Corporate Social Responsibility (CSR) also known as Corporate Citizenship

Corporate Social Responsibility (CSR) also known as Corporate Citizenship is generally understood as the way a company balances the economic, environmental and social aspects of its operation while meeting the expectations of its stakeholders. CSR is going beyond the legal obligations and the main objective of an organization that is maximizing profit and engages in activities on voluntary basis to have a positive impact on society.CSR is carried out through triple bottom line reporting which states not only financial results but also social and environmental impact of a business (Elkington, 1999).

CSR has been defined in various ways by different organizations and authors and its definitions varied between states. In one state CSR may be perceived as an initiative on a voluntary basis while in some as a legal obligation.

McGuire (1963) who defines CSR as:

“The idea of social responsibility supposes that the corporation has not only economic and legal obligations, but also certain responsibilities to society which extend beyond these obligations” (p. 17).

According to World Business Council for Sustainable Development in its publication entitled

Making Good Business Sense (2002) citing statement of Lord Holme and Richard Watts

(2000) defining a social responsible company as follows:

Corporate Social Responsibility 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.

For instance, Business for Social Responsibility defined CSR as: “Operating a business in a manner that meets or exceeds the ethical, legal, commercial and public expectations that society has of business.”

On the other hand the Commission for the European Communities (2001) defined CSR as “a concept whereby companies integrate social and environmental concerns in the business operations and in their interactions with their stakeholders on a voluntary basis”.

Kotler & Lee, 2005 defined “Corporate social responsibility is a commitment to improve community well-being through discretionary business practices and contributions of corporate resources”

Hence, we can say that a socially responsible company is one that strives to balance the socio-economic aspect of business so as to fulfill the obligations demanded by all stakeholders fairly and proportionally.

2.1.3) Theories of CSR

A number of theories regarding corporate social responsibilities have been developed. There are two theories that explain why organizations engage in CSR activities namely the legitimacy theory and stakeholder theory. The legitimacy theory and stakeholder theory have been emerged from the broader political economy theory (Gray et al., 1996; Deegan, 2002).

Political Economy Theory

Gray, Owen & Adams (1996) have defined political economy as ‘the social, political and economic framework within which human life takes place’. Thus society, politics and economics are inseparable, and an organisation cannot operate on its own without considering the society, its employees, its suppliers, its investors, its consumers, the government and the environment. Political economy theory does not concentrate only on the economic self-interest and wealth-maximisation of the corporation but also considers “the political, social and institutional framework within which the economic takes place” (Gray, Kouhy & Lavers 1995b, p. 52).

Political economic theory tends to justify why “corporations appear to respond to government or public pressure for information about their social impact” (Guthrie &Parker 1990, p. 172).

Moreover political economy theory identifies that an organization can make use of social and environmental disclosures in annual reports as a means to achieve its goals and to influence the attitudes of stakeholders (Guthrie & Parker 1990).

Legitimacy Theory

The legitimacy theory argues that an organization will carry out its operations in such a way that they are perceived to be legitimated by the society within which they operate. According to legitimacy theory ” organizations continually seek to ensure that they operate within the bounds and norms of their respective societies, that is, they attempt to ensure that their activities are perceived by outside parties as being legitimate” (Deegan, 2000) .

Legitimacy Theory states that there is a social contract between the organisation and society in which it operates. Social contract means the implicit and explicit expectations that society has about how the organisation should conduct its operations. The explicit expectation might be in the form of legal requirement while other non-legislated societal expectations encompass the implicit expectations.

It is considered that an organization will have the legitimate right to continue its operation in the society as long as it is fulfilling the societal expectation. The society may revoke the organisation’s licence to operate or contract to continue its operation in case there is breach in the social contract between the organisation and society. This may be followed by sanctions such as fall in the demand of its products or services, fines, legal restrictions on its operations.

Moreover, it is also expected that in order for the organisation to survive, it will have to adapt to the changing expectations of society. Under the legitimacy theory not only the interest of investors is considered but also the interest of the public at large.

Legitimacy theory asserts that organizations disclose social and environmental information with the aim to enhance their reputation and to legitimate or maintain the legitimacy of its activities in social, political, and environmental areas.

Stakeholder Theory

Stakeholder theory (Gray, Kouhy & Lavers 1995b, p. 53) states that “the corporation’s continued existence requires the support of the stakeholders and their approval must be sought and the activities of the corporation adjusted to gain that approval. The more powerful the stakeholders, the more the company must adapt. Social disclosure is thus seen as part of the dialogue between the company and its stakeholders”. Freeman (1983) defines stakeholders as “any group or individual who can affect or is affected by the achievement of the organisation’s objectives”.

