Corporate Social Responsibility in Qatar Bank - Research Paper Example

Abstract

This paper examines the effects of corporate social responsibilities (CSR) in an organization and how the CSR affects organizations. Organizations are focusing on various CSR activities with the aim of improving their image in the society. Although there is some cost involved in the implementation of CSR activities studies have shown that organization that relates well to the community achieve more than the organizations which focus on profit maximization goals only. This document has established that CSR helps the organization to become more profitable. When the organization shows more concern for the society, it engages in cost-reducing strategies, reduces waste, attracts more customers, and attracts and retains competent employees. Customers are willing to pay higher prices for goods and services of the companies that engage in ethical activities. Also, the organization saves the cost of hiring and recruiting employees because the rate of employees’ turnover is low. Furthermore, a company that relates well to the society is less like to experience legal disputes hence it can save some expenses that would be incurred in solving disputes in the court. Another benefit of CSR is the low cost of equity. A socially responsible organization reduces information asymmetry and attracts more investors resulting in a reduction of cost of equity. The case study of Qatar Bank in this document demonstrates the various benefits an organization can achieve by engaging in CSR activities. Finally, the document includes a recommendation for the organizations to focus on CSR activities seeking to promote the interests of all stakeholders to achieve sustainability.

• Introduction

CSR is an approach to the organization to show its concern for the environment and achieve sustainability goals. In the modern society consumers and other stakeholders have become more conscious about the activities of the firms and how they impact the society (Denis, 2001). The business environment is becoming extremely competitive due to globalization and increasing customer awareness. The approach of the organizations to focus mainly on goals of profit maximization is undermining competence of many organizations because an organization cannot be sustainable if it ignores the welfare of various stakeholders. Both consumers, investors, employees, government, suppliers and other stakeholders play a critical role in the success of the organization. The organization requires the support of all stakeholders to be sustainable and competitive. This requires the managers to have a clear vision and goals of how the organization can deliver value to various stakeholders for it to be sustainable. Implementing CSR policies comes at a cost, but the organizations draw more benefits from all stakeholders than what it could obtain from one or a few stakeholders. The organizations that implement CSR activities influence how various stakeholders perceive them and attract more benefit than a profit-maximizing organization that disregards CSR activities. This paper examines the merits and demerits of the CSR activities of an organization, the effects of CSR activities on the business profitability and cost of equity. Also, it examines the case study of CSR in Google, BMW and Doha Bank of Qatar to establish various activities used by these organizations and how they influence the organization's value and profitability. Some organizations believe that implementing CSR activities is an unnecessary cost while others consider it as a necessary practice to promote sustainability of the business.

• Literature Review

“CSR is the commitment of a business to contribute to sustainable economic development, working with employees, their families, the local community and society at large to improve their quality of life.” Organizations are using various CSR activities to achieve sustainability of their operations. According to Crotty (2009), corporations are becoming socially responsible by adopting policies that focus on showing respect to the people they interact with, showing concern for the environment and communities, and upholding standards of moral value. However, CSR activities cannot make a direct contribution to business profitability, firms’ value or cost of equity because these are CSR activities are not necessarily income generating activities (Johna & Senbet, 1998). The CSR contributes business performance by creating a conducive environment for the business to improve its performance.

Firm’s profitability is determined by increased revenue above the cost of sales. Businesses want to become socially responsible for attracting more loyal customers, comply with the laws to avoid penalties, attract more investors, etc. (Johna & Senbet, 1998). A firm that implements CSR activities is likely to benefit from improved brand value, access to cheaper finances, loyal customers and efficient employees among other benefits. CSR activities give firm competitiveness in the industry which results in increased cases, more revenue from premium prices and reduced cost from improved efficiencies (Crotty, 2009). CSR activities affect firm’s value, profitability, and cost of equity.

The firms’ value reflects the investor’s confidence in the firm. The market value of an organization is determined by the value of the market price of company’s share in the market (Jackson & Aguilera, 2003). A company that has implemented CSR activities it is likely to win the confidence of more investors. Consequently, the value of its assets and liabilities will improve (Business Ferret, 2017). Better performance is reflected by the growth in the market price of its shares or the price of company’s book value.

