The Necessity Of Csr

Published Date: 02 Nov 2017

1.1 Introduction

It was at the beginning of the economic recession in the United States of America when Barack Obama claimed that the modern era is the "age of responsibility". He mentioned that it is time to adopt values that serves the greater goals of society.

Decision making regarding the allocation of scarce resources is more complex in modern times, than before. It has been a long time since the organizations and the academic cycles repudiated the central focus of neoclassical economics, which is the main objective of organizations is the maximization of profit and adopted more humanistic identity. Prahalad and Hamel (1994) indicate that, environmental concerns, customer’s expectations, problem of excess capacity, constitute an integral part of decision making. It is clear that corporations must be aware of stakeholders’ different needs and expectations (Freeman 1984). Wood (1991) opposes that the different expectations between stakeholders and organization constitute the corporate social performance record. According to him corporations from the one hand must satisfy stakeholders’ expectations and on the other hand must weigh if these expenses are outweigh financial performance. Moreover, organizations adopt a social profile for instance, the production of green products, recycling, the reduction of carbon footprint and philanthropic activities in order to achieve a competitive advantage. Whether is a trend or not consumers show their interest to green companies by buying their products or support their services.

The median consumer of the 21st century is aware of the environmental problems and tries to contribute to the elimination of this problem buying organic products, electric machines with lower electric consumption, or boycott companies that are suited for environmental pollution, such as BP after the pollution of Mexican gulf. More and more people are getting informed through Green Peace official site which companies support green technology. Consequently the power of consumer should not be considered negligible by the organisations.

The necessity of CSR is supported also by the public opinion and by executives within corporaitons. A majority of consumers 88% believe that firms among their activities that are dealt with the profitability and the continuity should attempt for the improvement of environment and the society. In addition, the 93% of 750 CEO agree that the long term financial performance can be achieved through CSR.

In a global level many regulations are legislated to control the emissions of the industrialized countries. A popular example is the Kyoto protocol. Consequently, the appetite for corporate social responsibilities is expected to rise since that kind of regulations support it.

The purpose of this research is to determine whether there is a relationship between corporate social responsibility (CSR) and financial performance. I will try to investigate if there is a relationship in Dutch listed companies who disclose CSR reports.

In order, to continue with the research it is necessary to understand the term CSR.According to European commission CSR is:

"A concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis."

From the previous definition we can conclude that stakeholders unambicously play an important role in the development of CSR activities. As stakeholders we can distinguish every group of people that is of interest for the growth and profitability of company such as shareholders, clients, potential investors, and vendors and groups that are affected by the services or products of a company. Such groups may be consumers, the local government and the society as whole.

The Industry of Canada, government of Canada formulates the following definition: "CSR is the way the company integrates economic, environmental and social objectives while, at the same time, addressing stakeholder expectations and sustaining or enhancing shareholder value."

The previous definition underlines the 3P (people, planet, profit) approach an important pillar for the existence of companies.

However, social responsibility has not achieved an absolute acceptance from academics and practitioners. One reason is the implementation and regulation costs, since companies must follow specific guidelines and procedures. Supporters of neoclassic theory such as Freidman, expressed their disagreement whether an organization can have an active role in the society and the environment. According to Freidman an organization must have only one objective: profitability.

1.2 Problem Statement

According to Kinney (1986) a good research question "should address the relation of two or more concepts, implies the possibility of empirical testing and is important to the researcher and others"

This study concerns a sample of listed companies in the region of the Netherlands, a country that show a big interest in corporate social responsibility. The time period will be used is 2006-2009.

The main research will be formulated as follows:

"Does Corporate Social Responsibility affect the financial performance of Dutch listed firms?"

Each chapter will provide important information in order to answer this question step by step by answering sub- questions. Other sub-questions will be:

"What is Corporate Social Responsibility (CSR)?"

Although in the introduction I made a reference to the term of CSR , evolution analysis of CSR and some important studies are necessary to understand the concept.

"Which economic theories explain the importance of CSR ?"

Theories are important because they explain certain behaviors, in our case the relationship CSR- Stakeholders, CSR perfo- Financial performance.

"How can be measured the financial and the social performance?"

As we will see in the next chapters, measuring csr performance is considered a difficult approach. Therefore, answering to this question will provide important information for our research.

The results of prior studies are mixed. Many authors argue that there is a positive relationship between CSR and Financial Performance while others found a negative or a neutral relationship. There are two reasons why it is important to answer this research question. First, is the contribution to existing knowledge since the majority of prior studies are focused in the region of United States of America or other European countries and secondly, the attempt to find results through a theoretical approach which are important for the practitioners.

