Executive Compensation, Sustainability, Climate, Environmental Concerns, and Company Financial Performance: Evidence from Indonesian Commercial Banks
Round 1
Reviewer 1 Report
I read the paper with interest I think it is an interesting topic but as it stands it requires some more work. I have following comments to make.
I think you need to revisit and revise the paper and pay attention to your style of writing. Sorry, I found it confusing, there are a number of very long statements and you tried to say some many things in one sentence that I lose you by the end of sentence.
In literature review you started with describing the Throughput Model but I feel that the link with your empirical framework and logical discussion is very weak.
1.2 you went to discuss and define terminology in the middle of the paper, you can be concise about it and it is often just a sentence or footnote.
I am not sure why you stopped at 2014, this is 2019, the study is already outdated, I would encourage you to extend the time horizon, if possible to 2018 or at least 2017.
The choice of method is not justified.
I am concerned about your construction of CS concern from the modification of GRI 3.1 disclosure indicators by adopting the manual quantitative content analysis method. To what extent they can really measure CS concern is debatable.
On the question of executive pay and performance of the firm there is also an aspect of endogeneity and is this high pay making firm do better or is it the good performance which is reflected in the high pay?
At the end I would say a good round of proofreading is always a good idea.
Author Response
We thank reviewer 1 for his/her very good comments. Below are our responses to reviewer 1.
I read the paper with interest I think it is an interesting topic but as it stands it requires some more work. I have following comments to make.
I think you need to revisit and revise the paper and pay attention to your style of writing. Sorry, I found it confusing, there are a number of very long statements and you tried to say some many things in one sentence that I lose you by the end of sentence.
The paper has been professionally proofread.
In literature review you started with describing the Throughput Model but I feel that the link with your empirical framework and logical discussion is very weak.
We strengthen this section by including the following in the introduction:
The Throughput Model has been documented in the literature regarding conceptualizing a variety of significant issues in accounting and organizational behavior (Foss and Rodgers, 2011; Rodgers and Housel, 1987; Rodgers et al., 2017), ethics/corporate social responsibility matters (Rodgers et al., 2014; Rodgers and Al Fayi, 2019) and ethical dilemmas in auditing (Guiral et al., 2015; Rodgers et al., 2009). It provides a comprehensive theoretical context for inspecting interconnected processes impelling the decisions that impact on organisations (Nutt, 1998). This model’s distinctive contribution is that it illuminates essential pathways in sustainability decision-making (i.e., a parallel process instead of a serial process). It includes the constructs of perception (framing environmental conditions), information, judgment (analysis of information/environmental condition) and decision choice as it applies to organisations.
1.2 you went to discuss and define terminology in the middle of the paper, you can be concise about it and it is often just a sentence or footnote.
I am not sure why you stopped at 2014, this is 2019, the study is already outdated, I would encourage you to extend the time horizon, if possible to 2018 or at least 2017.
The banking environment in Indonesia is quite stable without the market volatility that other markets are plaque with in their systems.
The choice of method is not justified.
The choice of method is justified by the following studies:
Foss, K., & Rodgers, W. (2011). Enhancing information usefulness by line managers’ involvement in cross-unit activities. Organisation Studies, 32(5), 683-703.
Guiral, A., Rodgers, W., Ruiz, E. & Gonzalo, J. A. (2010). Ethical Dilemmas in Auditing: Dishonesty or Unintentional Bias? Journal of Business Ethics, 91(1), 151-166.
Guiral, A., Rodgers, W., Ruiz, E., & Gonzalo-Angulo, J. A. (2015). Can expertise mitigate auditors’ unintentional biases? Journal of International Accounting, Auditing and Taxation, 24, 105-117.
Rodgers, W., Choy, H.L., Guiral, A., 2013. Do investors value firm's commitment to social activities? Journal of Business Ethics 113.
I am concerned about your construction of CS concern from the modification of GRI 3.1 disclosure indicators by adopting the manual quantitative content analysis method. To what extent they can really measure CS concern is debatable.
