Social Responsibility and Financial Performance - Literature review Example

Social Responsibility and Financial Performance Introduction Business entities are required to perform their duties, manage their image, and be responsible for their behaviors, generate benefits to the society. All these constitute Corporate Social Responsibility. There are various conflicting notions on the significance of corporate responsibilities to the environment and society (Lance, 2001). The main motive behind this literature review is to conduct an analysis through various studies in order to provide an understanding of the role of corporate social responsibility on financial performance and shareholders’ value. In order to conduct a literature review, two main themes are being highlighted including the relationship of CSR and financial performance and the relationship of CSR and Shareholders Value (Aras et al., 2010). A literature review is carried out by incorporating conceptual and theoretical frameworks (Aupperle et al., 1985). The theoretical framework provides relevant theories and models associated with corporate social responsibility, and its impact on financial performances and shareholders’ value. The conceptual framework would improvise the need of research on the basis of previous researches by various scholars and examining their objectives, methodology adopted and research findings. This provides insight on how different variables identified in themes chosen are linked together and are a significant part of in the corporate sector. Theoretical Framework Definition The emergence of corporate scandals, financial responsibilities and environmental threats has sensitized the society to be concerned with the social and ethical responsible behavior of companies. The concept of Social Responsibility (CSR) refers to the role of businesses towards the society. In the past, questions have raised various controversies whether corporations have social responsibilities or not. Cane and Matten (2010) in their study highlights, ‘it is by now fairly widely accepted that businesses do indeed have responsibilities beyond simply making a profit’ (Crane & Matten, 2010). A number of concepts such as Corporate Citizenship, Corporate Sustainability, and Corporate Social Responsibility are listed with regard to social responsibilities. Until now, no comprehensive and common definition has been accepted under the term. Merriam Dodd defines CSR as a concerning role of managers towards the society. The concept of CSR is also referred as a social obligation of companies (Dahlsrud, 2008). Marrewijk (2003) illustrates that the CSR is the intersection of different disciplines, perspectives, and the ideological position of society, therefore, it is not possible to propose a biased definition. Seth (1975) defines CSR as ‘Social Responsibility implies bring corporate behavior up to a level where it is congruent with the prevailing social norms, values, and expectation of performance’. Fedrick (1960) argues that a business cannot address influences on social norms and expectation performance. Kotler and Lee (2005) state, ‘Corporate Social Responsibility is a commitment to improve community well-being through discretionary business practices and contributions of corporate resources’. Russell (2010) illustrates that the CSR by segmenting businesses and society, stating that the CSR ‘are more practical, localized and more often focused on sustainability.’ Model CSR is a wide field, and a number of theories have been applied in the field. According to the study of Klonoski (1991) divides CSR theories among three different categories, that is, the first group, Fundamentalism, encompassing of all the theories stating that corporations have no social responsibilities or have a very limited one. The second is Moral Personhood and Moral Agency; it states that the organization is ethically responsible for their action. The third is the Social Institutions that have been extensively debated throughout the times, it states ‘corporation’ as a social institution and therefore, the corporation has social responsibilities. Garriga and Mele (2004) categorize CSR theories on the basis of social reality that is 1) Instrumental Theories: Corporation are the wealth creation elements in the society and the social activities are only accepted with the continuous creation of wealth (shareholder value approach) 2) Political Theories: Under the power the political arena corporations accept duties and rights to participate in the social activities. 3) Integrative Theories: the theory argues a corporation is an element that integrates the social demands, that is, the growth of the business is dependent on the continuity, growth or existence of society (Dahlsrud, 2008). 