Governing the Responsible Investment of Slack Resources in Environmental, Social, and Governance (ESG) Performance: How Beneficial are CSR Committees?

Heubeck, Tim; Ahrens, Annina Article — Published Version Governing the Responsible Investment of Slack Resources in Environmental, Social, and Governance (ESG) Performance: How Beneficial are CSR Committees? Journal of Business Ethics Provided in Cooperation with: Springer Nature Suggested Citation: Heubeck, Tim; Ahrens, Annina (2024) : Governing the Responsible Investment of Slack Resources in Environmental, Social, and Governance (ESG) Performance: How Beneficial are CSR Committees?, Journal of Business Ethics, ISSN 1573-0697, Springer Netherlands, Dordrecht, Vol. 198, Iss. 2, pp. 365-385, https://doi.org/10.1007/s10551-024-05798-6 This Version is available at: https://hdl.handle.net/10419/323328 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. http://creativecommons.org/licenses/by/4.0/ Vol.:(0123456789) Journal of Business Ethics (2025) 198:365–385 https://doi.org/10.1007/s10551-024-05798-6 ORIGINAL PAPER Governing theResponsible Investment ofSlack Resources inEnvironmental, Social, andGovernance (ESG) Performance: How Beneficial are CSR Committees? TimHeubeck1 · AnninaAhrens1 Received: 13 May 2024 / Accepted: 5 August 2024 / Published online: 14 August 2024 © The Author(s) 2024 Abstract Possessing slack resources enables businesses to invest in innovative and stakeholder-focused initiatives. Therefore, we posit that higher slack resources encourage businesses to allocate these resources to improve their environmental, social, and governance (ESG) performance. Moreover, as a central sustainability governance mechanism, we hypothesize that the corporate social responsibility (CSR) committee supports investing slack resources in ESG initiatives. Using data from Nasdaq-100 firms, we find initial support for a positive effect of slack resources for ESG. However, further analyses reveal that slack resources become detrimental to ESG after an economically relevant threshold, indicating an inverted U-shaped effect of slack resources. Additionally, despite their generally positive effect, we uncover that CSR committees cannot effectively enhance the benefits of low or moderate slack levels for ESG nor prevent the detriments of elevated slack levels for ESG. Therefore, our study significantly contributes to the ongoing discourse surrounding slack resources, ESG, and the usefulness of CSR committees. These findings hold significant implications for ethical resource allocation, urging firms and their decision-makers to reconsider the dual-edged role of slack resources in the unique ESG context and support the CSR committee in realizing its potential for promoting sustainability and ethical practices within the organization. Keywords CSR committee· ESG performance· Slack resources Introduction Corporate social responsibility (CSR) is a significant concern for modern-day corporations, which need to balance tensions between profit-maximization goals (the shareholder view) and societal pressures for a sustainable, equitable, and transparent business environment (the stakeholder view) (Delgado-Ceballos etal., 2023; Fatima & Elbanna, 2023). Even more so, shareholders have begun to advocate for explicitly integrating CSR into business operations and strategies (Fatima & Elbanna, 2023). As a measure of CSR, environmental, social, and governance (ESG) performance has become a crucial nonfinancial metric (Martiny etal., 2024).1 Despite receiving extensive attention, the connection between ESG and firm performance remains contentious, but most research supports the positive effect of ESG on financial performance (Huang, 2021). Thus, due to its financial materiality and the growing recognition of socially responsible investing (Martiny etal., 2024), it becomes imperative to understand the factors that drive ESG. Previous research has explored various organizational factors as predictors of ESG (for an in-depth review, refer to Gillan etal., 2021), among which resource availability has emerged as an ESG conduit—or, conversely, a barrier when lacking (Hong etal., 2012). Slack resources are the “potentially utilizable resources that can be diverted or redeployed to pursue the goals of one or more organizational actors” (Mount etal., 2024, p. 13); thus, they * Tim Heubeck tim.heubec[email protected] 1 Chair ofInternational Management, Faculty ofLaw, Business, andEconomics, University ofBayreuth, Universitätsstraße 30, 95447Bayreuth, Germany 1 ESG covers a wider range of issues than CSR or corporate social performance (CSP) due to its three underlying pillars related to environmental (e.g., resource use, carbon emissions), social (e.g., employee rights, diversity), and governance (e.g., shareholder protection, board independence) considerations (Martiny et al., 2024). In conjunction with the measurability of ESG performance, we will use firms’ ESG performance to measure the sustainability performance of firms related to these three pillars. 366 T.Heubeck, A.Ahrens represent an adequate measure of resource availability. However, the direct role of slack resources for ESG remains poorly understood. This comprehension is crucial because slack resources are pivotal in facilitating or constraining organizational outcomes (Mount etal., 2024), including ESG. Drawing on the resource-based view (RBV) (Barney, 1991), prior research suggests that slack resources could represent a double-edged sword for ESG. For one, slack resources facilitate the beneficial impacts of ESG on organizational outcomes, notably firm value (e.g., Alshorman etal., 2024; Lu etal., 2023) and performance (e.g., DuqueGrisales & Aguilera-Caracuel, 2021; Lin etal., 2019). Other research suggests that financial slack may undermine CSR efforts (Shahzad etal., 2016) or be unrelated to CSR (Xu etal., 2014). Therefore, given the general significance of slack resources for ESG and the potential duality within slack deployment, it becomes evident that investigating the impact of resource slack on ESG performance is crucial to research and practice. There are also significant gaps in the current knowledge of slack resources in the ESG context. Firstly, the limited research on slack as an enabler of ESG concentrates on financial slack resources (e.g., Lin etal., 2019; Shahzad etal., 2016; Wasiuzzaman etal., 2022), which may limit the understanding of the nuanced effects of slack on ESG because slack resources comprise more than financial resources. Specifically, slack resources are multidimensional, comprising unabsorbed (e.g., liquid resources) and absorbed slack resources (e.g., excess staff). This distinction is significant due to the varying underlying characteristics of the two slack types (Marlin & Geiger, 2015; Mount etal., 2024), especially in the CSR domain (Zhao etal., 2024). However, previous research has either focused on unabsorbed slack (e.g., Islam etal., 2021; Wasiuzzaman etal., 2022) or absorbed slack (e.g., Mattingly & Olsen, 2018; Shang etal., 2023; Xu etal., 2014). Thus, there is a lack of research that examines both slack types as direct antecedents to ESG, which might explain the conflicting findings obtained in previous studies. Moreover, within the ESG context, slack resources have predominantly been conceptualized through the lens of the RBV. While this viewpoint effectively explains the buffering and exploration-enhancing advantages of slack resources (Mishina etal., 2004; Nohria & Gulati, 1996), it overlooks