Firms cost of equity is determined by the cost a firm incurs in compensating the share equity owners for the risk of investing in the business. A firm that is perceived as being risky must pay its investors higher risk premium to persuade them to invest in the business (Crotty, 2009). CSR portrays business as having a stronger risk management strategies, have corporate governance and better public image. A firm that discloses its CSR sustainability information to the public wins the confidence of investors because they perceive it as a less risky business (Jackson & Aguilera, 2003). Disclosing financial sustainability report willingly saves the firms cost of searching for such information and will be willing to invest in the firm at lower return compared with firms that do not make closure CSR information.

2. 1 Advantages of CSR

CSR improves organizations value and profitability. Studies have established that CSR offers many benefits to the organizations such as improving the reputation and brand awareness (Business Ferret, 2017). The corporations are seeking to be a socially responsible focus on reducing resource use and waste by increasing efficiency of operations, reducing the cost of operations, reusing or recycling waste, increasing accountability and transparency with all stakeholders such as media, shareholders, local community and the financial analysts (Denis, 2001). A firm which implements CSR activities improves its performance by attracting potential investors and loyal customers who are willing to pay higher prices for the firm's products and services (Corporate Social Responsibility report, 2012). Consequently, its performance will improve and reflect in the improvement of it share prices in the market.

Most customers expect companies or businesses to be socially responsible on how they address environmental issues and relate with their workers. Customers are willing to pay higher prices to purchase the products and services of companies they perceive as socially responsible (Crotty, 2009). Therefore, a socially responsible corporation develops good relations with its customers which help the company to gain a competitive edge over their competitors.

The corporations that implement CSR policies provide good care for their employees and establish a good working environment (Jackson & Aguilera, 2003). They can attract and retain more competent employees because every employee wishes to work in a good environment where they felt respected and cared for. Firms which are CSR conscious motivate employees and offer them an opportunity for personal and career development (The Business Ferret, 2017). The employees will want to work longer in the organization and attract new employees. The organization keeps employees happy and will not incur huge cost of hiring and recruiting new employees every time.

An organization adds value and benefit to the entire society by engaging in CSR activities. The organization becomes efficient with how it uses its resources and commits its resources to activities that create value for the society (Bolt-Lee & Moody, 2010). Those companies avoid unhealthy competition and focus on fair business competition. They use efficient processes and minimize waste thus benefiting the entire community.

2. 2. Disadvantages of CSR

Some corporate managers believe that engaging in aspects of corporate social responsibility diverts their focus on the main goal which is to maximize shareholders wealth. They argue that a corporation that seeks to be socially responsible must engage in certain activities that result in a reduction of profit (Crotty, 2009). The practices could include forgoing some projects that could result in huge profits, but ones considered unethical. Also, firms incur additional expenses to implement CSR activities such as using environmentally friendly materials and generate less waste to the environment that could increase investment cost (BMW Group, 2017). Therefore, being socially responsible organization may seem as futile.

A corporation purporting to be socially responsible uses some of its resources to provide charitable activities to the society (Bolt-Lee & Moody, 2010). Also, they spend substantial resources in promoting the welfare of the society including employee’s motivation. The resources spent on corporate social activities reduce the shareholders returns hence it is a cost to the shareholders.

A company that is pursuing CSR program is required to disclose any fault on its products in case of violation of CSR programs (Jackson & Aguilera, 2003). For instance, a company producing smartphones may have to call back the faulty gadgets they had sold for replacement or refund the customers which adversely affect the image of the company.

2.3 Effects of CSR on Firm Value

The firms’ value reflects the investor’s confidence in the firm. According to Jackson & Aguilera (2003), the market value of an organization is determined by the value of the market price of company’s share in the market. The firm’s value plays a significant role to the investors because the increase in the price of shares implies an increase in investors returns. A company that has implemented CSR activities it is likely to win the confidence of more investors and result in an increase of the market price of its shares due to rising market demand (Business Ferret, 2017). Investors want information about companies that have a good reputation and have potential to enhance financial performance to invest more resources because such investments have less risk compared with corporations which do not make disclosure of corporate CSR activities..

