CSR and Organizational Financial Performance - Research Paper Example

CSR and Organizational Financial Performance Name: CSR and Organizational Financial Performance Course: Tutor: Institution: Date: Table of Contents Table of Contents 2 Executive Summary 3 1.0 Introduction 4 2.0 Findings Credibility 5 3.0 CSR and Financial Performance Enhancement 6 3.1 Corporate Governance 6 3.2 Environmental Responsibility 9 3.3 Social Responsibility 13 4.0 CSR as a Liability to Organisations 16 References 21 Executive Summary The concept of corporate social responsibility and its contribution towards the financial performance in organisations is a new financial aspect. In this case, there exist literature gaps in the role and contributions of this concept in organisational financial performance. This report identifies the various financial performance evaluation techniques and their role in an organisation. As such, it identifies the profitability, liquidity, and gearing ratios as the key financial performance evaluation tools. To this effect, the report evaluates the role of the three corporate social responsibility components, corporate governance, environmental responsibility, and social responsibility against these measures. Further, the report examines the extent to which CSR programs serve as liabilities in organisational corporations due to increased costs, bureaucracy, and organisational efforts diversion. As such, the report offers a critical analysis of the CSR programs reviewing both their financial merits and demerits. Conclusively, the report establishes that despite the challenges and demerits of CSR programs, CSR enhances increased organisational financial performance on all the three aspects. 1.0 Introduction In the wake of globalization, organizations find it hard to compete in the highly dynamic international markets. These markets are increasingly changing making organisational market influence a continuous challenge. This is due to increased market infrastructures allowing for cultural diffusion, market integrations and increased customer market knowledge. Specifically, in the recent past, customers, market, public, as well as other market stakeholders have increasingly known their obligations as well as rights from the sellers. As such, in order to please and appeal to this new group, organizations have to adopt new strategies. Banerjee (2007, p.167) in an evaluation on the merits and demerits of changed market approaches, argued that, it is only enterprises adopting such measures succeed in the international market. This leads to a major shift in company valuation from the past. Initially, organizational performance was hedged on their respective financial performances. As such, corporations’ success and focus was entirely on profit maximization and cost reduction. In this regard, organizations perceived the market and their production processes in terms of costs and gains financially. Consequently, corporations strived to develop cost efficient structures. Teece (2007, p.1322) in a study on traditional approaches’ adopted to enhance financial performance, developed a range of strategies. The study established that organizations strived at increasing production efficiency to reduce on inputs wastage, thus reducing on per unit cost of production. Moreover, such corporations adopted cost reduction strategies in the supply chain in order to reduce on distribution and logistics costs. Through such a system, corporations reduced on costs while retaining reasonably high prices that led to increased financial performances. However, these techniques are no longer sufficient to guarantee continued financial performance increase. As such, in the recent past, corporations have adopted the corporate social responsibility (CSR) technique (Teece, 2007, p.1345). 2.0 Findings Credibility In this new approach, organizations employ the balanced score card on their evaluation of practices and eventual performance ranking. On the balanced score card, as Altekar (2005, p.421) states, corporations rank their performance as either financial or non-financial. Performance is no longer measured in financial terms alone. CSR is a business approach with an orientation that seeks to create a link between the financial business aspects with the non-financial aspects. It seeks to ensure the utilization of the non-financial performances to enhance and propel the organizational increased financial performance that forms its ultimate operational objective. In this case, an organization’s CSR seeks to establish a business social platform through which corporations can utilize the achieved non-financial gains as intermediary factors to boost their financial performances. Unfortunately, minimal research and studies have been conducted to establish the relationship between CSR, and organizational financial performance. In this case, a majority of the studies associate it with the non-financial performances in a business. This argument and the associated literature research gap on CSR financial performance role necessitate this study. As such, this paper seeks to demonstrate the role played by CSR programs in enhancing business financial performance. In this case, the paper seeks to discuss CSR concepts and how their execution financially benefits business enterprises in the long run. In particular, the study evaluates the corporate governance, environmental and social responsibility CSR components in its analysis. In order to enhance data and discussed findings credibility the report basses the critical analysis on peer reviewed journals and professional books on CSR, finance and accounting. 