Corporate Social Responsibility's Impact on Firm Value - Article Example

Corporate Social Responsibility on Firm Value Article: “The Impact of Corporate Social Responsibility onFirm Value: The Role of Customer Awareness”by Henri Servaesand Ane Tamayo Name University Introduction Article: Servaes, H. and Tamayo, A., 2013. The impact of corporate social responsibility on firm value: The role of customer awareness. Management Science, 59(5), pp.1045-1061. Corporate governance refers to the processes, relations, and mechanisms which companies apply to enact measures of control as well as ensuring that they are well directed (Shailer, 2004). On an elaborate perspective, as Aziri (2014) argues, it refers to the totality of institutional arrangements, legal rules, as well as corporate practices that determine who controls a company, and who benefits from these perspectives. For this reason, it entails setting the policy framework for business corporations and incorporates issues like how stakeholders influence policy formulation process, performance accountability, and ensuring that performance standards are applied (Saeidi et al., 2015). One of the corporate governance issues that organizations deal with is Corporate Social Responsibility (CSR). It owes to the fact that CSR disclosure is affected by the values, motives, and choices of the people involved in taking and formulating decisions in the companies, as well as adopting governance mechanisms including board composition and ownership structure (Khan et al., 2013). For this reason, there is a strong relationship between CSR approaches and corporate governance mechanisms adopted by corporations. The current paper outlines and summarizes the arguments presented in the article, “the impact of corporate social responsibility on firm value: the role of customer awareness,” by Henri Servaes and Ane Tamayo. It also discusses the context of the reading, as well as the issues the writers point out about corporate governance. Additionally, this paper discusses why the arguments are being made in the media, and finally, it concludes by providing an opinion about these issues. Arguments made in the article The article showcases how CSR and firm value are positively related for those firms with high customer awareness forged upon advertising expenditures. It presents the reasons why organizations are increasingly dedicating an enournous financial muscle for CSR activities. However, as the authors assert, this view is consistent with the fact CSR initiatives will add value to a firm because of the significant customer awareness. Mainly, CSR measures are put in place so that a firm creates more publicity for its brand, thereby creating more public awareness. In this article, however, this is dependent on the extent of customer awareness. If a firm has negligible customer awareness, then the CSR moves will be less beneficial to the firm. Therefore, the writers investigate under what circumstances will the CSR initiatives are beneficial to the firm.Essentially, the authors posit that under a moderating variable, the advertising intensity, a firm will significantly reduce the information gap between itself and the company, and thereby increase the probability that the customers will find out about the company’s involvement in the CSR initiatives, and reward the business for its CSR efforts, often via profits. Another assertion posed is the fact that advertising enables a company to enhance its information environment which increases its potential awareness about it, and in turn, prompting it to further become more informed about the firm, its practices, products, and CSR issues. For this reason, the authors predict that CSR initiatives related to advertising intensity will positively impact the firm’s value. Advertising intensity is the total expenditure for marketing endeavors, particularly on making adverts. The article points out that increased expenditures enhance the effect of CSR initiatives as it creates more corporate awareness, thereby creating an increased “goodwill” on the customer’s part. Other assertions presented in the article include the fact that CSR efforts should be consistent with the general reputation of the company for advertising measures to be effective. The article stresses on the importance of implementing CSR efforts in achieving a greater firm’s value via creation of awareness. Even so there are various main arguments presented in the article. The authors assert that by adopting CSR activities, a firm affirms that it has established its commitment to contribute to sustainable economic development, as well as advocating a positive working relationship with the employees, the local community, employees’ families, and the society in order to increase the quality of life. However, CSR activities increases the value of the firm by enhancing its awareness among the various customers, but this is closely related to the amount of advertising intensity. Further, by creating more public awareness, the firms are more vulnerable to instances of penalization whenever CSR concerns arise. The authors argued that for those firms with low public awareness, the CSR efforts will insignificantly or negatively impact the firm’s value. Following this assertion, these firms will have to use a high advertising intensity, and consequently, they will not achieve what they intended, which translates to losses in advertising. In addition, the authors also point out that advertising can negatively affect the CSR value whenever there is an inconsistency between the overall reputation and the implemented CSR efforts. Furthermore, they also argued that even after the inclusion of firm fixed effects, there exists no direct relation between the firm value and the CSR measures. For this reason, it can be summarized that those firms that engage in publicizing their CSR initiatives can only add value to the firm if they are aligned to its reputation. Therefore, those firm with poor reputations will reap very little or no immediate benefits after they participate in CSR initiatives. However, there is still hope for these companies in the long run as they can change their perception to the customers by rebranding their image to a more positive one. Context of the Readings in Relation to Corporate Governance As mentioned before Aziri (2014) points out that corporate entails the institutional arrangements, legal rules, as well as corporate practices that can add more value to the firm, such as the creation of benefits. For this reason, CSR can be correlated with this definition primarily because the CSR efforts are mainly practices that a particular company has employed to create publicity, thereby creating an opportunity for enjoying more benefits. These benefits are usually in the form of increased profitability. Khan et al. (2013) argue for businesses to benefit from external stakeholders, they have to gain their legitimacy as encapsulated by precincts of the legitimacy theory. According to Aguilera (2007), CSR incorporates socially responsible actions, and in turn, legitimately fulfilling the needs of the stakeholders. These stakeholders include customers, the society, employees, environment and stakeholders, and they have to enjoy prime benefits from the CSR measures (Srivastava, 