific, typically elite and culturally well-educated, types of customers (Bourdieu, 1979) to “build business relationships with wealthy clients (who are likely to be patrons of the arts)” and as “a form of advertising directed at potential clients” (Brown et al., 2006:863). Kirchberg (1995) also argues that firms support the arts to disseminate a good image to community stakeholders and that the number of local ABI instances increases with a firm’s degree of urbanization and with the education of the population. 2.2. ABI: the relevance of disclosure Firms engage with ABI and, more generally, with CSR initiatives in order to make a positive impact on their customers and their stakeholders. Arts and business partnerships are also associated with the greatest effect in terms of impact on corporate image (McNicholas, 2004). Pomering and Dolnicar (2009), however, state that customers are positively affected by the CSR initiatives of organizations only if they are aware of them. They claim that it is the disclosure of such initiatives, rather than their mere existence, that matters. Similarly, Schwaiger et al. (2010) find that ABI have an impact on corporate reputation only if stakeholders are informed about them. They also find that “people perceive a general value to society associated with sponsorship of the arts, independent of whether they are interested in such events or not” (Schwaiger et al., 2010:87). The basic idea is that, in response to corporate communication about ABI, a person relates to the event and the company involved in it at both a rational and an emotional level. From the entity’s point of view, the positive emotions of people towards ABI will be reflected in a positive perception of the company and its products or services. In addition, art events create a positive effect on an affective dimension because consumers and entities are linked at an emotional level (Schwaiger et al., 2010). Based on this evidence, the importance of continuous communication about ABI is crucial, because it is the disclosure that enhances the perception of the CSR performance of firms for both internal and external stakeholders (Larson, Flaherty, Zablah, Brown, & Wiener, 2008). The relevance of ABI communication for companies is also supported by Maignan and Ralston (2002), who investigate the topics disclosed in the CSR reports of firms in France, the Netherlands, the UK and the US, and find that in the majority of countries, entities disclose more about ABI than about other initiatives, such as those related, for example, to employees’ health and safety. 2.3. Hypotheses development As argued by Jizi et al. (2014), if ABI and the reporting of ABI are not seen as a temporary fashion but are linked to societal concerns, they are used to maintain positive relationships with stakeholders and are aimed at reducing agency costs and legitimizing the role of companies in our society. Therefore, one would expect that firms with more effective CG structures would be particularly meticulous in providing information about ABI. Hence, in accordance with the growing overlap between CG and CSR, on the assumption that ABI and CSR are related and following the expectation that ABI disclosure increases shareholder value and firm 3

