Corporate Social Responsibility Csr And Financial Performance Management Essay

Chapter 2

Literature Reviews

2.1 Introduction

In this chapter, a complete set of literature review will be presented. I have done a few journal reviews on the past journals written by several authors. There are 15 journals had been studied about the relationship of corporate social responsibility (CSR) and financial performance in Malaysia and also other countries as well as other related CSR journals.

2.2 Prior Studies on CSR in Malaysia

A study by Mustaruddin Saleh, Norhayah Zulkifli, and Rusnah Muhamad (2010) examined the relationship between CSR disclosure and institutional ownership of 200 Malaysian public listed companies from 2000-2005. CSR disclosure was determined from four dimensions: employee relations, community involvement, product and environment. CSR disclosure levels were assessed quantitatively by using weights that are assigned to different items based on the relative importance of each item to different user groups. Results show that there is positive and significant relationship between CSR disclosure and institutional ownership. This means that how managers handle the social issues of their company had attracted institutional investors. Results also show that employee relation and product have positive and significant relationship to institutional ownership. A high investment in community involvement and environmental dimensions show institutional investors require a higher costs or expenditures. This investment will influence the cash flow of a company. Thus, results indicate that community involvement and environmental dimensions are significantly negatively related to institutional ownership.

Tamoi Janggu, Corina Joseph, and Nero Madi (2007) also employed sentences as measurement tool to assess the level of CSR disclosure of 169 industrial companies listed on Malaysian Stock Exchange from 1998 to 2003 with specific company’s characteristics: size, profitability, leverage, audit firm and ownership. This study indicates that the overall level of CSR among industrial companies in Malaysia is increasing. Human resource dimension revealed the highest amount of disclosure for six years. This shows that company does appreciate their employees. Results also show that CSR is positively related to firm size and also profitability, while CSR is negatively related to leverage. Size of audit firm does not show an impact on disclosing CSR.

Nor Hawani, Mustaffa Mohamed, and Norashfah Hanim (2011) examined the level of CSR disclosure of 44 GLCs listed on Malaysian Stock Exchange. This study also explores the relationship between total disclosure and company characteristics: size, age, leverage and profitability. Results show that marketplace information is the most disclosed theme, while environmental information is the least disclosed. The results indicate that marketplace as a medium to transfer information to customers and it is the most important theme of disclosure. GLC also have the perception that their company does not bring any environment impact to the society, so there is not much environment information to be disclosed. Results also show that GLCs with higher total of assets tend to disclose more compared to GLCs with lower total assets.

Other research done by Azlan Amran and Susela Devi (2008) investigated the influence of government and foreign affiliates on the development of CSR in Malaysia. Sentences are employed as a basis to measure the level of CSR disclosure. The results show that there is a positive relationship between a company that has a high proportion of government shareholding and CSR. Besides, a company also depends on government contracts to produce a better reporting. This means that strong governmental pressure is imposed on companies that choose to associate with the government.

Prior studies had show that Malaysian companies are involved in CSR practice because the way the management solve the social issues can attract institutional investors (Mustaruddin Saleh et al., 2010) as well as pressure from the government and foreign affiliates (Azlan Amran and Susela Devi, 2008). Company characteristics, namely size and financial leverage affect CSR disclosure in Malaysia (Tamoi Janggu et al., 2007; Nor Hawani et al., 2011).

2.2 Prior Studies on CSR and corporate financial performance

A study by Mustaruddin Saleh, Norhayah Zulkifli, and Rusnah Muhamad (2011) ‘looking for evidence of the relationship between corporate social responsibility and corporate financial performance in an emerging market’ was carried out as the empirical examination of the relationship between CSR and CFP in the emerging markets context is limited. Lack of knowledge and awareness of CSR by Malaysian PLC are confirmed through prior studies. This research is done to study the relationship between CSR and corporate financial performance (CFP) for 200 Malaysian public listed companies. The data was collected from companies’ annual reports through Bursa Malaysia web site, Hydra database and Central Bank of Malaysia in which CSR is measured through four dimensions, namely, employee relation disclosure, community involvement disclosures, product disclosures and environmental disclosures. Whereas, CFP is measured using Return on Assets (ROA), stock market return and Tobin’s Q ratio.

