Corporate Social Responsibility
Introduction
becomes increasingly noticeable that
more and more companies engage in socially responsible activities, reporting
annually on various fields, unrelated to financial performance or business
interactions. These social interactions initiated by firms refer to the
Corporate Social Responsibility, a perspective, which is broadly defined as the
concept through which companies voluntary incorporate social and environmental
concerns in their business strategies, basing on the interactions with related
stakeholders (The European Commission, 2002). The main intuition behind this
notion lies in the fact that in presence of globalization and improved
information, companies become more sensitive to the environment of their
operational area and to a society at large. Thus, companies engage in
interactions with stakeholders via different CSR channels that address main
stakeholder groups, such as consumers, suppliers, local communities and many
others. Following this logic, when company possesses money preferences, while
stakeholders possess social preferences, a certain scenario is possible, when
both parties gain through the initiated CSR activities by the firm.possible
presence of additional channel to generate profits boosted the attention
towards this field, however empirical papers do not provide precise information
on the impact of CSR activities on profits of the company. Thus, the topicality
of this paper is stipulated by the lack of a tangible benefit that would
stimuli companies to initiate CSR activities, given the presence of expansion
of new production opportunities and increased governments’ intentions to
develop additional CSR legislation.aim of this work, thus, is to reveal
benefits of CSR strategies that would serve as a motivation for managers and
shareholders in the context of a classical firm, which possesses monetary
preferences.
In order to address such aim, a
two-step model was developed, basing on the stakeholder theory and on
assumptions regarding stakeholders’ and shareholders’ preferences. The first
step is made in order to understand what particular factors influence levels of
three large sub-groups of CSR. These sub-groups are: Consumer CSR, Labor CSR
and Environment CSR. It is hypothesized that different factors, such as firms’
size, age, industry type, profitability, country status and exposure of the
company to the media in case of a negative event affects levels of CCSR, LCSR
and ECSR. The second step is aimed at revealing that these three CSR sub-groups
influence the level of sustainability of a company. The main intuition behind
testing such relationship lies in the fact that usually companies may suffer
from monetary short-term bias, which means that they fail to generate
intertemporal profits, putting more weight on the short-term profits at the
expense of the opportunity to raise long-term profits, simultaneously
deteriorating interactions with stakeholders (R. Benabou, J. Tirole, 2009).
Thus, it is proposed that improved interactions with stakeholders via three
large CSR sub-groups positively influence the opportunity to generate long-term
profits.sample consists of 20 companies from different countries, operating in
different sectors, with a six-year time horizon. Levels of CSR sub-groups were
calculated in a comprehensive way, using the coding procedure. It was important
to account simultaneously for several characteristics of CSR: diversity, actual
progress and size effect. Other data was constructed, using different
databases. Thus, 3 panel data models were developed in order to test hypotheses
from the first step of the model and another pool model was developed in order
to test hypotheses related to the second step of the model.results of the
first-step model showed that all variables tested proved to be significant,
determining different relationships with dependent variable, consistent with
the logic behind them. The results of the second-step model revealed that
implementation of various CSR activities influence positively the level of
sustainability of a company.paper is organized as follows. In the next section,
literature review is provided with an analysis of different ways in which CSR
concept was viewed and tested. Then, an essential theoretical framework is
addressed, slipping to the development of hypotheses. In the next chapter, a
model is presented with analysis and discussions. In the last chapter possible
policy implications are discussed and conclusion is provided.
Literature review
research on corporate social
responsibility are generally quite differentiated since the concept itself
appears to be ambiguous in its understanding and implementation.empirical
studies on corporate social responsibility tried to find the connection between
corporate social and financial performance of the firm. Such interest of
researchers to explore this particular area arised from the development of
theoretical framework which has progressed from the question whether corporate
social responsibility can improve total economic welfare as a channel of public
good provision to the question of why and how implementation of CSR works
within current global state of economy. The crucial question then is why firm
should engage in CSR activity and who bears the costs associated with it.
Early literature on CSR is related
to a so-called “corporate philanthropy” concept and explores the subject in
terms of relationship between CSR and competitiveness. Pioneer of this
framework was Michael E. Porter, whose approach to corporate philanthropy
criticizes Milton Friedman’s argument, which states, “the only responsibility
of business is to maximize profits” (M. Friedman, 1970). According to Porter
(1998), the essence is that “philanthropy can have a strong influence on
creating a more productive and transparent environment for competition”
(Michael E. Porter, Mark R. Kramer, 2002) since environmental norms and regulations
stimulate innovation. Moreover, considering Porter scenario, where social and
economic concerns are not counteracting, but rather interconnected,
“philanthropy can often be the most cost-effective way-and sometimes the only
way-to improve competitive context” (Michael E. Porter, Mark R. Kramer, 2002).
This hypothesis was heavily criticized which led to the development of
theoretical foundation of Porter’s theory made by Stefan Ambec and Philippe
Barla (2001). This work formalizes the idea that environmental regulations
induce innovation through an increased productivity and thus lead to an
increase of expected profits and it is done “in a stylized model of
renegotiation” (S. Ambec, P. Barla, 2001). The model assumes that there are
three agents acting in the economy: firm (F), a division manager (M) and a
benevolent regulator (R). The development of a production plant begins with
setting an initial investment I in Research and Development, where the outcome
of a program is “a technology with constant production cost” (S. Ambec, P.
Barla, 2001); it is also assumed that there exist two types of technologies,
one of which doesn’t cause environmental damage, whereas the other does.
Further development of the model suggests two games played by F and M: unregulated
and regulated ones, where the former suggests the absence of environmental
regulation and the latter considers the opposite case. The comparison of the
outcomes of the two games leads to an ambiguous total effect. The essence is
that in case the technology produces environmental damage, regulation has two
effects: “it reduces information rents; and decreases the private surplus” (S.
Ambec, P. Barla, 2001). From the one side, it leads to a positive impact on
investment in research and development, but from the other side, it causes
negative effects on firm’s expected profit. It is possible to state the
sufficient conditions in order for the total effect to be positive, so that the
Porter’s proposition holds, but generally it can be concluded that the results
are not as evidential as it could be expected. Attention also should be paid to
the comprehensive research on the relation between environmental regulations
and competitiveness made by Carl Pasurka (2008), which addresses theoretical
and empirical overview of a given issue. Regarding empirical research,
generally, the attention is paid towards the correlation between pollution
regulation costs and production of goods, rather than to the welfare effects
arisen from the reduced pollution. Empirical study made by David Pearce and
Charles Palmer (2001) revealed that generally “each $1 of environmental
expenditures raises (marginal) cost of production (D. Pearce, C. Palmer, 2001;
C. Pasurka, 2008) which contradicts Porter’s hypothesis. However, the study conducted
by Richard D. Morgenstern, William A. Pizer, and Jhih-Shyang Shih (2001)
demonstrated a positive correlation between environmental regulations and the
cost saving of the firm. Observers investigate the issue for the four intensive
polluting industries, distinguishing between environmental and
non-environmental costs of a plant, particularly, they “allow for the
possibility that environmental expenditures influence non-environmental
production costs, and the test null hypothesis that these activities are, in
fact, distinct. Basic approach is to model non-environmental production costs
using a translog fixed-effects cost function, and then to include an extra term
allowing for the possible influence of environmental expenditures” (R. D.
Morgenstern, W. A. Pizer, J. S. Shih, 2001). The results generally provide
evidence for the Porter’s hypothesis, that is, with a pooled model for a large
plant data, a significant cost saving was revealed, however, when using a fixed
effect approach, for the three of given four industries the distinction between
costs was insignificant, whereas null hypothesis was rejected for the remain
industry. This gives a somewhat ambiguous inference, however, researchers
associate it with a possible omitted variable bias. Attention also should be
paid to the fact that labor market is considered to be one of the significant
determinants of competitiveness. Several works were devoted to the correlation
between environmental regulation and employment, one of the most substantive
papers in this field being conducted by Richard D. Morgenstern, William A.