3.0 CSR and Financial Performance Enhancement CSR as an organizational marketing tool is anchored on three main pillars namely corporate governance, environmental responsibility, and social responsibility components. It is through these broad components that act as guiding principles that organizations execute their CSR programs and activities. Thus, the three, as Low, C, Low, S and Ang (2013, p.177) argue, form the building blocks in CSR. To this effect, the role of CSR towards increased financial performance is evaluated through a systematic analysis of each concept and its consecutive contribution towards organizational increased financial performance. 3.1 Corporate Governance CSR plays a key role in organizations corporate governance. Corporate governance is the structure and systems through which organizations activities are directed. In this case, the organizational structure, reporting, and management hierarchies represent the organizations corporate governance structures. Although it is an administrative and management concept, CSR plays a role in facilitating and promoting integrity and transparency in these developed internal control systems. CSR principle advocates for professional integrity in organizational management and activities execution. In this case, employees and the management are charged with the responsibility of demonstrating honesty and the possession of strong moral society-right principles. In this regard, such individuals are expected to engage in honest and morally upright business activities. Moreover, CSR in internal control management advocates for transparency. The principles advocate against withholding of information by the management or organizational employees. As such, the organizations remove all communication barriers and enhance free communication flow across its internal and external communication channels. The development and adoption of these two key aspects of integrity and transparency in an organization’s internal control system, leads to its performance change. In this case, the adoption of the two principles leads to increased investor confidence in an organization as they have updates and honest analysis on such organization’s performance. Through the concept of transparency, organizations develop honest and accurate financial statements that act as a summary of an organization’s financial analysis. Elliott (2006, p.130) argues that a majority of organizations potential investors rely on the organizational financial statements prepared and audited by independent parties to for authentication purposes. Consequently, when such financial statements are prepared under the principles of integrity and transparency, the audit reports affirm them as honest and accurate. Consequently, investors develop confidence with such organizations. This increases an organizations investment levels as investors will to invest in such corporations. Such a form of investment is categorized into two for those investing in the company as additional shareholders through shares purchases and those offering finances to the organizations as creditors. Such contributions through CSR enhance increased financial performance. On one hand, the increased need to purchase an organization’s shares by new investors increases the demand for such shares. Thus, according to the law of demand, prices rise simultaneously increasing the amount of funds received. Resultantly, this increases organization’s current assets against its current liabilities. Therefore, under the liquidity ratios analysis, the ratio amount increases that depicts an increased financial perforce. On the other hand, for investors who invest in the organizations through funding, they enable increase the value of external capital funding in the organizations investments. Similarly, for this case, under the gearing ratios, this leads into an increased financial performance as the ratio drives toward the desired balanced ratio. In addition, under corporate governance, CSR is mandated with the task of ensuring process, structures and activities compliance with the organizational goals and strategic objectives, as well as ensuring their legal compliance with existing legal requirements. CSR’s role in this concept is the development of an appropriate internal reporting system that is in congruence with the overall organizational goals. In this case, the approach ensures that enterprises develop internal reporting systems that enhance efficiency. The systems establish viable and non-viable investments through the identification of their productivity levels. Moreover, the systems provide an avenue for the initiation of proactive measures to correct, halt, or change less productive and non-viable projects. McDonald, Corrigan, Daly and Cromie (2000, p.153) argue that internal reporting systems serve as a management tool. The authors, through a study o the role of internal reporting system, established that such systems provided an avenue for information gathering in corporate decision-making. As such, the study revealed that unlike the external reporting system, that adopts a historical perspective on an organization’s performance, the internal reporting systems, under the concepts, of integrity and transparency, represent accurate organizational current analysis on financial performance