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legitimacy, firms with appropriate CG mechanisms are expected to be more socially and culturally responsible than companies with poor CG practices (Chan et al., 2014; Jizi et al., 2014; Ntim & Soobaroyen, 2013b). Defining whether the CG of entities is strong or weak is not as simple as it may sound. Several authors have tried to implement firm-level CG scores based on few, self-selected CG characteristics (Brown & Caylor, 2006). Such self-developed scores, however, have usually been criticized because the choice of the features that become part of the index, as well as the weight associated to each of them, is affected by the subjectivity of the authors. Indeed, the quality of CG depends on the interrelations between numerous CG mechanisms, and therefore the latter cannot be included in, and/or excluded from, a CG index at the authors’ discretion. Thus, independent and comprehensive measures are more reliable (Chan et al., 2014). In this paper, we employ an independent score that includes an exhaustive selection of CG elements encompassing board functions and structures, management succession planning, presence and type of shareholder rights, nature and number of executives and board compensations (Campa & Donnelly, 2016). Accordingly, the first hypothesis is stated as follows: H1. There is a positive relationship between CG quality and the extent of ABI disclosure. The board of directors is seen as the most important CG mechanism of control. Therefore, drawing on previous research on the CSRCG link among both listed financial institutions (Andrikopoulos, Samitas, & Bekiaris, 2014; Jizi et al., 2014) and non-financial companies (Giannarakis, 2014; Ntim & Soobaroyen, 2013a, 2013b), several board features will be examined. Following the characteristics most frequently used in previous studies, we focus on female board members, independent directors, board meetings and board size.2 Previous evidence shows that female directors improve CG through a better use of the whole talent pool’s capital and the promotion of an inclusive climate that better represents all stakeholders (Terjesen, Sealy, & Singh, 2009). Furthermore, diverse boards improve corporate legitimacy (Ntim & Soobaroyen, 2013a), because they are associated with higher levels of expertise and experience (Ntim & Soobaroyen, 2013b). Several studies empirically identified the causality between social disclosure and gender (Haniffa & Cooke, 2005) and found that female directors develop CSR in organizations (Setó‐Pamies, 2015), increase the probability that a firm is included in corporate recognition lists such as the “Most Admired Companies”, the “Most Ethical Companies”, the “Best Companies to Work For”, and the “Best Corporate Citizens” (Landry, Bernardi, & Bosco, 2016) and are associated with a higher engagement in charitable giving and a higher level of firm philanthropy in the area of the arts (William, 2003). Accordingly, the second hypothesis is stated as follows: H2. There is a positive relationship between the proportion of female directors and the extent of ABI disclosure. Brown et al. (2006) show that boards with a higher proportion of independent non-executive directors (INEDs) give more to social causes such as the arts. INEDs represent the interests of various stakeholder groups and monitor the actions of managers (Haji, 2013); thus, they are able to exert pressure on firms to undertake initiatives that ensure the well-being of a broader array of stakeholders (Haniffa & Cooke, 2005), and therefore to positively affect decisions on ABI disclosure (Jizi et al., 2014; Ntim & Soobaroyen, 2013b). Thus, the third hypothesis is stated as follows: H3. There is a positive relationship between the proportion of INEDs and the extent of ABI disclosure. The number of board meetings could be used as a proxy for enhanced monitoring (Haji, 2013), since a higher meeting frequency may enhance the board’s ability to monitor shareholders’ interests and reduce agency problems accordingly (Bacon, Cornett, & Davidson, 1997; Giannarakis, 2014). Active board members are also expected to stimulate social initiatives because of the strategic potential of CSR to enhance the corporate image in financial downturns (Bacon et al., 1997). Therefore, more frequent board meetings are in the interest of shareholders (Vafeas, 1999). Disclosure practices have been related to the number of board meetings (Kent & Stewart, 2008), especially because CSR initiatives are usually incorporated into business operations, and therefore it is expected that CSR strategy is discussed at each meeting (Haji, 2013). Frequent board meetings could also align INEDs’ interests with management’s interests (Bacon et al., 1997). Therefore, the fourth hypothesis states that: H4. There is a positive relationship between the number of board meetings and the extent of ABI disclosure. In addition to composition and meeting frequency, the effectiveness of boards can be measured using board size. A board should be neither too large, nor too small: large boards are characterized by inefficient monitoring, communication, coordination and decision-making (Jensen, 1993), whereas small boards tend to be less competent to effectively meet global challenges due to a lack of monitoring capacity and diverse resources (Giannarakis, 2014). Larger boards have also been associated with better monitoring capacities, as they bring together diverse backgrounds, experience and expertise (Haji, 2013), while smaller boards benefit from higher levels of commitment and accountability (Dey, 2008). Smaller boards also place a higher workload on directors, which is particularly relevant for financial institutions because of their highly regulated environment (Jizi et al., 2014). Larger boards have been positively related to voluntary disclosure practices (Giannarakis, 2014; Haji, 2013; Ntim & Soobaroyen, 2013b) and are also found to engage more with social initiatives such as ABI (Brown et al., 2006). For all these reasons, the fifth hypothesis is stated as follows:

2 CEO duality has also been included in previous (non-European) studies, (e.g., Jizi et al., 2014; Mallin et al., 2013; Ntim & Soobaroyen, 2013b; Ntim et al., 2013). However, this CG proxy is not included in the study because of the strict regulations for European financial institutions and the subsequent rarity of CEO duality within the firms that are included in the research sample.