Pizer, and Jhih-Shyang Shih (2002). As with their previous work, they took a
large data on pollution-intensive industries and revealed that, on average,
introduction of regulations doesn’t change general equilibrium in the labor
market, that is, the amount of labor affected is very small. However, slightly
positive and significant effects were recognized for the two industries, but,
taking into account the absence of significant effect in the whole market, it
means that differences in the intensities of regulation among industries cause
factor movements until the market is in equilibrium again. Revising different
empirical tests on Porter’s hypothesis, we can see that the results are ambiguous
and contradictory, with more weight put on the pessimistic justification of the
theory, meaning that introduction of regulations leads to a decreased
productivity. As mentioned by Pasurka (2008), in order for the results to be
comprehensive, there should be a formal unification of models under a given
theoretical framework.to step aside from a large amount of articles devoted to
the framework proposed by Porter and to consider the case of why companies
engage in CSR activities from a different angle, we will discover a literature
that generally suggests that corporate responsibility projects result from the
private politics. The essence of this perspective is based on the famous
stakeholder theory proposed by R. Edward Freeman (1984), where stakeholders are
defined as any group of people that can affect or can be affected by the firm’s
actions (Freeman, 1984). This theory pays substantial attention to external
stakeholders, who, by definition do not have contractual agreements with firm;
examples of such groups are social activists, religious groups and other types
of NGO-s. Despite the fact that these groups do not have “internal” influence
on firms operations, they can implement a set of different actions (such as
lawsuits and strikes, for example) that can force companies to follow their
particular interests. The sphere of influence of stakeholders on the firm can
be decomposed into two parts: first one targets direct costs in the form of
fees, for example, and the second one targets company’s reputation that can
affect internal stakeholders and regulator authorities. Considering the
reputational aspect of the firm, the earliest studies were conducted by Phillip
B. Shane and Barry H. Spicer (1983) and K. Mattew Gilley, Dan L. Worrell,
Wallace N. Davidson, Abuzar El-Lelly (1995). The former study revealed that the
share price of a particular firm dropped significantly in the day of the
announcement of poorer pollution performance and vice versa, concluding that
share prices reflected overall market’s perception that increased pollution
event caused negative financial consequences, while the latter showed that
investors were more interested in the new eco-friendly products rather than in
changes in organizational process, boosting company’s reputation. Going back to
the stakeholder theory, Charles Eesley and Michael J. Lenox conducted a
comprehensive study on the factors that influence firms’ responsiveness to the
secondary stakeholder demand. Researchers created a database, including 331
firms and 307 stakeholder groups, where each firm was at least once subject to
a civil suit, letter-written campaign or other types of actions mentioned
above. Results of this work are evidential in the sense that secondary
stakeholders’ demand is most likely to be met in case if their actions are
implemented by the more legitimate groups and by groups whose power is greater
in comparison to target firm (C. Eesley, M. J. Lenox, 2006). These results are
also important in the context of regulation. Traditionally, economists believe that
only a governmental impact can provide incentives for the firm to implement
social responsibility activities, being skeptical about self-regulation
concept, which is the voluntary initiative of the firm to reduce its negative
impact beyond rules established by the state (A. King, M. Lenox, 2000; C.
Eesley, M. J. Lenox, 2006). This work, thus, provide evidence for the
possibility of self-regulation, particularly, firms can find it plausible to
address the social impact of its operations, thus, reducing disadvantageous
practices of stakeholders, which generally contradicts famous Friedman’s
argument and sets a new perspective in comparison with the one introduced by
the Porter. This idea was further developed in the work written by Robert Innes
and Abdoul G. Sam, where scholars investigated factors that influenced firm’s
participation in the Environmental Protection Agency’s 33/50 program. The study
directly refers to the determinants of voluntary reduction of pollution, since
participation in the program was not obligatory and could not promise any
benefits for the participants regarding scrutiny of governmental authorities.
However, observers revealed that actual rewards to participated companies took
place in the form of lower environmental inspections and enforcement actions,
which proved to be a significant incentive for firms to participate in the
program, together with such interesting in our case factor as an incentive to
prevent potential strikes and pressure for tighter regulations by stakeholder groups
(R. Innes, A. G. Sam, 2008). It also should be noted here that observers didn’t
find sufficient evidence for the popular hypothesis, which states that the
voluntary pollution reduction serves as a channel to attract “green market”
consumers. What is specifically remarkable is that Innes and Sam found out that
releases of targeted chemicals fell significantly not only for the program
participants, but for the non-participants as well (R. Innes, A. G. Sam, 2008).
Thus, this work simultaneously addresses significance of the concept related to
correlation between private politics and level of CSR and possibility of the
self-regulation by the firms. However, such behavior of the firms to initiate
actions in order to decrease toxic releases might be originated from the
possibility of being rewarded by the authorities, which is very rational
proposition. Jacob Brower and Vijay Mahajan in their recent study on the
relationship between company’s level of social responsibility and stakeholders
community (2012) do not doubt the fact that the presence of stakeholders groups
as representatives of surrounding environment influences CSR activities of the
firm, basing this view on previous studies that prove stakeholder theory to be
one of the most convincing answers to the question “why” firms should engage in
CSR. Citing such observers as Waddock and Graves (1997), Hoeffler (2010), Basu
and Palazzo (2008), Brower and Mahajan aim at understanding what features of a
firm’s particular stakeholder society influence the diversity of its social
performance, proposing the following features: sensitivity of a firm to
stakeholder demand, diversity of this demand and exposure to stakeholders
actions (J. Brower, V. Mahajan, 2012). KLD database and the 400 Social
Investment Index was used and 10 hypotheses, consistent with three main drivers
of CSR noted above, were proposed, including those that address marketing
techniques of a firm, degree of globalization, size, branding strategy and
other, representing possible channels that firms may have in order to obtain
information on stakeholders’ demand and to respond to it correctly. Considering
the results of this paper, observers revealed support for the major of
hypotheses tested and provided empirical evidence that supports the general
idea of stakeholder theory. Going into details, Brower and Mahajan showed that
firms respond with an increased CSR diversity in cases when firms are more
sensitive to stakeholders demand and when they have greater exposure to the
risk of disadvantageous actions from stakeholders (J. Brower, V. Mahajan,
2012). The work might also be noteworthy since it emphasizes empirical evidence
on targeted strategy of the firm regarding CSR, which is an important feature
since in todays’ global economy framework more and more firms engage in CSR
activities with nearly 75% of executives believing their firms need to consider
CSR in their strategy (The Economist, 2008), but, as mentioned by many scholars
and academics (Berns, 2009; Lubin, Esty, 2010; Crittenden, 2011) generally,
managers do not have a sense of what corporate social strategy should be.
Taking into account papers that provide empirical evidence on the stakeholder
theory it might generally be concluded that observers found that public
politics should be considered as an important channel of CSR mechanism.
Literature that addresses a question
of why and how firms should implement CSR strategies not only explores the case
under the presence or absence of environmental regulations as it was emphasized
by the empirical studies written on the Porter hypothesis and stakeholder
theory proposed by the Freeman, but it also explores the concept in a broader
sense, particularly, scholars investigate the correlation between CSR and
financial performance of the firm. Regarding studies written on this particular
field, it would be most appropriate to mention paper made by Joshua D.
Margolis, Hillary Anger Elfenbein, James P. Walsh: Does it pay to be good? (J.
D. Margolis, H. A. Elfenbein, J. P. Walsh, 2007). This paper is unique in its
field since authors take a neutral position and perform a meta-analysis of 167
previous studies written since year 1972 to year 2007, detecting 192
interactions between corporate social and financial performance of the firm.
The choice of past works in order to perform a meta-analysis was somewhat
comprehensive since each particular research paper should have satisfied three
general criteria, including measurements of CSR, of corporate financial
performance (CFP) and of size-effect of the correlation between CSR and CFP for
individual companies. All statistical values showed in past papers were coded
in such a way that positive and negative effects represent financial benefit
for the former and loss for the latter (J. D. Margolis, H. A. Elfenbein, J. P.
Walsh, 2007). Since generally investigations in this area are very
differentiated in methods and explanatory variables used due to the lack of
unified theoretical basis, Margolis, Elfenbein and Walsh detected five
specifications of each paper to be coded, including: types of CSR and CFP used,
number of companies, timing and control variables. Probably, one of the most
non-trivial specifications is “types of CSR”, since, as it was already
mentioned, the concept of CSR is extremely broad and each observer builds on
his own vision of what CSR is and how to quantify its performance. Taking it
into account, academics created nine sub-categories, distributing indicators
used in previous studies to the appropriate one. These sub-categories include:
charitable contributions, corporate policies (meaning ethical actions of a
firm), environmental actions, revealed misdeeds (meaning voluntary disclosure
of socially disadvantageous behavior), transparency (voluntary disclosure of
information regarding company’s performance), self-reported social performance,
observers’ perceptions (experts, opinion of other firms’ managers and other),
third-parties audit and screened mutual funds (J. D. Margolis, H. A. Elfenbein,
J. P. Walsh, 2007). Regarding the measures of CFP, observers coded them in
accordance with two classes: accounting-based or market-based ones. Control
variables included those that correspond to the tidy logic when talking about
CSR and performance of the company, specifically, these are size of a company, risks
associated with it and industry type. When talking about results of this
meta-analysis it should be noted, that more than a half of effects studied
revealed no significant relationship between CSR and CFP. Taking into account
nine sub-categories used to show different approaches to CSR activity,
observers revealed that firms with better accounting-based measures of CFP tend
to invest more in charitable foundations; in case when company reveal its
socially-irresponsible behavior, market tends to induce penalties in the form
of decreased stock returns; transparency of a firm is proved to be a valuable
characteristics; but other effects appeared to be insignificant (J. D.