the potential drawbacks from an agency-theory standpoint (Jensen, 1986; Leibenstein, 1969), such as fostering managerial self-opportunism or loosening control systems (Bourgeois, 1981; Nohria & Gulati, 1996). Thus, framing the discussion of resource availability in the ESG context within a more comprehensive theoretical framework can illuminate the potentially dual nature of slack resources in corporate sustainability. Additionally, slack resources have predominantly been examined as a contingency factor in the relationship between ESG and organizational outcomes (e.g., Lin etal., 2019; Uyar etal., 2023; Zhao etal., 2024), overlooking the potential direct impact of slack resources on ESG. This research gap is significant as slack resources serve to reconcile shareholder and stakeholder interests (Shahzad etal., 2016), potentially acting as both drivers and barriers to ESG performance. Finally, existent slack research tends to view CSR as a voluntary endeavor (e.g., Harrison & Coombs, 2012; Kang etal., 2016; McGuire etal., 1988), despite ESG performance being increasingly recognized for its financial materiality (e.g., by enhancing reputation capita or attracting investors) (Delgado-Ceballos etal., 2023; Jebe, 2019). Prior research has focused on slack resources in the context of CSR (e.g., Islam etal., 2021; Shang etal., 2023) and not the new context of ESG, which is potentially less voluntary and in all cases more comprehensive—consequently, more difficult to realize—than CSR. Therefore, it is essential to explore whether slack resources can also facilitate, at least in part, non-voluntary ESG activities. Considering these intertwined gaps, we pose the following research question: Are slack resources drivers or barriers to ESG performance? To complement the RBV with an agency-theory lens, we propose that the relationship between slack resources and ESG should be studied under the contingency of CSR governance. Especially a dedicated CSR committee—composed of directors skilled to identify, formulate, and implement sustainability strategies and raise their importance in the boardroom (Fuente etal., 2017)—could lead to enhanced ESG performance through slack resources (Radu & Smaili, 2022). Further, CSR committees align with agency theory’s premise that boards fulfill fiduciary responsibilities by monitoring managerial actions (Hillman & Dalziel, 2003). A distinct CSR committee can facilitate better board supervision of ESG-related decisions and guide managers toward more ethical and accountable conduct (Gill, 2008; Radu & Smaili, 2022), indicative of a shift from narrow shareholder focus to broader stakeholder consideration (Gill, 2008). The CSR committee could serve as a mechanism for directing slack resources toward ESG endeavors, primarily due to the consideration and monitoring of stakeholder interests at the strategic level (Eberhardt-Toth, 2017). Consequently, CSR committees have the potential to address ethical challenges surrounding the managerial allocation of slack resources by ensuring that these surplus resources are directed toward environmental, social, and ethical initiatives (Leyva-de la Hiz etal., 2019). However, despite the potential benefits, the presence of a CSR committee might be merely symbolic, lacking the efficacy needed for effective managerial oversight of ESG issues (Chams & García-Blandón, 2019; Michelon 367 Governing theResponsible Investment ofSlack Resources inEnvironmental, Social, and… & Parbonetti, 2012). Recognizing these potentially conflicting effects underscores the necessity to discern which aspect is pertinent when making investment decisions regarding slack resources. This argument leads to the second research question: How does the presence of a CSR committee influence the relationship between slack resources and ESG? This study explores these two interconnected research questions using 12year data from Nasdaq-100 firms. Grounded in an RBV framework, the results support the positive effect of slack resources on ESG. However, they also reveal that the presence of a CSR committee positively influences ESG but attenuates the positive association between slack resources and ESG performance. We perform additional analyses to shed light on the underlying dynamics. Firstly, we demonstrate that the effect of slack resources on ESG is not linearly positive; instead, it follows an inverted U-shaped trajectory, where the effect of resource slack turns negative beyond an economically relevant threshold. Secondly, we reveal that the unabsorbed slack dimension predominantly shapes the slack effect, albeit its magnitude increases when both slack dimensions interact in driving ESG. Thirdly, the impact of resource slack is discernible in the environmental and social dimensions of ESG but not in the governance dimension. This study offers several contributions to management literature. We enrich the RBV by identifying slack resources as pivotal facilitators of ESG performance. Furthermore, the inverted U-shaped effect demonstrates a crucial tradeoff between resource slack and ESG performance: while resource availability fosters ESG at low slack levels, excessive slack resources increasingly impede ESG. Hence, our findings align with the documented inverted U-shaped relationship between slack resources and innovation (e.g., Chiu & Liaw, 2009; Heubeck & Meckl, 2024; Nohria & Gulati, 1996) and invigorate the discourse on slack resources in management and organizational domains (Lu etal., 2023; Mount etal., 2024). We present evidence supporting RBV arguments, indicating that these resources drive ESG at low slack levels. Conversely, our findings align with the agency view and its adjacent inefficiency arguments at higher slack levels, suggesting that high slack levels can pose barriers to ESG. Moreover, this study responds to recent research inquiries (Heubeck & Meckl, 2024; Lu etal., 2023; Mount etal., 2024) by emphasizing the primary influence of unabsorbed slack resources in the ESG context. Furthermore, the findings underscore that slack effects are most pronounced in the environmental and social pillars of ESG, with no discernable effect in the governance realm. Thus, we foster a nuanced comprehension of the relative significance of slack resources for the pillars of ESG, echoing recent scholarly calls (Duque-Grisales & Aguilera-Caracuel, 2021; Shang etal., 2023). Additionally, this study contributes to CSR governance literature by revealing that a CSR committee mitigates the ESG advantages of organizational slack, potentially due to the dual-edged nature of slack resources. Simultaneously, we demonstrate that CSR committees are ineffective in mitigating the adverse impact of slack resources on ESG performance at elevated slack levels. This result challenges conventional perspectives on CSR governance, highlighting the limited ability of CSR committees to influence resource allocation decisions concerning slack resources. Taken together, our study contributes to the discourse on ethical business and sustainable investment behavior. We demonstrate that slack resources can support business ethics while, at the same time, revealing paradoxical tensions in both the relationship between slack resources and ESG as well as the contingency role of CSR committees. These findings hold significant implications for generating a business environment geared toward sustainable and ethical operations. Through this contribution, we shed light on the primary purpose of ethical business in creating “environmental, social, and