Corporate Social Responsibility in Financial Services - Term Paper Example

? Corporate Social Responsibility in Financial Services Table of Contents 3 Introduction: Financial services and corporate social responsibility 4 Research problem 6 Existing literature: corporate social responsibility in financial services 8 Research strategy 11 Use of data sources 12 Investigation of the research problem 14 Central arguments and ideas 15 Recommendation 17 Conclusions 18 References 20 Abstract Considering all sectors of the economy, the financial services sector is one important area that demands proper sense of responsibility towards the society in the plight of financial gains. The financial services area comprises of the economic services provided by the financial institutions in the society for managing the funds of the public for their investments considering the short term and long term gains. The major financial services in the society includes the services offered by credit unions, banks, investment funds, credit card companies, stock brokerage firms, etc. The fund manager, investment advisors and the consultants play a crucial to uphold the interest of the stakeholders who has invested their funds. It is already in vogue that the financial services sector has the primary aim of increasing the value of the investors and are thus not paying due care towards corporate social responsibility. The role of corporate social responsibility in the area of financial services is thus extremely important looking at the interest of the society in which the financial services firm exist. A research on the topic of corporate social responsibility in the area of financial services has been carried out to provide an insight on the significance of performing the role of corporate social responsibility and the impact created on the development of the society followed improvement in performance of the financial services firms. Looking at the growing market share of the financial services, poor suggestions offered by the fund managers to the investors, scandals involving fund management, concerns about agency problems in private equities and reduction of pay levels has increased the importance of corporate social responsibility in financial services. Introduction: Financial services and corporate social responsibility The primary aim of the financial services companies is to provide better service to the depositors and their investors by taking appropriate steps to increase the wealth of the shareholders. In order to provide short term gains to the shareholders by giving more priority to the short term interests, the increase in foul play has increased in the operations of the financial services firm thereby compromising on the security of the money deposited or invested. The investors apart from seeking higher returns through efficient advices of the fund managers are also interested for safekeeping of their shareholder value (Elangovan and Mohan, 2008, p.34). This means that the seekers of financial services would not be ready to incur a loss at the cost of expected higher returns. The investors and stakeholders have become more and more aware of the social, ethical and environmental aspects of their investments for which the corporate social responsibility in financial services has attained more and more significance day by day. The daily operations of financial services firma are supported with the help of resources available from the societies in which they operate. The manpower and client base available from the societies are the major resources that are used by the financial services firms to run and sustain their businesses. It is thus important for the financial services companies to return the benefits to the societies in which they operate. For this reason, the financial services organizations develop their strategies on corporate social responsibility mainly looking into four major areas like manpower sustenance, business integrity, community and the environment. The adoption of corporate social responsibility provides confidence to the investors on the long term sustenance of the organizations and their long term growth prospects. Thus a socially responsible role of the financial services is highly valued by the investors. The emergence of various rating agencies has also occurred looking at the trend of increasing corporate social responsibility activities of the financial services sector (Samuel and Hayes, 1993, p.21). The rating offered by the several rating agencies leads to the flow of information in the market about the policies and strategies adopted by the companies. Also it provides an information whether the financial services organization are looking at long term sustenance in the market or thriving for short term goals by luring in investors. The companies looking to mitigate the damages caused to the investors by providing true advices and guiding them for enhancement of wealth as well as safekeeping of their deposits would adopt the role of corporate social responsibility. Performance on corporate social responsibility not only restricts the damage to the environment in which they operate but also ensures to create a stable environment (Mares, 2008, p.23). This is also a reflection of the long term policy making for the companies giving an impression that the financial services firm are planning for a long term existence. The internal and external stakeholders of the financial services firm get a guideline to decide on the entry or exit of relationship with the companies. The investors, depositors, employees, agencies and the management also show their confidence on the financial services companies based on such information on their activities. The acts of corporate social responsibility are treated as non-financial performance. Thus the ability of the financial services firms to engage in corporate social responsibilities gives an indication of their abilities to invest in non-financial activities as result of adequate retained earnings and asset base for long term growth. The investment in non-financial activities reaps the benefits for the financial services firms to increase their profitability in future by building confidence and faith among the depositors and investors. Financial services business is an area where more than selling the financial product, the experience is sold by the companies to their investors and depositors. An expected promising performance of the investment that leads to the increase in the wealth of the investors would lead to more inflow of customers to the financial services firms (Khan, 2011, p.28). The attachment of individual’s money in the transactions with the financial services firms requires development of faith