Which Dimensions of Corporate Social Responsibility Drive Internal Control Effectiveness ? Evidence from Listed Non-Financial Firms in Pakistan

Abstract

The theorization of CSR as a precursor of good governance infrastructure has steadily gained traction, instead of being a result of a good governance infrastructure, yet internal-control literature has insisted on treating CSR as a unitary construct, as though it were not a real question whether it is a good organizational control system or a bad one that is influenced by its constituent dimensions. It breaks down the Carroll CSR pyramid into seven dimensions, the economic dimension, legal dimension, ethical dimension, philanthropic dimension, environmental dimension, stakeholder engagement dimension and governance-oriented responsibility dimension, and tests the different dimensions with varied impact on the internal control effectiveness (ICE), operationalized by the five components of the COSO Integrated Framework, across listed non-financial firms in Pakistan. Chief financial officers, finance managers, and internal auditors of 268 manufacturing, textile, cement, sugar and chemical industry firms listed on the Pakistan Stock Exchange (PSX) were surveyed in the primary survey to obtain the survey data. SmartPLS 4 was used to test seven hypothesized relationships with partial least squares structural equation modeling (PLS-SEM). The measurement model has shown acceptable levels of reliability, convergent and discriminant validity in all constructs. The results of the structural models show that governance-oriented CSR (β = 0.312, p < .001), ethical CSR ( = 0.241, p <.001) and lawful CSR ( = 0.198, p <.01) have the greatest positive influence on internal control effectiveness, and the impact of philanthropic CSR is relatively weak and statistically insignificant at the traditional 5% level ( = 0.084, p =.073). The effects of economic, environmental and stakeholder-engagement dimensions have moderate, statistically significant positive impacts. The seven CSR dimensions together account 63.4 percent of the variance in internal control effectiveness (R2 =.634; Q2 =.401), which is very high level of explanatory and predictive power. The findings enhance the stakeholder, agency, and legitimacy theory by showing that not every type of socially responsible behavior is equally relevant to control infrastructure and provide PSX-listed companies and regulators with a dimension specific roadmap to bolster internal control by making targeted CSR investment and not generic CSR spending.