Margolis, H. A. Elfenbein, J. P. Walsh, 2007). Overall correlation between CSR
and performance of the firm appeared to be significant and positive, but
extremely small, that generally represents pessimistic result, since, general
opinion on this subject before this paper’s results conformed that CSR could be
a promising mechanism to achieve higher returns. This study is the additional
confirmation of the complexity and ambiguity of attempts to measure CSR and its
mutual relation with company’s performance. However, it is essential to note
that this paper is written generally in order to reveal effects of
“Non-for-profit” CSR, a concept, according to which CSR activities originate
from the shareholders’ preferences which arise from a wish to either sacrifice
profits for socially responsible actions or to avoid moral hazard (Friedman,
1970). “Strategic” CSR framework is based on the
“resource-based-view-of-the-firm”, as examined by the Abagil McWilliams, Donald
S. Siegel, Patrick M. Wright (2005), where CSR can appear to be a sustainable
competitive advantage of a firm. Generally, such view on CSR is related to a
mechanism that should be set in accordance with particular market conditions,
technological issues, political context and stakeholder environment. Thus, this
view is more vague with implementations originated from different theoretical
contexts presented above. One of the papers made by Paul C. Godfrey, Craig B.
Merrill and Jared M. Hansen is relied on the strategic model that associates
CSR performance with shareholder’s value, where CSR is viewed as an effective
mechanism that creates goodwill and protection from stakeholders’ penalties.
Thus, observers test whether CSR possesses “insurance” property. Specifically,
authors hypothecate that specific CSR activities create a goodwill that doesn’t
generate value of the firm, but rather protect it in case of negative events
(P. C. Godfrey, C. B. Merrill, J. M. Hansen, 2008). Observers distinguish
between “technical” CSR activities and “institutional” CSR activities, meaning
that the former is related to CSR policies that target primary stakeholders,
while the latter targets the secondary stakeholders. Using a panel data of 160
firms with 254 possible disadvantageous events for years from 1991 to 2002,
observers, together with hypotheses regarding types of assets of a firm, size
of a firm and types of negative events, propose a hypothesis that in case of
negative event, “value protection” feature of institutional CSR dominates that
of technical CSR. For the dependent variable, authors chose stock prices data
around a negative event. Results showed, in general, a significant evidence for
the risk management implications of CSR mechanism, detecting that “value
protection” effect holds for institutional CSR activities, but it doesn’t hold
for the technical CSR, with a note that technical CSR revealed its possible
benefit only for the large firms, while institutional CSR benefited all firms
regardless its size (P. C. Godfrey, C. B. Merrill, J. M. Hansen, 2008). Authors
found these results to be consistent with their initial theoretical
proposition, which states that technical CSR activities that address primary
stakeholders, namely, those who have direct, contractual relationships with a
firm, doesn’t create the same type of goodwill. Despite the fact that studies,
which investigate strategic implications of CSR report more optimistic results,
still, academics argue that up to the time when unified conception of what
constitutes CSR is agreed, papers will continue to report disparate and
inconsistent results (A. McWilliams, D. S. Siegel, P. M. Wright, 2005). Recent
studies continue to investigate different causal relationships between CSR and
a firm; this could be a question of what influences implementation of specific
CSR actions or vice versa, how introduction of CSR
influences firm’s performance. Following this trend, Ramin Gamerschlag, Klaus
Möller, Frank Verbeeten investigated
the question of what factors influence voluntary CSR disclosure by German
companies (R. Gamerschlag, K. Möller, F.
Verbeeten, 2010), showing that the relationship holds for shareholder
structure, size of a firm and interactions with
stakeholders. Nagib Salem Bayoud, Marie Kavanagh and Geoff Slaughter, who
investigated the same issue for Libyan firms (2012), received similar results.
Recent paper, written by Johan Graafland and Corrie Marereeuw-Van der Dujin
Schouten (2012), is relatively less specific, since authors observe factors
that influence executives’ involvement in CSR activities targeted at labor,
environment and other social aspects. Observers do not classify stakeholders as
primary and secondary, as it was done in papers observed previously, rather
they build a classification based on the impact of CSR on a particular group,
specifically they refer to two main aspects of CSR: social and environmental
ones, where social aspect includes labor, safety, health and other, while
environmental refers to firm operations’ impact on nature. The main goal of
this paper is to investigate what particular motives drive CSR activities,
analyzing a sample of 473 executives. Researchers’ propose a classification of
channels that drive CSR decisions: extrinsic and intrinsic motives, where the
former is related to the possible financial gains from the CSR as a way to
improve reputation, competitive advantage or as a way to reduce costs for
energy, transportation, waste and also through mitigation of government
regulation; whereas the latter refers to the non-financial motive, based on the
executives personal beliefs (J. Graafland, C. Marereeuw-Van der Dujin Schouten,
2012). Moreover, observers divide the intrinsic motive into two types: a moral
duty and an expression of altruism (J. Graafland, C. Marereeuw-Van der Dujin
Schouten, 2012). Despite the fact that these intrinsic motives may seem to be
alike, they are quite different in that sense that moral duty type refers to
the situation, when manager implements socially responsible actions because she
believes it to be a right thing, but not because she finds it enjoyable,
whereas altruism refers to a case, when manager wishes to contribute to a
social welfare. In other words, the main difference between these two types is
that in case with moral duty, a manager would not implement CSR strategy if she
was not obliged to by a certain set of beliefs. Basing on this classification,
researchers performed an analysis, using 2500 questionnaires of CEO as a data.
Results are conclusive almost for all suggested hypotheses, except for the
linkage between CSR and manager’s income. Authors revealed that intrinsic and
extrinsic motives influence equally on labor CSR strategy, whereas
environmental CSR activities are explained mostly by the intrinsic motives. It
is also shown that on average, intrinsic motives outperform extrinsic, and
moreover, managers who possess intrinsic motives may prefer higher level of CSR
engagement instead of income generation (J. Graafland, C. Marereeuw-Van der
Dujin Schouten, 2012).it is evident from the literature review, issue of
corporate social responsibility remains open for further empirical researches,
since papers as well as theoretical base can not conclude on a unique solution
to a question of why increasing number of corporations involve in socially
responsible activities. This paper is aimed at resolving a long-standing
conflict between Porter and Friedman, using best practices and at the same time
introducing a new approach and understanding of motives that drive CSR
activities.
1. Theoretical framework and
hypothesis development
.1 Theoretical perspectives on
CSR involvement
entering the theoretical framework
relevant for the analysis of corporate social responsibility practices, it is
needed to define the term itself. As it is stated by the World Bank: “Corporate
social responsibility - is the commitment of business to contribute to
sustainable development, working with all relevant stakeholders and society at
large to improve quality of life in ways that are both good for business and
good for development” (2003). It is needed to add here that a certain socially
responsible action is considered to be CSR if its level exceeds that enforced
by the regulatory authority; in other words, CSR is a certain contribution to
society that goes beyond the law. As it was emphasized earlier, the proposed
definition is extremely vague, so that empirical and theoretical base lack the
unified vision of what constitute CSR, which in turns leads to contradictory
results of research papers aimed at showing drivers and motives for socially
responsible investments. In order to address the construction of possible
unified theoretical framework, which serves as a base for the further empirical
research, three main approaches to CSR should be considered.first approach to
the existence of CSR is insider-generated corporate philanthropy, which refers
to a “pure philantrophy” case, when socially responsible investments arise due
to a particular willingness of top management of the company to initiate
giving. Moreover, charitable contributions in this case are made not because of
the wish to trade income for some socially beneficial practices, but due to the
individual preferences of a manager or CEO (R. Benabou, J. Tirole, 2009). In
this sense, CSR is viewed as a static cost parameter that may lead to a
sub-optimal firm’s value. Such practices are heavily criticized, with the most
famous critics emphasized by Milton Friedman, who stated that the only
responsibility of a company is to maximize profits and managers should
contribute to social welfare using their own money, rather than investing from
company’s income, however, it should be noted here that usually governments at
least restrict the number of possible contribution channels by deciding which
particular NGOs or other institutions can serve as a target of tax-deductible
contributions (Friedman, 1970). Friedman’s critique was in turn criticized for
the simplicity of its approach and theoretical literature investigates
different processes that may result in more positive treatment of not-for
profit CSR. For example, one of them explains the existence of pure
philanthropic CSR activities as a way to resolve the moral hazard problem,
which arises between shareholders and managers. It is stated that shareholders
may prefer to sacrifice money for charitable contributions rather than
enhancing top managers’ bonus payments.second approach to CSR views this
concept as a delegated philanthropy, which refers to a situation when company
can be viewed as a channel to enhance social value. The essence is that
different stakeholder groups may have a demand for corporations to trade money
for contributions to social welfare, following this logic, income reduction due
to CSR contributions reallocates to stakeholders given their demand (R.