Given our state of knowledge, the encoding of CS concerns is typical. For example, the KLD data base set utilizes ordinal scales for some of their measurements of intangible variables.
On the question of executive pay and performance of the firm there is also an aspect of endogeneity and is this high pay making firm do better or is it the good performance which is reflected in the high pay?
We ran a lag model to determine if these issues were a problem.
That is, Table 2 contains a statistical description of the indicators of the impact of executive compensation on company financial performance through its sustainability concerns. To provide additional assurance that the results are not partially attributable to an incomplete first stage model, including the lagged time effect for executive compensation. In addition, the sustainability concern in the third model augments the first and second stage models. Moreover, an endogeneity test with reverse direction between executive compensation and sustainability concern is also applied in the fourth model.
At the end I would say a good round of proofreading is always a good idea.
We had a professional proof-reader to edit the paper.
Reviewer 2 Report
See attached.
Comments for author File: 
Comments.pdf
Author Response
We thank reviewer 2 for his/her very good comments. Below are our responses to reviewer 2.
REVIEWER 2
1. Endogeneity problem
The endogeneity problem is particularly relevant in the context of time series analysis of causal processes. Our study is based upon a theoretical model that has been tested in areas.
Moreover, on page 3 we state “this study provides distinctive empirical results including lagged and moderating tests, as well as recognizing the endogeneity among constructs. Furthermore, this study proposes an alternative measurement of CS concerns as a company’s activity and manifestation of CS by analysing the disclosed integrated content of economic, environmental, and social activities within business processes in corporate responsibility (CR) reporting, or sustainability reporting (SR), according to the modification of GRI 3.1 indicators.”
Further, the following studies implemented the same procedure:
Foss, K., & Rodgers, W. (2011). Enhancing information usefulness by line managers’ involvement in cross-unit activities. Organisation Studies, 32(5), 683-703.
Guiral, A., Rodgers, W., Ruiz, E. & Gonzalo, J. A. (2010). Ethical Dilemmas in Auditing: Dishonesty or Unintentional Bias? Journal of Business Ethics, 91(1), 151-166.
Guiral, A., Rodgers, W., Ruiz, E., & Gonzalo-Angulo, J. A. (2015). Can expertise mitigate auditors’ unintentional biases? Journal of International Accounting, Auditing and Taxation, 24, 105-117.
Rodgers, W., Choy, H.L., and Guiral, A., 2013. Do investors value firm's commitment to social activities? Journal of Business Ethics 113.
Rodgers, W., Mubako, G., and Hall, L. (2017). Knowledge Management: The Effect of Knowledge Transfer on Professional Skepticism in Audit Engagement Planning, Computers in Human Behavior 70, 564–574.
2. What insights can you provide based on your finding? Do they push forward our understanding? What should we do with your research? Do you have any suggestions to improve the current regulation or practice?
This paper suggests that executive compensation, as a determinant factor of corporate sustainability concern, is designed to motivate managers to implement better and to disclose more corporate responsibility activities that are tightly linked to company financial performance, according to the shareholder and stakeholder perspectives, as suggested by Mahoney and Thorne (2006) and Callan and Thomas (2014). Further, we enhanced our conclusion as follows:
Our findings should be particularly important for policy makers, governments, and corporate decision makers that strives for improving social sustainability especially in the area of compensation and performance. We could extend our research study to include international firms and scrutinize wthether the observed patterns prevail in other countries that have unique social institutional enviroments, market development and culture.
Further implications of our paper includes the implementation of ethical decision-making pathways in organizational settings. These pathways can assist future researchers to identify the ethical pathways of the organization relationships through the direct and indirect relationships between policymaking activities, technical expertise and reporting decision.
Finally, our paper was professionally proofread.
Round 2
Reviewer 1 Report
I am glad to see that you have addressed my comments.
Author Response
Dear Reviewer #1,
Thank you for your helpful comments, which we believe will improve the paper.