financial wealth, thereby making a positive contribution to the environment and society in a financially responsible manner” (Spiller, 2000, p. 151). Theory Background andHypotheses Development Slack Resources andESG Performance Slack resources constitute a central component of the resource portfolio and encompass resources beyond the firm’s immediate operational needs (Cyert & March, 1963; Nohria & Gulati, 1996). The concept of slack resources can be traced back to the foundational works of resourcebased theory by scholars like Penrose (1959). Through the lens of the RBV, firms can gain competitive advantages by leveraging their internal resources (Barney, 1991). Accordingly, firms endowed with superior resources—those possessing tangible or intangible assets characterized by value, rarity, inimitability, and non-substitutability (VRIN)—are positioned to pursue strategies and actions that confer competitive advantage (Barney, 1991; Dierickx & Cool, 1989). As determinants of resource availability, slack resources influence the extent to which firms can—and are willing to—allocate resources to projects of varying risk levels (Lu etal., 2023; Nohria & Gulati, 1996). Slack resources are a focal construct in Cyert and March’s (1963) behavioral theory of the firm (BTOF) (Argote & Greve, 2007; Mount etal., 2024). Rooted in the surplus nature of slack resources, the BTOF emphasizes slack’s role in shielding organizations from internal (e.g., goal conflicts, performance pressure reduction) and 368 T.Heubeck, A.Ahrens external (e.g., economic downturns, competitive challenges) disruptions. Slack provides the necessary resources to address and manage these challenges while maintaining the stability of ongoing business operations (Argote & Greve, 2007; Bourgeois, 1981; Lu etal., 2023). Consequently, organizational theorists regard slack resources as pivotal drivers of organizational growth and performance (Lu etal., 2023). These two theoretical perspectives elucidate the primary functions of slack resources in fostering ESG performance. Specifically, slack resources enable firms to fulfill two critical functions, both of which are highly pertinent in the ESG context. The first involves risk-taking, exploration, and innovation, as organizations endowed with surplus resources can more readily mitigate goal conflicts, lower acceptance thresholds, and tolerate delayed or uncertain returns from projects compared to less resource-endowed counterparts. From an RBV perspective, slack resources represent a reservoir of discretionary assets that can be channeled into uncertain endeavors (Bentley & Kehoe, 2020; Mishina etal., 2004; Shahzad etal., 2016), including those related to ESG initiatives. The first function of slack resources encapsulates their role in inducing ESG initiatives by fostering risk-taking, exploration, and innovation, which is essential for companies embarking on long-term and risk-oriented ESG endeavors (Lu etal., 2023). While this perspective has traditionally dominated innovation research (e.g., Bentley & Kehoe, 2020; Tabesh etal., 2019), it is equally applicable to the ESG context. Investments in ESG projects extend beyond firms’ core business responsibilities (Gillan etal., 2021; Jebe, 2019). Therefore, prioritizing ESG projects over other profitable endeavors could entail significant opportunity costs—potentially offsetting the benefits of ESG (Lu etal., 2023). However, firms with slack resources are better positioned to balance shareholder and stakeholder interests as they possess the resources to pursue both simultaneously— without needing to consider the potential trade-off between them (Lu etal., 2023). Existing research corroborates that mitigating financial constraints fosters CSR (e.g., Harrison & Coombs, 2012; Hong etal., 2012). The second function of slack resources pertains to flexibility and responsiveness. Resource-rich firms are equipped to capitalize on emerging opportunities as they possess the necessary resources or can readily mobilize them. Consequently, slack resources enhance the adaptability and agility of firms (Bentley & Kehoe, 2020; Lu etal., 2023). In the ESG context, firms with ample slack resources can invest in new environmentally friendly technologies promptly, without protracted decision-making processes. Hence, firms with substantial slack resources are more inclined to embrace the uncertainty of change (Cyert & March, 1963; Nohria & Gulati, 1996), making investments in ESG more probable. These arguments suggest that due to the (1) enhanced risk-taking, exploration, and innovation and (2) increased flexibility and responsiveness associated with slack resources, firms with higher levels of slack are more inclined to seek out, devise, initiate, and realize ESG initiatives. On the contrary, agency theorists offer a more pessimistic perspective on slack resources, suggesting that an abundance of slack can breed inefficiencies, encourage self-serving behavior, and foster managerial complacency (Bourgeois, 1981; Leibenstein, 1969; Nohria & Gulati, 1996). Consequently, slack resources may lead to heightened risk-aversion and prioritizing personal projects over decisions that enhance value or support stakeholders (Bourgeois, 1981; Jensen & Meckling, 1976; Nohria & Gulati, 1996). However, in the distinctive decision-making context of ESG, research indicates that self-interested managers often pursue initiatives that benefit stakeholders due to their desire for personal fulfillment, recognition, or reputation reinforcement (Masulis & Reza, 2015; Petrenko etal., 2016). Thus, higher levels of slack may also bolster ESG performance as the agency issues associated with slack—such as diminished oversight (Jensen, 1986; Leibenstein, 1969)—empower managers to advance their personal agendas, including enhancing their reputation or expanding their social networks (Masulis & Reza, 2015). In conclusion, we posit that ESG presents a fitting investment environment for slack resources due to the discretionary nature shared by both (Harrison & Coombs, 2012; Kang etal., 2016; McGuire etal., 1988). Furthermore, the escalating pressures toward ESG have transformed ESG from predominantly voluntary endeavors to compelling business imperatives owing to the financial significance they entail (Duque-Grisales & Aguilera-Caracuel, 2021; Jebe, 2019). These arguments lead to the first hypothesis: Hypothesis 1 Slack resources have a positive impact on ESG performance. Moderating Effect ofCSR Committee The specific design of corporate governance structures establishes the framework for a firm’s ethical, legal, and social conduct (Jamali etal., 2008). One specific CSR governance mechanism is establishing a separate CSR committee, which helps companies align their corporate governance with ESG objectives (Fuente etal., 2017; Spitzeck, 2009). Thus, corporate governance structures can be configured to support ESG initiatives. Drawing from stakeholder theory, CSR committees are established to address stakeholder interests and aim to foster sustainability within businesses (Chams & García-Blandón, 2019; García-Sánchez etal., 2019). In addition, Burke etal. (2019) argue that CSR committees serve stakeholder and 369 Governing theResponsible Investment ofSlack Resources inEnvironmental, Social, and… shareholder interests, recognizing that shareholders are increasingly concerned with business actions regarding employees and the environment. Furthermore, CSR committees are driven by creating value and attaining financial