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H5. There is a positive relationship between board size and the extent of ABI disclosure. Finally, ownership dispersion enhances the position of managers at the expense of company owners (Berle & Means, 1932), while closely held firms are associated with increased managerial monitoring because owners have more power to influence the board (Ntim & Soobaroyen, 2013b). Hence, closely held firms are associated with fewer agency issues, and therefore they are less inclined to mitigate information asymmetry between managers and shareholders or to legitimize their actions (Chan et al., 2014; Ntim et al., 2013). In addition, because of low outsider interest, they are also more effective in avoiding normative stakeholder demands for social initiatives (Ntim et al., 2013). In line with prior evidence on CSR disclosure suggesting that closely held firms disclose less information about social initiatives (Chan et al., 2014; Ntim & Soobaroyen, 2013a, 2013b), the sixth hypothesis is stated as follows: H6. There is a negative relationship between ownership concentration and the extent of ABI disclosure. A very deep crisis was experienced in 2008, considered by far the worst since the early 1970s or even since the Great Depression (Haldane, 2009). Situations of financial crisis may impact on the links between CG and ABI disclosure highlighted above. Kirchberg (1995) finds that companies discontinue ABI in financial downturns but increase social disclosure and CG quality afterwards (Ntim et al., 2013) in order to restore their legitimacy in society, (e.g., Chan et al., 2014; Jizi et al., 2014). Indeed, financial institutions are consistently associated with the causes of the crisis (Kirkpatrick, 2009) and they revisit their CG mechanisms and social initiatives in response to these negative feelings from society (Adams, 2012). Accordingly, the last hypothesis is stated as follows: H7. Financial crises have an impact on the relationships between CG and the extent of ABI disclosure. 3. Sample and methodology 3.1. Sample selection The hypotheses are tested on a 10-year sample of European financial institutions starting from 2004. The choice of European entities takes into account the international character of ABI and the impacts of firms across the borders of national stock markets (Andrikopoulos et al., 2014), as well as the fact that a strong uniformity was found in how European firms report on their CSR activities (Perrini, 2005). The starting point of the time series coincides with the year the OECD published a revised version of their influential Principles of Corporate Governance, according to which improved CG practices are expected, particularly within large European institutions (OECD, 2015). In line with previous research on the CSR-CG link (Albertini, 2014; Mallin et al., 2013; Perrini, 2005), the sample is taken from a ranking of financial institutions based on the overall firm size of listed companies. More specifically, the 147 European financial institutions listed on Forbes Global 2000 during the sample period formed the starting point.3 Given the extensive manual collection of data, (i.e., annual reports and social reports were searched for ABI information for each of the 10 years, in order to construct the dependent variable), the sample was refined to the largest 50 financial institutions from Forbes Global 2000. This choice is consistent with sample limitations highlighted in previous studies, (e.g., Albertini, 2014; Ntim & Soobaroyen, 2013b; Ntim et al., 2013) and also ensures that the firms in the sample have a similar level of regulatory scrutiny and public visibility (Jizi et al., 2014).4 To ensure sample homogeneity, two companies were eliminated because they were market regulators and thus had different goals from those of mainstream financial institutions, two firms were excluded because of missing CG and/or financial data and four entities were omitted because they had not been listed for the entire period analysed. Accordingly, the final sample includes 42 unique companies over a 10-year time series, giving a total of 420 firm-year observations.5 The financial institutions in the sample operate in Austria (1), Belgium (2), Denmark (1), France (5), Germany (4), Italy (4), Netherlands (2), Norway (1), United Kingdom (9), Spain (4), Sweden (4) and Switzerland (5). 3.2. Measurement of ABI disclosure ABI disclosure data were collected by hand from companies’ annual reports and social reports, using a content analysis technique. Even though companies are able to inform their stakeholders about ABI in other ways, (e.g., through social media or their corporate website), we focused on these two documents for several reasons. Firstly, the annual report is seen as the most important and effective reporting device for the dissemination of a corporate social image, since it is aimed at a wider set of stakeholders (Castelo Branco & Lima Rodrigues, 2006) and it is under greater control of managers and directors as well as auditors (Jizi et al., 2014). However, an 3 Since previous studies found a positive correlation between disclosure and firm size, Ntim and Soobaroyen (2013b) argue that a sample based on firm size allows for the possibility of controlling for this (see also Collett & Hrasky, 2005). 4 Prior empirical studies on the CG-CSR link that used the technique of content analysis were either cross-sectional studies with relatively large sample sizes considering one firm-year (Chan et al., 2014; Giannarakis, 2014; Jizi et al., 2014) or longitudinal studies with small sample sizes (Albertini, 2014; Ntim & Soobaroyen, 2013b; Mahadeo et al., 2011). Most of these studies focused primarily on annual reports and on one particular country. 5 The final sample size is in line with similar longitudinal studies with sample sizes ranging from 41 (Mahadeo et al., 2011) to 85 listed companies (Haji, 2013). It is also worth noting that these studies focus on non-financial companies and that the time horizons of these studies are generally shorter than the 10-year sample period of this research.

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exclusive focus on annual reports was found to provide an incomplete view of this topic, and therefore this research also considers social reports. Secondly, previous studies that looked at subareas of CSR (Ntim & Soobaroyen, 2013a), focused on both annual and social reports, and therefore adopting the same technique would allow comparisons to be drawn, complementing the current state of research. Thirdly, from a methodological point of view, both annual and social reports are widely available, and this fact “facilitates systematic data collection” (Ntim & Soobaroyen, 2013a, p. 126Ntim and Soobaroyen, 2013aNtim & Soobaroyen, 2013a, p. 126). We followed the methodology of content analysis that was drafted for CSR studies, taking into account the reliability and validity concerns associated with developing and testing a coding instrument (Boyatzis, 1998; Weber, 1985) arising from the subjective nature of content analysis (Easterby-Smith, Thorpe, & Jackson, 2012; Haji, 2013). We aimed to minimize the influence of subjectivity in several ways. We found three different measures for the assessment of CSR disclosure: words, sentences, and proportions of a page (Chan et al., 2014). We opted for sentence count, which is the most unambiguous measure as sentences are easy to identify (Chan et al., 2014; Ntim et al., 2013). Indeed, words do not carry any meaning without their context and coding the areas of a page is highly subjective due to differences in the layout. We also included non-narrative types of disclosure, (e.g., photos of art and charts on art expenditure), because of their relevance in relation to ABI and their power to attract attention from stakeholders (Chan et al., 2014). A checklist instrument with various items was used to categorize ABI disclosure (Klettner, Clarke, & Boersma, 2014).6 A scoring method based on an unweighted approach was applied (Haji, 2013; Khan, 2010) by increasing the score by one point for any sentence and/or photo in the annual and social reports that contained ABI information.7 Appendix A describes the detailed item search and the scoring procedure. 3.3. Measurement of CG variables Data on corporate governance were downloaded from Datastream, where available, in accordance with previous studies, (e.g., Ntim & Soobaroyen, 2013a), while missing data on female directors, INEDs, board meetings and board sizes were manually collected from the companies’ corporate governance reports. 3.4. Regression models The following models were developed for gathering evidence about the proposed hypotheses.8 ABI_TOTit= β0 + β1CGSCOREit + β2SIZEit + β3LEVit + β4OPROFITit + β5CROSSLISTit + εit