1.3 Contribution to existing knowledge

In this part I will outline the reasons why is it important to have an answer to the research question. As Gordon and Porter (2009) mention a good research study should address an issue and provide new insights that are of importance both to academic cycles and to practitioners. Moreover, further research is imposed when the findings of previous researches are contradictory. More specifically, previous scholarships found a neutral, positive or negative relationship between CSR and financial performance.

Therefore this study will be beneficial to:

Scholarship. Prior studies were referred to different regions. For instance, the majority of them investigate this correlation in the USA territory.

Dutch shareholders. If a positive relationship exists between CSR and FP then the shareholders would expect an increase in shares of those companies which support CSR policies.

Dutch Companies. Dutch corporations which adopt CSR activities voluntary or not they will improve those activities if a positive relationship exists.

Dutch Government. If a positive relation exists then the government would encourage companies to disclose CSR information with benefits. In addition, they could change regulations to oblige companies to disclose CSR information.

1.4 Thesis Outline

Introduction: In the first chapter is presented an overview of the subject. A brief definition of CSR and the formalition of research question and the contribution to knoledge of this study.

Theoretical Framework: An overview of the concept of CSR and its evolution will be discussed in the first part. In the second part are discussed the relevant theories that are able to explain the relationaship between CSR and Financial Performance and the relationship of CSR and stakeholders.

Literature review: The third chapter is dealt with findings of prior studies in this area.

Hypotheses: The development of hypotheses will take place in this chapter.

Research design: In this chapter I will refer to the constructs of my statistical analysis, control variales, variables, which method I will use to measure CSR, time period and theavailability of data will be discussed there.

Results: In this chapter I will present the results of my statistical analysis and some tests to enhance the validity of the results.

Conclusions: Finally, an overview of the results ,suggestons for future research and potential limitations will be presented.

Summary

In this chapter was introduced a broad term of CSR, the scope and the

CHAPTER 2

Theoretical framework

In this part I will analyze the concepts of Corporate Social Responsibility (CSR), Corporate Social Performance (CSP),corporate financial performance CFP An integral part of a research study is also the theories. A theory is a set of ideas that are able to explain and predict specific observations.In our study we will refer to those theories that can explain the relationship of CSR and FP. These theories are the Stakeholder theory, the resource based view of the firm, Institutional theory@@@.

2.1 Corporate social responsibility

The early years of the 20th century were the ideal time period for academics to concentrate in the concept of social responsibility. The industrial revolution of the previous century contributed to industrialism of nations and the increase of mass production, but it was at the same time a dangerous path for the environmental sustainability. In the 1920s is observed a first attempt by academics to develop an argumentation about sustainability.

However, the first frameworks regarding CSR provided in the 1960s. Davis (1960) stated that some decisions taken by managers and concern social responsiveness may have a long run economic gain. On the contrary Walton acclaimed that the "costs are involved for which it may not be possible to gauge any direct measurable economic returns‟(Walton, 1967) regarding the attempt of companies to be socially responsible.

Several studies attempted to provide an enhanced framework such as Sethi (1975) who identifies the construct of CSR through three dimensions: social responsiveness, social obligation and social responsibility. Additionally, Carol (1979) stated that executives may prioritize responsibilities as economic, ethical, legal and philanthropic. Several studies contributed to the necessity of the audit of CSR reports such as Bowman and Haire, 1975; Buehler and Shetty, 1976.

According to Lantos (2001) a CSR can have three demeanors: altruistic, ethical and strategic. The first one refers to providing aid to groups of stakeholders without expecting to gain observable financial benefits. Ethical CSR is aim to "protect those who may harm by the normal operations of the corporations". Finally, Strategic CSR is defined as a way to achieve competitive advantage.

An important role in the development of CSR played the non- academic article of Milton Friedman 1970. Such as others supporters of the classic economic theory Freidman stated that firms "do not have responsibilities over the environment" but the political mechanisms should be of interest of responsibility. At the same period Freeman expressed a different approach. Freeman through the stakeholder theory (I will explain it on the next session), expressed that organizations can have positive results regarding their financial performance.

Wood (1991) contends the following definition:

"A business organization’s configuration of principles of social responsibility processes of social responsiveness, and policies, programs and observable outcomes as they relate to the firm’s societal relationships".

The world business Council for sustainable development states:

"CSR is the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large’’

Corporate social responsibility framework

Hilman (2001) alleged that a successful corporate responsibility framework should address the following components: "economic responsibility to investors and consumers, legal responsibilities, ethical responsibility to society and discretionary responsibility to the community". He also included two more dimensions of CSR, stakeholder management and social issue participation. Those characteristics are dealt with the ability of a firm to treat stakeholders’ expectations in a satisfactory way.