success, aligning with shareholders’ expectations (Burke etal., 2019). The CSR committee performs two primary functions to ensure it can effectively shape the board’s decision-making. Firstly, it monitors the board to ensure alignment with the interests of various stakeholder groups and compliance with regulations and policies (Chams & García-Blandón, 2019; García-Sánchez etal., 2019). Secondly, it advises the board to improve decision-making, mitigate risks, and raise directors’ general awareness of ESG considerations (Burke etal., 2019; Eberhardt-Toth, 2017; Fu etal., 2020). In the context of slack resources, the board of directors occupies a central role due to its authority in allocating resources toward ESG (Harrison & Coombs, 2012; Radu & Smaili, 2022). Furthermore, CSR committees shape employee behavior by setting CSR regulations and implementing incentives to promote responsible practices (Liao etal., 2015). Empirical research has demonstrated that a CSR committee positively impacts the ESG performance of firms (Hussain etal., 2018). In their literature review, Velte and Stawinoga (2020) concluded that appointing a CSR committee impacts CSR performance positively. Birindelli etal. (2018) found that CSR committees significantly influence firms’ ESG performance, particularly in communicating their environmental orientation to external stakeholders. However, there is little evidence of whether CSR affects all ESG subfactors equivocally. While Biswas etal. (2018) demonstrated that a CSR committee positively influences the social and environmental performance of Australian firms, Radu and Smaili (2022) found that CSR committees of Canadian firms only influence their social performance. In addition, conflicting findings from other studies prompt a discussion regarding whether CSR committees may function more as symbolic gestures rather than influencing directors’ decision-making processes (Chams & García-Blandón, 2019). Research shows that firms with a CSR committee do not exhibit a greater propensity to reward environmental strategies than those lacking such structures (Berrone & Gomez-Mejia, 2009). Similarly, the presence of CSR committees does not lead to a significant increase in the quality of environmental disclosure (Rupley etal., 2012). In light of these mixed results, we build on Harrison and Coombs (2012), who demonstrated that corporate governance mechanisms influence the relationship between slack resources and discretionary investments, to suggest that a CSR committee will use its influence to encourage the board of directors to allocate slack resources to ESG initiatives. The moderation effect occurs because the CSR committee recognizes the potential for maximizing value for stakeholders and shareholders. Thus, it provides the board of directors with knowledge on sustainability initiatives and guides managers’ decision-making toward enhancing their firm’s ESG performance (Michelon & Parbonetti, 2012). Therefore, we propose the following hypothesis: Hypothesis 2 The presence of a CSR committee positively moderates the relationship between slack resources and ESG performance. Method Sample Selection andData Collection Our research sample consists of firms listed on the Nasdaq-100 stock market index, which includes the 100 largest nonfinancial firms by market capitalization. This sample selection was deliberate, as these firms face considerable stakeholder pressures to engage in sustainable investments due to their prominent position in the capital market, a trend also reflected in the ESG guidelines implemented by Nasdaq (Shields etal., 2021). To ensure an adequate sample size, 2010 was chosen as the starting point for data collection, consistent with prior research that has also been selected this year to mitigate the post-effects of the Global Financial Crisis (Heubeck & Meckl, 2024). The data collection concluded in 2021, which was chosen to account for the one-year lag in ESG performance and represented the most recent data available for the year 2022. An initial list of constituents was compiled from the historical lists of the Nasdaq-100 index spanning 2010–2021 to circumvent survivorship bias (Brown etal., 1992). We sourced data for these firms from LSEG Eikon, a premier financial and ESG data repository widely utilized in numerous previous studies (e.g., Delgado-Ceballos etal., 2023; Just etal., 2023). We collected data for the independent variables for the observation period, with ESG data lagged by one year. Our data collection led to 165 firms, comprising 1439 observations. Table1 summarizes the total number of firms over the specified time frame. Variable Measurement ESG performance is measured using LSEG Eikon’s ESG scores, which rank firms into percentiles (from 0 to 100) and assign corresponding grades (from D− to A +) (LSEG, 2023).2 This percentile score quantifies a firm’s ESG 2 We acknowledge that the choice of ESG data provider may have influenced our results. Variations in ESG scores across different providers could lead to differing outcomes (see Berg etal., 2022 for an investigation of the various ESG score providers). We chose LSEG 370 T.Heubeck, A.Ahrens performance, with the ESG score from t + 1 utilized to address endogeneity concerns (Semadeni etal., 2022). Slack resources are measured by differentiating between absorbed and unabsorbed slack (Sharfman etal., 1988), utilizing averages from measures proposed by Wiseman and Bromiley (1996) and Lee and Wu (2016). Absorbed slack, also known as recoverable slack, is measured by the selling, general, and administrative (SG&A) expenses-tosales ratio, capturing resources integrated into the organizational design, such as personnel, training, or advertising costs. Unabsorbed slack comprises available slack (current ratio = current assets/current liabilities), reflecting disposable resources via the abundance of short-term working capital, and potential slack (debt-to-equity ratio = equity/ liabilities), indicating a firm’s financial structure and borrowing capacity. The presence of a CSR committee is indicated by a dummy variable (assigned a value of 1 if present and 0 if absent) (Endrikat etal., 2021; Radu & Smaili, 2022). Following prior studies, we also incorporated several board and firm characteristics that may influence ESG performance. Table2 provides an overview of these controls, outlining their definitions, the expected relationship with ESG performance, and exemplary studies. Analysis andResults Descriptive Statistics andCorrelations Table3 illustrates the distribution of the sample across different industries. Most of the sample originates from the Manufacturing, Information, and Professional, Scientific, and Technical Services sectors. Table4 summarizes descriptive statistics, including means, standard deviations, and correlation coefficients. On average, firms have an ESG score of 53.51, corresponding to a ‘B–’ grade, indicating above-average ESG performance (LSEG, 2023), consistent with findings from other studies (e.g., Heubeck, 2024). The average scores for each ESG pillar indicate some variance, with firms scoring lowest on the environmental pillar (environmental pillar: 44.11; social pillar: 56.83; governance pillar: 55.01). Firms, on average, possess 1.008 units of slack resources. The averages for absorbed and unabsorbed slack are 0.213 and 1.803, respectively, comprising a mean of 2.324 for available slack and 1.283 for potential slack. These figures align with previous research (e.g., Lee & Wu, 2016), except for the