Reviewer 2 Report
The authors did minimal work to improve the paper. Many of my concerns and suggestions are ignored.
Author Response
Dear Editor,
Our apologies for not sending more completed responses to reviewer’s 2 inquiries. Responses to reviewer #2’s comments are below.
We included the following references to enhance our introduction and hypotheses sections. Further, we included more support to booster the hypotheses:
But is it an agency problem?
As a test for agency theory we state on lines 109-113, we state… For example, using CEO pay slice, CEO tenure, and CEO duality to measure CEO power, Li et al. (2016) demonstrated that CEO power is negatively correlated with firm’s choice to engage in CSR and with the level of CSR activities in the firm. Furthermore, the results suggest that CSR activities are in fact value enhancing in that as firms engage in more CSR activities their value increases.
Li, F., Tao Li, T. and Minor, D. (2016), A Test of Agency Theory: CEO Power, Firm Value, and Corporate Social Responsibility, International Journal of Managerial Finance, 12 (5), pp. 611-628
For H1: (lines 193-200)—we included the following… In addition, Dunbar et al. (2017) found that CSR standing is positively related to CEO pay-risk sensitivity. This demonstrated that firms whose sustainable initiatives are regarded to be fruitful are more likely to provide their CEOs greater risk-motivating financial incentives. They further surmised that this association is propelled by CSR strengths rather than CSR concerns. Finally, the authors offered evidence that firm overall risk and idiosyncratic risk negatively moderated the association between CSR and CEO future risk-taking financial incentives. The mixed findings in recent studies demonstrate that consensus on explaining this relationship has not been reached and that further studies are clearly needed in this area.
Dunbar, C.G. and Li, F., and Shi, Y. (2017). Corporate Social Responsibility and CEO Risk-Taking Incentives. Available at SSRN: https://ssrn.com/abstract=2828267 or http://0-dx-doi-org.brum.beds.ac.uk/10.2139/ssrn.2828267
H2 & H3: lines 208-214 --We added… In addition, Hong et al. (2016) found that firms with more shareholder-responsive corporate governance are more likely to offer compensation to executives associated to firm social performance outcomes. They further argued that stipulating executives with direct incentives for CSR is a valuable tool to increase firm social performance. Their findings make available evidence recognizing corporate governance as an element of managerial incentives for social performance. This suggests that CSR undertakings are more likely to be advantageous to shareholders, as contrasted to an agency cost.
Hong B., Li, Z., and Minor, D.B. (2016). Corporate Governance and Executive Compensation for Corporate Social Responsibility, Journal of Business Ethics, 136 (1), pp. 199-213.
H4: lines 248-249 -- We indicated the following… In addition, Ikram et al. (2019) found that opaque CSR contracts correlate more strongly with measures of good governance and firm value as compared to transparent CSR contracts.
Ikram, A., Li, F. and Minor, D. (2019). CSR-Contingent Executive Compensation Contracts. Journal of Banking & Finance forthcoming.
In the introduction and/or conclusion, you can talk about the contributions
In the conclusions section we state the following on lines 559-580 the following:
We suggest that implementing a model such as the Throughput Model can assist management with its CSR is an organizational obligation to the interests of their customers, employees, shareholders, communities. Further, the Throughput Model’s pathways can provide useful knowledge to managers and executives regarding which links needs to be strengthen for the ecology, social and environmental consequences of their business activities. This also implies that our modeling processes can aid socially responsible firms to have a well-functioning corporate governance system in line with designing the CEO compensation package.
The Throughput Model’s pathways can also stimulate across organizations’ CSR programs, philanthropy, and volunteer efforts that may benefit society while boosting their own brands. Hence, as important as CSR is for the community, it is equally valuable for an organization’s brand and reputation. For example, the paper proffers six dominant ethical positions that can assist management to determine the appropriate pathway that contributes to sustainable development by delivering economic, social and environmental benefits for all stakeholders.