Benabou, J. Tirole, 2009). The intuition behind this view is very similar to
that employed in financial intermediation theory of delegated monitoring, that
is, the core incentive to delegate contributions is the presence of transaction
costs. Corporations, being involved in tight financial ties with its suppliers
have a significant cost advantage in transferring CSR in comparison to
individuals. Moreover, companies may not only perform a transferring function,
but they can also implement a value restoring function in a way, which is
better in comparison to governments and NGOs. Examples of such function are
evident from every-day life, when people prefer to buy organic products, thus,
fostering companies to continue implementation of CSR activities. Despite that
both views on CSR may look quite similar, they are different in two senses:
first refers to the coincidence of stakeholders’ and shareholders’ social and
environmental concerns and the second one refers to the determination of the
party that bears the cost of responsible investments. This determination
depends on the relative strength of preferences in case if they coincide.view
on CSR that should be considered under theoretical framework refers to a case,
when a company can “do well by doing good”. That means that a company, using a
CSR channels to address relevant stakeholder demand, may enhance long-term
maximization of profits. Porter, who proposes a strategic view on corporate
philanthropy, heavily emphasizes this view. He argues that Friedman’s argument
on CSR is based on the assumption, which states that social and business
objectives are separated, so that CSR is a pure expenditure that distorts
economic results. As stated by Porter, this assumption is violated when
corporation uses a strategic context when implementing philanthropic actions. A
company, consolidating CSR into its business strategy may improve the quality
of economic environment of the community in which it operates, which in turn
leads to a long-term sustainability (Porter, 2002). The main idea is that,
actually, companies do not operate in isolated environment from its local
community and their competitive advantage depends on the characteristics and
attributes of the local environment, where operational facilities are set
(Porter, 2002). A good example of this dependence may be the case of
improvement of educational programs, since education is usually regarded as
social concern, however, enhancing educational level of the local labor by the
company may substantially increase its competitiveness. Nowadays, productivity
of labor, effective usage of resources and capital are main factors that
influence the long-term performance of the firm. Thus, addressing thoughtful
CSR strategies, such as educating labor, improving its health and working
conditions, may lead to superior results. Moreover, exploring emerging
countries and improving their social and economic conditions may lead to a new
beneficial allocation of production facilities and new market creation. Porter
demonstrates this strategic view on the CSR by the “Convergence of Interest”
graph (Graph 1) that illustrates the area, where stakeholders’ and shareholders’
area converge, producing an effective “win, win” strategy (Porter, 2002).
1. A Convergence of
Interests (Porter, 2002)
Implementation of CSR activities,
following this logic, may also serve as a way to gather support from the
governmental authorities and public opinion in order to escape from a strict
supervision on correspondence with imposed regulations.into account all three
different views on CSR activities, it is possible to sum up interactions between
stakeholders and shareholders given possible scope of their preferences and
illustrate the resulting taxonomy of CSR (Table 1), proposed by Markus
Kitzmueller and Jay Shimshack (2012) in the form of the following matrix:
1. Taxonomy of Corporate Social Responsibility
|
|
Shareholders
|
|
|
|
Social preferences
|
Monetary preferences
|
Stakeholders
|
S
|
Not for profit CSR - delegated
philanthropy Mixed effects on financial performance
|
Strategic CSR - “win, win”
scenario Maximization of profits
|
|
M
|
Not for profit CSR -
insider-generated philanthropy Reduction of profits
|
No CSR activities Maximization
of profits
|
As it was discussed earlier,
insider-generated philanthropy and delegated philanthropy views on CSR are
similar in the sense that corporation’s shareholders possess certain social
preferences, however stakeholders may possess either social or monetary preferences
which in turn determines the resulting motive for CSR and the financial
performance of a firm. In case when stakeholders possess monetary preferences,
shareholders perform socially responsible contributions basing on their own
individual willingness to enhance social welfare, which leads to a situation,
when CSR is an expenditure, which reduces profits and may lead to a sub-optimal
firm’s value. In case when stakeholders possess social preferences, they may
have a demand for the corporation to act ethically on their behalf, which
appears to be a not for profit CSR initiative viewed as a delegated monitoring
concept. The determinant of the resulting effect on the firm’s financial
performance depends on the question of who bears the cost of CSR, which in turn
depends on the relative strength of considered preferences. A case when both
groups possess monetary preferences, there is no motive to implement CSR
strategies. Finally, a situation, when a firm possesses monetary preferences,
while stakeholders have a demand for a firm to implement CSR activities, refers
to a strategic CSR case or a “win, win” view, where firm maximizes profits.
However, it is important to address relevant stakeholders’ demand in order to
enjoy benefits that could be generated from the interaction between CSR and
business aims discussed above.should be noted that almost all definitions and
views on CSR refer to the connection of underlying concept with stakeholders.
Such unity in understanding of a particular social group influenced by CSR
arose from the stakeholder theory proposed by Freeman. This theory introduces
two definitions of stakeholders, first one emphasizes that it is any group or
individual who can affect or is affected by the achievement of the
organization’s objectives, while the second defines it as any group that is
vital for the survival of a company (Freeman, 1984, 2004). Main groups of
stakeholders refer to customers, local communities, labor, suppliers and
shareholders. The main idea behind the development of this theory lies in the
fact that nowadays corporations, due to variety of factors such as improved
informational channels, globalization and increasing demand for environmental
regulations, become extremely sensitive to the state of communities that surrounds
its operational area.
Practice shows that large
corporations increasingly adopt stakeholder approach into its strategies;
nearly half of the Fortune Global 250 companies disclose the information about
its various CSR activities, addressing different stakeholder groups, providing
information about their environmental concerns, labor and consumer
responsibilities., empirical and theoretical literature contradicts on the
effects of CSR activities on the financial performance of the firm. Studies
which test the relationship between CSR and financial performance show the
modest positive correlation, which means that involvement in CSR strategies
does not actually enhance profits even when companies disclose to improve local
community in the ways described by the strategic management theories.
Nevertheless, each year an
increasing number of companies initiate CSR, certificating its plants with
LEED, improving labor conditions and spending facilities on research and
development in order to improve product quality and safety. Moreover,
corporations prefer to disclose this information, acceding to Global Reporting
Initiative, an organization that develops standards for voluntary reports on
sustainability. Given that these companies do not have a return from such responsible
investments, a natural question occurs - if not profits, then what motivates
corporations to involve in socially responsible strategies?
Following the aim to address this
question and basing on the stakeholder theory, a two-step model is to be constructed,
where the first step is set in order to identify factors that influence the
level and diversity of CSR and the second step is aimed at showing how
implementation of CSR strategies, targeted at different stakeholder groups,
affects the capacity of the firm to earn profits in the long run.
1.2 Development of hypotheses,
step 1
The first step is performed in order
to reveal factors that influence different channels of CSR that can be used to
address stakeholder groups. Total level of company’s CSR performance is then
divided into three large categories: level of Consumer CSR (CCSR), level of
Labor CSR (LCSR) and level of Environment CSR (ECSR).
Size
It is expected that the size of a
company influences the level of CSR activities. The intuition here is based on
the fact that larger size or market presence implies relatively greater amount
of transactions and bigger diversity of operational areas. This leads to a
situation, when larger firms face a superior number of stakeholder groups who
may demand socially responsible actions, in comparison to small-or-medium size
companies. Moreover, larger companies, due to bigger scale of transactions,
possess a higher probability of negative outcomes, which in turn means that a
company becomes more vulnerable to the attention from regulators, media and
other groups. In this case CSR activities implemented by larger firms may have
a greater level due to a higher capacity needed to meet reputational risks.
Thus:
Hypothesis 1: There is a
positive and significant relationship between size of the firm and level of
CCSR
Hypothesis 2: There is a
positive and significant relationship between size of a company and level of
LCSR3: There is a positive and significant relationship between size of a
company and level of ECSR
Companies that have a longer history
tend to be more visible, so that they have tighter interactions with society.
