Corporate Social Responsibility and Corporate Financial Performance - Literature review Example

Corporate Social Responsibility and Corporate Financial Performance Name Institution Professor Course Date ESSAY QUESTION: 'It is a part of good management to engage in corporate social responsibility, but it does not strengthen corporate financial performance'. Discuss this statement using relevant management theory, research and concepts. Introduction The importance of corporate social responsibility initiatives in the modern business world implies that firm’s perception of such policies has changed from a pointless addition to a crucial function of a firm. Corporate social responsibility involves a business perspective to a sustainable growth through delivery of environmental, social and economic benefits for all stakeholders. It is a firm’s initiatives to evaluate and be accountable for its impacts on social wellbeing and the environment. Corporate social responsibility calls for the constant commitment by a firm to behave ethically and take part in economic development while enhancing the quality of life of the employees, their families, the community and society as a whole. Although corporate social responsibility initiatives improves a firm’s image, improve morale, reinforce its brand and raise share prices, most of CSR initiatives do not strengthen a firm’s financial performance. This paper discusses the implications of CSR initiatives on a corporate financial performance. The wide range of descriptions, issues and approaches linked to corporate social responsibility suggest that these fundamental questions do not necessarily hold simple answers. The question as to whether a firm should focus on activities that impact its financial bottom line linger in the minds of most managers. Threat to the reputation of a firm and competitiveness are things that can negatively affect the financial performance of a firm. Therefore, these concerns require great attention by the management of firms. It is a priority that firms enhance the education, health and other components of social welfare. In Australia, the emphasis is largely on environmental protection. According to Blackburn (2015), a survey carried in 2010 that involved almost 500 CSR experts across Australia found out that corporate social responsibility strengthens the reputation and image of organisations that pursue them and not their financial performance. However, the question that comes into minds of many people is the worth of reputation. While firms engage in corporate social responsibility to enhance their reputation, the success of these CSR activities and initiatives is hindered by pressure for short-term financial performance. Corporate social responsibility involves the continued commitment by businesses to behave ethically and contribute to economic growth while enhancing the quality of life of the stakeholders. Although the CSR satisfies the economic goals of a firm, CSR initiatives require a sacrifice in short-term profits of a firm. Evidently, CSR initiatives are voluntary activities that surpass the legal requirements and interests of a firm to promote social good. From the financial performance angle of firms, it is a basically accepted occurrence that the principal goal of any business organisation is profit maximisation. According to Kakakhel, Ilyas. Iqbal and Afeef (2016), firms that undertake their operations in a productive way generate maximum profit. In the contemporary business world, the concept of social responsibility for firms is to play a crucial role in the success of firms. Therefore, firms focus on spending on corporate social responsibility in terms of worker’s pension benefits, donations, wages, salaries and other financial help of society. From a common theoretical perspective, it is a common view of scholars and researchers that all the firms that spend more on diverse corporate social responsibility actions experience higher financial performance. With respect to stakeholder management theory, corporate social responsibility initiatives are a means to achieve a firm’s objectives. However, CSR activities are more valuable for organisations with increased levels discretionary cash. Firms, which have good terms with respect to their stakeholders, particularly employees, improves their level of productivity because of the low cost of worker’s commitments an aspect that enhances the financial performance of a firm. On the contrary, Karagiorgos (2010) asserts that the social responsibility activities of firms hold a negative impact on the financial performance of the firms. According to the author, CSR activities are a burden to a firm’s budget. Simionescu & Dumitrescu (2014) further confirm that there is a negative relationship between financial performance of a firm and its CSR activities. The authors maintain that social activities waste the funds of a firm thereby negatively affecting its financial performance. According to Flammer (2015), social responsibility is