and confidence between the source of funds and the usage of funds. The sources of funds are the customers who would bet on their wealth at the cost of calculated risk and the funds are used by the banks and the financial services organizations for increasing the returns. Thus the confidence of the public and society is dependent on the actions of the financial services companies which are exhibited through corporate social responsibility. Due to increase in confidence of the market investors, the stock prices of the companies would be sold at a higher price and the price to earnings ratio of the stocks would also increase (Celliera and Chollet, 2010, p.3). This would indicate better performance of the companies as the shares would be traded at a premium due to better future anticipation by the investors. The overall improvement in the performance of the stocks and increasing in valuation of the companies would lead to increase in operations and revenues of the companies thereby increasing the net profits and return to the shareholders. Thus the corporate social responsibility plays a crucial role for the financial services sector (Schwalbach, 2010, p.34). Research problem The research problem in hand is to carry out a research on the significance of corporate responsibility in the areas of financial services. The importance of corporate social responsibility in the financial services sector could be understood by analyzing the impacts of these activities of the financial services sector on the volume and value of transactions by the society. The need for corporate social responsibility in the financial services become more prominent from the impacts on the overall profitability and returns on the investments as a result of restoration of confidence among the investors and the society due to socially responsible actions of the companies. The research also establishes the need for protecting the interests of the people and the society in which the business of the financial services co-exist. The research provides a clear indication to the companies and the flag-holders of the financial services of the approach to be taken while advising clients for enhancing the value for their money keeping aside the narrow short term interests. Apart from addressing the actionable from financial services company, the research also aims to establish the perspective of the investors and the recipients of financial services. The research helps to understand whether the recipients of financial services attach importance to the social activities or are only concerned with monetary gains. The research problem helps in finding the reactions and responses of the recipient of financial services toward activities of financial services sector on non-financial areas. The sensitivity of the society towards performance of non-financial performance would provide a guideline to the financial services of the outlook of the investors. The sensitivity of the investors towards such non-financial performance would determine their decisions for investment which would lead to the flow of information to the market. This is according to the efficient market hypothesis that the information flow to the market would lead to fluctuation of confidence of the public and the society on their future performance and returns. Accordingly the stock prices would also fluctuate leading to fluctuation in price to earnings ratio of the stocks. An increase in price to earnings ratio would mean that the investors would be ready to pay more for the stocks of the company for its each unit earnings and vice versa for decrease in price to earnings ratio. The research problem also includes determination of the change in stock prices or valuation of companies as a result of changes in roles of corporate social responsibility (Idowu and Louche, 2011, p.49). The research provides an indication of the section of investors that are in favour of socially responsible roles of financial services that includes non-financial activities. Thus the research problem is aimed at establishing the scope of corporate social responsibility in the financial services. A hypothesis could be designed for the research to be undertaken. Based on the findings of the research, the hypothesis could be tested to find whether the hypothesis could be accepted in order to reach a conclusion. This completes the design of the research problem. Existing literature: corporate social responsibility in financial services Financial services sectors comprises of a broad range of companies offering services in the financial industry which includes the banks, non-banking financial services, credit unions, insurance companies, credit card companies, investment funds, mutual funds, stock broking firms, etc. While some of the organisations like the banks mainly focus on safe keeping the money of the depositors and at the same time increasing their wealth by engaging the money in profitable investments. Various other loans and financial services are also offered by the banks. Joint ventures and strategic alliance in the financial services sector is also increased in order to serve the customer with more efficient process and at the same time sharing the involved risk. The banks in the financial services sector which lends money to the public are commercial banks whereas the banks that help the business to raise funds either through debt or equity option is called investment bank. The other players like the non-banking financial companies, investment funds and stock broking companies and non-banking financial services mainly focus on offering increased returns to the investors by investing mainly in private equities and taking advantage of the market fluctuation and appropriate time of maturity. These financial services have grown over the years as a result of expected higher returns from the investment in such funds. The funds are formed by a portfolio of government and private equities which also reduces the risk and at the same time optimizes the return. The two aspects in the financial services to the customers include the safe keeping of the funds of the depositors or investors and the providing benefits to the customers through increased returns on their investments. The list of financial services provided by the companies in financial industry is very large. The traditional financial services by commercial banks and other licensed companies include safekeeping of money and deposits, chequebook facilities for withdrawal of funds, internet banking and phone banking facilities, wireless and electronic fund transfers, maintenance and renewal of user-id and password for financial transactions, credit card facilities, international debit card facilities, insurance