In this case CSR may be viewed as a channel to maintain these interactions and
boost reputation, thus:
Hypothesis 4: There is a
positive and significant relationship between age of a company and level of
CCSR5: There is a positive and significant relationship between age of a
company and level of LCSR6: There is a positive and significant relationship
between age of a company and level of ECSR
As companies become more profitable
and prosperous, they may face pressures from two sides. First side refers to
governmental authorities and political pressures, thus, more profitable firms
may find it useful to show, via CSR channel, that they operate in accordance
with social and ethical norms, otherwise it might occur to be costly. Local
communities and society at large represent the second side, since highly
profitable firms may generate certain expectations from the society regarding
its benevolence. Thus, a company may ease the pressure, implementing CSR
activities aimed at improving local environmental conditions, for example.
Also, it should be noted that higher levels of profitability generate resources
that can be used to strengthen social interactions, thus:
Hypothesis 7: There is a
positive and significant relationship between profitability of a firm and level
of CCSR8: There is a positive and significant relationship between
profitability of a firm and level of LCSR9: There is a positive and significant
relationship between profitability of a firm and level of ECSRof Industry
Type of industry determines, first
of all, regulation aspects. Firms that refer to heavy equipment industries,
such as oil, gas or mining have significant constraints on the amount of, for
example, CO2 and Green House Gases emissions and governmental organizations
continue to impose new regulations and harden those in existence. In this
sense, CSR activities clearly address the problem, aiming at preventing such
situations. Moreover, basic industries also face highest public pressures,
which is evident from many cases, when local communities sue companies for
environmental distortions, such as water pollution or destructive logging, here
CSR may serve as an insurance against pressures outside classical market
interactions. However, regarding the relationship between basic industries and
the level of Consumer CSR it should be noted that heavy equipment industries do
not have a constant and direct contact with customers, since a larger
proportion of their production is not devoted to consumer goods, thus they may
find it unreasonable to invest intensively in Consumer CSR.also should be noted
that CSR occurs to be a good way to ensure the presence of competent labor. A
pharmaceutical company, for example, may launch educational programs in order
to attract and prepare labor, appropriate to specific industry requirements,
boosting effectiveness of production.factor that explains the intuition behind
the relationship between industry type and level of CSR lies in the competitive
nature of the market. Companies that operate in the household chemistry sector
may signal safety and quality of their products by implementing related
programs, such as ensuring the certification of suppliers. Thus:
Hypothesis 10: There is a
negative and significant relationship between industry type and level of
CCSR11: There is a positive and significant relationship between industry type
and level of LCSR12: There is a positive and significant relationship between
industry type and level of ECSRStatus
Country status of the company’s
operational area is an important factor since it affects heavily the initial
“state of the world”. Country might be a member of various global organizations
that impose tougher environmental and labor standards, so that excessive
regulations may lead to a decline in the incentive for the voluntary
investments in environmental enhancement. However, it might also be true that
consumers differ across countries in their perception of what a high quality
product is and in their expectations about company’s involvement in the state
of social welfare, thus:
Hypothesis 13: There is a
positive and significant relationship between country status and level of
CCSR14: There is a positive and significant relationship between country status
and level of LCSR15: There is a negative and significant relationship between
country status and level of ECSRAccident
It is argued that companies, whose
various business activities are more intensively covered by media, tend to have
higher levels of socially responsible investments. The intuition behind this
logic is quite simple, companies that are more visible attract higher levels of
attention from the public and thus become more vulnerable to stakeholders’ actions
and political pressure.
This may lead to disadvantageous
outcomes especially in case of a negative event. Following this logic, Media
Accident factor implies a degree of public awareness related to negative
events, caused by companies’ actions or failures. A negative event here implies
cases of labor injuries, fatalities or accidents that harm environmental
conditions.
Following this logic, a company may
turn to invest more in related spheres, such as Labor CSR and Environment CSR
in order to reduce possible costs associated with high visibility, thus:
Hypothesis 16: There is a
negative and significant relationship between media accident and the level of
CCSR17: There is a positive and significant relationship between media accident
and the level of LCSR18: There is a positive and significant relationship
between media accident and the level of ECSR
.3 Development of hypotheses,
step 2
Hypotheses built in the first step
of the model aim to show factors that affect the presence of various strategies,
which constitute socially responsible actions of the firm, however they do not
show the motivation for the engagement in CSR activities. Motivational aspects
for corporations regarding responsible investments differ from that of
individuals in that sense that these social contributions should still provide
a certain tangible benefit, apart from satisfaction of individual preferences.
As it was emphasized earlier, involvement in the sphere of CSR does not show
improvements in financial performance of the firm. However, that doesn’t
necessarily mean that CSR activities are proved to be inappropriate means to
attain a “win, win” scenario. Possible explanation here lies in the fact that
usually companies suffer from a short-term monetary bias, in other words, incentives
to boost profits in the short-run exceed that for the long-run, which in turn
disadvantageously affects long-term performance. Such short-term bias implies
not only possible loss in the long-term performance, but also deteriorations in
corporate relationships with stakeholder groups (R. Benabou, J. Tirole, 2009).
For example, a company may spare money on the safety and quality of a product,
quality of working conditions or on the environmental issues in order to boost
short-term profits, but these actions in the long-run may lead to a loss of
consumers, difficulties in attracting competent labor and to increased
regulations. Thus, it is reasonable to conclude that CSR strategies should be
tested in the context of long-run opportunity to raise profit. In other words,
CSR should show to influence the level of corporate sustainability. Taking this
logic into account, the second step of the model is to be constructed.CSR
Socially responsible investments
aimed at improving relationships with customers vary in possible strategies and
provide different benefits. Consumer CSR in the form of, for example,
certification of plants and suppliers may be aimed at signaling the quality of
a product, which ensures long-term commitment of customers. This type of CSR
may also generate a new group of “eco-consumers”, implementing recycled
packaging or promoting waste reduction to the public. Consumer CSR is
especially significant for retail companies, who have a direct “dialogue” with
their customers. Thus:
Hypothesis 1: There is a
positive and significant relationship between level of Consumer CSR and
sustainability of a companyCSR
The main function of CSR activities
implemented in order to address labor concerns is to attract qualified labor.
The ability to retain competent workers directly affects company’s
effectiveness, thus:
Hypothesis 2: There is a
positive and significant relationship between level of Labor CSR and
sustainability of a companyCSR
CSR in environment address several
issues. First of all, these investments serve as a way to improve relationship
with regulatory authorities and may be considered as an insurance against
disadvantageous actions and punishments implemented by public and market in
case of a negative event. Furthermore, investments in related programs may
decrease costs of production and lead to a more efficient usage of resources,
thus:
Hypothesis 3: There is a
positive and significant relationship between level of Environment CSR and
sustainability of a company
2. Design of the study and methodology
.1 Model construction
This part of the paper is devoted to
the presentation of the model that is constructed in order to reveal factors
that influence three large sub-groups, which in sum constitute level of CSR
activities implemented by the company and show that these sub-groups have a
direct impact on the sustainability of a company.it was stated earlier, the
underlying model is constructed as a two-step model, where the first part is
made in order to show the relationships between different firm-level
characteristics, macroeconomic conditions and levels of CSR
sub-groups.firm-level characteristics, it was hypothesized that company’s size,
age, profitability and industry type have a positive relationship with the
levels of Consumer CSR, Labor CSR and Environment CSR. As a macroeconomic
condition, country status is used to account for the differences among
countries, which influences the level CSR. It is also hypothesized that
exposure of companies to media influences levels of CSR sub-groups since higher
levels of media exposure increases the visibility of a company by its
stakeholder groups. Thus, three following Pool models are constructed:
ti=
α+β1ASSETSti
+β2AGEti+β3EPSti+
β4INDUSTRYti+β5COUNTRYSTti+β6MED_Ati+εtti=
α+β1ASSETSti+
β2AGEti+β3EPSti+β4INDUSTRYti
+β5COUNTRYSTti+β6MED_Ati+εtti=
α+β1ASSETSti+
β2AGEti+β3EPSti+
β4INDUSTRYti+β5COUNTRYSTti+β6MED_Ati+εt,
where:- level of consumer CSR- level
of labor CSR- level of environment CSR- measure of the size of a company-
refers to the age of a company- measure of a profitability of a company-
provides a distinction between types of industries- provides a distinction
between country statuses_A - a measure of a number of articles devoted to
negative events caused by company’s operationssecond step of the model is aimed
at showing relationship between three sub-groups of CSR and sustainability of a
company, hypothesizing that underlying sub-groups influence the sustainability
positively, thus, the following Pool model is constructed:
SALESti= α+β1CCSRti+β2LCSRti+β3ECSR+εt,
:- a measure of sustainability of a
company- level of consumer CSR of a company- level of labor CSR of a company-
level of environment CSR of a company
2.2 Data and sample
construction
Since the research in this paper is
organized, generally, as a two-step model, data construction is comprehensive
and consists of quantitative and qualitative characteristics. The main
difficulty in obtaining relevant data was the inability to access a unique
database, KLD Research, which addresses social and environmental performance of
firms, emphasizing different dimensions and possible CSR sub-categories. Such
situation influenced the way in which sample and dependent variable data was
measured.