Finally, according to him, an effective CSR is "shown to minimize conflicts between corporations and society" and economic advantages can be obtained such as the following:

Risk Reduction: Firms which implement CSR policies, acquire trustworthgy relationships with the society, by supporting the huma rights, improving the relationships with their employees and providing a moral way of life and consequently, they avoid criticism from the community and non-profit organizations. This guarantees their shares and earnings.

Waste Reduction: Firms which engage in waste reduction are less vulnerable to regulatory fines.

Employee Productivity: When the emplyees work in a pleasant environment and have good relations with the employers, they tend to be highly motivated and more productive. As a result the firm’s overall performance is ameliorated.

KPMG indicates the following CSR framework:

Identify and hierarchize CSR, CSR strategy and governance, Sustainability performance management CSR reporting

2.2 Corporate social responsibility and Disclosures

Corporate disclosures provide valuable information to potential stakeholders. Information such as the financial performance of the company, profitability, is useful for investors, the public, even bank institutions are aware of them in order to provide with loans the companies. For a similar purpose CSR disclosures inform stakeholders for the intentions and the progress of corporate social responsibility within organization. Concerning the reporting reliability qualified auditors make audits to these reports.

Guthrie & Parker, (1993) argue that the existing accounting framework is too limited because the financial performance does not represent the overall performance of one organization. Estes, (1976) indicates "businesses must meet societal expectations of both profit generation and contributions to the quality of life in general".

In the next table are presented many alternative reporting frameworks.

1

The Balanced Scorecard

The Balanced Scorecard: Translating Strategy into Action (1996; based on a 1992 article) – Professor Robert S. Kaplan and David P. Norton

2

The Jenkins Report

Improving Business Reporting – A Customer Focus (1994) – American Institute of Certified Public Accountants

3

GRI

Sustainability Reporting Guidelines (2000; revised 2002) – Global Reporting Initiative

4

ValueReporting

The ValueReporting Revolution: Moving Beyond the Earnings Game (2001) and Building Public Trust: The Future of Corporate Reporting (2002) – both PricewaterhouseCoopers

5

The Hermes Principles

The Hermes Principles: What Shareholders Expect of Public Companies – and What Companies Should Expect of Their Investors (2002) – Hermes Pensions Management Limited

6

he 21st Century Annual Report

The 21st Century Annual Report/Prototype plc (1998) and Performance Reporting in the Digital Age (1998) – both ICAEW

New reporting frameworks (Source: ICAEW, 2004)

From the aforementioned frameworks, GRI has gained a wide acceptance and reputation. The United Nations Environmental Program (UNEP) and the Coalition for Environmentally Responsible Economies (CERES) formed the Global Reporting Initiative (GRI) in 1997. GRI provides indicators to organizations in order to measure and report their economic social and environmental performance.

The reporting guidelines are a framework for reporting, financial, social and environmental performance. "They (a) outline reporting principles and content to help prepare organisation-level sustainability reports; (b) promote comparability of sustainability reports; (c) serve as a key tool in the overall process of stakeholders’ engagement". Nigel Finch (2005)

2.4 Theories

1) Instrumental theories

Instrumental theories describe that CSR activities are adopted by the institutions to generate profit. Theodore Levit (1958) in his article The dangers of social responsibility opposes that "governments role is not business and business’s role is not government". According to this view organizations have a unique attribute which is the generation of wealth and are not responsible to adopt activities related to social issues. He believes that each government must aware of that kind of policies and activities. On the same line Freidman (1970) expressed that the persistence on CSR may lead to an agency problem within the firm. An agency problem arises when a part of profit is invested in CSR actions and could be share to the shareholders or to be invested in activities that directly generate profit. Of course, the maximization of profit can be achieved by parties who have a stake in the organization. It has been argued that in specific cases the satisfaction of these interests may result in profit, (Mitcell et al 1997, Odgen and Watson, 1999).

Natural resource-based view of the firm and dynamic capabilities

The resource based view of the firm (RBV) Barney (1991), Wernerfelt, (1984) maintains that the ability of the firms to outstand against competitors "depends on unique interplay of human, organizational, and physical resources over time",(Garaga and Mele). Barney (1991) states that "if these resources are valuable, rare, inimitable and non-substitutable, they can constitute a source of sustainable competitive advantage". Similarly with this concept Hart (1995) outlines additional attributes with respect to corporate social responsibility. More specifically he states that, corporations in specific industries may obtain competitive advantage using resources in environmental social responsibility. Additionally, Russo and Fouts (1997) attested this empirically on companies with environmental social responsibility and accounting profitability and found that the speicic companies increased their profitability.