and milestones towards the achievement of its strategic objectives. In this case, using the internal reporting tools, the management is able to identify the organizational sequential development and performance over the months and the probability of achieving the intended organizational goals. To this effect, Adams (2002, p.225) argued that, through the adoption of CSR internal reporting frameworks, the organizational management can incorporate proactive decisions on investments to enhance increased projects productivity as well as reduce on unnecessary costs and expenses. In this case, CSR, through the initiation of internal reporting systems, enhances increased organizational financial performance. On one hand, through the adoption of proactive measures, there is efficiency in investment management. Consequently, the management ensures the derivation of maximum gains from each respective project undertaken. This ensures increased return on investment through shareholder value maximization. Consequently, under the profitability ratios this increases the ratio that is recognized as positive financial performance. Thus, CSR enhances positive financial performance. On the other hand, due to the reduction in unnecessary operational costs and expenses, organizations achieve reduced per unit production costs. As such, through the profitability ratios it is apparent that CSR reduces on the cost of production that increases the earnings cost ratios recognized in accounting as financial performance improvements. This concept, through the application of a matching concept results to much earnings as compared to minimal expenses and costs incurred in achieving them. Thus, as evidenced from the two concepts of internal control and internal reporting systems developed unde3r the corporate governance CSR component, CSR plays a significant role in enhancing increased organizational financial performances and eventual success (Aras and Crowther, 2008, p.101). 3.2 Environmental Responsibility In organizational operations, businesses cause impacts on the immediate environment they operate in. This is regarded as the business venture environment. A business environment can be classified as the physical environment in which a corporation is located. This includes its surrounding location, society, community, and natural resources surrounding its facilities. Additionally, a business environment hypothetically represents the markets in which the organization serves. As such, organizations serving the international markets have international environments in all the foreign markets served. Moreover, business ventures environment extends to their entire supply chain. This implies that the markets and physical location environment for an organizations supplier’s and distributers as well as partners is classified under an organizations operating environment through the supply chain concept. This means that the activities of such partners in the supply chain impacts directly on the organizations operations and eventual performance in the market. It is upon this realization that CSR environmental responsibilities concept arises under the basic principles and policies aspects arises. In this case, the operations of individual organizations and those of its partners in the supply chain are guided by these basic guidelines. Jonker and Eskildsen (2007, p.176) in an argument on the role of CSR in an organizations environment operations, the authors established that CSR principles on environmental continuous improvements and the adoption of proactive measures leads to increased industry and general market performance. On one hand, the adoption of a sustainable production environmental friendly approach enhances efficient management in the supply chain. In this case, organizations with such a strategy tend to establish ties and links with their supply chain partners. For instance, the execution of such a strategy enhances increased cohesion and relationship among partners in the supply chain. Organizations monitor the environmental impacts of all partners in the supply chain. Through such a monitoring scheme, inefficiencies in the supply chain are identified. Subramani (2004, p.52) conducted a study to establish the economic relevance of increased relationships among supply chain partners. The study sought to establish the nature, types and costs structure of the supply chain partners in the supply chain. In its research, the study developed a hypothesis that supply chain relationships influenced the structure and value of production costs incurred by supply chain partners. As such, it developed a study in comparison of both organizations with CSR supply chain sustainability structures with those that lacked the same strategies. In this case, the study established that organizations under the CSR environmental sustainability program recorder reduced costs are unit of production. It established that partly this was because of reduced inefficiencies in the supply chain. The study argued that through the program, synchronous information flow and unrestricted communication was registered among partners (Subramani, p.63). Consequently, supply chain challenges such as failed communication or miscommunication were considerably reduced. In addition, the study established that the reduced costs among CSR program partners was a as result of appraisal and continuous improvement programs implemented under the strategy. Supply chain partners appraisal is