Through this research, result indicates that CSR is positive and significantly related to CFP. They reported that employee relations, community involvement and product dimension have a positive relationship with corporate financial performance. Companies which invest more in CSR tend to have a better financial performance. Whereas, environmental dimension has a negative relationship with corporate financial performance. Investments have to be made to implement environmental plans and this will affect the cash flow of a company. By indulging in environmental activities, a higher cost will be consumed and this fails to add value to the reputation of the company among stakeholders (Mustaruddin Salleh et al., 2011). This study had also further explore on whether there is any relationship between CSR and CFP in long term and the results prove that there is weak evidence on the significant relationship between CSR and CFP in the long run.

Read also  Implementing A Performance Management Framework Management Essay

‘CSR and financial performance in developing economies: The Nigerian experience’ was investigated by Uadiale and Fagbemi (2012). There are only a few research had been done on CSR and financial performance in Nigeria beside research focus on multinational companies operating in Nigeria. Thus, this research seeks to check out to which extent CSR contributes to financial performance of Nigerian listed firms. 40 listed companies on the Nigerian Stock Exchange had been studied. Accounting definition which includes return on equity (ROE) and return on assets (ROA) are used to measure the financial performance of a company, while the level of CSR was assessed from the perspective of community performance, environment management system and employee relations. As a result, the study indicates that ROE is significantly mutually related to community performance, environmental management system and employee relations. This study suggested firm in Nigeria to invest in CSR activities in order to build their image and reputation and thus increase returns. Only community performance has significant effect on ROA, while environment management system has negative relationship with ROA.

Shveta Kapoor and Sandhu (2010) investigated the effect of CSR on CFP after controlling for some variables which may affect financial performance of a firm. This study is carried out as the results of prior studies on the relationship between CSR and CFP which showed positive, negative, no relationship or inconclusive relationship. In this study, CFP is measured in terms of profitability and growth, while CSR is measured from seven dimensions: community involvement, human resources, environmental contribution, product contribution and customer relation, rural development, shareholders’ relations and diversity. Data have been collected from annual reports, individual websites of the companies and Prowess, Centre for Monitoring Indian Economy (CMIE) electronic database from 93 companies under 13 industrial sectors. The findings discover significant positive effect of CSR on profitability. The companies that disclose more tend to have higher profits. It also has shown no significant effect on growth which may be due to influence of some other factors such as product quality, marketing strategy, and others.

‘The relationship between CSR and firm financial performance: evidence from firms listed in LQ45 of the Indonesian Stock Exchange Market’ by Maman Setiawan and Darmawan (2011) explained the application and relationship of CSR and firm’s financial performance. This study has been carried out because the researchers want to find out whether the financial crisis took place in 2008 will bring an impact on the CSR activities. For this study, financial performance is measured through stock return (cumulative abnormal return) and from the accounting definitions, ROE and ROA. Data was collected from annual report of the firms listed in the LQ 45 of the Indonesian Stock Exchange Market and Global Reporting Initiative. Results showed that CSR has positive effect on the firm financial performance using both market definition and accounting definition measures. Results had indicated that positive effect of CSR can be minimized or get rid by the negative effect of financial crisis. By improving CSR activities, it is then believed that it can reduce the effect of the financial crisis in the future. Therefore, according to Maman Setiawan and Darmawan (2011), the firms are suggested to increase the CSR activities in order to have a better implication for the firm financial performance.