Stakeholder theory

The primary ideas concerning Stakeholder theory were formed during the 70s. However, Freeman (1984) was the first that formulate a clear definition. According to him is "a conceptual framework of business ethics and organizational management which addresses moral and ethical values in the management of a business or other organization". The stakeholder theory as the majority of the existing theories in economics has been influenced by other sciences such as philosophy, ethics and political theory. Donaldson and Preston (1995) argue that Stakeholder theory has three different dimensions: The first one describes the nature of an organization, which is a "a constellation of cooperative and competitive interests possessing intrinsic value" (see Donaldson and Preston (1995). Secondly, they point out its instrumental dimension which is the balance between the effective stakeholder management and achieving objective goals. Last but not least, the normative dimension indicates that an organization has an obligation to fulfill the needs of the stakeholders.

West (2012) concludes: "Overall, the stakeholder theory for a successful, sustainable business appears to be an attempt to inject a reflexive morality into the actors that are using the amoral economic machine".

Social contract theory

In a similar way social contract theory demonstrates that there is an implicit contract between businesses and society. Moir states that both sides are obligated to maintain this contract. The role of CSR in this theory is fundamental "since is a method to ensure that the actions of the company will be viewed as living up to the Contract" West (2012).

Measuring CFP

There are three procedures to meausure CFP: a) Market based (investor returns), b) accounting based (accounting returns), c) perceptual survey (survey measures). Market based meusures like share price and share price appreciation is a process to measure financial performance taking into account shareholders as a primary stakeholder group (Cochran and Wood 1984). In other words the available information provided by share prices reflects all efficient information for analysts to measure the financial performance.

Another perspective to measure the profitability of an entity is the accounting based indicators like ROA (return on assets), ROE (return on equity), EPS (earnings per share). These indicators constitute an internal efficiency of firms, because they provide information in which way managers allocate entity’s earnings to different managerial processes.

ROA

The indicator ROA shows the profitability of an entity in relation to its assets. ROA indicates the ability of management to generate profit by using the existing assets. The specific ratio is often used to compare companies which belong to the same industry or comparing ones company’s previous years with current. Hull and Rothenberg, 2008; Mahoney and Roberts, 2007; Waddockand Graves, 1997; Lee et al., 2009;D’Arcimoles and Trebucq, 2002;Aras et al., 2010; Bhagat and Bolton, 2008 used the existing ratio in their studies.

ROE

The ratio ROE indicates the net revenues of a company in related to shareholders investments. Net income is for the full fiscal year (before dividends paid to common stock holders but after dividends to preferred stock.). In the existing literature Mahoney and Roberts, 2007; Waddockand Graves, 1997; Lee et al., 2009; D’Arcimoles and Trebucq, 2002; Aras et al., 2010 ROE is used as a way to measure profitability.

Finally, perceptual measures are subjective estimates like "soundness of financial position", "wise use of corporate assets".

The majority of previous studies rely on market-based and accounting meusures to measure the profitability of the firms. Mc Guire et al (1988) states the difficulties occur adopting market or accounting measures. Accounting measures are reliable only when the selected firms have adopted the same accounting policies and norms. Otherwise, the researcher may find false results. Additionally, due to the fact that accounting measures contains information from discretionary reporting the manipulation from top executives is possible. On the other hand market based measures are evaluations of investors and may not be reliable. In contrast, the availability of market based measures consists of an easy path to evaluate firms performance (Goukasian and Whitney, 2008)

2.3 Corporate Social Performance

The meausurement of Corporate social responsibility is referred also as Corporate social perfoarmnce. According to Dennis et al., (2008, pp.26), "Corporate social performance (CSP) describes the proposed relationship between corporate social responsibility activities and firm-level corporate financial measures".

CSP can be measured by two approaches. One method is to designate social performance as a "multidimensional construct" embracing the effort of an organization to accomplish certain responsibilities such as the economic, legal, ethical, and discretionary (Carroll, 1979, 1999) or embracing business’s principles, processes of response to rising issues, and observable practices and outcomes (Wartick & Cochran, 1985;Wood, 1991). An another process to measure social performance is to measure the way that a corporation fulfill the needs and desires of stakeholders (Campbell, 2007; Clarkson, 1995; Cooper, 2004; Post, Preston, & Sachs, 2002)

Cochram and Wood (1984) conclude that there are two ways to measure the CSR

The reputation index

Content analyses

In the first approach analysts rate some dimensions of social performance.

Unlike CFP which can be measured precisely CSP presents some difficulties. The fact that CSP is a multidimensional construct makes difficult to measure it because researches may focus only to some parts of that and not as whole Waddock and Graves (1997).

Overall CSP–CFP Relationship

As stakeholder theory played a significant role in the literature points out the positive relationship between CSP-CFP, it is necessary to refer to the most important findings and attributes.

Jones (1995) who is considered one of most the influential researchers regarding stakeholder theory in his paper concludes that the repeated interactions between stakeholders and companies which are characterized by trustworthy and moralism can influence the financial performance in a positive way. , Jones (1995) borrows frameworks from agency theory transaction cost economics, team production and business ethics.