(1)

ABI_TOTit = β0 + β1BWOMENit + β2INEDit + β3BMEETit + β4BSIZEit + β5OWNERit + 6SIZEit + β7LEVit + β8OPROFITit + (2) β9CROSSLISTit + εit Variables are defined in the following Table 1. Model (1) provides evidence to test hypothesis H1. A positive and significant β1 would suggest higher ABI disclosure when the CG score increases.9 Model (2) provides evidence to test the hypotheses H2 to H6. In particular, a positive β1 would indicate higher ABI disclosure when the presence of females on the board increases, in accordance with H2. A positive and significant β2 would support H3 since it would suggest a positive relationship between ABI disclosure and the percentage of INEDs. A positive and significant β3 would indicate a positive link between ABI disclosure and the number of board meetings, thus supporting H4. A positive and significant β4 would provide evidence in favour of H5, as it would indicate a positive relationship between ABI disclosure and board size. Finally, a negative β5 would support H6, indicating a negative relationship between ABI disclosure and ownership concentration. Models (1) and (2) are also estimated separately for the period before the global financial crisis, (i.e., up to and including 2007) and the period after the financial crisis, (i.e., from 2008 onwards), to investigate H7.10 Other variables have been included in the models to control for other factors related to ABI disclosure, such as firm size (Mackenzie, 2007), company profitability (Chan et al., 2014), leverage (Giannarakis, 2014) and the cross-listing status of firms (Ntim & Soobaroyen, 2013a). 6 Based on the definition of the European Commission, the definition of the arts is interpreted narrowly, thus excluding general historical, (e.g., historical museums), sociocultural, (e.g., supporting literacy in developing countries) and general cultural, (e.g., preservation of World Heritage sites) connotations as well as non-social corporate practices, (e.g., art insurance and artworks as financial assets) from the analysis. 7 To ensure the reliability of the dependent variable, the scoring has been developed separately by each author and, furthermore, a third person reviewed 150 randomly selected observations (around 36% of the entire sample). 8 The variables expressing the quality of CG and the individual CG attributes were not included in the same model to avoid multicollinearity issues. 9 The score is provided by a DataStream ASSET4 ESG ratio coded “CGVSCORE”. It is a number between zero and 100 that indicates how a company performs compared to the entire ASSET4 universe. A discussion with a DataStream representative highlighted that more than 250 elements of governance are taken into consideration when constructing the index, including board functions, board structures, management succession planning, shareholder rights and executive or board compensations. The score is calculated and also normalized with a Z-score methodology using a relative measure comparing one company with the entire ASSET4 universe (a benchmark of approximately 6,000 companies). Thus, it is not affected by the different levels of governance quality in each country. It is also an “independent” score because it is not affected by biases due to self-selection of corporate governance attributes to be included in the score. 10 The results reported in Section 4 are consistent whether 2008 is considered as a pre-crisis year or excluded from the analyses.

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Table 1 Variable definition (in alphabetical order). Name of the variable

Description

ABI_TOT BMEET BSIZE BWOMEN CGSCORE CROSSLIST INED LEV OPROFIT OWNER SIZE

The number of ABI sentences in both annual and social reports. The natural logarithm of the total number of board meetings during the fiscal year. The natural logarithm of the total number of directors on the board at the end of the fiscal year. The percentage of women on the board of directors. A measure of companies’ corporate governance quality. Dummy variable that takes 1 if a company is cross-listed and 0 otherwise. The percentage of independent non-executive directors. The financial leverage of a company calculated as total debts over total assets. Operating profit divided by sales. The percentage of the single biggest owner (by voting power). The natural logarithm of total assets.

Table 2 Descriptive statistics.

ABI_TOT CGSCORE BWOMEN INED BMEET BSIZE OWNER SIZE LEV OPROFIT CROSSLIST

N.