According to this theory, for an organisation to be successful it must be able to balance the conflicting demands of its various stakeholders.

Stakeholder theory asserts that managers ought to work in the interests of all those who have a “stake” in the firm. Freeman terms the stakeholders as “Big Five” which include the shareholders, employees, suppliers, customers and the communities in which the firm operates.

According to Clarkson (1995) there are two types of stakeholders namely the primary and the secondary. A primary stakeholder is “one without whose continuing participation, the corporation cannot survive as a going concern” while secondary stakeholders are those “who influence or affect, or are influenced or affected by, the corporation, but they are not engaged in transactions with the corporation and are not essential for its survival”.

Deegan (2000) states that stakeholder theory can be categorised into 2 branches namely the ethical (normative) and managerial (positive) branch. According to the ethical branch, management should carry on the business for the benefit of all stakeholders and they need to be treated fairly by the organisation. By contrast, the managerial branch of stakeholder theory states that the organisation is likely to respond in a way that satisfies the demand of particular stakeholder groups, that is, those who are powerful because they control resources that are necessary to the organisation’s operations (Ullman, 1985). Moreover the disclosure of information is considered to be an important strategy in managing stakeholders in order to gain their support and approval.

Benefits and drawbacks of engaging of CSR

Benefits

When firms engage in social activities, it brings several advantages to the business. Some major advantages are as follows. Firstly it improves a company’s public image. Every business organization strives to enhance its public image in order to attract more customers, better employees and to increase its market share. Social responsibility improves the public image of business. According to Fombrun (1996), Fombrun and Foss (2004) and Hillman and Keim (2001) ,CSR is a valuable tool for creating reputational capital in terms of good corporate image and improved reputation, giving the firm a competitive advantage.

Furthermore when business engages in socially responsible acts, this can help to avoid government regulation which is unwanted as “excessive government regulations increase compliance costs” (Lantos 1999, p. 224). Business organisation can therefore discourage government from introducing new restrictions by engaging in socially responsible behavior.

Thirdly it promotes long term profits. Firms engaging in social activities may result into long run business profits (Adams and Hardwick, 1998; Waddock and Graves, 1997; Pava and Krausz, 1996). Jones (1995) and Jones and Wicks (1999) argued that socially responsible behaviours have a positive impact on financial performance through creation of intangible assets such as good reputation, trust, and commitment which lead to the long-term success of the business.As a consequence this improves the ability of the firms to attract resources, boost performance and offer competitive advantages while fulfilling the needs of its stakeholders (Fombrun et al., 2000). Stakeholders’ satisfaction improves the relationship between the CSR and the firms’ financial performance. Moreover there are various studies that have examined the relationship between CSR and corporate financial performance and most of them suggest that the links are positive.

In addition investors are more likely to invest in companies that undertake socially responsible activities. As such corporate social responsibility boost a firm’s financial and stock market performance and acts as a shield to instability and share price volatility. Moreover socially responsible investment is growing considerably. Thus companies with good CSR approach are likely to attract those investments and are in a better position to get access to capital.

Involvement in social activities also increase customer loyalty, create more supportive communities, assist in employee recruitment, motivation and retention leading to higher productivity.

Critiques of CSR

However while undertaking socially responsible acts, business suffer from some limitations. Dealing with complex social activity and business works is not the same thing. Social matters require special skills and expertise that may be lacked by business people. It is argued that these activities should be left to other institutions like NGOs and the government as business people is not trained to social problems. Moreover Friedman (2002) argued that CSR is not the responsibility of business and are non-business issues. He maintained that “business of business is business”. Hence engaging in social behaviours means diverting from the core objectives of business, that is, profit maximization.

Moreover CSR lowers a firm’s economic efficiency and profits. Social involvement means engaging funds in activities that will generate no return. These funds could otherwise use to invest in profitable opportunities. As a result the firm may experience higher cost leading to lower profits. In addition socially responsible firms have to bear unfair cost. For instance when firms being socially responsible install more safety equipments than it is required by the law to protect its employees, its costs will be higher and profits will be lower than those firms that do not take similar socially responsible initiatives. Thus these firms are penalized and bear the risk of going out of business, especially in a highly competitive market. This is an obvious issue particularly when firms are competing with foreign companies. Hence the least socially responsible foreign competitors will lead in the market. Moreover when a business uses some of its resources for social activities, there is a risk of lowering its efficiency.

Social accountancy

Accountancy is the process of communicating financial information about a business entity that is relevant to users and reliable.