services, mortgage loans, personal loans and loans for other requirements, etc. The other areas of financial service include mainly the operational areas of investment banks and other financial agencies. The services include advisory services of stock broking, private equity, venture capital for issuance of IPO, debt resolution services, etc. The advisory services on stock broking advise the investors to invest or sell securities and stock of certain companies in order to achieve enhancement of shareholders’ value. The private equity services deal with acquiring a majority stake in a private entity with an intention to acquire the company. The venture capital services of the financial companies include providing capital for starting a venture or business that would help the company to issue an IPO. The debt resolution services are aimed at assisting the individual who has sufficiently high volumes of debt to be paid off. It is needless to mention that the financial services are provided by the companies who have expertise and the knowledge of investment and returns in the market and well conversant with the risk-return trade-off. These services are provided to the people and investors who are willing to increase their wealth through appropriate investments but are not proficient in taking the investment decisions. This evolves the role of financial services for channelizing the funds from the source to the means. Financial services thus have ample scope of unethical business practices which could be adopted by the employee and internal stakeholders. This would impact the interests of the external stakeholders or the customers and also would adversely impact the community and the environment. It is thus the responsibility of the financial services to be responsible towards the society and the environment in which they exist. Several instances of poor governance by the financial services, adverse suggestions and advises by fund managers keeping short term narrow interests in mind, ignorance of wider stakeholder interests and lack of contribution to the community and environment keeping themselves confined only to financial profit earnings have raised concerns among the investors to take the social, ethical and environmental activities of the financial services into consideration for taking decision over entering into a transaction on financial services. Thus financial services companies have inclined towards non-financial activities giving more importance towards their corporate social responsibility. Socially responsible acts of financial services towards tightening their system of governance and widening their areas of interest have helped to gather confidence of their customers (Schwartz, 2011, p.16). Proper training to the employees providing financial services has shown prevalence of better sense to give priority to the investor preference. Socially responsible acts for development of the community and environment have been perceived optimistically by the investors that have helped to improve the profitability in the long run. The engagement of the financial services companies with the non-governmental organizations have helped to uphold the CSR activities and spreading the benefits of new technologies to the rural areas as well (Banerjee, 2007, p.42). This would help to attain financial inclusion by providing financial services to all sections of the society who are deprived of such financial services. Use to green technologies, reduction of usage of paper, wireless connectivity helps to spread the benefits of financial services to a large section of people in a much quicker time. Apart from the engagement in social development and limiting the damages to the society, the financial services have also focussed in making their people socially responsible persons. This has been achieved through a tighter system of governance where the feedback on the code of conduct of the employees would be available for monitoring and tracking purposes. The disclosure of acts of corporate social responsibility by the companies gives rise to rise in share prices of not only the financial services companies but also other companies that are included in the fund portfolio. This occurs as result of the confidence shown by the investors as they perceive that the financial services firm would co-exist for long and is a socially responsible (Bacher, 2007, p.34). The acts of corporate social responsibility being a non-financial performance may be viewed by some sections of the investors as non-contributing to their vested interests. However, the market trend shows that the corporate social responsibilities of the financial services have helped to increase the market share and profitability in the long run. Research strategy The research strategy adopted for finding the scope of corporate social responsibility in financial services involves collection of data from secondary sources. The data collected from the secondary sources are considered to be reliable as these have been collected from the online articles and available documents from the official electronic sites of the organisations. The collected data has been analyzed in the context of the financial services offered by the companies. A hypothesis has been designed for conducting the research. The null hypothesis for the research was that corporate social responsibility in the financial services does not have significant impact on the profitability and long term growth of the financial services. The null hypothesis has been designed for possible rejection under the conjecture or belief that it is true. Thus the null hypothesis designed for the research was tested against the findings of the research that has been conducted using the secondary data sources. The analysis and findings of the research gives a true picture of the effect of corporate social responsibility in the areas of financial services. The impacts of the corporate social responsibility was analyzed by the spread of benefits as a result of the corporate responsibility activities, attainment of financial inclusion as a result of CSR in financial services, restoration of the society confidence in the operations of financial services firm and the extent to which stability in the environment has been achieved. The analysis of the factual data on corporate social responsibility in financial services also provides an indication of how well the damage to the society and people has been restricted in the plight of attainment of financial growth. The analysis of data obtained for the initiative of financial services for corporate social responsibility has been tested against the null hypothesis developed for the research. This helped us to conclude whether the