a process through which the functioning, strategic performance and strategies of partners is regularly evaluated and measured. These results are compared against a pre-determined benchmark criteria. The appraisal process is advantageous on the involved organization in a range of factors. One, the appraisal provides an outward assessment on the corporation rather than the internal evaluation measures executed internally by such corporations. Thus, appraisal supplements involved corporate governance internal control measures, ensuring that both its internal stakeholders and the external stakeholders evaluate the organization. Such an evaluation enables corporations established the discrepancies between their own perceptions in their operations and those of partners in the supply chain (Zhou and Qingyuan, 2011, p.319). The establishment of such variances enables corporations establishes the extent to which the corporations’ internal structures are either consistent or inconsistent with the market expectations. Additionally, an appraisal assessment acts as an evaluation criteria for supply chain partners who lack appropriate internal control measures. Thus, rather than relying on the statutory financial statements presentation at the end of an accounting period to establish inefficiencies in their systems in order to take action, appraisals provide current organizational performance analysis and provoke corporations in the supply chain to adopt proactive measures correcting variances between expected and progressively attained results in the chain. The adoption of these approaches among chain partners enhances reduction of the overall chain per unit production costs. As such, the cost of acquiring products as well as transmitting them in the supply chain is considerably reduced enhancing reduced total production costs. Therefore, based on the profitability ratios, the appraisal process enhances reduced production costs. Thus, through the adoption of the matching accounting principles CSR through the supply chain partners’ appraisal programs leads to increased earnings at reduced costs thus enhancing organizational profitability, which is a positive organizational financial performance (Presutti, 2003, p.222). In addition, the development of sustainable environmental techniques, organizations facilitate the development and adoption of new production techniques and process in order to meet the sustainability standards. In this regard, sustainable production aims at reducing the rate of production inputs wastage. Consequently, this increases efficiency as well as ensuring value acquisition for organizational investments in the production process. Thus, through this approach, organizations maximize their shareholders value and leads to increased return on investments. This is regarded as a process of continuous improvement through which the chain partners increase their production to enhance efficiency in the long run. This approach and results, if evaluated under the gearing ratios measures of organizational financial performance, leads to increased shareholders value. Thus, CSR through its environmental responsibility concept and continuous improvement aspect enhances increased shareholder and overall increased organizational financial performance. 3.3 Social Responsibility Organizations’ main role and strategic objective is to generate profits for their operations in the long run. As such, corporations strive to achieve their overall obligation towards shareholders on value creation. However, with increased market knowledge and competition, other market stakeholders both internal and external have established besides their contribution to such organizations, the organizations also poses a range of responsibilities towards them. Among these stakeholders are the employees and organizational customers. Any corporation that seeks to succeed in the market place in the wake of current global competition is obligated to oblige and meet the expectations of these groups. Horrigan (2010, p.222) sought to establish the rationale for an organizations social responsibility in its eventual market success. In particular, the study sought to establish whether the costs incurred in meeting these obligations are additional costs in the production costs or the revenue gained as a result offsets them. In the study, the authors sought to establish the need, cost, and benefits of developing employee-oriented programs such as employee career development programs. The study established that organizations incurred huge costs in the setting up of such programs to enhance employee motivation and well fare. However, the study revealed that organizational corporations’ efforts and input in the employee development programs and welfare obligations enhanced and significantly increased employee motivation and satisfaction. Interviews conducted on employees in organizations with such programs revealed increased motivation and satisfaction levels unlike peers in organizations that lacked such programs. In this regard, Gossling (2011, p.85) argues that employee satisfaction reduces organizational human resource turn over. Human resource turnover and the subsequent recruitment need is an expensive organizational process. The process of recruitment, orientation, training and eventual incorporation of new staff members into an organizations culture is not only a lengthy process an expensive , but also inconveniencing in the seamless organizational