4) Ethical theories related the social responsibility of the corporation with the society on the ethical ground. They state that the corporation and society both are embedded with ethical values (sustainable development concept). Windsor (2006) classifies CSR theories on the competitive approach that is associated with the development of the CSR literature (Dahlsrud, 2008). Significance Several studies have been conducted to determine the effectiveness of CSR on the corporate financial performance. The study of Barreto (2008) evidently points the direct relationship between CSR and Financial performance. The CSR Program of Marks and Spenser in 2007 stated, ‘with the ultimate goal of becoming the world’s most sustainable major retailer’. After the five years of the program, the business turned out to very profitable. The recent survey of Accenture and UNGC 2010 show that the most of the CEOs believe that the CSR can improve the competitiveness and financial performance of the organization. It is also believed that the CSR plays a critical role in the competitiveness and future success of the corporation. Therefore, CSR has drawn attention of scholars to understand the relationship between CSR and Corporate financial performance. The reputation of the corporation and welfare of its stakeholder play a crucial role in the long-term survival and wealth maximization. Werther and Chandlet (2006), highlights that the CSR greatly influences the reputation of the corporation that eventually affect its market and shareholders’ value. The finding of Montiel (2008) depicts that the financial performance of the organization directly influences the value of the organization. Reputation of an organization and welfare to its stakeholder are most critical elements for stockholders wealth maximization (Montiel, 2008). Windor (2006) argues that the corporate activities create negative externalities that have to be addressed by setting rules, policies or even by corporation themselves (Windsor, 2006). Conceptual Framework CSR and Financial Performance Corporate Social Responsibility has always been linked with financial performance. Some scholars have the view that their relationships pose a positive role and others have been critical about this aspect. These issues concerning CSR are debated across organizations since ages across countries. As there is no agreed definition of CSR, it is difficult to adapt effective ways to measure it. In the beginning, the relationship between corporate social responsibility and society was examined and then later the application of these processes in regard to the business was determined. In order to determine the effectiveness of corporate social responsibility on financial performances, various researches are conducted that provide distinct findings, which are as followed. A practitioner Fitch (1976) has conducted a study to determine how firms are required to be socially responsible for their behaviors. In order to find relationship between CSR and financial responsibility, accounting based methodology is mostly adapted. However, these methodologies may have discrepancies as managers may manipulate performances and results. Also, the risks factors may also have an impact. To reduce these shortcomings, Fitch found that the stock market based measures are more effective and they eventually reduce varied results from occurring through accounting measurements (Ullmann, 1985). The only limitation could be on the investor’s part to instill an understanding of the firm’s performance (McGuire et al., 1988). A study conducted by Marc Orlitzky (2003) provides an understanding of the relationship between Corporate Social Performance (CSP) and Corporate Financial Performance (CFP). A meta-analysis was conducted constituting of about 52 studies providing about 33,878 observations. The findings of the research indicate that there is a positive correlation between the two, which is bidirectional, and the main mediator, which had any impact on the research, was basically the reputation. The findings of this research indicate that employees are more inclined towards performance in respect to social interaction and this gives rise to greater financial performance, main reason being, that they want to safe guard their reputation and image. Similarly, another research by Tsoutsoura (2004) provides answers that confirm with the analysis of Waddock, Graves (1997), and Auperle (1985). An examination of the research is in terms of legitimacy of corporate social responsibility through exploration using dataset of 500 firms of S&P from the years 1996-2000. Empirical tests used in its methodology are generating statistically positive approach that gives rise to bottom-line benefits. The conclusions from this study indicate that it is difficult to quantify the benefits, which are associated with the responsibility, but the experiment provides insight that corporations and firms, which have better financial performances, may invest more in employee relations, and CSR, but those firms who are facing internal problems may have difficulty to sustain themselves. Such a perspective gives rise to a theory of Slack resources (Waddock & Graves, 1997), which states the same. McGuire (1988) conducted a study in order to find out effective measurement of CSR. According to him, three methods are used to measure CSR in order to determine financial performance. The first method involves evaluation of corporate policies. The second method involves evaluation through annual reports, and third method is through data collection. Even though, these methodologies provide implications of CSR, but findings suggest that all these measurements give different findings. Moreover, the measurement is also undertaken through pollution controlling (Chen & Metcalf, 1980). A study proposed by Cochran and Wood (Cochran & Wood, 1984), propose an association of corporate social responsibility with financial performance. The research provided by Li (2012) is expanding Cochran and Wood’s study by conducting an empirical test of about 400 firms’ observations from the period of 1999-2009 to find its involvement. The result through regression analysis of the two provides a proactive association between CSR and financial performance and also reached conclusion that the age of assets