In a very competitive business environment, CSR plays the critical role in communicating the company’s value to the community. CSR advertisements increase the reputation of the company making the company competitive in the industry. According to Crotty (2009), CSR advertisements portray the company as being having a focus on improving products’ quality which makes its products more attractive. Because such companies do not portray themselves as profit-oriented firms, the CSR activities convince the public that the products of those companies are of superior quality and customers are willing to pay a higher price for the products. Furthermore, companies that invest in CSR activities can attract many loyal customers (Johna & Senbet, 1998). Consequently, the socially responsible companies become more competitive and profitable because they attract more customers and sell their products at competitive prices.

Through CSR activities of the organization the company creates customer awareness about its existence and the products they offer. In some cases, people get to know about the company and its products through its CSR activities such charitable activities in the society (Bolt-Lee & Moody, 2010). The companies engage in ethical activities and avoid engaging in activities that conflict with laws. Through positive advertising, the companies attract positive media popularity which adds value to the society. With the support of the community and adherence to the laws companies that implement CSR activities can expand the value of their assets and profitability.

According to Crotty (2009), CSR plays the critical role of communicating the company’s value to the community and enhancing business competitiveness by demonstrating the quality because firms that focus on CSR activities also have great concern for quality. The customers may be willing to pay premium prices for products associated with ethical companies thus adding value to the company. Johna and Senbet (1998) claim that companies that invest in CSR activities can attract many potential investors who contribute to the improvement of firms’ value.

Contrary to these perceived benefits, Will and Hielscher (2014) posit that CSR activities can reduce firms value because the firm commits some of its resources on corporate social activities which yield no return to the company. Nevertheless, despite these claims studies have demonstrated that CSR activities reduces firm’s cost of capital, stimulates the growth of the firm and contribute to sustainable future cash flows (Business Ferret, 2017). The extent of benefit a firm can gain from CSR activities depends on the actual cost compared with the actual gains.

• • Effects of CSR on Firm’s Profitability

There is always a concern about why some companies are focused on implementing CSR activities while others engage in unethical behaviour (Crotty, 2009). Some managers pursue shareholders policy which aims at maximizing profit for the shareholders with less regard to the impact of their activities on other stakeholders. Such companies avoid CSR activities because they perceive such activities as adding unnecessary cost to the organization to the detriment of the shareholders (Johna & Senbet, 1998). On the other hand, the managers who focus on stakeholders policy focus on activities that create value and benefit all stakeholders including investors, the employees, customers, the government, the general public, investment advisors and the media (Jackson & Aguilera, 2003). Though implementing the CSR activities involves huge cost, and individual commitment focused on ensuring the interests of all stakeholders are taken care of. Organizations that implement CSR activities expect to improve their profitability in many ways.

CSR promotes sustainable business profitability. First, the company can attract more investors because the public perceives the organization as being ethical and the best place to commit resources (Bolt-Lee & Moody, 2010). The investors have respect and confidence that their resources will be efficiently managed to create more resources for the investors. The organization utilizes the wide resource base to invest in more projects and contribute to the growth of resource and profits.

Also, the company with firm CSR policies focuses on sustainable projects that increase efficiency and reduce costs of the organization. For instance, the companies invest in efficient and sustainable machines and another production process which reduce consumption of energy and reduce cost (Jackson & Aguilera, 2003). Cost is an important component in the operations of the company, and when engaging in the efficient and cost-saving process, the organization improves its profitability in the long-run. Furthermore, a socially responsible organization is involved in recycling of waste and energy saving activities that promote organizations profitability.

Organizations that engage in CSR activities of integrating values and strategies are profitable because they are more innovative and produce quality products and services compared with unethical companies (Crotty, 2009). They are focused on promoting the welfare of various stakeholders through sustainable means. Consequently, various stakeholders give their support to the organization because in doing so they also promote individual interests. CSR activities promote business profitability through sustainable operations (Business Ferret, 2017). Being ethical organizations, there are fewer or litigations that would otherwise result in court fines and reduction in profit of the organization.

The CSR activities attract the support of the loyal customers, competent employees, good relationship with the government and positive media publicity that promote a sustainable and profitable working environment (Jackson & Aguilera, 2003). When various stakeholders work together, they achieve more than what one stakeholder can achieve individually. For instance, the organization produces products and services the consumer requires, the local community supports the business activities of the organization without posing resistance, and motivated employees work towards achieving higher performance. Also, suppliers are willing to associate with the organization and supplier the quality products on time, and consumers enjoy buying the product of the company at a higher price (Johna & Senbet, 1998). As the company becomes more competitive, it can increase revenue and reduce cost by enjoying economies of scale hence increase profitability.