CSR measure

Unlike CFP which can be measured with straightforward processes, Corporate Social Perfomrnace (bibliography referes to CSR measure as CSP) is considered obscure and difficult to research. CSP can be defined as ‘a business organization’s configuration of principles of social responsibility, processes of social responsiveness, and policies, programs, and observable outcomes as they relate to the firm’s societal relationships’ (Wood 1991a: 693).

From the definition it is obvious that CSP is a concept that can be evaluated through different approaches:

Charitable contributions

Philanthropic activities are a part of CSR and consequently, many companies are focused in that field supporting with actions such as cash benefactions or philanthropic foundations their interest for minority groups.

Corporate policies

Corporate policies are the procedures or the options that companies choose to protect or enhance their social image. Grossman and Sharpe (1986) examined the financial performance of the companies that invest in South Africa during apartheid compared to those companies which divested.

Environmental performance

Another way to measure one construct of CSP is the environmental performance. Environmnental performance can be describe the attempt of a firm to adopt activities which are fridlier to the environment. Such activities could be the reduction of carbon footprint, the waste management. Environmental performance can be done by external parties or by the business itself. It is obvious that the information provided by external sources are more reliable and objective.

Observers’ perceptions

Observers assess and evaluate the company’s industry the values and ethics of executive personnel and their subordinates. Fortune magazine list is one example.

Third party audits

The methodical process of evaluating the information that is dealt with CSR activities. Third party audits such as Kinder Lydenberg Domini KLD which evaluates companies’ social performance on eight dimensions.

The measurement problem

One reason why the relationship of CSP and FP cannot be measured accurate is the problem to measure CSP. Internal behaviors such as environmental strategies concerning the reduction of CO2,intenral behaviors or processes like policies dealing with minorities and external behaviors like philanthropic programs (Wood, 1991a, 1991b; Aupperle et al., 1985; Wolfe and Aupperle, 1991; Aupperle, 1991; Miles, 1987 Gephart, 1991). The measure problem becomes more difficult when the aforementioned processes are occurred differently across companies in different industries with different business strategies. Corporate social performance has been defined theoretically in two ways. The first one is to assess the performance through multidimensional structure and the ability to fulfill these responsibilities economic,legal,ethical and discretionary (Carol, 1979.1999). An another approach is how company cooperates with its different types of stakeholders and how fulfill their expectations (Campbell 2007, Clarkson 2005, Cooper 2004, Post et al, 2002).

.

Moscowitz (1972) is considered one of the first academics that tried to find a relationship between financial performance and sustainability. He classified 14 companies which had social attitude as an ideal choice to invest by observing their semi-annual performance in the stock market of Dow jones and S &P. The stocks of those companies outperformed in the terms of capital returns as a result social responsible firms can affect positively the stock returns. Vance 1975 on the other hand found a negative relationship of the same firms by collecting data of stock performance from 1972-1975. During this period the companies had performed poorer than other companies.

Motives for companies to engage in CSR

In this part we will discuss why companies strive to engage in CSR activities.

An interesting approach is described by Munilla and Miles (2005) regarding why companies adopt CSR policies. Munilla and Miles use Van Marrewijk’s (2003)CSR framework and Caroll’s (1991) pyramid (table 1).

Compliance driven

Profit driven

The financial benefits of CSR activities can be divided into three categories:

Short term benefits

Long Term benefits

General benefits

Short term benefits

The performance of a company might be improved in a short term period by upgrading working conditions or supporting with policies the diversity of nationalities and races, Tsoutsoura (2004).

Long term benefits

In addition, CSR information may be the key for the long term profitability of a firm. Juholin (2004) points out that the long term profitability is the driving force behind the disclosing of CSR information. According to Tsoutsoura firms that engage in CSR acrtions are less vulnerable in fraudulent and corrupted behaviors. Although, that the costs to maintain environmental controls are high, they have less risk to pay fines for environmental pollution. Another element that drives the long term profitability is the good reputation that social responsible firms tend to have. This attribute enhances the competitive advantage.

Geberal benefits:

Lotila (2004) refers to the importance of social disclosures reporting and the impact to the stakeholders. He states that a non communication is bad communication. Firms that do not disclose information are suspected by the stakeholders that have something to hide.

Caring driven

The caring driven mοtiνes can be characterized by unselfish behavior. Firms adopt CSR policies in order to follow the triple bottom line of profits, planet, people.

Synergistic

Johan Graafland distinguishes two main categories for the motivations that have firms to engage in CSR actions: extrinsic and intrinsic.

Extrinsic motives are the financial motives. "It encourages CSR because it has instrumental value for profit or income" As Brown and Dacin 1997 refer the CSR companies can improve their position in the consumer market. In addition, those companies are able to attract capable and responsible workforce.