have a long-term correlation with CSR. Looking at these studies one can deduce that most of these findings indicate the same positive relationship between the two, but there was a study by Aras (2010), which showed that there was no relationship between corporate social responsibility and financial performance, but corporate social responsibility is just an important as part of a corporation. The authors instilled study at Istanbul Stock Exchange (ISE) through their Social responsibility policies, examining their financial indicators using content analysis method of Bowman and Haire (1975). Furthermore, Montabon (2007) provides an analysis of Environmental management practices (EMPs), with financial performances through a method involving 45 corporate reports provide an analysis that there was a significant positive relationship existing between them. This methodology of content analysis is conducted using scheme and rules. In this regard the company’s annual report was used as a medium for coding. The study shows that other factors may be affecting on the performances as firm size and risks involved, etc. The research findings indicate that there is the relationship between CSR of any firm and the firm size with no significant relationship between CSR and financial performance. Such studies indicate that the relationship between the two is a debatable topic and different scholars have a different point of view relating to CSR and financial performances. There is another study by Mellat, Parasat and Adams (2012), which investigated the effect of CSR in an organization. The findings of this research indicate that corporate social responsibility has a positive effect on the internal performance of the organization and does not have any influence on the firm’s outside performances as organizations are normally economically driven. This research was conducted in a petroleum industry, and it improvises that benchmarking is an important part of the corporate world through which employees take this responsibility upon themselves to add beneficial and qualitative performances. Iran was taken as a sample where the participants were all male with qualifications of Bachelors degree. Methodology was run through empirical testing and validity measures. The content of the company’s information is measured through accounting bodies to ensure qualitative management. This methodology along with confirmatory analysis model gave rise to the findings that the corporate responsibility emerges from the upper management to the lower management level. It also shows that management can play an effective role improving the organizational performances to generate positive internal quality systems. The findings showed negative results for external quality results as the regression coefficient came negative. Though, there is a link between CSR and financial performance, but this link weather it is positive or negative is still debatable (Russo & Fouts, 1997). According to the study of Parast and Adam (2012), the concept of quality management has broadened the scope of supply chain, as well as addressing quality activities of suppliers and customers. The study emphasizes on the quality management correlating it with the interaction level of the corporation engaging with the environment (Parast & Adam, 2012). Parast and Adam (2012) in their study examine the external and internal benchmarking of the Petroleum Industry to determine it financial performance. It conceptualizes corporate social responsibility with the quality management with regard to its financial performance. A survey instrument was used to gather information about the quality management conduct the research. Middle east countries are the prominent petroleum industry, and therefore, a list of Middle East petroleum corporations was selected for the research. The finding of the study provides an understanding regarding the effect of corporate social responsibility on the organizational performance. It highlights that the top management are the main support to drive and ensure implementation of social responsibilities in their practices. The results of the study show a positive relation of corporate social responsibilities on the internal and external performance of the organization, whereas the finding of the previous research suggests an indirect relation between corporation responsibility and firms performance. As the petroleum organizations are different from other organization, this is one reason variance among the internal and external benchmarking has been observed. Therefore, it is evident from the study that the corporate social responsibility and financial performance still remain a debatable issue. Mustafa et al (2012) studies the concept of corporate social responsibilities with the companies’ performance of the public listed companies of Malaysia (Mustafa et al., 2012). For the purpose, 200 responses from the region were received to determine the results of CSR on the financial performance of the company (Mustafa et al., 2012). The multi structural equation modeling was used to analyze the relation between the variables. The findings of the study depict a strong relationship with the CSR and firm’s performance, direct and indirect relations were observed from the study. Direct relation between CSR and the company performance was greater than the indirect effect. The study indicates that the direct effects are the main pathways on the reputation of the corporation’s CSR and company performance (Mustafa et al., 2012). One of