The American Institute of Certified Public Accountants (AICPA) defined accounting as “the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character, and interpreting the results thereof.”

While Social accounting which is also known as corporate social reporting or sustainability accounting, is the process of communicating the social and environmental effects of organizations’ economic actions to particular interest groups within society and to society at large.

According to Freedman (1989), “Social accounting has been defined as the ordering, measuring and analysis of the social and economic consequences of governmental and entrepreneurial behavior”.

Thus, social accounting is linked with accountancy as it represents part of the conventional accounting dealing with the social transaction of a company.

A number of reporting guidelines or standards have been developed to serve as frameworks for social accounting and reporting and the main ones are GRI, AA1000 and ISO 2600. However there is no specific reporting standard yet but GRI is most widely used.

3.5 Category classifications included in social accountancy

The scope of social accountancy represents the area gaining company attention that will impact the social disclosure of its activities. According to experts, this scope is broken into some categories. However there is no standard format yet concerning the categories that need to be mentioned by a company in social responsibility reporting. Hence, the category varies between companies depending on the requirements of each company and stakeholder. Moreover Branco and Rodrigues (2008) stated that different sectors of the business arena have different social responsibility priorities.

The National Association of Accountant’s Committee on Accounting for Corporate Social Performance has identified four major areas of that a company needs to pay attention concerning its following social performance:

society involvement (community involvement), including activity that will benefit the general public like housing construction , philanthropy activity, financing of health services, and many more;

human resources area activities that will be advantageous to the employees practice like training program, improving working conditions, policy concerning promotion and any compensation to the employees;

physical sources and environment contribution, that is activities directed towards alleviating or preventing environmental deterioration or pollution, conservation of scarce resources and the disposal of solid waste

the product’s contribution/service, taking into consideration product quality, packaging , advertisement, warranty provision, and product security.

The categories that have been mentioned which are different from each other for the

Type of reporting:

for the reporting model by Inventory Approach, it consists of four categories: labor; community; product; and environment;

for the reporting model by Outlay-Cost Approach, it consists of four categories: personnel; customer; environment; and community; and

for the reporting model by the Cost Benefit Approach, it consists of four categories: employees; consumer; community; and environment.

However Ernst & Ernst (1978) identified six categories in which companies were reporting CSR. These were as follows:

Environment

Energy

Human Resources

Community Involvement

Products

Fair Business Practices

In Mauritius, there is an “Integrated sustainability Reporting” defined as section 7 in the Code of Corporate Governance for Mauritius which suggests guidelines to disclose CSR. According to the Code, CSR must be disclosed in terms of the following areas:

Ethics

Environment

Health and Safety

Social Issues

Hence, we can say that the category of corporate social activities that comes within the social accountancy scope is:

employee’s category;

consumer’s and product’s category;

community involvement category; and

environmental category.

3.8 Motivation and reason for doing social disclosure

In some states social disclosure is mandatory while in other states, firms voluntary disclose social information .There are many reasons and motivations why firms disclose social information although it is not an obligation. Some key drivers that push business to social disclosure are as follows:

To maintain the legitimacy of the firm’s operations (Legitimacy Theory).

According to Legitimacy Theory, company engages in social activities and discloses them so as to have the legitimate right to continue its operation in the society. If companies fail to carry out their responsibilities, they will have to bear the risk of losing their license to operate.

To manage or influence certain group of stakeholders who are more powerful

The Stakeholders’ theory argues that companies secure their relationships with their stakeholders through corporate social disclosure. The expectation of each group of stakeholders differs and the company must respond more to satisfy the demands of stakeholders who have greater influence.

To increase properties of all stockholders and managers.

Positive Accounting Theory assumes that everyone does the activity to fulfill its private interest. Thus managers disclose environmental and social information because they anticipate getting the make-up of properties from the disclosure activity. Make-up of properties is possible from an improvement in profit or assessment of the company.

To manage risk

Corporate social disclosure helps to minimize business risk. According to Trotman and Bradley (1981) and Henny and Murtanto (2001), disclosing social activities will cause high systematic risk to the company. It should be noted that managing systematic risk is easier than non-systematic risk as the latter cannot be diversified. Corporate social responsibility enables more effective management of risk, helping companies to reduce avoidable losses and identify new emerging issues.

Through a well-working CSR program the company avoids conflicts with customers and the society. Costs related to conflicts reduce earnings and the share price as well as it leaves the competitor with an opportunity to steal market shares.