2.2.1 Sample construction
In order to address main targets of
this paper, it was needed to obtain data for the maximum period possible. As it
was already mentioned, due to the absence of access to a specific database,
data on CSR could be obtained only from a specific type of reporting, these are
CSR reports or Sustainability reports, which are available on the companies’
websites. In order to get the information on the amount of companies that are
involved in the CSR strategies for a relevant period of time, GRI database was
used, which is a service provided by the Global Reporting Initiative
organization. This organization promotes CSR and Sustainability reporting to be
as vital as financial reporting and offers reporting standards for different
industries and regions, however, it should be noted here that such type of
reporting is not obligatory and appears as a voluntary initiative that
increases transparency. GRI database consists of general information on the
firm and several CSR reports. Despite the existence and growing interest to
guidelines provided by this organization, very small amount of companies are
engaged in this process from its beginning. Taking this fact into account, it
was possible to obtain a sample of 20 companies with annual CSR reports being
available for a six-year period (years 2007-2012). Another important sample
characteristic is that companies are generally divided into two large
categories, with 10 companies in each, where categories refer to the
“consumer-oriented” and “production-oriented”. Consumer-oriented category
includes such companies as Nestle, Procter and Gamble, J.P. Morgan
Chase&Co, Apple etc., whereas production-oriented one consists of Arcellor
Mittal, BP, E.ON and other. Both categories include broad range of industries
such as food and beverage, computer, financial services, mining, oil and gas
and other. The main differences between these two categories is that
production-oriented category refers to the heavy equipment industries and that
companies within categories showed to have different understanding of CSR risks
they face. Such difference is evident from materiality matrixes, which is a
tool to access particular fields of CSR that should be addressed. The matrix is
plotted in two dimensions, with different issues considered under stakeholders’
needs and business performance. Evaluating these matrixes, it could be noted
that companies which are allocated to production-oriented category perceive
environmental and labor safety as “high, high” level of importance, whereas
consumer-oriented companies, on average, state product safety to be of “high,
high” level. Additionally, in order to avoid a single country analysis, which
is done in many previous papers (R. Gamerschlag, K. Moller, F. Verbeeten, 2010;
N. S. Bayoud, M. Kavanagh, G. Slaughter, 2012), companies from U.S.A, Europe
and Russia were chosen. Given the novelty and voluntary nature of such
reporting, 15% of the sample refers to Russian companies, 40% refer to U.S. and
the remaining part is allocated to EU companies, this resulting allocation is
consistent with a general view regarding the fact that European countries have
leading CSR practices, demonstrating a good quality of reports and better
accessibility as compared with U.S. and emerging countries (KPMG, 2011).
2.2.2 Dependent Variables, step
1
In order to measure CSR performance
of the firm, coding procedure was used. The concept of CSR was divided into
three large categories of influence with many different sub-categories. These
categories are: Consumer CSR, Labor CSR and Environment CSR. The former refers
to corporate responsible practices that have particular influence on product:
product safety, packaging, suppliers monitoring, certification and other, and
on a target consumer’ view of a company, which is related to a responsible
investment in local community. Labor CSR refers to the implementation of
responsible actions towards employee, these could be: non-discriminating
recruitment processes, improved working conditions, safety issues, education,
training and other. The latter category consists of strategy aimed at decreasing
environmental impact and improving operational practices in terms of energy
usage, waste reduction, recycling and other (Table 1, Appendix). Total CSR
activity includes 93 sub-items, with 34 points allocated to Consumer CSR, 27 -
to Labor CSR and 32 - to Environment CSR.procedure involved a detailed analysis
of each of 120 Sustainability reports and assignment of 1 point in case if a
certain activity was recognized. Such procedure was used for several reasons.
First reason is that companies do not provide costs allocated to CSR activities
neither in CSR reports, nor in profit and loss accounts, which leads to
difficulties in assessing total cost of CSR activities implemented during a
year.
The second one refers to the core of
the concept itself, that is: since firm’s actions can be regarded as socially
responsible only in case when they possess “beyond the law” principle, it is
impossible to apportion the obligatory part of a certain improvement from a
voluntary one, especially if it is incorporated in operating process. These two
reasons influenced the way in which the table of total sub-items was created.
Generally, it is conducted in such a
way that allows accounting for both the progress effect and the diversity of
possible CSR activities. For example, if a company has a waste reduction
program, it gets 1 point for the presence of a program and 1 point if it showed
to reduce total waste, but if the next year it still implements a program, but
didn’t show to actually reduce waste for the year, 0 point is allocated., this
method alone doesn’t address the size effect. The essence is that, for example,
two companies may initiate an educational program for its labor, in this case
both of the companies get 1 point, but companies may have spent different amounts
of money on that, which influences the scale of implemented activity. Thus, in
order to account for a scale of CSR activities, final scores for CCSR, LCSR and
ECSR were calculated as a proportion of annual expenses of a company,
considering the results derived from the coding method (Table 1).particular
method to calculate levels of CSR sub-groups results in a case, when CSR
appears as a static cost parameter, however, coding procedure used to determine
the actual involvement of a company in CSR strategies makes it possible to
account also for the diversity of underlying activities and for the progress a
company makes.
2.2.3 Dependent Variable, step
2
As it was showed in the
meta-analysis written by Margolis, Elfenbein and Walsh (2007), there is an extremely
small positive correlation between CSR and financial performance of the firm.
Yet, more and more companies around the world, irrespective of preferences of
managers, involve in CSR activities. As it was emphasized earlier, CSR
activities affect different “hidden” sides of a business, strengthening
relationships with relevant stakeholder groups, attracting labor and relaxing
attention paid by regulatory authorities and public in general. All that boost
long-term opportunities to raise profits, leading to sustainability. Level of
sales of a company is considered to be a good measure of sustainability, thus,
annual data from Compustat Global and Compustat North America was used.
A different set of firm-level measures
was used in order to account for characteristics that influence CSR level and
diversity of activities. These measures, collected from Compustat Global and
Compustat North America for 20 companies within a given 6-year period, include
firm’s size, age and profitability, where firm’s size is reflected as asset
value and profitability is introduced by Earnings per Share ratio. Dummy
variable for the type of industry was also included with 0 allocated to
consumer-oriented firm and 1 to production-oriented company. Another firm-level
characteristic, which is Media Accident variable, was calculated using Factiva
database, a source that provides an access to leading periodical publications
all around the world. Media accident variable was estimated as a number of
articles, published during each year in a given time horizon, that publicize
accidents, emergency or injury cases with reference to a given company in the
sample. News line provided by a company itself was excluded from the sample in
order to account only for the real attention paid to a firm by the public. As
it could be expected, values are higher for firms of heavy equipment industries
than for those of consumer-oriented ones. Apart from firm-level variables,
Country Status factor was also included in order to account for the differences
between levels of CSR across developed and emerging countries. Country Status
variable is a dummy variable, where 1 indicates that a country is OECD member
and 0 otherwise. Membership of a country in the Organization for Economic
Co-operation and Development addresses primarily policy implication regarding
sustainable development and responsible investments. The aim of organization is
to recommend different policies on various topics that influence social
well-being, including: finance, competition, bribery, corruption and other.
Organization also pays attention to global environmental issues, launching a
Green Economy Initiative, which is aimed at providing guidance on country-level
reforms in order to achieve sustainable green growth. Belonging of a firm to
OECD country may explain higher level of CSR diversity, such as the
implementation of LEED certified buildings, regeneration of land and forests
etc.
2.2.5 Control Variables, step 2
As the second step of the model is
aimed at identifying correlation between Sales and components of total CSR
level, control variables are calculated according to the approach used to
estimate CSR expenditures. Levels of diversity and completeness of CSR for
companies for each year were calculated, using scoring technique. Thus, levels
of Consumer CSR, Labor CSR and Environment CSR are:
ti=
Σ XCti⁄NCti
= Σ XLti⁄NLti
= Σ
XEti⁄NE,
where: NC, NL,
NE - indicate maximum sub-items possible under Consumer CSR, Labor
CSR and Environment CSR sub-categories a firm may addressC, XL,
XE - indicate the amount of sub-item activities actually performed.