Intrinsic motives

The intrinsic motives are described by their altruistic and humanitarian behavior. The personal beliefs or concerns for the environment and society of top executives can influence the attitude of one company. According to Graafland intrinsic motivations can be divided in two categories: altruistic and moral duty." The moral duty to be socially responsible can be derived from ethical principles of moral philosophy or from religious principles". On the other hand

Literature review

In the previous chapter is described the relevant theories and definitions of our study. A fundamental part of a research is also the literature review in which is explained the findings of the previous scholars. However, it is important to mention that the first studies which attempted to investigate the correlation of CSR and CFP lack of methodological rigor and consequently, I omitted them.

Neutral relationship

Positive relationship

Negative relationship

Dooley et al. (1994)

The authors of this paper examine the relationship between economic performance- CEO stakeholder orientation and four pollution performance categories (direct releases to air and water, releases to public sewage, off-sight transfers, and a total category which is a measure of overall performance). Despite the fact that pollution performance is perceived as a "crude" measure of corporate social performance, it is widely used in scholarship and there is a deep interst in renewable form of energy.

As explained earlier CSR is a multidimensional construct and is difficult to measure it. This complexity consists a problem to define the relationship between financial performances. Waddock and Graves (1996) point out the difficulty to this correlation:

"CSP is a construct with a wide variety of inputs (investment in pollution control) internal baheviors or processes (treatment of minorities) and outputs (community relations) As a result the measures used in the empirical work have frequently benn one dimensional and have been applied to small samples of companies"

The findings of previous studies are inconsistent: Some theorists argue that there is a positive relationship between FP and CSR, while others oppose that there is a negative relationship. Finally, some researchers showed that CSP does not affect FP.

A positive relationship

CSP as a competitive advantage in attracting quality workforce

Greening and Turban

The continuity and the existence of one organization is based on the competitive advantage. One way to achieve advantage against competitors is the attraction of highly motivated, dedicated and creative employees. How one company can recruit an employee with those characteristics? The authors suggest that the answer underlies in the company’s social work. According to social identity theory not only employees are appealed by companies which have the same social goals but also their self-image is influenced by the image and reputation of employees.

Consrequently, CSR actions is a way to attract conscientious employees. Greening and Turban found that companies with strong CSP appeal high quality employees than companies whith worse CSP. In order to test their hypothesis they made an experiment with 39 participants. "Each survey contained 32 organizational descriptions, in which the CSP dimensions were manipulated, and respondents were asked to read each description and then indicate their attraction to the firm as an employer."

Does CSR increase the financial performance of firms?

Stakeholder theory posits that "corporations practicing stakeholder management will, other things being equal, be relatively successful in conventional performance terms (profitability, stability, growth, etc.)" Donalson and Preston (1995). Additionally, researchers such as Clarkson (1995), Cornell and Shapiro (1987), Freeman (1984), Mitchell et al. (1997) enriched the topic of the particular theory. Why is so important to rely on theories and the previous literature? Because, the enrichment of academic literature can lead to interesting results for the practitioners. In our case if the improvement of CSR leads to improvement of CFP there will be a broad desire from organizations to adopt CSR policies. Consequently, it is essential to find a justified answer in the existing debate.

Many authors encourage companies to procced to CSR. For instance, Fombrun (2001), Wang and Smith (2008) argue that social responsible companies may take an advantage in the market place. Similarly, companies which provide incomplete financial information to the stakeholders but at the same time are engaged in CSR activities may have a less sever treatment from them, Fombrun and Shanley 1990

Another benefit is the ability to respond effectively in different demands and market changes. Freeman and Evan (1990) posit, corporations which try to satisfy different groups of stakeholders with different interests "may increase their scanning skills and firms processes and information systems".

The increase of financial performance can be substantiated by utilizing available slack resources such as employee relations, community relations Waddock and Graves (1997). In the same way good management theory argues that "there is high correlation between good management practice, and CSP, simply because attention to CSP domains improves relationships with key stakeholder groups (e.g. Freeman, 1984), resulting in better overall performance" Waddock and Graves (1997). For instance the occupation of disabled employees or monorites may improve the productivity. Finally, "firms with high CSP ratings may gather an easier access to capital, through the improvement of their relationships with bankers and investors"

Finally,

firms with high CSP ratings may gather an easier access to capital, through the

improvement of their relationships with bankers and investors

One of the first researchers who examined the relationship between CSP and CFP was Moskowitz (1972). Moskowitz investigated the performance of the common stock returns for the first half of 1972 of 14 companies which charectirized as social responsible compared to stock market indices. He cocluded that since the stocks outperformed in terms of capital returns there is a positive association between CSR and stock returns. On the other hand Vance (1975) found a negative relationship between CSR and stock returns using a time period of three years.