To manage reputation

The loss of public confidence in the corporate word followed from the corporate scandals affecting Enron, WorldCom and the like, pulls the markets down and thus affecting the value and growth potential for many companies. When a business organisation is facing with allegation of business misconduct, its reputation which is one of the most important intangible assets of the company has to lose in the market (Weigelt and Camerer, 1988). Topolian(2003) defines corporate image as the summation of impressions and expectations of an organization built up in the minds of its stakeholders and the public.

As a consequence, many companies are implementing CSR as business strategy and disclosing these information to promote a good reputation and to show that they operate with the same social norms and values as those of their society (Parsons,1956 in Parsa and Kouhy, 2000). Moreover Guthrie and Parker (1989) concluded that a firm must disclose enough social information so that it can be judged as a good citizen.

3.9Social disclosure in annual report

Social responsibility disclosure has been defined as the “process of communicating the social and environmental effects of organizations’ economic actions to particular interest groups within society and to society at large” (Gray etal., 1996, p.3).

Social disclosure is a tool by which corporations can interact with the broader society. This interaction usually takes place through different media, in particular the companies’ annual reports which are used as “a means influencing society’s perception of their operations, and as a means of legitimizing their ongoing existence” (Deegan et al., 2000, p.101).

However there are other media of social disclosure like CSR reports, sustainability reports but these reports are less commonly used as compare to corporate annual reports. This is due to the high degree of credibility they lend to information reported within them, their use by a number of stakeholders as the sole source of certain information and their widespread distribution (Unerman, 2000).Although annual reports are important documents in social disclosure, using it as the only source for gathering data on social information can be criticized as it ignores other forms of communication (Roberts, 1991). Hence, annual reports are just one source of information.

2.2) Empirical Review

There have been many debates about the relationship between corporate social performance and corporate financial performance. Preston & O’Bannon, 1997 argued that there are two important issues in the relationship between CSP and CFP: direction and causality of the relationship. The direction of the relationship can be positive, negative and neutral. The positive direction of the relationship of CSP and CFP implies that an increased in CSP will cause CFP to increase as well, while the negative direction of the relationship means that increases in CSP will lead to a decreased in CFP. The direction of the relationship will be neutral if a change in CSP does not affect the CFP. The causality of the relationship indicates whether CSP influence CFP or whether CFP influence CSP.

The direction of the relationship

Negative association

According to those favoring a negative relationship between social and financial performance suggest that by engaging in social activities, firms incur a competitive disadvantage (Aupperle et al., 1985) because they are bearing costs that might otherwise be avoid or that should be borne by others like the government. Friedman’s (1970) and other neoclassical economists’ argued that few readily measurable economic benefits are derived from socially responsible behavior while it leads to numerous costs. According to this argument the costs fall directly to the bottom line resulting into a reduction in profits and thus shareholder wealth. Hence this theory expects a negative relationship between CSP and financial performance. Negative results are supported by Ingram and Frazier (1983), Wright & Ferris (1997), Patten (2002)

Positive association

This line of thinking is based on stakeholder analysis suggests that a company’s explicit costs conflicts with the hidden costs of stakeholders. From this perspective firms avoid cost to major stakeholders while considering their satisfaction (Cornell and Shapiro, 1987). Moreover this theory supposes that engagement in social activities would increase costs to competitiveness and decrease the hidden costs of stakeholders. This argument makes sense because good relationships with employees, suppliers and customers are essential for the survival of a company. Socially responsible behaviours will improve a company’s reputation and hence will have a positive impact on sales. Thus in the long run the financial performance of firms can be improved by foregoing short term financial performance. According to this theory, there is a positive relationship between CSP and financial performance.

The positive direction of the relationship has been supported by Worrell et al. (1991), Preston & O’Bannon (1997), Waddock & Graves (1997), Frooman (1997), and Roman et al. (1999), Orlitzky (2001), Orlitzky & Benjamin (2001), Ruf et al. (2001), Konar & Cohen (2001), Murphy (2002), Simpson & Kohers (2002), Orlitzky et al. (2003), and Mahoney & Roberts (2007).

Neutral association

Some empirical studies suggested that there is no relationship between social and financial performance. Ullmann (1985) argued that there is no reason to observe any relationship between social and financial performance, except possibly by chance, as there are too many intervening variables between them. Moreover the issue of CSP measurement may also mask the relationship between CSP and CFP (Waddock and Graves, 1997). According to McWilliams and Siegel (2000), the relationship between CFP and CSP would disappear when more accurate variables, such as research and development intensity are introduced into the economic models.

Some researchers found inconclusive results such as Anderson and Frankle (1980), Freedman and Jaggi (1986) and Aupperle, Caroll and Hatfield (1985), McWilliams & Siegel (2000 and 2001), Moore (2001), Fauzi (2004).