Mean

Median

St. Dev

Min

Max

420 420 420 420 420 420 420 420 420 420 420

20.543 70.328 0.159 0.691 2.354 2.684 0.156 20.173 0.248 0.100 0.452

4.500 75.220 0.133 0.772 2.398 2.639 0.099 20.229 0.257 0.103 0.000

40.770 19.747 0.124 0.190 0.411 0.283 0.143 1.014 0.177 0.097 0.498

0.000 7.750 0.000 0.080 1.099 1.792 0.021 17.555 0.009 −0.385 0.000

340 96.670 0.615 0.868 3.850 3.784 0.703 22.579 0.612 0.357 1.000

Variables are defined in Table 1.

Given the presence of an international panel data set, year and country dummy variables are also included in the models. The pvalues are calculated from robust standard errors. All continuous independent variables are winsorized at the 1st and the 99th percentile to prevent findings being biased due to the presence of outliers. 4. Results 4.1. Descriptive statistics and univariate analyses Table 2 shows the descriptive statistics for the variables used in the study. Table 2 shows that, on average, companies in the sample include 20.5 sentences related to ABI in their annual and social reports. The average CG score is 70.3 out of 100. Women represent 16% of board members, around 70% of board members are INEDs and boards are composed of about 15 members who meet about 10 times per year. The single biggest shareholder owns, on average, 15.6% of the company’s shares. Firms exhibit a positive profitability, their debts account for about 25% of total assets and around 45% of firms are listed in more than one financial market. A Pearson correlation matrix is reported in Table 3. The table shows an insignificant coefficient between ABI_TOT and CGSCORE (ρ = −0.059; p = 0.229) and between ABI_TOT and BWOMEN (ρ = -0.029; p = 0.554). This evidence would indicate that there is no univariate relation between ABI disclosure, CG score and the proportion of female directors. The coefficients between ABI_TOT and INED, BSIZE and OWNER are significant, and the signs support H3, H5 and H6. Finally, the correlation between ABI and BMEET is negative and significant, which is inconsistent with the prediction of H4. However, given the presence of significant correlations between ABI disclosure, CG variables and the several control variables used in the model, only multivariate analyses can provide statistically reliable evidence to test the hypotheses. 4.2. Regression analysis Table 4 reports the estimations of the models (1) and (2).11 Column A presents evidence to test H1, while column B deals with H2 to H6. The coefficient β1 in column A is positive and 11 The high values of the regression coefficients are due to the fact that we use, as the dependent variable, the actual number of ABI-related sentences.

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Table 3 Pearson correlation matrix.

ABI_TOT CGSCORE BWOMEN INED BMEET BSIZE OWNER SIZE LEV OPROFIT CROSSLIST

ABI_TOT

CGSCORE

BWOMEN

INED

BMEET

BSIZE

OWNER

SIZE

LEV

OPROFIT

−0.059 −0.029 0.169*** −0.088* 0.292*** −0.098** 0.038 0.099** −0.076 0.031

0.04 −0.192*** 0.034 −0.162*** −0.350*** 0.255*** −0.238*** 0.041 0.08

0.112** 0.134*** −0.152*** 0.027 0.480*** 0.153*** 0.054 0.006

−0.109** −0.018 −0.055 0.136*** 0.068 −0.046 0.173***

−0.183*** 0.174*** 0.111** 0.345*** −0.105** −0.248***

0.142*** 0.083* 0.166*** −0.061 0.116**

0.060 0.195*** −0.219*** −0.092*

0.320*** 0.059 0.186***

0.147*** −0.032

−0.029

Variables are defined in Table 1. Table 4 ABI disclosure and corporate governance. Dependent variable INTERCEPT CGSCORE BWOMEN

(A) ABI_TOT

(B) ABI_TOT

−153.920*** (0.002) 0.196* (0.056)

−178.140*** (0.003)

INED BMEET BSIZE OWNER SIZE LEV OPROFIT CROSSLIST Observations R-squared F-stat Year and Country dummies

9.685*** (0.000) −15.949 (0.242) 1.429 (0.941) −2.840 (0.344) 420 0.320 7.77*** Yes

77.764** (0.013) 14.578 (0.148) −2.802 (0.530) 10.754 (0.162) −30.276*** (0.002) 8.789*** (0.000) −10.698 (0.438) −3.438 (0.843) −3.606 (0.243) 420 0.353 6.57*** Yes

Notes: P-values (in parentheses below the coefficients) are calculated from robust standard errors. *, **, *** indicate significance at the 10%, 5%, 1% level, respectively, two-tailed. Variables are defined in Table 1.

