Religion and Corporate Governance: Evidence from 32 Countries

• DOI: http://doi.org/10.1111/ajfs.12130
• Published date: 01 April 2016
• Date: 01 April 2016
• Author: Shirley J. Daniel,Jaehyeon Kim

Religion and Corporate Governance:

Evidence from 32 Countries*

Jaehyeon Kim**

Shidler College of Business, University of Hawaii at Manoa

Shirley J. Daniel

Shidler College of Business, University of Hawaii at Manoa

Received 20 August 2015; Accepted 15 February 2016

Abstract

This study seeks to understand the effects of informal constraints, particularly religious

denominations, on corporate governance. Using archival data from a panel sample of 32

countries—between 2006 and 2010—we find that a higher proportion of Protestantism is

associated with stronger corporate governance after controlling for cultural, economic, legal,

and institutional factors. This study provides empirical support for the socio-cultural theory,

which posits that socio-cultural variables such as religion are associated with the level of

agency costs (Charreaux, 2004, Corporate governance theories: From micro theories to

national systems theories, Working Paper). The findings of this study contribute to the cor-

porate governance, accounting, finance, and management literature by showing that social

norms, especially religion, have a strong effect on corporate governance practices. Moreover,

this study provides insights for policy makers who are interested in enhancing corporate gov-

ernance, allowing them to strengthen formal constraints such as rule of law for countries

where there is a low proportion of Protestants, in order to improve corporate governance.

Keywords Catholics; Catholicism; Corporate Governance; Protestant; Protestantism; Religion

JEL Classification: G34, O16

1. Introduction

Weber (1905) claimed that the Protestant work ethic translated to the development

of capitalism. His claim has been considered controversial since it was published.

Larcker and Tayan (2011) and Charreaux (2004) suggest that religion plays a key

role in shaping corporate governance. Specifically, Fama and Jensen (1983) note

*We thank Kee-Hong Bae, Sid Gray, and Ghon Rhee for comments on an earlier version of

the paper.

**Corresponding author: Jaehyeon Kim, Shidler College of Business, University of Hawaii at

Manoa, 2404 Maile Way, Honolulu, HI 96822, USA. Tel: +1-808-956-3249, Fax: +1-808-956-

9685, email: jaehyeon@hawaii.edu

Asia-Pacific Journal of Financial Studies (2016) 45, 281–308 doi:10.1111/ajfs.12130

©2016 Korean Securities Association 281

that Protestantism is likely to have a more positive impact on corporate governance

than Catholicism. Religious groups may attempt to imbue corporations with their

religious values. For example, NACD Directors Daily (2014) reported that the Int er-

faith Center on Corporate Responsibility (ICCR)

1

led to governance changes in

JPMorgan Chase to subject executives to clawback provisions if their business units

engaged in unethical activity, and also to strengthen board accountability and over-

sight. In addition to the JPMorgan case, the ICCR has made a proposal for the sep-

aration of CEO and chairman at the Bank of America.

Religion and culture are distinct (Saroglou and Cohen, 2011; Ronen and Shenkar,

2013). According to Hofstede et al. (2010), there are three kinds of difference between

countries: identity, values, and institutions. Identity is composed of language and reli-

gion; values are national cultures; and institutions consist of rules, laws, and organiza-

tions. According to the social norm theory, social norms affect behavior because people

want to conform to their peer group (Kohlberg, 1967). Religion is a social norm. If the

behaviors of people are not consistent with what religion expects, those people will feel

discomfort. Many prior studies examine how religion affects individuals’ behaviors. For

example, Khavari and Harmon (1982) show that individual religiosity is negat ively

related to the use of illicit or illegal substances. Grullon et al. (2010) observe that firms

with more religious employees show greater monitoring of corporate managers than

those with fewer religious employees. However, some studies find that religion does not

necessarily have a positive influence on the behavior of individuals. According to Agle

and Van Buren (1999), religion marginally affects management attitudes. Terpstra et al.

(1993) observe that atheists are the least involved in insider trading among religious

individuals, agnostics, and atheists. Based on this prior literature, the relationship

between religion and ethical behavior remains unclear.

Many prior studies examine the effects of religion on macroeconomic outcomes.

For example, Barro and McCleary (2003) indicate that religious beliefs in heaven

and hell are positively related to economic growth, but church attendance is nega-

tively related to economic growth. Landes (1998) finds that different religious

beliefs are associated with differences in economic growth. Though a number of

studies explore the relationship between religion and ethical behavior or between

religion and economic consequences, research about how religion might affect cor-

porate decision making is at an early stage. Furthermore, with globalization, the

populations of many nations have become increasingly diverse and the impact of

the proportions of particular religious affiliations on corporate governance practices

at a national or international level has not been investigated.

Policymakers, regulators, and investors emphasize the virtues of good corporate

governance, but defining good corporate governance is difficult. Prior research in

the U.S. has shown that better corporate governance leads to higher firm value

1

The ICCR is a religious group that files proxy resolutions for social values it supports to be

reflected in corporate actions. The stated purpose of the ICCR is to enable employees, cus-

tomers, and shareholders of multinational corporations to have a better future.

J. Kim and S. J. Daniel

282 ©2016 Korean Securities Association