Margolis & Walsh (2003) mapped studies examining the relationship between CSP and CFP. They followed the works of Griffin & Mahon (1997) with wider time period (1972 – 2002) resulting in analysis of 127 published studies. Of these studies, a positive relationship was found in 70 studies (55%), a negative relationship in 7 studies, 28 studies supported inconclusive results, and 24 studies suggested the relationship went in both directions.

DIRECTION OF CAUSALITY: SLACK RESOURCES OR GOOD MANAGEMENT?

The second aspect of the relationship between corporate social performance and financial performance is the causality. Waddock and Graves (1997) put forward two theories to explain the causality, namely the slack resource theory and good management theory.

Slack resources theory

According to this theory, a company must have a sound financial position in order to undertake socially responsible activities. Better financial performance is likely to results in the availability of slack resource that will enable the companies to invest in social performance areas. Thus, to engage in socially responsible acts, the company needs some fund resulting from the achievement of financial performance. Accordingly, financial performance comes first. Some of the empirical studies (e.g. McGuire et al. 1988; 1990), provides support for the slack resources theory.

Good management theory

Good management state that there is a high correlation between good management practice, and CSP. This is so because socially responsible behaviours improve the relationships with key stakeholder groups resulting into better financial performance. A good reputation as perceived by its stakeholders will enable the company to achieve a better financial performance. Thus according to this theory, social performance comes first. McGuire et al. 1988; 1990) also supports the good management theory.

Studies empirical studies about the causal relationship

McGuire et al. (1988) found that there is no relationship current CSP and FP while lagged FP measures have a positive impact on current CSP measures.

Waddock and Graves (1997) proved the slack resource theory by deriving a positive relationship between CSR and prior financial performance and found that CSP is positively associated with future financial performance, hence confirming the good management theory as well.

Hillman and Keim (2001) found a positive relationship between CSP and FP, confirming the existence of a virtuous circle between the CSP and FP.

Charles-Henri and Stéphane (2002) in their study based on French companies concluded that higher performance does not lead to better CSP while they found that CSP is related to the number of employees. However they found a significant negative effect on CSP when return on equity is used as financial performance measure, that is, better CSP leads to lower return on equity. Moreover their findings demonstrate a neutral relationship when research and development intensity variable is introduced.

Nelling and Webb (2006) make use of the Granger causality approach, an econometric technique to determine the causal relationship between CSP and FP .They conclude that there is a relationship between CSP and FP when ordinary least square (OLS) regression models are used. However they find a lower relationship between CSP and FP which are not in line with prior empirical studies when using a time series fixed effects approach. When employing Granger causality models the same result is obtained as well. In addition by concentrating on individual measures of CSP, they observe causality running from stock market performance to CSP ratings concerning employee’s relationships.

Mahoney and Roberts (2007) have examined the relationship between CSP and FP on Canadian companies. They concluded that there is no significant relationship between a composite measure of CSP and FP. However when using a one-year lag, they determined significant positive relationship between individual measures of CSP concerning environmental and international activities and FP. They have examined only the direction of causality from CSP to FP.

Fauzi et al. (2007) in their study based on Indonesian companies, used the model derived from the slack resource theory and concluded that there is no relationship between CSP and CFP. However they found that company size affect the relationship of CSP and CFP. When they used the model derived from the good management theory, no evidence supporting a relationship between CSP and CFP was found.

Guler et al., 2010 in their study on the Turkish companies determined that neither the slack resource theory nor the good management theory holds. However they found a significant relationship between company size and CSR. Moreover when the research and development intensity was introduced, they found no significant relationship with profitability. Thus they concluded there is no link between CSR and financial performance.

Rim Makni et al., 2010 performed a study in the Canadian context using “Granger causality” approach. They found no significant relationship between a composite measure of CSP and FP, except for market returns. However, using individual measures of CSP, they found a vigorous significant negative impact of the environmental dimension of CSP and three measures of FP (return on assets, return on equity, and market returns). They concluded that FP does not granger cause CSP while CSP granger causes a reduction in the average market return.

Yang et al. (2010) examined the linkage between CSP and CFP in Taiwan and pointed out a positive relationship between previous CSP and return on assets for the next period. Though they found that previous CFP is not related to later CSP regardless of the financial performance variables (ROA, ROE, or ROS). Moreover a positive correlation with latter return on assets was observed when research and development intensity and size were considered. Hence indicating that higher previous CSP would lead to higher latter ROA when these variables are controlled.