significant at the 10% level (p = 0.056). In line with H1, it suggests that banks with higher levels of CG quality are more engaged with ABI since such entities take responsibility for all the firm’s stakeholders (Chan et al., 2014; Jizi et al., 2014). Among the control variables, there is only a positive relation between ABI and firm size. This is in accordance with previous findings that larger firms face more stakeholder demands and greater pressure for legitimacy, and therefore disclose more about CSR (Andrikopoulos et al., 2014; Haji, 2013). Column B presents the estimation of model (2) that includes the individual CG features. The coefficient β1 is positive and significant at the 5% level (p = 0.013) and supports H2, which states that the presence of female directors increases ABI disclosure. Indeed, women are associated with higher levels of accountability and company oversight (Landry et al., 2016). They are usually more sensitive, socially responsible and ethical in corporate performance than men. This leads to higher involvement in corporate philanthropy and ethical behaviours, including charitable giving and community involvement (Terjesen et al., 2009; Williams, 2003). Considering H6, the coefficient β5 is negative and significant at the 1% level (p = 0.002) indicating that companies with more highly dispersed ownership structures, which are predicted to experience higher stakeholder pressure for ABI, are inclined to make more extensive ABI disclosures. This would be in line with the theoretical suggestions of the agency, legitimacy and stakeholder 8

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Table 5 ABI disclosure and corporate governance: before and after the financial crisis. PRE-CRISIS Dependent variable INTERCEPT CGSCORE BWOMEN

POST-CRISIS

(A) ABI_TOT

(B) ABI_TOT

(C) ABI_TOT

(D) ABI_TOT

−276.909*** (0.004) 0.189 (0.217)

−321.191*** (0.007)

−68.028 (0.193) 0.331** (0.031)

−99.809 (0.163)

142.666** (0.037) 18.973 (0.227) 13.271 (0.143) 10.918 (0.489) −41.613 (0.115) 14.135*** (0.006) −35.026* (0.098) −37.944 (0.376) −15.649** (0.011) 168 0.381 3.79*** Yes

INED BMEET BSIZE OWNER SIZE LEV OPROFIT CROSSLIST Observations R-squared F-Stat Year and Country dummies

16.142*** (0.002) −48.040** (0.030) −28.068 (0.480) −10.080** (0.044) 168 0.324 4.58*** Yes

5.392* (0.074) 7.219 (0.678) 3.977 (0.871) 2.239 (0.536) 252 0.380 16.70*** Yes

68.935* (0.100) 13.231 (0.393) −12.010** (0.013) 13.319 (0.164) −28.636** (0.012) 5.754* (0.053) 9.842 (0.617) −6.469 (0.759) 2.435 (0.497) 252 0.418 10.02*** Yes

Notes: P-values (in parentheses below the coefficients) are calculated from robust standard errors. *, **, *** indicate significance at the 10%, 5%, 1% level, respectively, two-tailed. Variables are defined in Table 1.

theories that closely held firms typically have more capacity to meet shareholder, stakeholder and societal demands (Chan et al., 2014; Haniffa & Cooke, 2005; Ntim & Soobaroyen, 2013a, 2013b) and have less need to mitigate information asymmetry (Desender, Aguilera, Crespi, & Garcia‐Cestona, 2013). The coefficients β2, β3 and β4 are not significant. This indicates that the proportion of independent directors, the size of the board and the frequency of board meetings are not significant factors for explaining the extent of ABI disclosure. This is inconsistent with findings from past studies (Giannarakis, 2014; Haji, 2013; Jizi et al., 2014) and generally contradicts the predictions based on agency and stakeholder theory, since the quality of board activities has been associated with the mitigation of agency problems and the representation of a wider set of stakeholders (Haji, 2013; Haniffa & Cooke, 2005; Vafeas, 1999), including those concerned with the arts. With regard to the control variables shown in column B, only the coefficient related to the size of companies is, as in column A, positive and significant. Overall, the findings suggest that variations in the extent of ABI disclosure are related to firms’ overall CG structure, the proportion of female directors and the dispersion of ownership. Table 5 investigates H7, i.e., the impact of the financial crisis in 2008 on the link between CG and ABI disclosure. Columns A and B of Table 5 refer to the period preceding the crisis. A non-significant β1 in column A shows that, before the financial crisis, there was no relationship between ABI disclosure and CG quality. Column B highlights a significant coefficient for the variable BWOMEN, providing support for H2 in accordance with Table 4. The control variables indicate a positive relation between firm size and ABI disclosure and a negative relation between ABI disclosure and firm leverage or the presence of entities in more than one financial market. Columns C and D refer to the post-crisis period. Column C shows a positive and significant coefficient β1 (p = 0.031), indicating that the quality of CG, after the advent of the financial crisis, is positively related with the amount of ABI disclosure, in accordance with H1. This result is consistent with the agency theory, which suggests that extensive disclosure reduces agency costs due to a mitigation of future risk (Brown et al., 2006; Freeman, 1984). It is also consistent with the legitimacy theory, which indicates that well-governed companies have greater incentives to promote their social initiatives (Young & Marais, 2012) and with the stakeholder theory, which states that firms with better CG practices tend to disclose more extensively on their social responsibility practices in order to satisfy the needs of all stakeholders (Peters & Romi, 2014). This evidence is in line with studies that found that firms tried to restore their legitimacy after the financial crisis by increasing their reporting on social initiatives (Chan et al., 2014; Haji, 2013; Jizi et al., 2014). In addition, it indicates that, after the financial crisis, firms with stronger CG paid more attention to their ABI disclosure, probably as a result of the higher levels of scrutiny by stakeholders under this scenario. Finally, this result supports prior literature that found that companies increase social disclosure and CG quality after financial downturns (Ntim et al., 2013; Vafeas, 1999). 9