services and products delivery. Such increased turn over impacts on the sustainability and development of a stable corporate culture. Consequently, increased employee turnover leads to inconsistency in the production process, as well as increased costs overall production costs investment in human resource development. In this regard, employee turnover reduces organizations profitability due to increased cost of production. Moreover, it leads to reduced shareholder value on their return on investment due to functioning inefficiencies. Therefore, through CSR employee social responsibility programs, organizations reduce on these challenges. As such, organizations reduce on turnover and increase employee retention. Increased employee retention, motivation and satisfaction leads to increased human resource productivity. Consequently, organizational outputs increase at constant costs of production. This serves as a recipe for increased profitability. Under the profitability ratios, an organizations production output increase against constant costs results into increased profitability ratios. As such, the corporation’s financial performance increases considerably. Therefore, it is established that the social responsibility on employees CSR aspect in organizations increases employee satisfaction and productivity that results into increased organizational performances. Additionally, the CSR social responsibility aspect incorporates an organizations responsibility on its customer base. In this regard, corporations are obligated to develop and implement structures that support their customers. Such programs include participation in societal activities such as scholarships offering and participation in social events among others. Bronn and Vrioni (2001, p.210) conducted a study to evaluate the extent to which organizational social responsibilities on their customers impacted on their performance. In this case, the study sought to establish whether the involvement and investment in such programs yielded any benefits to organizations. The study established that involvement in customer social programs such as sponsoring of social events enhanced increased relationships between organizations and its customers. As such, the involved customers developed loyalty towards such organizations. Khanka (2006, p.432) argues that increased customer loyalty economically translates into increased organizational market influence as well as increased sales. In this case, increased sales results to increased earnings. Through quantity sales, organizations not only earn profits but reduced capital tied on stocks and produced products. This implies that such organizations record increased cash flow values surpassing their cash outflows. As such, through an evaluation of the liquidity ratios, such organizations develop and acquire enough funds to meet their short-term financial obligations. Thus, customer responsibility social programs enhance increased organizational financial performance. 4.0 CSR as a Liability to Organisations Despite the above-discussed CSR merits and contributions to enhanced financial analysis, some scholars argue that CSR programs are expensive ventures that are a waste of organisational funds and should be discouraged. In this case, the authors argue that CSR programs are unnecessary and a waste of organisational funds. The arguments in this case include increased costs and diversion of organisational efforts. CSR programs are an investment in organizational operations. Liverman (2004, p. 735) conducted a study to establish the nature and value of organizational funds invested in CSR programs. In this case, the studies established that CRS programs were classified under costs of production in the organizational financial statements. As such, the programs expenses were recorded in congruence with other production expenses such as distribution as well as inputs acquisition costs. The classification of CSR expenses as part of the organizational expenses has a direct impact on the organizational products pricing and eventually on the profit margins. In this regard, Crane (2008, p.274) argues that CSR leads to reduced profit margins. In the argument, the authors sought to u the financial statements representation and analysis as a validation evidence for these arguments. The authors highlighted that CASR programs are investment projects in organizations in both the end and the short run periods. On one hand, in the short run, CSR programs are classified as cash out flows in the cash flow statements. A such, the authors noted that through the use of the liquidity ratio financial performance evaluation tools, CSR programs lead to reduced financial performance in corporations in the long run. The concept of increasing organizational cash outflows in the short run reduces organizations liquidity ratios. In this regard, such organizations are unable to meet their obligations and liabilities in the short run. Further, the authors argued that through such deficiency organizations fall at the risk of losing their reputation and credibility that the CSR programs seek to establish. To this effect, Baker and Hodges (2004, p.21) argue that CSR programs main aim is to establish organizational credibility and boost its reputation and image among its external stakeholders. However, the associated costs in these programs lead to the erosion of the intended outcomes. Thus, such programs end up failing to achieve any of them. Consequently, with