the limitations of the study is that it applies only on the Malaysian public listed companies (Mustafa et al., 2012). Therefore, it is evident that the reputation of the corporation has direct effects on the CSR and financial performance. In order to study impacts of corporate social responsibility activities on the different industry, a study of Kang and Huh (2010) studies the positive and negative impacts of corporate social responsibilities on the financial performance (Kang & Huh, 2010). The main objective of the study is to measure negative and positive impacts on the hospitality industry. In order to examine the research, two different dimensions have been used to understand the impacts of CSR. The methodology studies CSR with respect to short-term financial performance and long term (Firms value) with the pooled linear regression model to study dependent variables (returns on assets ROA and Returns on Equities ROE) to measure industries profitability with respect to CSR (Kang & Huh, 2010). The research was conducted on four panels, the finding of the study shows that the hotel and restaurant industry show a direct relation between the CSR and financial performance of Hotel and restaurant industry, where as a negative impact between the airlines and CSR has been observed. Moreover, no particular relation between the casino industry and CSR has been determining on the firm’s performance or value (Kang & Huh, 2010). The findings of the study provide an understanding that the firm performance and value stimulates with respect to different industries (Chen & Metcalf, 1980). It is evident from the study that CSR influences particular industry (Kang & Huh, 2010). Therefore, it shall be noted that the CSR, does not necessary influences financial performance of corporation collectively. Dissimilar nature and the different amount of influence have been determined through out the industries (Kang & Huh, 2010). It suggests that the relevant mediators’ influences the mechanism of CSR effects on financial performance in a particular industry (Kang & Huh, 2010). Similarly, a study by Wu and Shen (2013) provides a brief understanding about the association between corporate social responsibility and financial performance with respect to three motives proceeding in the banking industry, that is, strategic choices, altruism and green washing (Wu & Shen, 2013). In order to understand the impact, a sample from different banks from Ethical Investment Research Service (EIRIS) was selected and the data was obtained from 162 banks and 22 countries from 2003-2009 to study the research question. To investigate the impact of CSR on the financial performance in the banking industry, banks were classified among four broad categories to understand the degree of engagement. Heckman two-step regression was adopted to understand multinomial logit model and performance equation. The finding of the study illustrates that the CSR activities positively influence the financial performance in terms of returns on assets and equities, incomes and non-interest incomes of the organization; whereas, the CSR has negative impacts on the non-performing loans. It is evident from the studies that the banks that are involved in the CSR activities have higher financial earnings and asset quality than the banks that are not engaged in CSR activities (Kang, 2010). According to the study of Lee and Sharma (2013), airline industries that are engaged in CSR activities show a positive relation with between the operations related activates on the firm's performance. The methodology adopted for the research was based on the examination and comparison on the OR and Non- OR CSR dimension with relation to the moderate effects on the oil prices relation. For the purpose, five sources were used to collect the data provided through the United States Bureau of Economic Analysis, United States Energy Information Administration with the consumer price index and the Gross Domestic Product to adjust inflation, during the period of 1991-2009, sample size of about 162 observation were identified to calculate the results. The finding of the study illustrates that positive effects of OR on the financial performance of the financial markets that include value added practice and make consequently incorporate the estimation in the airline values. On the contrary, the results of the study demonstrate that the Non-OR CSR activates deteriorate the firm’s performance with respect to the oil prices. It is evident from the study that the CSR dimension in the aviation industry is dependent on the market perception; therefore the financial outcomes of the OR CSR activities in the airline industries are more effective to overcome the oil prices exposures (Lee et al., 2013; Garay & Font, 2012). CSR and Shareholder Values Corporate Social Responsibility and Shareholder Value Maximization: The effect of the Corporate Social Responsibility on the shareholder value can be assessed by a study conducted by Martinaik & Polivka (2012). The study surrounds the question as if there is any impact of corporate Social Responsibility on the Shareholder Value. For answering this query, the study first conducts the logical analysis of such relationship and secondly it focuses on gaining the empirical evidence to prove such relationship. CSR is a long existing subject, which has always been in debate (Mullerat, 2011). The study first discusses the differing opinions about CSR by different economists and socialists. Robert B. Reich who was once a proponent of CSR