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Column D indicates that the presence of women on the board enhances ABI disclosure also after the financial crisis, in line with H2. During the financial crisis, the extent of ABI is negatively related to the number of board meetings (β3 is negative and significant at the 5% level). This is the opposite of the prediction of H4 and could be due to the fact that, in a crisis scenario, the board is not concerned with ABI but focuses more on restoring liquidity and profitability. The coefficient β5 is negative and significant at the 5% level, highlighting that, after the financial crisis, the extent of ABI disclosure is negatively related to ownership concentration, in line with H6. Finally, in the period after the financial crisis, the only significant control variable is firm size. Overall, the evidence indicates that the revised attention to CG practices and social actions after the financial crisis influenced the relationship between ABI disclosure and the CG of financial institutions.12 5. Conclusions A growing body of literature confirms the increasing overlap between CG and CSR disclosure, particularly in the wake of the financial crisis. At the same time, from an arts-oriented point of view, evidence is being found for the value-increasing potential of arts engagement for businesses. This study makes a unique contribution to the current state of research by bringing together the CG practices of financial institutions and ABI, through the focus on ABI disclosure, i.e., non-financial information about the firm’s exposure to the arts as presented in companies’ institutional reporting. Using a sample of European financial institutions, which have a long tradition of arts engagement and have been associated with a strong CG-CSR link, this study investigates whether firms with particular CG characteristics engage more with ABI. The evidence indicates that companies with better CG quality, higher proportions of female directors and greater ownership dispersion, engage more extensively with ABI. Firms with a stronger CG structure are more socially and culturally responsible and are more sensitive to the needs of different stakeholders and to the impact of the firm on communities (Chan et al., 2014; Jizi et al., 2014; Mahadeo, Oogarah-Hanuman, & Soobaroyen, 2011). Women directors have psychological characteristics that make them more sensitive, affectionate, helpful, kind, sympathetic, interpersonally sensitive and concerned about others’ welfare (Eagly, Johannesen-Schmidt, & Van Engen, 2003). Thus, they are more prone to enter into corporate charitable giving in the areas of community services, arts and cultural activities (Williams, 2003). Ownership dispersion increases the need of the management to mitigate information asymmetry between managers and shareholders or to legitimize their actions to a wider number of stakeholders and to respond to stakeholders’ demands for social initiatives (Ntim et al., 2013). Our results also indicate that the relationships between CG and ABI were different before and after the financial crisis, thus suggesting that economic shocks may have an influence on the CG-ABI disclosure link. They show that the overall CG structure became particularly relevant after the financial crisis, when financial institutions were under higher levels of scrutiny by stakeholders. These findings have several implications. They complement prior studies on the CSR-CG link and demonstrate to business and art researchers the relevance of firms’ ABI, from a CG point of view. The results show that financial institutions with some particular CG attributes are keener to be involved in social initiatives related to the arts sector. Thus, investing in those CG attributes could contribute to safeguarding the interests of stakeholders (Jizi et al., 2014). Moreover, by investigating the effect of engagement with ABI during the periods before and after the financial crisis, the evidence highlights how economic events impact on the social activities of financial institutions. The results could also be used by investors interested in investing in financial entities that have a broader and more societal role rather than opting for those that are exclusively profit-oriented. The study could also provide managers of arts institutions with a tool for identifying companies and types of board members to deal with in the creation of longterm relationships and empower them to diversify revenue streams and diminish their dependency on public funding. Finally, the findings could strengthen the currently relatively weak stakeholder position of art professionals within financial institutions. This research is not free from limitations. Firstly, following the main approach used in the literature, we focused on institutional documents provided by companies. Of course, entities can also use other forms of corporate communication such as websites, social media, sponsored events, billboards and television adverts. Given the use of a quantitative methodology, the significant size of the sample and the fact that the companies analysed come from several different countries, the investigation of all possible types of disclosure was not feasible.13 Future research could overcome this issue by collecting ABI data using a qualitative approach, (i.e., through interviews or questionnaires sent to financial institutions asking about their communication about ABI, rather than from institutional documents). This would, however, significantly limit the size of the sample. Furthermore, the approach used to create our dependent variable assumes that volume signifies importance (Chan et al., 2014). Although this quantitative approach enhances comparability (Chan et al., 2014; Ntim et al., 2013), it may overestimate the score of companies that repeat a sentence about a single example of ABI and underestimate the score of entities that engage with more diversified ABI but have less redundancy in their disclosure. However, as discussed in Section 3.2, there is no method that is free of limitations. Finally, in accordance with other studies, we did not investigate the universe of financial institutions but focused on the biggest 12 As a robustness test, we repeated the tests reported in Tables 4 and 5 using an alternative dependent variable that takes into account the proportion of sentences about ABI relative to the size of the reports. This variable is calculated by dividing the number of sentences about ABI by the total number of sentences included in the company’s report. The results, not tabulated for reasons of space, are consistent with those discussed here. 13 We attempted to explore ABI disclosure outside institutional reporting. We counted the sentences about ABI on the Facebook and Twitter accounts of the companies included in the sample and ran a correlation with the average number of ABI collected from the annual and social reports. We found a positive correlation coefficient of 0.736 (p = 0.000), which indicates that these two types of communication are strongly correlated. This is evidence that firms that communicate a lot about ABI through institutional reporting are also those that use social media more extensively for this purpose. It gives us assurance that the focus on institutional reports should not have biased our evidence by not considering other forms of communication.