potential slack measure, which is approximately half. Firms in our sample have considerable shortand long-term slack resources due to a relatively low SG&A-to-sales ratio (absorbed slack), a high current ratio (available slack), and a debt-to-equity ratio indicating good financial health and relatively low investment risk (recoverable slack) (Lee & Wu, 2016). Figure1 visualizes the distribution of the slack resource variable. The histogram indicates that most firms have relatively low slack levels due to the right-skewness and high density observed toward the left of the diagram. The slack values range from 0 to about 5 for most of the observations, except for two outliers removed from further analysis.3 Approximately, half of the firms (51.4%) have a CSR committee, consistent with findings from other studies (e.g., Derchi etal., 2021; Radu & Smaili, 2022). As summarized in Table1, there has been an increasing trend in the adoption of CSR committees over time, despite some fluctuations. The later periods especially showcase a substantial increase. This rise might indicate a growing recognition of CSR committees among firms. Table4 also presents mean values and standard deviations for the control variables. We find statistically significant correlations between slack resources, CSR committee presence, and ESG performance. The coefficients indicate no multicollinearity between variables (Kennedy, 2008), which Table 1 Time series: firm count and CSR committee adoption Year 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Number of firms 95 105 122 121 125 130 128 122 127 128 130 106 Of which have a CSR committee 37 48 61 58 55 52 53 54 56 73 101 92 38.95% 45.71% 50.00% 47.93% 44.00% 40.00% 41.41% 44.26% 44.09% 57.03% 77.69% 86.79% 3 Excluding these outliers does not impact our primary results, as confirmed by subsequent unreported tests that included the two outliers. Footnote 2 (continued) Eikon because it is one of the most widely used databased in empirical research (e.g., Delgado-Ceballos et al., 2023; Just et al., 2023). LSEG Eikon is a leading data provider widely adopted by both practitioners and scholars due to its extensive coverage and rigorous methodologies, which establish it as a credible primary source for ESG data (Del Vitto etal., 2023). 371 Governing theResponsible Investment ofSlack Resources inEnvironmental, Social, and… we will assess using variance inflation factors (VIFs) during regression analysis. Statistical Procedure andHypothesis Test Results Based on prior studies (e.g., Heubeck, 2024; Lee & Wu, 2016), a panel data estimator is deemed more appropriate than ordinary least squares (OLS) regression due to the longitudinal structure of the data. The Breusch-Pagan Lagrange multiplier test confirmed the panel data structure, warranting the use of a panel data estimator over OLS regression (Breusch & Pagan, 1980). The Durbin-Wu-Hausman test indicated that the fixed effects model suits the data (Greene, 2019). Detection of possible heteroscedasticity via the Table 2 Control variables: Definition, expected relationship, and exemplary references Variable Definition Expected effect on ESG performance Exemplary studies (1) Board size Number of board members Positive due to increased diversity in perspectives He and Jiang (2019) (2) Board independence Percentage of independent directors Positive due to more efficient monitoring Radu and Smaili (2022) (3) Board meeting number Number of board meetings Positive due to increased board activity and socialization processes Birindelli etal. (2018); Radu and Smaili (2022) (4) Board meeting attendance Average attendance of directors at board meetings Positive due to increased board activity and socialization processes Heubeck and Meckl (2024) (5) CEO duality Dummy variable, coded with values of 1 if the CEO is the board chairman, 0 if otherwise Negative due to decreased monitoring Endrikat etal. (2021); Radu and Smaili (2022) (6) Board gender diversity Percentage of female directors in relation to total board size Positive due to increased diversity and greater stakeholder concern Heubeck (2024) (7) Director tenure Average tenure of board members Negative due to decreased monitoring and increased change inertia Bravo and Reguera-Alvarado (2017) (8) Director affiliations Average number of external corporate affiliations of board members Positive due to increased resource access and information exchange Barroso-Castro etal. (2016) (9) Director skills Percentage of directors with an industry-specific or financial background Positive due to increased monitoring and knowledge He and Jiang (2019); Heubeck (2024) (10) Management compensation Total management compensation measured in 1 million USD Positive due to increased monitoring and better-skilled directors Ryan and Wiggins (2004) (11) Sustainability compensation incentives Dummy variable, coded with values of 1 if senior executives’ compensation is linked to CSR, sustainability, or health and safety targets, 0 if otherwise Positive due to greater incentives to promote sustainability Cordeiro etal. (2000) (12) Firm age Years since incorporation grouped in four age intervals (Coad etal., 2016) Positive due to increased legitimacy pressures D’Amato and Falivena (2020) (13) Firm size Natural logarithm of the total number of employees Positive due to increased stakeholder pressure D’Amato and Falivena (2020); Heubeck (2024) (14) Firm performance Return on equity Positive due to increased resource availability and support for ESG initiatives Huang (2021) (15) R&D intensity R&D spending to sales ratio; missing R&D values replaced with 0 (Koh & Reeb, 2015) Positive due to direct or spillover benefits for sustainable business operations Xu etal. (2021) (16) Industry affiliation Dummy variables for two-digit NAICS codes Captures potential differences between industries Radu and Francoeur (2017) (17) Years Dummy variables for observation years Captures potential differences between years Just etal. (2023); Radu and Smaili (2022) 372 T.Heubeck, A.Ahrens modified Wald test led to the usage of heteroscedasticityrobust standard errors (Greene, 2019). The pre-estimation assessments revealed that a fixed effects panel data estimator with heteroscedasticity-robust standard errors offers the best-fit estimation approach. Standard errors were clustered at the firm level. Table5 presents the regression results, which remain unaffected by multicollinearity, as evidenced by VIF tests and correlation coefficients below conventional thresholds (Johnston etal., 2018; Kennedy, 2008). We executed regression models hierarchically, with Model 1 comprising the control variables, Model 2 adding the slack resource variable (Hypothesis 1), Model 3 including the CSR committee variable, and Model 4 adding the interaction between slack resources and CSR committee (Hypothesis 2). R2 values exceed conventional levels across all models. The hierarchical regression results demonstrate that study variables contribute to the research model’s explanatory power, as additional variables enhance explanatory capacity compared to the baseline model (ΔR2 = 0.127). Hypothesis 1 posited a positive direct effect of slack resources on ESG performance. Regression results support this hypothesis, indicating a positive and significant coefficient (b = 1.863, p = 0.053). Thus, slack resources foster firms’ ESG performance. Hypothesis 2 suggested that the presence of a CSR committee amplifies the positive effect of slack resources on ESG performance. While the interaction between