turned away from it to oppose it quoted it. It’s just because of these differences that there has been no universal definition of CSR. The CSR is seen from different perspectives mainly social, economical and economical (Micheal & Jedreiz, 2005). The Research suggests that only questionnaires and studies have been conducted on CSR, but no experimentation is done to prove it. This gap has motivated this research to conduct practical research. The impact of CSR is considered on different components of the Profit and Loss statement. CSR adds to the expenses and costs of the business (Waddock. & Graves, 1997). Although this leads to additional tax saving and sometimes Governments allow more tax savings on such expenditures, but the effect of tax saving cannot be surpassed by the amount of expenditures incurred. Therefore, this relationship is not worth to be mentioned. The only way CSR can lead to an increase in the shareholder value is by an increase in the revenue. If customers value CSR, they will be inclined to buy products, this will increase the revenue of the company (Backer & Cudmore, 2006). However, in countries where customers are self-centered rather than society-centered, CSR will not lead to a positive impact on shareholders’ value. The study first cites results of the experiments conducted earlier by the behavioral economists who proved that most of the customers are self-less, and then the study criticizes the experiments conducted by such economists. The experiment conducted by Martinaik & Polivka (2012) consisted of two teams. Each member of the team was made to think as a partner of the other team member and asked to allot him the share of his partner. The amount given by the partners was subjected to statistical analysis. However, a rich debate on CSR shows that the subject is gaining popularity exceptionally. This shows that CSR is gaining popularity (Thomson Reuters, 2011). CSR will only increase shareholders’ value if customers are paying a value to the social work performed by the company and are willing to buy products of the company. The study proved that consumers are normally rational as they are unwilling to pay more for the products even if the manufacturers are socially responsible (Edge Hill University, 2008). Another study conducted by Becchetti, Cicirettri & Hasan (2009) is aimed at finding any relationship between CSR and the shareholder value (Social Science Research Network, 2009). For this purpose, 400 Domini index companies were selected from 1990-2004. The study has an underlying assumption that investors are following the investing activities of the company and are aware of the fact that the company recognizes its Corporate Social Responsibility (Byrd, 1992). The effect of the entry and exit of the companies to the Domini index is studied. At first, study is conducted for the frequency of the news coming to the market of entry and exit. Arrival of news conveys the interest of the market for that subject. (Howton, 2009) Then, after it, a study is conducted over the impact of entry/exit on the returns of the company. The impacts on the return were corroborated by following seasons in the stock market so that it can be assured that changes in the returns are solely due to the seasonality of the Domini index. The study shows that the market takes an interest in CSR news and share values increase due to CSR works by companies (Linda, 2010). The exit from the Domini index had a negative impact on returns and not vice versa. Companies, which depart and then arrive at Domini index again, were not able to gather the same response as they gathered on their first arrival (Aupperle et al., 1985) In earlier studies, relationship of CSR and shareholder value maximization is discussed for going-concern companies whose capital structure has not changed substantially. The following study shows the relationship of CSR and shareholders’ value in the case of mergers where capital structures are also changed. Mergers are taken to study because they are tough decisions and go through a number of challenges. Apart from this, the seldom occurrence of mergers makes them unique to be studied. Employees and other stakeholders enjoy a long relation with the firm. The change of management due to the merger pose a threat to such internal and external stakeholders (Edmans, 2012). Firm level study was conducted for CSR performances. The performances included the financial aspect as well and the social perspective, as well. Regression analysis is used to draw realistic results from the research. More than 1,500 companies’ KLD ratings were tested. For giving more support to the results, FTSE 4 Good index is also studied. Since FTSE studies the environmental aspects of the performance by dividing it into more detailed five components, it brings more confidence in the study. After reaching a conclusion that there exists a positive relationship between mergers and shareholder value, an increase in value due to the cross industry effect is removed. This was done because the profitable industry of acquirer may have its effects on less profitable venture of the acquired (Harford, 2004; Agrawal, 1992). Acquisitions were ignored during this study. The study shows that even in case of mergers, the acquiring company and the acquired one, both enjoy high shareholder value in case of high CSR expenses incurred by them. Specifically, the Corporate Social Responsibility displayed by the acquiring company plays a positive role in shareholder value maximization. In case of mergers, if