In general, the results put forward that organizations' active engagement in CSR activities and its social performance improve CEO compensation structure in a way that encourages CEOs to maximize firm values in the long run and buttresses organizations’ corporate governance system. Providing that CEOs convey and employ organization’s CSR policies, our results offer noteworthy perspicacity into how and to what extent they govern organizations’ engagement in CSR activities. Although our study emphases is on the effect of CEO compensation structure on CSR performance and market value impact, our findings also suggest avenues for further research on how an organization’s CEO compensation structure contributes to forming the profiles of CEOs and how CEOs perceive their role in organization’s CSR activities.
Round 3
Reviewer 2 Report
Much improved. Some minor comments below.
You should study and rationalize the use of firm size measures in the literature since frim size is the key variable in this area and they affects the independent and dependent variables simultaneously. See Dang et al. 2018. Measuring Firm Size in Empirical Corporate Finance. Journal of Banking & Finance, 86:159-176. After all it is the most significant variable in most studies alike. You need to discuss and justify your firm size measure. The results may not be robust to different measures of firm size, which is very common in this area.
It would be interesting to study or at least discuss other channels of corporate governance. For example, market competition as a governance mechanism: Giroud, X., and H., Mueller, 2011, Corporate governance, product market competition, and equity prices. Journal of Finance 66, 563-600. CEO tournament as governance: Coles et al. 2018, Industry Tournament Incentives, Review of Financial Studies, 31(4):1418-1459. On compensation incentives as governance: Core, J. and Guay W., 1999, The use of equity grants to manage optimal equity incentive levels, Journal of Accounting and Economics 28, 151-184. On mutual monitoring among the executives as governance: Li, 2014, Mutual monitoring and corporate governance, Journal of Banking & Finance, 45, 255-269. If your data doesn’t have those variables, at least, you need to discuss those aspects of corporate governance to give readers a more comprehensive view.
Author Response
Dear Editor,
We thank the reviewer for providing us with additional comments that will undoubtedly improve our manuscript. We replied to the following two issues:
You should study and rationalize the use of firm size measures in the literature since firm size is the key variable in this area
We respond as follows (included on lines 326-335: Although, firm size has been one of the instrumental measures in the literature, since it affects the independent and dependent variables simultaneously (Dang, Li, and Yang, 2018), our study varies in that it uses a process model. That is, this type of modeling opens up the black box by examining the intermediary variables (i.e., between the inputs and outputs) as well as providing a representation of a decision-making process involving CS issues (Foss and Rodgers, 2011; Rodgers, 1997).
Dang, C., Li, Z. and Yang, C. (2018). Measuring firm size in empirical corporate finance, Journal of Banking & Finance, Elsevier, 86(C), pp. 159-176.
It would be interesting to study or at least discuss other channels of corporate governance.
There are other channels of corporate governance. For example, Giroud and Mueller (2011) found that weak governance firms have lower equity returns, worse operating performance, and lower firm value, but only in noncompetitive industries. As a function of CEO tournament as governance, Coles, Li, and Wang, (2018) found that firm performance, firm risk, and the riskiness of firm investment and financial policies are positively associated with the external industry pay gap. Regarding compensation incentives as governance, Core and Guay (1999) found that grants of new incentives from options and restricted stock are negatively related to these deviations. Finally, on the issue of mutual monitoring among the executives as governance, Li (2014) found strong evidence that suggest mutual monitoring provides important checks and balances on CEO power.
Coles, J., Li, Z., and Wang, A. (2018). Industry Tournament Incentives, Review of Financial Studies, 31(4), pp.1418-1459.
Core, J. and Guay W. (1999). The use of equity grants to manage optimal equity incentive levels, Journal of Accounting and Economics 28, pp. 151-184.
Giroud, X. and Mueller, H.M. (2011). Corporate Governance, Product Market Competition, and Equity Prices. The Journal of Finance, 66, pp. 563-600.
Li, Z. (2014). Mutual monitoring and corporate governance, Journal of Banking & Finance, 45, pp. 255-269.
Author Response File: 
Author Response.docx