2.5 How CSR Affects the Cost of Equity

The cost of equity refers to the return an organization gives to the shareholders or equity investors as a return for the risk of their capital investments in the organizations. Investors offer their financial resources to support the growth of the organization and in return, they are rewarded with the share of the gains from the investments (Bolt-Lee & Moody, 2010). Firms must take consideration of the cost of capital when determining the cash flow of the business operations because the higher cost of equity reduces the value of the company’s investments. The CSR activities of the business affect the equity cost of the organization.

The cost equity is affected by the information asymmetry between the investors and managers of the organizations. Managers are assumed to have more information that the investors are creating information asymmetry (Crotty, 2009). Depending on the size of the organization the investors and organization benefit more from the disclosure of financial information. The financial analysts and media focus more on providing disclosure of information regarding the company’s operations to reduce the information asymmetry. If an organization makes more disclosure of financial information attracts more investors and buyers thus increasing the value of the company (Johna & Senbet, 1998). Although all investments carry some risks, many investors fear firms which they have little or no information about. Firms with more disclosure attract more investors and expand the base of their investments which consequently lowers the cost of equity (Crotty, 2009). However, a company that makes a voluntary disclosure of financial information reduces the cost of capital equity compared with organizations that depend on financial analysts and the media to mine data for disclosure of financial information. Therefore, large organizations that engage in more CSR activities have a lower cost of equity because of increased asset base financed by the investors.

A firm which is perceived as being risky must pay its investors higher risk premium to persuade them to invest in the business (Crotty, 2009). CSR portrays business as having a stronger risk management strategies, have corporate governance and better public image. According to Jackson & Aguilera (2003), the disclosure of firms CSR information can help the company to win the confidence of investors because they perceive it as a less risky business. The firm’s sustainability report willingly saves the firms cost of searching for such information and will be willing to invest in the firm at lower return compared with firms that do not make closure CSR information (Bolt-Lee & Moody, 2010). Large organizations that engage in more CSR activities have a lower cost of equity because of increased asset base financed by the investors.

• Methodology

This data and information used for this study were obtained from secondary research. It involves the analysis of various secondary sources including books, journals and articles. Also, additional information was obtained from the company’s websites. A descriptive approach was used to present the relationship between firms CSR activities and the impact they have on firms’ performance. An inference was drawn based on the literature analysis of data obtained from the companies’ websites.

• Analysis CSR in Organizations
• Google CSR Case Study

Google is one of the companies ranked high for its CSR policies. Google has a reputation for offering its employees with the best working environment. Employees have contributed to the excellent performance of Google because it provides them time to innovate thus making it one of the most innovative companies (Business Ferret, 2017). The company has attracted the potential investors resulting in significant growth of Google’s value as determined by the growth of total assets shown in the figure below.

Figure 1

Consequently, the innovative products attract more customers and promote loyalty among the customers hence increasing Google profitability as shown in the diagram below (Business Ferret, 2017). The Google’s values have grown significantly from about $90 billion in 2012 to over $170 in 2016. The unprecedented growth of firm’s value is attributed to its CSR activities which have contributed to higher employees’ productivity and quality products.

Figure 2

• BMW’s CSR

BMW is one of the most sustainable companies in the automobile industry. The company produces environmentally friendly vehicles with a focus on fuel efficiency and low carbon emissions (BMW Group, 2017). The company also empowers its employees and offer friendly products and services to the customers. Due to its focus on sustainability BMW has managed to increase its value steadily from 2012 to 2015 as shown in figure 3 below.

Figure 3

Also, BMW has managed to increase its profitability consistently because of loyal customers who have shown their willingness to recommend BMW products to other consumers (BMW Group, 2017). The profit has grown steadily since 2012 to 2016 as shown in figure 4 below.

Figure 4

BMW operates in more than 150 countries. Its CSR activities have led BMW to gain international recognition as a socially responsible firm. Also, it has over 140,000 employees worldwide, and because of its ability to attract competent employees, BMW is one of the most innovative automobile companies. The customers are willing to pay a higher price for the BMW’s products which enhance the company’s profitability.