a donation from shareholders to stakeholders that lowers a firm’s profits. Flammer (2015) maintains that a firm’s social engagement may be compelled by own social preferences of managers to establish overly friendly links with specific stakeholders. On the contrary, corporate social responsibility holds a positive relationship with a firm’s financial performance. According to Aras (2014), a high degree of corporate social responsibility will guarantee good relationships with all the stakeholders an aspect that improves the financial performance of a firm. With respect to stakeholder’s theory, corporate social responsibility activities are actions undertaken to benefit stakeholders with the ultimate objective of benefitting shareholders. According to the theory, firms engage in CSR to enhance their efficiency, reputation, trust and brand. Such actions helps in attracting novel customers while retaining older ones thereby promoting the competitiveness and profitability of firms. Big firms such as Google, IBM, GE, Nestle, Walmart, Uniliver, Marks & Spencer an Johnson & Johnson to mention but a few experience the benefits of engaging in corporate social responsibility activities (Flammer, 2015). These firms have gained a competitive advantage over their competitors from corporate social responsibility activities. Corporate social responsibilities increase shareholder value through enhancing operating performance. In addition the stakeholder theory maintain that corporate social responsibility act benefits firms through increasing employee satisfaction that in turn increases the productivity and profitability of firms. CSR activities augments goodwill of customers towards a firm, hence increased sales that translate to an increase in profitability. With respect to social impact theory, firms such as Wal-Mart make a positive difference that contributes to the firm’s profitability. According to Kavoura, Sakas and Tomaras (2016), companies that engaged in CSR activities have a strong positive correlation with Return on Assets whereas the link between CSR and Return on Equity is weak. A research cited by Kavoura and associates indicated that there is indeed a correlation amid financial performance and CSR largely because firms undertaking CSR activities tend to outperform in ROE compared to firms that do not engage in CSR initiatives. Drawing on the stakeholder theory, the study cited by Kavoura et al.(2016) further indicated that firms that engage in CSR activities stock obtain higher stock values because stakeholders positively assess these activities. CSR activities lower risks, strengthens legitimacy and develop a competitive advantage. However, there are two elements of corporate social responsibility. One of the components entails enhancing the relationships of a firm with its primary stakeholders otherwise referred to as stakeholder management. Enhancing the stakeholder relationships hold positive impact on the performance of a firm. Corporate social responsibility strengthens a firm’s reputation. Aligning the interests of stakeholders and corporate philanthropy creates trust besides promoting the reputation and image of a firm. According to Sims (2009), organisations and their leaders must take into consideration the effect of their actions and decisions on society as whole. The firms must take responsibility for their actions and improve the welfare of society. Evidently, firms exist to serve societal needs. As such, being a steward of the needs of society is a socially responsible, natural and appropriate act. Organisational leaders must assess their actions and decisions not simply from the perspective of effectiveness of a firm, but also from the angle of a greater good. According to Pirsch, Gupta and Grau (2007), the success and continued existence of a firm are contingent to satisfy economic objectives and non-economic objectives. The other element of CSR relates to social issues. These issues do not improve or strengthen a firm’s financial performance. According to Aras (2016), CSR activities, particularly those that focuses on social issues threatens survival of firms. This is a clear indication that CSR activities do not always hold a positive and direct effect on a firm’s financial performance. A study carried out by Al-Hadi et al (2017) that involved 651 publicly listed firms in Australia indicated that there is a negative association amid financial performance and corporate social responsibility initiatives in firms that are in their early life cycle stages. The findings of the study by Al-Hadi et al (2017) are a clear indication that corporate philanthropy and financial performance follows an inverted U-shape. Drawing on the agency theory and private cost theory, when organisations engage in more environmental and social activities, they incur substantial indirect and direct costs. These costs imply a negative relationship amid corporate social responsibility activities and the financial performance of a firm. Although the stakeholder