slack resources and the CSR committee is significant, the coefficient is negative (b = −2.185, p = 0.024). Consequently, Hypothesis 2 is rejected due to an opposite effect, implying that the positive impact of slack resources on ESG performance diminishes in firms with a CSR committee. Additional andRobustness Tests Nonlinear Slack Effect The data analysis has yielded somewhat inconsistent results, as indicated by the negative significant correlation between slack resources and ESG performance observed during descriptive analysis, contrasting with the positive significant effect of slack resources on ESG performance revealed in the regression analysis. These findings suggest a potential nonlinear relationship between slack resources and ESG performance, consistent with insights from prior studies in other contexts (e.g., George, 2005; Heubeck & Meckl, 2024; Tan & Peng, 2003). We investigated the presence of a nonlinear effect by incorporating the squared variable of slack resources into the regression model. Our analysis provides initial support for an inverted U-shaped impact of slack on ESG, with the linear effect showing a positive and significant coefficient (b = 5.858, p = 0.005) and the nonlinear effect demonstrating a negative and significant coefficient (b = −1.023, p = 0.004) (Haans etal., 2016). To substantiate this relationship, we employed a three-stage procedure (Lind & Mehlum, 2010). Firstly, Sasabuchi’s (1980) test affirms the inverse U-shaped relationship (p = 0.005), with the joint significance of the slack variables given (p = 0.016). Secondly, the turning point of this inverse U-shaped relationship is 2.863. Thirdly, utilizing Fieller’s standard errors, we calculated the 95% confidence interval as [0.025; 5.640]. Thus, the extreme point lies within the confidence interval. Importantly, these findings were robustly supported by the joint significance of the control variables (p = 0.000) and all model variables (p = 0.000). Table 3 Distribution of firms in the different industries Industry Number of firms Percentage Code Description 21 Mining, quarrying, and oil and gas extraction 2 1.21 22 Utilities 2 1.21 31–33 Manufacturing 56 33.94 42 Wholesale trade 4 2.42 44–45 Retail trade 15 9.09 48–49 Transportation and warehousing 6 3.64 51 Information 45 27.27 52 Finance and insurance 3 1.82 53 Real estate and rental and leasing 1 0.61 54 Professional, scientific, and technical services 21 12.73 56 Administrative and support and waste management and remediation services 5 3.03 72 Accommodation and food services 3 1.82 81 Other services (except public administration) 2 1.21 Total (2010–2021) 165 100.00 379 Governing theResponsible Investment ofSlack Resources inEnvironmental, Social, and… like innovation (e.g., Heubeck & Meckl, 2024; Nohria & Gulati, 1996), remains central to our analysis. Our study underscores that the impact of slack resources on ESG performance hinges on the relative level of slack resources. At low levels of slack, we find support for resource-based arguments due to the facilitating role of slack resources. Thus, our research enriches the RBV (e.g., Barney, 1991; Dierickx & Cool, 1989) by revealing that slack resources can qualify as VRIN resources that infer competitive advantage in ESG. Additionally, we contribute to the BTOF (Cyert & March, 1963) by highlighting the pivotal function of slack resources in resolving conflicts of interest, particularly between shareholders and stakeholders, which are pertinent in the ESG domain. In essence, we demonstrate that lower levels of slack foster ESG performance by fostering risktaking, exploration, innovation, and enhancing flexibility and responsiveness. At higher levels of slack, we find support for arguments rooted in agency theory. Our analysis of the inverted U-shaped effect reveals that an excess of slack resources— beyond the optimal point—diminishes firms’ efforts toward ESG initiatives. This outcome may be attributed to inefficiency, opportunism, and risk-aversion factors (e.g., Bourgeois, 1981; Jensen & Meckling, 1976; Nohria & Gulati, 1996). Consequently, the assumption that self-interested managers prioritize ESG investments due to reputational concerns appears unfounded. Even if this argument were partially valid, the detrimental effects of higher amounts of slack resources outweigh any potential benefits. These findings suggest that an abundance of slack may lead to suboptimal investment behavior in ESG endeavors or diminishing ESG returns from additional investments. Lower levels of slack, in contrast, may compel managers to meticulously assess and prioritize promising ESG initiatives while encouraging more vigilant monitoring by the board of directors. We contribute to the literature by examining the dynamics of various slack types, particularly absorbed and unabsorbed slack resources, in influencing ESG outcomes (e.g., Marlin & Geiger, 2015; Mount etal., 2024; Tan & Peng, 2003). We find that unabsorbed slack resources drive an inverse U-shaped effect on ESG, highlighting their discretionary nature and significant association with ESG outcomes, while absorbed slack shows no significant association (e.g., Islam etal., 2021; Shahzad etal., 2016; Wasiuzzaman etal., 2022; Xu etal., 2014). Our findings suggest that the impact of slack on ESG can vary depending on the type and level of slack resources. Additionally, we do not find an inverted U-shaped effect of absorbed slack on ESG performance, possibly due to differences in research contexts and outcome variables (Shang etal., 2023). Overall, our study underscores the dual nature of discretionary resources in relation to ESG considerations. Furthermore, our research contributes by revealing that the effect of slack resources varies across different dimensions of ESG. While slack resources exert the most pronounced influence on environmental and social performance, they exhibit no discernible impact on governance performance. This phenomenon may stem from firms’ constrained ability to promptly allocate slack resources to initiatives involving management structure, shareholder rights, or overall CSR strategy. In summary, our study significantly contributes to the ongoing discourse surrounding slack resources and ESG by bridging these two distinct areas of inquiry through our theoretical framework. This integration represents a crucial step forward in comprehending the determinants of ESG performance and reigniting discussions on the role of slack resources within the management domain. Contingency Role oftheCSR Committee Our empirical investigation into the contingent effects of the CSR committee reveals two contradicting influences related to ESG. Fundamentally, the results suggest a direct positive impact of the CSR committee on firms’ ESG performance, consistent with previous studies (e.g., Birindelli etal., 2018; Radu & Smaili, 2022). Viewing it through an agency lens, the benefits of a separate CSR committee stem from its monitoring and advisory roles, especially in directing managers who can benefit from the expertise of the environmentally conscious CSR committees (Berrone & Gomez-Mejia, 2009). Our findings also reinforce stakeholder theory, as the CSR committee endeavors to fulfill the interests of diverse stakeholder groups urging firms to enhance their sustainability performance (Michelon & Parbonetti, 2012). However, our findings also demonstrate a detrimental effect of the CSR committee on the relationship between slack resources and ESG performance, indicating that its