3. Results and discussions
3.1 First step of the model
The results of the first step of the
model are presented in the following three tables. Since the implemented
methodology required the usage of a panel data, three Pool models were
constructed. Sorting between possible specifications of a panel data model,
such as the fixed-effect model and random-effect model, and using OLS, WLS and
GLS, the best models were chosen based on the R2 and Durbin-Watson
parameters. Taking into account the fact that E-views does not provide the
opportunity to test panel data model for the presence of heteroscedasticity,
White cross-section weighted method was used in order to prevent estimation
bias.
3.1.1 Consumer CSR
The resulting regression for the
Consumer CSR is as follows with the results provided in the Table 3:
CCSR = 1.22803751763*AGE +
22.8073389384*EPS - 0.18620226096*MEDIA_A + 766.526924176*COUNTRYST +
0.00131269112442*ASSETS - 443.095361103*INDUSTRY
Variable
|
Coefficient
|
Std.
Error
|
t-Statistic
|
Prob.
|
AGE_
|
1.228038
|
0.314893
|
3.899854
|
0.0002
|
EPS_
|
22.80734
|
6.231033
|
3.660282
|
0.0004
|
MEDIA_A_
|
-0.186202
|
0.076364
|
-2.438346
|
0.0163
|
COUNTRYST_
|
766.5269
|
46.18782
|
16.59587
|
0.0000
|
ASSETS_
|
0.001313
|
0.000143
|
9.178363
|
0.0000
|
INDUSTRY_
|
-443.0954
|
83.55462
|
-5.303062
|
0.0000
|
|
Weighted
Statistics
|
|
|
|
R-squared
|
0.560509
|
Mean
dependent var
|
3652.099
|
|
Adjusted
R-squared
|
0.541233
|
S.D.
dependent var
|
5320.887
|
|
S.E.
of regression
|
2181.303
|
Sum
squared resid
|
5.42E+08
|
|
Durbin-Watson
stat
|
0.587658
|
|
|
|
|
Unweighted
Statistics
|
|
|
|
R-squared
|
0.070407
|
Mean
dependent var
|
1316.159
|
|
Sum
squared resid
|
6.90E+08
|
Durbin-Watson
stat
|
1.419681
3.1.2 Labor CSR
The resulting regression for Labor
CSR is as follows, with results provided in the Table 4:
LCSR = 0.681641387676*AGE +
24.8092243746*EPS + 0.204192985799*MEDIA_A + 891.690614186*COUNTRYST +
0.000210708673908*ASSETS - 504.149065001*INDUSTRY
|
|
|
|
|
|
|
|
|
|
Variable
|
Coefficient
|
Std.
Error
|
t-Statistic
|
Prob.
|
|
|
|
|
|
|
|
|
|
|
AGE_?
|
0.681641
|
0.268367
|
2.539958
|
0.0124
|
EPS_?
|
24.80922
|
6.096301
|
4.069554
|
0.0001
|
MEDIA_A_?
|
0.204193
|
0.121844
|
1.675857
|
0.0965
|
COUNTRYST_?
|
891.6906
|
131.6469
|
6.773351
|
0.0000
|
ASSETS_?
|
0.000211
|
3.06E-05
|
6.888921
|
0.0000
|
INDUSTRY_?
|
-504.1491
|
57.63637
|
-8.747066
|
0.0000
|
R-squared
|
0.579273
|
Mean
dependent var
|
800.3077
|
|
Adjusted
R-squared
|
0.543276
|
S.D.
dependent var
|
1074.115
|
|
S.E.
of regression
|
994.1941
|
Akaike
info criterion
|
16.69045
|
|
Sum
squared resid
|
1.13E+08
|
Schwarz
criterion
|
16.82982
|
|
Log
likelihood
|
-995.4269
|
Hannan-Quinn
criter.
|
16.74705
|
|
Durbin-Watson
stat
|
0.995148
|
|
|
|
R2 and Durbin-Watson
statistics for the following panel data model are not very high, which again
might be connected to sub-optimal time horizon. However, most of the
coefficients are significant at all reasonable significance levels, except for
the coefficient for AGE, which is significant at 5% level and for the
coefficient for MEDIA_A, which is significant at 10% level. It is again
possible to observe high and negative coefficient for the industry type and
high and positive coefficient for the Country Status.
In case of the country status, the
same logic can be implemented as in the case with Consumer CSR. As for the
industry type variable, it can be concluded, that production-oriented
industries are extremely affected by the governmental constraints and
expectations from the public, regarding their environmental activities, leading
to decreased incentives to voluntary invest in other sub-groups of CSR. Media
accident variable showed to have an intended effect, emphasized by the
hypothesis, which is also consistent with an intuition behind its negative
value in the Consumer CSR Pool model.
EPS and Assets variables showed
consistent results, however Assets variable coefficient is smaller than in case
with Consumer CSR, which might be the case, since older companies have tighter
relationships with customer stakeholder group, so that CCSR should be addressed
in order to maintain these relationships, but in case with Labor CSR, smaller
coefficient value may account for the fact that ways in which labor issues are
addressed change a little with time.
.1.3 Environment CSR
The resulting regression for Labor
CSR is as follows, with results provided in the Table 5:
ECSR = 1.39428167296*AGE +
3.95280786462*EPS + 0.161782630355*MEDIA_A - 49.8891229593*COUNTRYST +
0.00301234363213*ASSETS + 139.844599738*INDUSTRY
Table 5.
Variable
|
Coefficient
|
Std.
Error
|
Prob.
|
AGE_?
|
1.394282
|
0.637797
|
2.186089
|
0.0309
|
EPS_?
|
3.952808
|
1.579623
|
2.502374
|
0.0138
|
MEDIA_A_?
|
0.161783
|
0.080162
|
2.018186
|
0.0459
|
COUNTRYST_?
|
-49.88912
|
22.47797
|
-2.219468
|
0.0284
|
ASSETS_?
|
0.003012
|
0.000128
|
23.62454
|
0.0000
|
INDUSTRY_?
|
139.8446
|
26.22611
|
5.332266
|
0.0000
|
|
Weighted
Statistics
|
|
|
|
R-squared
|
0.726601
|
Mean
dependent var
|
3945.784
|
|
Adjusted
R-squared
|
0.714610
|
S.D.
dependent var
|
4631.824
|
|
S.E.
of regression
|
2276.242
|
Sum
squared resid
|
5.91E+08
|
|
Durbin-Watson
stat
|
0.402473
|
|
|
|
|
Unweighted
Statistics
|
|
|
|
R-squared
|
0.169016
|
Mean
dependent var
|
1733.806
|
|
Sum
squared resid
|
2.10E+09
|
Durbin-Watson
stat
|
0.626399
|
|
R2 for this panel data
model is higher than for previous ones, however Durbin-Watson statistics is not
very high. All coefficients of the underlying variables showed to be
significant at 5% level. Here, we observe changes in the sign of the
coefficient for the Industry type dummy variable, for the Environmnet CSR model
it is high and positive, which perfectly goes in line with intuitions provided
previously for its negative sign for Consumer CSR and Labor. So, it might be
the situation when managers of production-oriented industries tend to invest
heavily in socially responsible activities aimed at improving environmental
conditions. Country Status dummy variable also changed its sign from positive
to negative. Which may partially be explained by the fact that OECD-membership
countries tend to have tougher environmental regulations which leads to a
decline in incentives for voluntary environmental enhancement programs. Media
accident variable coefficient is also positive, which means that an increased
amount of articles devoted to accidents, injuries, fatalities and other
negative events leads to an increased investment in Environmental CSR, which
suits the proposed hypothesis and logic behind it.
3.2 Second step of the model
Considering the second step of the
model development, a fixed-effect panel data model was constructed and the
resulting regression is:
SALES=Сi+ 123530.931205 +
5.25538005069*ECSR + 30.7113491663*LCSR +7.45303324343*CCSR
Table 6.
Variable
|
Coefficient
|
Std.