null hypothesis developed for the research could be accepted or rejected. The rejection of null hypothesis meant that the alternate hypothesis has been accepted as per the findings of the data analysis. The acceptance of null hypothesis indicates that there is no sufficient evidence available to accept the null hypothesis. This research strategy helped to analyze the scope of corporate social responsibility in the financial services and also provide a guideline of the impacts of the acts of corporate social responsibility in financial services. Use of data sources The information received from the data sources have been discussed below. Several companies in the industry of financial services have engaged in the acts of corporate social responsibility that has enable them to achieve financial inclusion by providing financial services to a large section of the society and thereby acquire confidence of the investors and achieve long term growth. Charles Stanley is a financial service company headquartered in London (Charles Stanley & Co. Limited, 2013, p.1). The UK based financial service company has the primary aim of maximizing the wealth of its shareholders by increasing the net income year after year. Charles Stanley also recognized the fact that their non-financial performance is also essential from a wider perspective of their business. The non-financial performance of the company is aimed at restoring the confidence of the investors and the society. The people of the society would realize the return of benefits by the financial services company and would accept the business entity as their fellow social citizen. Thus the senior management and board members strategically planned to spend quality time with the employees, clients, shareholders, the community and the environment to percolate the strategic policies for implementation and awareness. Charles Stanley as a part of their corporate social responsibility focussed on establishing a strong system of governance to achieve business integrity, attaching more accountability to the work of their employees and contributing to limit the damages to the environment and the community. Another example of scope of corporate social responsibility in financial services could be understood from the socially responsible acts undertaken by Britain’s Barclay’s bank. Barclays bank has focussed on achieving financial inclusion that carries positive social effects as well as opportunities for future. Barclay’s bank has entered into collaboration with two NGO to set deposit and loan schemes for people in the rural sector. The bank also looks at the opportunities in markets of Africa where 80% of the people do not have access to bank accounts. The acts of social responsibility are due to provide future opportunities for the bank for expansion. Apart from the activities on corporate social responsibilities, the financial services company also publish useful information on their activities to the public and the society. This information was observed in case of Canadian based Scotia Bank (Scotiabank, 2005, p.7). The financial services company publishes a comprehensive report on the corporate social responsibility undertaken by the company. The detail on the contribution of the financial services company on the health, education and social services of the company and its impacts on the customers, employees, shareholders and other stakeholders are given in the report. This helped the company to acquire the confidence of the customers and increase their revenues and long term profits. Investigation of the research problem An investigation and analysis of information obtained from the data of the financial services organization Charles Stanley reveal the following findings. The major areas of corporate social responsibility of the financial services were to implement responsible actions in business practices through strong governance and guidance to their employees (Mallin, 2007, p.38). This ensured integrity of business in financial services as well as creates a stable environment for the environment and the community. All these acts of corporate social responsibility created an atmosphere of confidence in the investors that resulted in the growth of revenue from 105 million pound sterling in 2008 to 119 million pound sterling in 2012. The total equity of the shareholders increased from 71 million pound sterling to 81 million pound sterling. Thus the investors and the society realized that the financial services company would co-exist with the society in the long run and thus entered into financial transactions with the company that improved the wealth of the shareholders over the last five years. Thus corporate social responsibility has huge scope in the financial services (Solomon, 2007, p.47). Although it is a non-financial activity, but the activities meet the psychological demands of the customers and pave the path for long term growth and profitability. Barclays Bank has strategically implemented its policies on corporate social responsibilities by focussing on financial inclusion. Apart from adding value to the society in which they co-exist, the bank also opened new opportunities for expansion into unexplored areas of financial services. The spread of information on corporate social responsibility and its initiative to include all section of people in the gamut of its services has led to its worldwide acceptance in the societies. This has led to the increase in net income of the bank from 4.57 billion pound sterling to around 10 billion pound sterling in the last five years. Due to long term gains achieved as a result of the strategic CSR activities of the firm, the total equity of the stock holders have also increased in the last five years. The financial services firm also take the environment credit rating into account for the purpose of assessing feasibility of loans to be granted. A higher environmental credit rating indicates higher feasibility of repayment. Apart from undertaking the corporate responsible acts in the society, the financial services also need to publish the information on their corporate social responsibilities. This would develop the confidence of the society on the operations of the financial services firm that would in turn lead to the appreciation of share prices and long term growth. The case of Scotia Bank showed that the company methodically publishes the corporate social responsibility report. This led to the flow of information to the investors that influenced their decision of investment in the company stocks. As a result of the corporate social responsibility, the stock prices of the company increased from CAD 48.19 in 17th Jan, 2008 to CAD 58.37 in 1st may, 2013. Central arguments and