However, CSR activities require commitment of firm’s resources

• Doha Bank in Qatar

The Doha Bank has been involved in CSR activities for years. In 2004 the firm started showing concerns for the environment to achieve sustainable development. Nevertheless, it was not until 2009 when the bank began publishing its sustainability report. In 2011 Doha implemented extended its CSR activities including educational and skills development programs to support “eco-schools” initiative to entrench environmental consciousness in local schools (Corporate Social Responsibility report, 2012). Also, it supports talents of the youths and development activities through direct involvement of employees and donations of finances. These and other CSR activities have contributed to the tremendous of the bank in the country as the most trusted bank and have attracted more investors and customers.

The figure 5 below shows improvement in Doha Bank’s value and equity since 2001 to 2016 due to CSR activities.

Figure 5

The value firms’ value of Doha Bank has grown tremendously since 2012 following the implementation of various CSR programs. Although the firm has experienced consistent growth of assets and equity value, a significant growth happened after 2012. The 2012 asset value growth rate was 4.7% compared with 2011, while the 2013 growth rate was 21% compared with 2012 growth rate. This tremendous growth can be associated with increased performance due to CSR sustainability programs.

Also, during the same period equity value grew significantly by 49.3% in 2013 compared the 6.6% growth rate in 2012. The growth in the firm’s equity can be associated with the low cost of equity as more investors gain confidence with the firm. Therefore, has been an improvement in firm’s performance since the implementation of various CSR programs in 2012.

Figure 6

The figure 6 above shows increase in profitability for Doha bank due to effective CSR policies. Though bank made profit consistently during the entire period under review, there were higher profits after 2004 when the firm engaged in environmental protection programs and further growth occurred in 2012 which can be attributed to the implementation of various CSR programs. However, the profitability decline in 2016 was due to higher resources committed to investments which did not yield any return that year (Doha Bank, 2016).

Doha Bank supports various CSR programs in Qatar including environmental awareness programs and philanthropic activities. The firm enjoys various benefits due to its CSR initiatives including improved customer satisfaction, better financial performance, customer loyalty, reduced operational risks, customer willingness to pay higher premiums prices and development of products and services which are easy to use by the customers (Doha Bank, 2016). Doha Bank has received international recognition and won various awards for its various CSR programs.

Recommendations and policy implications

Most organizations avoid CSR activities because they do not have clear information of how such activities can benefit the organizations. However, the analysis of various organizations and their respective CSR activities can enhance understanding of the perceived, and actual benefits and organization get by focusing on CSR activities.

I would recommend every organization to engage in CSR activities in their everyday operations to promote a benefit for the organization and all stakeholders. Based on the stakeholders’ theory, the organization cannot achieve much by focusing on one stakeholder and ignoring other stakeholders. For an organization to achieve sustainable profitability and development, it has to take into consideration of the interests of all stakeholders who reciprocate by ensuring the success of the organization in the long-run. The organization should develop sustainability policies that promote the interest of each stakeholder. For instance, the policies on producing quality goods will require the organization to motivate employees and improve their efficiency, deliver quality products to customers, minimize waste and in turn increase profit for the investors.

Also, I would recommend firms like Doha Bank to include the actual amount they spend on various CSR activities and the firm benefit from various CSR activities.

• Conclusion

CSR is a great concern to the organizations and other stakeholders. Although businesses are established with the main goal of generating profit from its transactions, it cannot survive without other stakeholders. The CSR activities enable the organization to show concern for the society and the environment. The benefit of CSR surpasses its cost. The CSR improves business profitability by attracting competent workers which result in improved organization performance, attracts more customers and investors thus enhancing business performance. Also, CSR activities minimize the unnecessary cost of legal mitigation, invest in efficient technology, attract more investors, improved company reputation and create market opportunities for organization resulting in better performance. Additionally, CSR activities reduce the cost of equity because of the free disclosure of financial information by the organizations that reduce information asymmetry and attract more investors increasing the company’s asset base. The Doha Bank in Qatar is a classic example of how organizations benefit from CSR activities. Through deliberate policies to become the leader in Green Banking institution by supporting the development and environmental protection Doha Bank has enhanced its performance to become the largest bank in Qatar.