Error
|
t-Statistic
|
Prob.
|
C
|
123530.9
|
6969.842
|
17.72363
|
0.0000
|
5.255380
|
1.546857
|
3.397457
|
0.0010
|
LCSR_
|
30.71135
|
3.673044
|
8.361280
|
0.0000
|
CCSR_
|
7.453033
|
2.402389
|
3.102343
|
0.0025
|
|
Effects
Specification
|
|
|
Cross-section fixed (dummy
variables)
|
|
R-squared
|
0.965080
|
Mean
dependent var
|
147411.9
|
Adjusted
R-squared
|
0.957160
|
S.D.
dependent var
|
169053.4
|
S.E.
of regression
|
34990.42
|
Akaike
info criterion
|
23.93409
|
Sum
squared resid
|
1.19E+11
|
Schwarz
criterion
|
24.46836
|
Log
likelihood
|
-1413.045
|
Hannan-Quinn
criter.
|
24.15106
|
F-statistic
|
121.8532
|
Durbin-Watson
stat
|
1.807204
|
Prob(F-statistic)
|
0.000000
|
|
|
|
it is evident from the Table 6, R2
is nearly reaches 1 and Durbin-Watson statistics also show superior
results. All variable coefficients are significant at 1% level, means that
Consumer CSR, Labor CSR and Environment CSR investments positively affect
Sales, which is a measure of sustainability of a company. It is also
interesting to analyze the size allocation of coefficients. Investments in
Labor CSR showed to have a larger positive effect on the company’s
sustainability, then go investments in Consumer CSR and then - investments in
Environment CSR. Such situation is generally consistent with the logic that
investments in labor help to attract and retain competent labor, enhancing its
safety, health, education and working conditions, which leads to a superior
effectiveness of company’s production, while investment in consumer CSR achieve
its objectives to maintain relationships with the underlying stakeholder group.
Investments in Environment CSR are shown to affect the long-term ability to
generate profits, however, its’ relatively small coefficient, in comparison to
CCSR and LCSR, may be explained by the fact that usually, voluntary investments
in ECSR, given the presence of excessive regulations, are considered to serve
as an insurance against public pressures in case of a negative events, which
was demonstrated by the significant and positive Media accident coefficient in
the regression tested to identify factors that influence level of ECSR.
Policy implications
Following the results and findings
of this paper, it is possible to introduce an evidence for managers that a
theoretical “win, win” scenario is possible. That is, taking into account that
shareholders possess monetary preferences, while stakeholders, represented by
different groups that can affect the performance of a company, possess social
preferences, implementation of various CSR activities may enhance the long-run
opportunity to raise profits via different channels, where each channel is
determine by the specific characteristics of a particular stakeholder group.
Thus, CSR can be viewed not as the way to satisfy particular shareholder’s
social preferences in the form of charitable contributions, which may lead to a
sub-optimal value of the firm, but, conversely, CSR can be implemented as a
strategy aimed at attaining sustainability. These conclusions are relevant,
since it was shown by the model, that such large sub-groups of CSR as Consumer
CSR, Labor CSR and Environment CSR are all proved to influence significantly
and positively the sustainability of a company. The only case to be considered
here is the appropriate evaluation of relevant stakeholder groups and
understanding of the CSR channels, through which a firm may address this group,
so that these means could be improved, enhancing the quality of these
interactions, which in turn will lead to a long-term financial
superiority.possible implication that might be introduced should be addressed
to governmental authorities. Taking into account the presence of tough
environmental regulations and a trend towards its further implementation and
the results of the current model, it might be argued that government need to
relax such regulations due to several reasons. First of all, it was showed that
country status, introduced as a country membership in OECD organization,
influences significantly and negatively the level of Environment CSR, which may
imply that excessive weight put on environmental regulations may depress
voluntary motives, which leads to a decrease in the Environmental CSR level.
Moreover, as Environmental CSR is shown to constitute a significant part of
companies’ sustainability, excessive regulations may, thus, influence
negatively the long-term opportunity to generate profits, distorting general
economic conditions.
Conclusion
literature written in the field of
CSR is aimed at the identifying various channels and strategies through which
implementation of CSR activities may enhance market positions of the firm and
improve its financial performance. These theories agree upon the importance of
identifying and addressing appropriate stakeholder groups. Building
relationships with stakeholders, who generally possess social preference, a
classical firm may reach a “win, win” condition, which implies maximization of
profits, while meeting demand for various social interactions. However, such
theoretical framework, when testing in order to reveal relationships between
CSR strategies and financial performance of the firm, generally do not provide
the evidence for such relationship, meaning that CSR does not show to increase
profits of the firm.all that into account, this paper was developed in order to
reveal what motivation may stand behind CSR activities. Basing on the
stakeholder theory and a “win, win” scenario, a two-step model was developed,
where the first step was devoted to identifying factors that influence levels
of CSR sub-groups, each of which represent a channel to address main
stakeholders groups, and the second step was devoted to showing that these
channels indeed influence sustainability of a firm.this research method, 3
panel data models were constructed with results, showing that companies’ size,
age, profitability positively affect all three sub-groups of CSR, while other
factors such as industry type, country status and media accident revealed
different relationships with three CSR dimensions, for example, companies that
operate in a heavy equipment type of industry, tend not to invest in the
Consumer CSR and Labor CSR, while Environment CSR is positively affected by the
industry type. Country membership in OECD organization negatively affects the
level of Environment CSR, while Media exposure of a company in case of a
negative even, such as accident that affects labor or environmental conditions,
have a positive effect on the level of Environmental CSR. The results of the
second step fixed-effect model revealed that actually all three sub-groups that
constitute total CSR level have a positive effect on the firms’ sustainability,
showing the motivations to involve in CSR strategies.about policy implications,
apart from proposing a way to managers to enhance sustainability, an important
policy implication lies in a fact that it highly recommended for governmental
authorities to relax the increasing implementation of different environmental
regulations and let the companies to implement voluntary socially responsible
activities towards environment in the ways that benefit stakeholders and
society at large, enjoying a “win, win” scenario.
corporate social
responsibility manager
References
Academic
sources:. Mattew Gilley, Dan L. Worrell, Wallace N. Davidson, Abuzar Et-Jelly,
2000, “Corporate Environmental Initiatives and Anticipated Firm Performance:
The Differential Effects of Process-Driven Versus Product-Driven Greening
Initiatives”, Journal of Management, 26, pp. 1199-1216.Grant, Andrew W. Jones,
Mary Nell Trautner, 2004, “Do facilities with Distant Headquarters Pollute
More? How Civic Engagement Conditions the Environmental Performance of Absentee
Managed Plants”, Social Forces, 83, pp. 189-214.Rose, Q. Anton, George Deltas,
and Madhu Khanna, 2003, “Incentives for environmental self-regulation and
implications for environmental performance”, Journal of Environmental Economics
and Management, 48, pp. 632-654.Innes and Abdoul G. Sam, “Voluntary Pollution
Reductions and the Enforcement of Environmental Law: an Empirical Study of the
33/50 Program”????Eesley and Michael J. Lenox, 2006, “Firm responses to
secondary stakeholder action”, Strategic Management Journal, 27, 765-781.Brower
and Vijay Mahajan, 2011, “Driven to Be Good: A Stakeholder Theory Perspective
on the Drivers of Corporate Social Performance”, Journal of Business EthicsL.
Reinhardt, Robert N. Stavins, and Richard H.K. Vietor, 2008, “Corporate social
Responsibility Through an Economic Lens”, Review of Environmental Economics and
Policy, 2, pp. 219-239.Ambec, Philippe Barla, 2002, “A theoretical foundation
of the Porter hypothesis”, Economic Letters, 335-360.D. Morgenstern, William A.
Pizer, and Jhih-Shyang Shih, 2002, “Jobs Versus the Environment: An Industry-Level
Perspective”, Journal of Environmental Economics and Msnagement, pp. 412-436.D.
Morgenstern, William A. Pizer, and Jhih-Shyang Shih, 2001, “The Cost of
Environmental Protection”, The Review of Economics and Statistics, pp.
732-738.Pearce and Charles Palmer, 2001, “Public and Private Spending for
Environmental Protection: A Cross-Country Policy Analysis, Fiscal Studies, pp.
403-456.Palmer, Wallace E. Oates, and Paul R. Portney, 1995, “Tightening
Environmental Standards: The Benefit-Cost or the No-Cost Paradigm?”, Journal of
Economic Perspectives, pp. 119-132.Pasurka, 2008, “Perspectives on Pollution
Abatement and Competitivness: Theory, Data, and Analyses”, Review of
Environmental Economics and Policy, 2, pp. 194-218.D. Margolis, Hillary Anger
Elfenbein, James P. Walsh, 2007, “Does is pay to be good? A Meta-Analysis and
redirections of research on the the relationship between corporate social and
financial performance”C. Godfrey, Craig B. Merril, and Jared M. Hansen, 2009, “
The relationship between corporate social responsibility and stakeholder value:
an empirical test of the risk management hypothesis”, Strategic Management
Journal, 30, pp. 425-445.Kitzmueller and Jay Shimshack, 2012, “Economic
Perspectives on Corporate Social Responsibility”, Journal of Economic
Literature, pp. 51-84.E. Porter and Mark R. Kramer, 2002, “The Competitive
Advantage of Corporate Philantropy”, Harward Business Review, pp. 56-68.
Похожие работы на - Corporate Social Responsibility
|