management theory postulates that firms that engage in corporate social responsibility obtain resources that are controlled by the stakeholders such as social capital, financial capital and human capital, the private cost theory indicate that firms through CSR incur extra costs that weaken their financial performance. Corporate social responsibility positively impacts the financial performance of firms that demonstrates improved past performance. Apparently, different firms hold different outcomes and demands for corporate social responsibility. In this regard, firms engage in corporate social responsibility initiatives when their financial resources allow. These activities consume the firm’s financial resources hence weakening its financial performance. Although between 50 and 90 percent of a firm’s market value can be attributed to reputation, corporate philanthropy incurs both indirect and direct costs in a firm (Blackburn, 2015). Corporate social responsibility incurs both indirect and direct costs. Although numerous studies have confirmed a positive link between corporate social responsibility and financial performance of a firm, the private cost theory demonstrates that corporate philanthropy incurs direct and indirect costs. Blackburn (2015) asserts that social responsibility holds a financial cost. For instance, Starbucks Coffee Australia incurs direct and indirect costs through its corporate philanthropy. In its part of corporate social responsibility, Starbucks allows its workers to donate one day per year of their time in charity of their choice. The absence of one individual in that one day affects the productivity and profitability of the firm. The firm also engages in environmental protection activities and donations to universities ( Henderson, Peirson, Herbohn & Howieson, 2015). While these types of activities contribute to the wellbeing of the society besides promoting the image and reputation of the firm, they weaken the financial performance of the firm. Most of social responsibilities require funding from firms that are engaging in these activities. The funds are drawn from the firm’s accounts in terms of private or indirect costs. These costs weaken the financial performance of the firms. Conclusion Many scholars, experts and researchers have assessed the relationship between corporate social responsibility activities and financial performance of firms. The findings from different studies have been conflicting with majority of researchers confirming a positive relationship amid CSR activities and financial performance of firms. It has been noted that the survival and profitability of firms are contingent to fulfil the non-economic objectives and economic objectives. Numerous researchers have argued that CSR activities help in lowering risks, increasing competitiveness of firms, and enhancing trust and reputation. All these actions increase sales, ROA and ROE. However, while corporate social responsibility helps in building the reputation of firms, the social responsibilities involved require funding. The funds are drawn from the firm’s account as private costs an aspect that weakens the financial performance of the involved firms. Therefore, corporate social responsibility activities do not always strengthen the financial performance of firms. References Al-Hadi, A et al.(2017), Corporate social responsibility performance, financial distress and firm life cycle: Evidence from Australia. Journal of Accounting and Finance. DOI: 10.1111/acfi.12277 Aras, G .(2016). A handbook of corporate governance and social responsibility. USA: CRC Press. Blackburn, W.(2015). The sustainability handbook: The complete management guide to achieving social, Economic. UK: West Academic. Flammer, C.(2015). Does corporate social responsibility lead to superior financial performance? A regression discontinuity approach. Journal of Management Science, 1-20. Henderson S.et al.(2015). Issues in financial accounting. Australia: Pearson Higher Education. Kakakhel, S.J., Illays, M., Iqbal, J & Afeef, M.(2015). Impact of corporate social responsibility on financial performance: Evidence from Pakistan’s cement industry. Abasyn Journal of Social Science, 8 (2), 392-404. Karagiorgos, T.(2010). Corporate social responsibility and financial performance: An empirical analysis on Greek Companies. European Research Studies, 7(4), 88-108 Kavoural, A., Sakas, D.P & Tomaras, P.(2016). Strategic innovative marketing: 4th IC-SIM, Mykonos, Greece 2015, UK: Springer. Pirsch, J., Gupta, S., & Grau, S.L., (2007). A framework for understanding corporate social responsibility programs as a continuum: An exploratory study. Journal of business ethics, 70, 125–140. Simionescu, L., & Dumitrescu, D.(2014). Corporate social responsibility and financial crisis. Journal of Public Administration, Finance and Law, 1, 31-37. Sims, R (2003). Ethics and corporate social responsibility: Why giants fall. UK: Greenwood Publishing. Journal of Accounting and Finance. DOI: 10.1111/acfi.12277 Read More