2012). According to Siddiqui (2010), the issue of CSR is very wide, and is not limited to just companies, rather, the entire economies and the governments, for example, the governments and policy makers in emerging economies promoted western-styled models to gain legitimacy with stakeholders such as foreign governments and international aid agencies. Even so, most of the CSR approaches adopted by firms will always yield positive results. According to Husted and de Jesus Salazar (2006), CSR allows firms to increase their profitability as well as the social output, but these companies have to ensure that they adopt those initiatives that are considered socially responsible, particularly on strategic rather than altruistic grounds. For this reason, it can be derived that only when socially responsible CSR practices are implemented will a firm’s value be increased in terms of profitability and social output (Cheng et al., 2014). In accordance with the article, the Barnea and Rubin (2006) also point out that of the CSR activities do not maximize the value of the firm, then they ae a waste of the company’s valuable resource, and could potentially be value-destroying. According to Fisman et al. (2005), there is a correlation betweern CSR and profitability. Also, as they argue, firm performance is negatively correlated with CSR approaches that utilize a low-advertising intensity, but the effect is not present for those companies with high advertising intensity (Elliott et al., 2013.For this reason, this is in line with the article as both assert that a high advertising intensity, will in turn, yield more corporate awareness, and as a result, the firm will invest in various CSR options that will eventually lead to an increase the firm’s value owing to the increased customer awareness. As such, in general terms, even though the effect might be negligible, CSR contribute to more profitability, as well as the creation of a strong firm value. Ideally, as Edmans (2012) points out, an increase in firm value created by CSR improves job satisfaction.Moreover, managers from a corporate governance point of view have more to gain or lose by implementing CSR, but may still implement the initiatives for developing a better self-image or brand (Fismanet al., 2005). Both the article and the literature review advocate the inclusion of CSR activities in the firm’s context. This is because it leads to more positive results in most of the instances. Essentially, these actions have to follow the legitimacy theory where the actions are undertaken legitimately to enhance the value of the firm, as well as the creating more customer awareness. However, most of the literature, as well as the article point the fact that all stakeholders have to be included, including the environment, internal stakeholders, and the society in general so as to increase the quality of life (Aguinis and Glavas, 2012). In addition, the issue of advertising efficiency is an important paradigm in creating awareness as far as CSR initiatives are concerned. For instance, firms that have low customer awareness are set to reap less benefits compared to those firms with an increased publicity. As such, the level to which the CSR efforts benefit a particular firm is dependent on the level of publicity and customer awareness. If a firm has less customer awareness and huge chunks of capital are invested in CSR, the company is more likely to experience losses, however, in the case of a well-known brand, the benefits are set to be plenty. This is characterized by increased profits, even when they are negligible. However, in the long-term, firms with little publicity can receive more benefits in the future after it builds a positive self-image (Michelon et al., 2013). Media and CSR Arguments Given the importance of CSR initiatives, the media plays an important role in stressing why corporations should adopt these measures by creating awareness and citing its importance for business. These arguments are made in the media to promote the devotion of firms to CSR. CSR increases, as Financier Worldwide Magazine (2015) points out, the competitiveness of a firm is adopted by putting in place measures that integrate ethical, environmental, social, consumer concerns, and human rights into the business strategy. The arguments show the importance of adopting CSR on a local and global perspective. It also portrays the importance of involving all stakeholders, and stressing that the aim of CSR is to impact positively the society by exploiting the creation of shared value for business owners, shareholders, employees, and the various stakeholders (Zyglidopoulos et al., 2012). Additionally, it cites the importance of CSR, including increased customer loyalty and satisfaction. The media has an influential role on companies, and given the rising concern of social responsibility, which is exacerbated by the issues of globalization, the media has to voice what CSR approaches firms are taking, which ae most effective so that it can impact positively the field of CSR. As such, the arguments presented shed more light on how the media perceive, cover issues, as well as prioritize issues related to corporate governance, and in particular, CSR. For this reason, the media covers CSR issues as related to the community and the society in general. As cited earlier, CSR has to include all stakeholders, and society is one of them. For this reason, when the arguments are covered in the media, then more publicity on the importance of CSR is covered. Besides, the media enables corporations to do their bit when it comes to social causes, along with letting the world know what some companies have done and setting an example so that others might follow (Management Study Guide (MSG), n.d.). Conclusion In conclusion, CSR activities will lead to a positive firm value. As a matter of fact, businesses show that they at least care about the shareholders, stakeholders, employees, the local community, and the society in general when they take initiatives that are socially responsible. By doing so, the band and image of the organization is significantly improved, which in turn, increases its market value. For this reason, CSR is one of the major corporate governance issues. It relates to how profitable a business is. In addition, it also ensures an improved customers awareness, thereby building the image of the firm. A better image is advantageous as it translates to increased customers’ loyalty and satisfaction, and consequently, higher profitability. As such, CSR activities enhance the value of a firm. . References Aguinis, H. and Glavas, A., 2012. What we know and don’t know about corporate social responsibility a review and research agenda. Journal of management, 38(4), pp.932-968. Aziri, B., 2014. Corporate Governance: A Literature Review. Management Research and Practice, 6(3), p.53. Cheng, B., Ioannou, I. and Serafeim, G., 2014. Corporate social responsibility and access to finance. Strategic Management Journal, 35(1), pp.1-23. Edmans, A., 2012. The link between job satisfaction and firm value, with implications for corporate social responsibility. The Academy of Management Perspectives, 26(4), pp.1-19. Elliott, W.B., Jackson, K.E., Peecher, M.E. and White, B.J., 2013. 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