ideas The central arguments and ideas developed for corporate social responsibility in the field of financial services are based on the use of the data sources and subsequent investigation of the information retrieved from the data sources. The primary focus of the financial services is to maximize the profits of the shareholders and increase the return on equity of the shareholders. The non-financial activities that involve expenses instead of profits over the short term are equally important for consideration of the companies. The operations of the financial services include transaction of money and sale of experience instead of any tangible product to the customers. The expectation of high return is credible to the investors only at the cost of restoration of confidence and faith among the members of the society. The investors are becoming increasingly aware of the non-financial performance and activities of the company considering the trend of poor governance, lack of integrity of the business, increased pay cuts, adverse impacts on the society and environment. There have been ample instances to create an impression on financial services that focus on short term narrow gains against upholding wider interest of the stakeholders. The poor suggestions offered by the financial services organisation for fulfilling their business targets have led to enormous losses for the investors. Thus the attainment of faith among the recipients of financial services is essential for sustaining the long term growth prospects. This confidence building activity could be done by returning the benefits to society that is obtained from the resources offered by the society. Maintenance of strict governance and code of conduct for the employee and creating a stable environment for the community and the environment would attract more customers to financial services. This leads to the increase in customer base and market share which supports long term growth and profitability. Hence, the idea of undertaking non-financial activities like corporate social responsibility would contribute to the development of financial services. Although a section of the investors may view corporate social responsibility activities as expenses that do not increase the shareholders’ wealth, the common view of major section of the society sees corporate social responsibility of financial services as an indicator of good financial performance and anticipates long term stability for the performing financial services company (Crowther and Rayman-Bacchus, 2004, p.26). Recommendation Based on the above research, it could be recommended that the financial services sector should engage more into the activities of corporate social responsibility looking at the long term growth prospects. The acts of corporate social responsibilities may be observed as non-financial activities or net expenses that reduce the wealth of the companies and the shareholders. However, the other side of story tells that activities of corporate social responsibility are investments to explore future opportunities of growth and has advantages of increasing market share and profitability in the long run. The data obtained for the research and the subsequent analysis carried out indicates that financial services like Charles Stanley, Barclays Bank and Scotia Bank have taken up activities on corporate social responsibility that reaped benefits in the long run. In the same lines, the financial services companies need to adopt the roles of corporate social responsibility in order to limit the damaged to the environment, community and the society. The use of new technologies, reduction in the usage of paper and entering into collaboration with the non-governmental organizations would help the financial services to reach the lowest rank of the society and would help to achieve financial inclusion in the countries all over the world. This would lead to the development of goodwill for financial services among the customers. Thus increase in financial transactions would lead to increase in revenue generation and net profits of the financial services sector. Thus long term growth of revenue and net profits could be achieved by undertaking corporate social responsibility. The efficiency in corporate social responsibility activities could be attained by implementing tighter system of governance leading to better integrity of business. The effective implementation of corporate governance leads to responsible actions from the employees thereby creating a stable environment of the financial services. Apart from undertaking responsible actions in the society, the true disclosure of information and reports on corporate social responsibility by the companies in financial services is extremely important (Horrigan, 2010, p.18). The efficient disclosure of information in the corporate social responsibility reports lead to flow of information to the market on the basis of efficient market hypothesis. These information leads to favourable responses from the investors in anticipation of expected favourable responses for future. Thus the share prices and valuation of the financial companies appreciated due to adoption of corporate social responsibility roles. Conclusions The corporate social responsibility in the area of financial services is extremely important from the point of view of the financial service providers as the investors have shown increasing concerns on the ethical, social and environmental performance of the companies. The rise in awareness of society and the investors come at the back of poor services provided by the financial service providers which have confined their financial advices looking at the narrow short term gains of the industry. The shareholders thus attach high importance to the corporate social responsibilities of the financial services which gives an outlook of the market players about their prospects for long term existence in the industry and also an indication of the financial health of the companies. Several financial services companies like Charles Stanley, Barclays Bank, Scotia Bank, etc. have taken initiative to become socially responsible citizens by undertaking corporate social responsibilities. Apart from tightening their business integrity and contributing to development of society through activities like financial inclusion, the companies also take necessary steps to publish reports on corporate social responsibility undertaken by them. The reports on corporate social responsibilities lead to spread of awareness among the society on the responsible actions undertaken by the companies which has impact on the stock prices of the company. References Bacher, C. 2007. 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