Stakeholders are also skeptic for firms that are operated in industries with the risk of an incident is high. The environmental pollution which is caused by BP in the Mexican gulf, incidents with a loss of human lives in mining companies in South Africa influence the public opinion negatively. Blacconiere and Patten (1994) investigate the impact of Union Carbide’s chemical leak in India which cost the lives of 4000 people to companies in the same industry. They found that chemical companies experienced a negative market reaction after the Union Carbide’s incident. Nevertheless, companies that provide an efficient sustainability reports experienced a less negative market reaction. Karpoff and Lott (2005) study investigates whether the environmental violations by public traded companies correspond to losses. In their research they examine 478 environmental violations from 1980-2000. Their findings are consistent with Blacconiere and Patten (1994), the shares of the companies whivh are investigated or charged with violating environmental rules experience are declined.

An empirical observation has conducted by Brammer and Millington (2004) to observe the implications of a specific element of CSR like charitable contribution in corporate behavior. According to them the donations were raised to 147% in the period 1989-1999 in the UK listed companies. In order to test their hypotheses they use two time periods ,1989-1990 and1998-1999. They found that at the first period donations by UK listed firms were driven by the rate on return on sales and not by the pressures or demands of their stakeholders. This means that philanthropic actions were characterized by a completely altruistic behavior of top executives. At the second period the profitability seems to play a less important role. The companies focused on many variables that are dealt with the desires of stakeholders such as the firm size.

We already mentioned some studies that argue the CSR is the driven key to increase the financial performance but we did not mentioned if constitutes a fundamental key for the long existence of one company. Collins and Porras (2000) in their book Built to Last describe the characteristics of those companies which are "built to last". They refer that such companies have true visions and they do not stand only to very good financial superiority. Waddock and Graves (2000) investigated whether those 18 companies have established a truly relationship with their stakeholders. In other words they investigate whether the stakeholder management consists a way to build an organization with a long term existence. In order to measure CSR they use KLD ratings in the following sectors: community relations, employee relations, treatment of the environment, product and diversity. They found that visionary companies seem to relate better to primary stakeholder than counterparts. Apart from their ecseptional financial performance, those companies are characterized by lees amount of debt, indicating that a good stakeholder management leads to an overall good management inside organization. It is also vital to refer that the Built to last companies are founded before 1950’s and their counterparts too.

Negative relationship

The relevant scholarship focuses on the attitude of shareholders when top executives managers decide to adopt social responsible actions. Researchers who indicate a negative relationship between CSR and FP are supporters of Neoclassical theory. Freidman (1970) was the first who argued that businesses have only one social goal: to make profits. Their main responsibility is to protect their shareholders. Although, Freidman did not support his view sienctifically he unintentionally gave motives to his opponents to evolve CSR concept.

Wright and Ferris (1997) examined the special occasion of divenstment in South Africa during the period of apartheid. Many companies that period decided to divest supporting their different believes with the specific country. According to authors this has a result to "negative abnormal returns accruing to their common stock". In order to support their hypothesis they investigate 116 divest situations during the period 1984-1990.

Another issue is the high costs for the implementation of CSR practices. Auprelle et al (1985) argue that socially responsible companies are at competitive diasvantage compared to less responsible companies because, those costs reduce profitability and shareholder wealth.

Simpson and Kohlers (2002) proposed the "managerial opportunism hypothesis". According to them, when there is a high financial performance, top executives reduce the associated costs with CSR in order to achieve better short term profitability and consequently higher compensations. On the other hand when organizations do not attempt to perform well managers increase the costs of CSR to justify the poor performance.

Neutral relationship

Finally, previous scholars indicate that there is no relationship between CSR and CFP. McWilliams and Siegel (2000) indicate that organizations and society are too complex and it is impossible to have a direct and simple relationship. Halme (2009) argues that this relationship may exists due to exclusion of industry specific variables. More specifically, Wingard (2001) stated that the lack of control variables and non sufficient dependent variables the relationship of CSR and CFP will be erratic. An important control variable according to McWilliams and Siegel (2000) is the investment in Research and Development.

Research design and data

This chapter discusses the method and the means which are required to test the hypotheses. As it is mentioned this study is a quasi-experimental research which means its internal validity is considered low. An effective way to enhance the internal validity is the inclusion of control variables. This chapter is divided in three parts : The first one describes the models that are used to measure financial performance and corporate social performance, the second deals with the analysis of necessary control variables and the last part refers to the model of control variables.