such high possibility of failure to achieve the intended outcomes and the subsequent impacts on organizations liquidity ratios, CSR programs are established as inappropriate ventures and ones that lead to decreased financial performances. Additionally, CSR programs in the end fall under long-term projects and investments in organizational financial statements such as the balance sheets. In this case, the programs, due to their perceived benefits as discussed under CSR role in organizations are categorized and considered as investments. Thus according to the profitability ratios, such an investment should earn shareholders increased value through increased return on investment. However, Jackson, Jones and Bodek (1996, p. 5) argue that this is not the case. The authors argue that CSR programs earn non-financial benefits to an organization such as market goodwill. Nevertheless, the authors argued that these earnings rarely translate into financial gains due to capital in availability. In this regard, the authors develop their argument based on the nature and constraining factors in capital development. As such, the authors argue that most corporations operate under strained capital expenditures. Thus, the available capital ought to be spent on viable projects that derive maximum gains to the shareholders. However, the authors argue that CSR programs are not the best alternative investments in such situations where corporations have minimal and limited working capital. The authors argue that financial investments in organizations are based on the investment costs and the derived earnings ratio. As such, they argued that although CSR programs have their share of benefits in the long-run, they do not represent the best investment alternatives. Therefore, they have a high opportunity cost of investment. Consequently, the authors established that CSR programs neither support nor enhance increased financial performance. In the current highly competitive global market, corporations operate based on lean management and operations. This implies that such lean organizations reduce on processes, activities as well as structures in their supply chain and internal management in order to enhance efficiency and reduce on costs. In this respect, Nicholas, J and Nicholas, M (2011, p. 33) argued that lean organizations enhance reduced bureaucracies, that facilitate efficiency and organizational flexibility. These features, as the authors argue, enhance increased financial performances. However, CSR programs initiate a contrast of these principles. Through the development of increased internal control systems and reporting systems under corporate governance increase bureaucracy leading to an increase in cost structures consequently educing on financial performance. 5.0 Conclusion Summarily, this paper evaluates the contributions of CSR programs towards organizational positive performance. In this case, the study evaluated the varied financial performance measures. The evaluation and discussion of these evaluation measures created a background through which CSR programs discussed in the study are evaluated against. The discussed financial performance measures include the profitability, liquidity, and gearing ratios. In this analysis, the profitability ratios evaluate an organizations ability to earn funds based on investment earnings. Moreover, the liquidity ratios evaluate an organizations ability to fund and cater for their short-term liabilities and obligations. As such, the ratios evaluate the cash flow statements based on the cash inflows and outflows over a given specified accounting period. Further, the gearing ratios compares shareholders equity in an investment over those from external funding. The gearing ratios, in a bid to maximize shareholder value, advocate for a balanced investment ratios. Based on these ratios, the study evaluates the three CSR components namely corporate governance, environmental responsibility, and social responsibility. On one hand, the study reveals that corporate governance, incorporating internal control and reporting systems, contributed to increased financial organizational performance. The enhancement of transparency, accountability, and integrity in organizational internal operations facilitates increased earnings at reduced costs as per the profitability ratios. On the other hand, environmental responsibility, through supply chain management enhances increased production under reduced costs of production. Further, the report reviews arguments developed to the effect that CSR programs serve as a liability to organisations financial performance. In this case, the report reviews the concept of increased costs, bureaucracy, as well as reduced working capital. As such, the report establishes that through the profitability ratios, CSR reduces financial earnings trough he profitability ratios value reduction. However, based on the discussed concepts, it is apparent that CSR, despite its challenges, enhances increased financial performance. In this report, the merits outweigh the demerits. Thus, this report recommends the adoption of CSR programs in a bid to increase organisational competitiveness as well as increasing organisational financial performance. 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Zhou, Qingyuan, 2011, Applied Economics, Business, and Development: International Symposium, Isaebd 2011, Dalian, China, August 6-7, 2011, Proceedings, New York Inc Springer-Verlag. Read More