companies prove themselves to be responsible socially, the other stakeholders including employees and investors are also convinced that the company will fulfill the implied contracts to them, as well. This way, merged companies attract more investors to itself (Bauer & Koedijk, 2005). The growing importance of CSR called for more detailed study of this relationship. Kanga, Lee and Huh (2010) conducted a study that examines the relationship of CSR activities on the performance of firms operating in the hospitality industry (Kanga et al., 2010). Many studies have already been conducted on the impacts of CSR over the financial performance of the hotels. The study conducted by Garcia and Cruz showed that there is a positive relationship between the shareholders’ value of the hotel and its CSR activities (García & Cruz, 2007). However, this study is based on the opinions of the managers of the hotels, which is subjective and may be biased. The psychological effects of CSR are studied. Studies show that a bad news is of more attention to the listeners than a good new. It is observed that those who are elder in age pay more value to positive CSR than the younger ones (Mather & Carstensen, 2005). In order to bring more objectivity to the opinion, this study is conducted by examining two dimensions i.e. profits and total firm’s value. Profit indicates the short-term performance and firm value represent the long-term value addition to the company. The value of profit is taken from the financial statements prepared by the management and firm value is based on market results. This is beneficial so that both internal and external perspectives are incorporated in the study. CSR data is gathered from KLD Research and analytics from 1991-2007. The study showed that there is no significant impact of the positive CSR activities on short-term profits, but the firm value is definitely benefited from the CSR activities in the long run. · Future Research & Conclusion After examining all concepts and theories associated with CSR, it can be concluded that the idea whether there is any relationship of corporate social responsibility with financial performance or not is highly controversial as it difficult to measure this aspect due to other factors, which have an influence on it; for instance, employee relations, accurate and reliable data, etc. have a direct influence on financial performance of companies. However, it can be also be suggested that there is a need to explore more studies in this area in order to link profitability and financial performance with CSR to see if the findings are consistent over a period of time. The time interval in which the CSR has an influence on the financial performance also requires to be studied through viable data and methodology. Such research work will help generate ethical and normative ground through which organizations will be required to work pro-actively through corporate social activity, which becomes an important part of their social responsibility. Summary Corporate Social Responsibility is now considered as an integral part of businesses. Some scholars have accepted this concept while some have disregarded its significance in regard to financial performance and others has scrutinized it as it becomes one of debatable topics today. With respect to its definition, function and significance CSR has its role of being responsible to the members of the society and this function makes it liable to play an effective role in enhancing a company’s performance whether it is a financial function, profit making or if it is in respect to shareholders’ value. Theoretical and conceptual framework provides the same understanding through a survey of different researches conducted by scholars. Corporate Social Responsibility has been studied under three main categories: Fundamentalism, Moral Personhood and Moral Agency. and Social Institutions. The impact of CSR on shared value highly depends on the companies’ revenue as most of the people who feel that organizations are concerned with actions and regard CSR as part of their task then they will be inclined towards the product. In any case, the shareholders’ value is more indulged in those companies where there they are more ethically connected and are supposedly responsible for their actions. These researches have diversified results, but in most of the cases, the corporate sector feels that they are accountable to their society and the corporate world has required taking responsibility for their actions. In this regard, the top management can instill effective measures even though there are many risks and environmental factors involved. In order to measure CSR, many methodologies are used but in order to prevent manipulation stock marker based measures can be adopted. Findings also indicate that there can be a positive relationship between CSR and financial performance, negative or new relationship between the two. However, it is difficult to quantify the results that are coming in response to both the elements. The size of the company and the age of the assets also have a correlation with CSR. In the end, it is concluded that there is a need to conduct further experiments on the subject in order to gain additional knowledge on the field though there are limitations in its measurement. List of References Aupperle, K.E., Carrol, A.B. & Hatfield, J.D., 1985. An Empirical Examination of the Relationship between Corporate Social Responsibility and Profitability. 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