presence does not encourage firms to invest additional slack resources in enhancing their ESG performance. Consequently, significant questions arise regarding the ability of this subcommittee to influence and steer management decisions. Previous research suggests that CSR committees are purely symbolic due to reputational concerns; therefore, they are not linked to enhanced sustainability performance (Chams & García-Blandón, 2019; Rodrigue etal., 2013). Although this rationale may partially explain our findings, we believe other factors may contribute to the negative moderation effect of CSR committees on the relationship between slack resources and ESG performance. It is plausible that CSR committees lack sufficient authority to influence board or executive decisions on slack resources, serving primarily as advisory bodies whose proposals may not always be followed (Berrone & GomezMejia, 2009). Alternatively, CSR committees may focus 380 T.Heubeck, A.Ahrens more on investing additional slack resources in preventing CSR misconduct than actively promoting ESG initiatives (Rodrigue etal., 2013). Thus, the presence of a CSR committee may not necessarily indicate greenwashing or deception but rather a lack of empowerment to allocate slack resources to ESG initiatives. Another explanation could be that CSR committees have a negative perception of slack resources due to the detriments of high slack levels. Thus, CSR committees may restrain slack investment in ESG, even at low slack levels. We believe this argument could also be linked to the elusive nature of slack resources (Mount etal., 2024). Assessing the level of slack to determine the relative extent of slack (e.g., low vs. high) could be a non-routine and challenging task for the CSR committee. To avoid ESG detriments, the CSR committee may strive to actively reduce the investment of slack resources into ESG—irrespective of the slack level. At the same time, our findings demonstrate that the CSR committee is ineffective in reducing the ESG detriments of high slack levels. Therefore, we provide partial evidence that the pure establishment of a CSR committee is insufficient to mitigate the adverse effects of slack. The CSR committee’s composition could reflect the root cause, as adept committee members might mitigate the adverse impacts of surplus resources by intensifying oversight. Further investigation is warranted to examine how various attributes of CSR committees could influence the slack resources–ESG performance relationship. Given these findings, as agency theory suggests, our research indicates that sustainability governance mechanisms like CSR committees positively influence ESG performance. Therefore, by revealing that the advantageousness of CSR committees depends on the specific context, we pave the way for future research to unpack this subcommittee’s tasks and makeup as well as gauge the firm’s underlying rationale for installing a CSR committee. Managerial Implications Our study holds significant implications for managers looking to enhance their firm’s ESG performance. The first set of implications revolves around the amount of slack resources. Our findings substantiate a general positive effect of slack resources; therefore, we strongly advocate for managers to allocate especially unabsorbed slack resources toward improving ESG performance. However, managers must exercise great caution when determining the amount of slack resources to invest in ESG initiatives. Our study reveals that lower levels of slack positively influence ESG performance, reaching an optimum point beyond which increasing slack resources diminishes ESG performance. In light of this dual effect, we recommend that managers allocate only a modest amount of slack resources to environmental and social initiatives to enhance ESG performance. Therefore, it is crucial for managers to meticulously select ESG investment initiatives, ensuring they are specifically targeted at enhancing overall ESG performance. Investing additional slack resources into environmental and social initiatives may not yield improvements and might be better allocated to other promising causes. Consequently, the findings highlight that the vigilant monitoring of the amount of slack resources invested in ESG initiatives is imperative, especially relevant to the environmental and social pillars, as these are highly affected by slack resources. The second set of implications pertains to utilizing governance mechanisms to boost ESG performance. Specifically, establishing a CSR committee by the board proves valuable in this regard, significantly enhancing ESG performance. Such committees oversee management practices and provide expertise in mitigating misconduct, enhancing overall ESG performance. Firms should contemplate appointing environmentally and socially conscious directors to form a subcommittee, signaling their commitment to stakeholders to improve ESG performance. Second, the CSR committee fosters ESG consciousness not only at the top management level but also among lower-level employees through incentivizing ESG-friendly practices and providing training on avoiding environmental or social misconduct. By instituting a CSR committee at the board level, firms can instill sustainability throughout the organization, meeting stakeholder expectations. Third, since establishing a CSR committee is voluntary, its presence can significantly enhance environmental and social initiatives, and its positive signaling effect can help differentiate firms from competitors and gain a competitive advantage. However, our findings also caution firms to carefully assess the role of their CSR committee concerning slack resources. The pure establishment of a CSR committee is not conducive to translating slack into ESG outcomes, and its presence does not effectively mitigate the detriments of high slack for ESG. Therefore, we advise firms to consider the CSR committee’s composition and equip this subcommittee with sufficient authority. Factors such as the number of independent directors, frequency of meetings, and the directors’ gender or expertise can influence the outcomes of CSR committees (Eberhardt-Toth, 2017; Elmaghrabi, 2021). Since the composition of board committees remains an under researched topic (Alhossini etal., 2021; Rossi & Tarquinio, 2017), more research is needed to study CSR committee composition in conjunction with slack resources and ESG to provide managers with more guidance for deciding who should be on the CSR committee. Limitations andFuture Research We note that our findings should be interpreted with some limitations in mind, which can serve as departure points for future research. First, we focused on publicly listed and large 381 Governing theResponsible Investment ofSlack Resources inEnvironmental, Social, and… firms from a highly developed economy owing to data availability and comparability considerations. Future research could build on the study design to conduct research in less developed economies or smalland medium-sized enterprises. Changing the research setting could provide more insights into the relationships between slack resources, CSR committees, and ESG performance due to different institutional frameworks or decision-making processes that could influence these relationships. Second, while our measure of slack is well established in management literature, future research could utilize emerging technologies, such as generative artificial intelligence, to benchmark specific slack measures against