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ones, adopting all the necessary statistical robustness features to control for that fact. Despite that, the results may not be applicable to very small financial entities. Declarations of interest None. Acknowledgments The authors acknowledge the extremely helpful comments, insights, and encouragement of the Editor, Marc Verbood, and of three anonymous reviewers. This research did not receive any specific grant from funding agencies in the public, commercial, or not-forprofit sectors. Appendix A. ABI measuring instrument Following previous literature in which the technique of content analysis was based on a particular definition or document (e.g. Ntim & Soobaroyen, 2013b; Peters & Romi, 2014), the definitions of CSR and the arts of the European Commission were used in order to assess if a sentence was ABI-related within a particular context or paragraph within an annual or social report. As such, and following Mahadeo et al. (2011) who emphasised the double interpretation of words, non-arts related connotations with the keywords below, are not included. Hence, each match within a particular report is assessed individually and interpret in its context in order to avoid multiple interpretations (e.g. ‘architecture’ and ‘culture’ with organisational meanings). Additionally, translations in native languages were made, for instance in order to search for arts-related institutional names, typically written in native languages (e.g. art is ‘kunst’ in Dutch and German). ABI categories Measured are: graphic information, images, and information on initiatives as part of CSR strategies and policies, donations, contributions, community activities and projects, partnerships, prizes and awards sponsoring, support programmes and employee activities Art; Arts; Artistic Theatre Museum; Gallery; Exhibition* Literature; Archives; Library Architecture Orchestra; Opera Musical; Music; Concert Film; Photography Ballet, Dance Poetry; Poem Culture; Cultural (heritage)** Graphic Design, Fashion

* Only museums of arts (excluding history, war, financial museums); excluding organisational or financial-related exhibitions. ** Excluding general, and organisational connotations, such as ‘corporate culture’, and ‘remuneration culture’. The general phrase ‘cultural activities’ is only included if, within the context of the report, it was related to the ABI of a firm.

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Williams, R. J. (2003). Women on corporate boards of directors and their influence on corporate philanthropy. Journal of Business Ethics, 42(1), 1–10. Young, S., & Marais, M. (2012). A multi‐level perspective of CSR reporting: The implications of national institutions and industry risk characteristics. Corporate Governance: An International Review, 20(5), 432–450. Zattoni, A. (2011). Who should control a corporation? Toward a contingency stakeholder model for allocating ownership rights. Journal of Business Ethics, 103(2), 255–274. Domenico Campa is a Professor of Accounting at the International University of Monaco (Principality of Monaco). He holds a Ph.D. in Accounting from the University College of Cork. He served the board of the European Accounting Association as national representative for Ireland from 2013 to 2016. His research interests include auditing, corporate governance, corporate social responsibility, earnings quality, and IFRS adoption. He published in recognised international refereed journals including Accounting and Business Research, Journal of Accounting, Auditing, and Finance, International Journal of Corporate Governance, International Review of Financial Analysis, International Review of Law and Economics and Managerial Auditing Journal. Evy W. A. Zijlmans is an Analyst Capital Structuring and Corporate Finance Advisor at Rabobank Utrecht (the Netherland). She holds a Master of Science in Business and Management (First Class Honour) from Trinity College Dublin and a Master of Arts in Art History, Modern and Contemporary Arts (cum Laude) from the University of Groningen. During her studies she investigated the professionalization of corporate arts collection based on a sociology theory of arts and the art-based initiatives of financial institutions. Having a strong background in both arts and business, she has also been a freelance consultant for art startups.

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