Measurement of Financial Performance

In chapter 3 is mentioned that there are two common ways to measure the financial performance of one firm: accounting and market-based variables. The dependent variable in this study is the stock returns, consequently we will use market-based variables. A considerable amount of studies use market based variables to meauser the financial performance (Nelling and Webb, 2009; Bhagat and Bolton, 2008; Brammer et al., 2006).The following formula which is used also by Alexander and Buchholz (1978) and Omran and Ragab, (2004); Brammer and Millington, (2008) will calculate the finajncial performance:

Rjt = (Pt- Pjt-1 + Djt)/Pjt-1.

Where:

Rjt = the return on stock J in period T

Pt = Price per share at the end of period T

Pjt-1 = Price per share at the end of period T-1

Djt = Dividends received in period T

It is important to refer that the market based approach involves some risks regarding the accuracy of financial performance of a firm. Generally, stocks are affected by the trend of the market reaction and forecasting of its profit estimation. Control variables are necessary to ensure that this formula will indeed capture the real financial performance.

CSR performance

Previous studies used content analysis or reputation index to measure csr information. A content analysis provided by the Dutch Ministry of Economics "Ministerie van Economische Zaken" will be applied in our case. Each year the ministry of economics gives an overview of transparency of almost 170 dutch companies with the highest turnover relying on their CSR diclosures. Transapency provides interesting insights to the dutch government, such as statistic information, how many companies proceed to csr reports and if there is an improvement each year. It is conducted each year on January, for the results of previous year, with the cooperation of Pricewaterhouse cooper.

The social performance is evaluated by 10 indicators ranging from 0 for companies with no csr activities to 10 for companies who have an exceptional sustainable record. Those indicators cover a wide range of sustainable activities from environmental aspects to business strategy.

Profile

Vision and Strategy

Governing Board and Management Systems

Chain Responsibility

Stakeholders

Economic Aspects of the Operating Processes

Environmental Aspects of the Operating Processes

Social Aspects of the Operating Processes

Verification

Remaining Remarks

A total score for social performing will reach to 100 points.

However, the specific framework has borrowed some constructs from other recognized frameworks such as the Global Reporting Initiative, Guideline 400 and Guide to sustainability reporting.

Control variables

The insertion of control variables is important not only to enhance the internal validity but also to prevent a nonsense correlation. Waddock and Graves (1997) used firm size (total sales, total assets and number of employees), risk(long-term debt to total assets ratio) and industry.

Size (S)

The size of the firms is included and consists one of the most important control variables. Medium and small sized firms generally do not apply csr because the costs are relatively high. Brammer et al (2006) in their study included market capitalization. In this study I will select log of total assets as it is also included in other studies such as Pava and Krausz (1996), Tsoutsoura (2004), Lopez et al. (2007).

Risk (R)

Industry (I)

Year (Y)

and more eyes watching the actions of corporations. These groups and individuals act

as concerned spectators by pressuring corporations to change their controversial

practices (Shamir, 2005). The combination of all of these groups and individuals

creates levels of social awareness and action that have the potential to push

corporations or even whole industries in a specific direction. For example, NGOs and

activists have undertaken both legal and non-legal campaigns to publicly shame

corporations for their controversial actions (Porter and Kramer, 2006; Shamir, 2005).

Legal action can also occur if the controversial issue is viewed as violating a

country’s laws or regulations. Examples include Royal Dutch Shell being sued for

conspiring with the Nigerian government against the Ogani people and Coca-Cola being

sued over claims they should be held liable for the activities of paramilitary units who

terrorized and murdered union organizers at a bottling plant in Colombia (Shamir,

2005).

Outside of judicial systems, campaigns have consisted of "consumer boycotts,

divestment programs, and popular protest in order to pressure MNCs to adopt

responsible business practices" (Shamir, 2005, p. 99). Aiding in the process of greater

access to information are groups such as Wikileaks, which publicly distribute

confidential information regarding the actions of governments and corporations. Most

notably, communications by the US government with regard to diplomatic cables

involving both the Iraq and Afghanistan wars were publicly released verbatim, which

resulted in public outcries against both Wikileaks and the US government (The New

York Times, 2011).

In addition to external factors, internal pressures have created a diverse range of

motivators that may entice corporations to engage in CSR. Motivators to engage in

CSR include the reasons to create new benefits for a corporation, avoid current or past

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controversies and problems, deal with employee attraction and retention issues, and

even maintain the status quo. These motivators can range from dealing with reputation

issues to basic altruistic endeavours (Porter & Kramer, 2006; Bluestone, Heaton &

Lewis, 2002; O’Dwyer, 2002; Oketch, 2005; Moir, 2001; Lantos; 2001; Frankentel, 2001;

Levis, 2006; Bennett et al., 2009; Frynas, 2009; Kurucz, Colbert, & Wheeler, 2008).

Reminiscent of other aspects of CSR (i.e. definitions and responsibilities), the

area of motivators has become saturated, unorganized, and convoluted with concepts.

In general, categorizing motivators into broad encompassing groupings is not common.

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