qualitative insights from firms’ annual reports. For instance, leveraging tools like ChatGPT-4o could enable sentiment analysis by developing relevant keywords and analyzing financial reports (Cao & Zhai, 2023). Additionally, we focused on financial slack resources, although other types of slack (e.g., human resource slack) or other intangible resources could influence the level of ESG investment. Third, we have not explored the dynamics between the two slack types (absorbed vs. unabsorbed), nor can we derive an optimal configuration of slack resources in the face of increasing ESG demands. Future research is needed to examine how the underlying slack types interact in affecting ESG outcomes and if there is an optimal configuration of absorbed and unabsorbed slack resources. Fourth, our study design using secondary data did not allow us to illuminate the firm internal processes that led to the deployment of slack resources. Thus, future research is needed to explore whether and how, for example, different perceptions of managers (e.g., opportunity or threat) could lead to different slack deployment decisions for ESG. Fifth, we treated the CSR committee as a binary variable. While this approach is standard practice in related studies (e.g., Fuente etal., 2017; Wasiuzzaman etal., 2022), future research is needed to explore the composition of the CSR committee. For example, the management capabilities of the CSR committee members could play an integral role in influencing the deployment of slack resources, as previous research has shown that managers’ dynamic capabilities are related to sustainability outcomes (Heubeck, 2023). Our study aimed to understand the impact of ESG investments on firm performance across various industries rather than conducting detailed analyses of committee compositions. Although factors such as gender composition are considered important, they fall outside our primary scope and are suggested for future research. Sixth, another limitation is that we only used data from one ESG data provider. Using other ESG rankings might have produced different results due to the lack of a standardized rating system. This variability in ratings from different ESG agencies can significantly impact the perceived performance and efficiency of ESG investments (Berg etal., 2022). Consequently, firms may find it challenging to achieve consistent performance improvements through ESG practices due to these rating discrepancies, highlighting the ambiguous role of ESG. This limitation opens up a potential avenue for future research to explore how different ESG performance metrics affect firm performance. As some studies indicate that investing resources in ESG initiatives is inefficient (Makridis & Simaan, 2024; Mithani, 2017), assessing whether firms should allocate slack resources to ESG initiatives or other areas for better efficiency could be helpful. Last, our study did not test for industry differences, but we controlled for them in our analysis. We focus on deriving general implications applicable across various industries; therefore, we did not conduct cross-industry comparisons. Nevertheless, further studies could close that gap and delve deeper into industry differences, especially exploring how the investment of slack resources in ESG initiatives takes effect in specific sectors such as manufacturing. Conclusion andContributions toBusiness Ethics Although research on ESG and its impact on performance measures is extensive, there exists a gap in studies examining the antecedents of slack resources for firms’ ESG performance and the governance mechanisms shaping this relationship. This study offers an in-depth analysis of the dynamics of slack resources and ESG performance and highlights the importance of further research on the potential influence of governance mechanisms. We have demonstrated that slack resources play a crucial role in ESG performance, revealing a nuanced and contingent relationship. Our findings indicate an inverted U-shaped effect, with low slack levels positively impacting ESG, peaking at an optimal point, and declining after that. This effect is mainly driven by unabsorbed slack resources, notably affecting the environmental and social dimensions of ESG. Despite the general benefits of CSR committees, our study suggests they are ineffective in leveraging slack resources for ESG initiatives or mitigating their detrimental effects. Our research offers a detailed exploration of how slack resources, CSR committees, and ESG performance interact, providing valuable insights into their complex dynamics. This study holds significant implications for business ethics. By shedding light on the financial antecedents of ESG performance, we demonstrate that resource availability is a critical—yet dual-edged—determinant of ethical business operations. Further, while we reconfirm the ESG benefits of CSR committees, we reveal that these sustainability-oriented subcommittees may face challenges in directing the beneficial investment of slack resources toward ESG at low slack levels 382 T.Heubeck, A.Ahrens and that they cannot effectively mitigate the ESG detriments of slack resources at high levels. Thus, we urge firms to reconsider the role of the CSR committee to enable this subcommittee to realize its full potential and effectively contribute to developing strong business ethics and the global vision of a sustainable and egalitarian society. We call on top managers to purposefully allocate slack resources to address today’s most pressing global challenges and broaden their decision-making horizons from self-interested motivations to promote business ethics and responsible investment of company resources. Acknowledgements The authors acknowledge the use of ChatGPT (https:// chat. openai. com/) and Grammarly (https:// www. g ramm arly. com/) to provide suggestions for revising the contents of this manuscript and checking its grammatical correctness. After using these tools/services, the authors reviewed and edited the content as needed. The authors take full responsibility for the publication’s content and confirm that it reflects their original work. Author Contributions Tim Heubeck contributed toward conceptualization, data curation, formal analysis, investigation, methodology, project administration, supervision, validation, writing—original draft, and writing—review and editing; Annina Ahrens contributed toward conceptualization, writing—original draft, and writing—review and editing. Funding Open Access funding enabled and organized by Projekt DEAL. Project DEAL enabled open-access funding. No other funding was received to assist with the preparation of this manuscript. Data Availability Data are available from the corresponding author upon reasonable request but not publicly available due to the data provider’s data-sharing restrictions. Declarations Competing interests The authors declare no relevant financial or nonfinancial conflicts of interest to disclose. They certify that they are not affiliated with or involved in any organization or entity with any financial or nonfinancial interest in the subject matter or materials discussed in this manuscript. The authors have no financial or proprietary interest in any material discussed in this article. Open Access This article is licensed under a Creative Commons Attribution 4.0 International License, which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons licence, and indicate if changes were made. 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