A study by Hichem Dkhili and Henda Ansi (2012) examined the impact of CSR on financial performance and assessed the level of perception of CSR in Tunisian companies through 5 dimensions: economic, legal, ethical, discretionary and environmental. Financial performance was measured using ROE and ROA. This study collects data through face interview by conducting field investigation (questionnaires). When the researcher uses ROA, they found out that there is no relationship between CSR and financial performance, while there is positive relationship between CSR and financial performance when they use ROE. The environmental dimension measured using both ROE and ROA produced a negative effect. This is due to investment in environment is very expensive which can negatively affect the financial performance (Hichem Dkhili and Henda Ansi, 2012).

According to Choi, Kwak, and Choe (2010), empirical studies on the relationship between multi-dimensional CSR activities and CFP does not exist in Korea. Thus, this study is carried out to investigate the relationship between CSR and CFP. CFP is measured using accounting-based measures, ROE and ROA, and market-based measures, Tobin’s Q ratio. This study uses stakeholder-weighted CSR index and equal-weighted CSR index to measure CSR. Stakeholder-weighted CSR index measured CSR based on the relative importance of each stakeholder group on the industry to which individual firms belong to, while equal-weighted CSR index assumes all KEJI categories are equally crucial to all stakeholders. By using stakeholder-weighted CSR index, stakeholder misalignment problem can be overcome. There is a significant and positive relationship between CFP and stakeholder-weighted CSR measure, but not the equal-weighted CSR measure. From the results, it shows that it is crucial to identify which aspect of the social responsibility is more crucial to primary stakeholders. This is due to a firm’s social initiatives when properly directed will improve its bottom line in Korea.

A study by Juanita Oeyono, Martin Samy and Roberta Bampton (2011) was carried out to examine whether Indonesian corporations are attentive to CSR issues and how socially responsible their operations are. Level of CSR reporting according to Global Reporting Initiative (GRI) in the top 50 corporations with the biggest market capitalisation in Indonesia had been studied. Causal relationship between CSR and profitability (EBITDA and EPS) among Indonesian corporations had also been examined. CSR can be determined using GRI guidelines such as economic, environmental, labour practices and decent work, human rights, society, and product responsibility. From the study, results showed that 11% of corporations fulfilled all six of the GRI indicators, 36% only fulfilled four indicators, 27% fulfilled three indicators, 22% fulfilled five indicators, 2% fulfilled two indicators and another 2% fulfilled one indicator. Human rights indicator is the least famous indicator for Indonesian corporations, while the most important indicator is economic indicator. Results also showed that there is a positive relationship between CSR and CFP. The positive relationship means that when a company involves more in CSR practices, they will get a higher EBITDA and EPS.

Read also  STRATEGIC HUMAN RESOURCE MANAGEMENT OF SAINSBURYS

According to Sarwar Uddin Ahmed, Md. Zahidul Islam, and Ikramul Hasan (2012), the research is done to investigate the linkage between CSR and CFP on the banking sector in Bangladesh by using questionnaires survey. This research is carried out as over the past few years, researches around the world have revealed positive, negative, mixed and neutral effect of CSR on CFP. CSR is determined from the dimensions of values and transparency, workplace, corporate governance practices, environment and community, while CFP is determined using ROA, earnings per share and price earnings ratio. Results indicate that banks’ social performances were below 75% in all the five categories of CSR indicators, especially value & transparency, environment, workplace, and community. No significant proof was found to show that CSR banks outperform the non CSR banks. This study showed that it needs more detailed follow-up studies in order to monitor the linkage between CSR and financial performance.

A study by Hasan Fauzi and Kamil M. Idris (2009) is basically to determine whether there are positive relationships between CFP and CSR under slack resources theory and to determine whether there are positive relationships between CSR and CFP under good management theory by incorporate strategic management’s concept into the definition of CSR as sustainable corporate performance including social, economy and environment. Questionnaire survey was used to carry out this study. The company’s performance is measured from growth and profitability dimension, while CSR is determined from the perspective of business environment, business strategy, organization structure and control system. According to Hasan Fauzi and Kamil M. Idris (2009), they found out that there is a positive relationship between CFP and CSP under the slack resource theory and also positive relationship between CSP and CFP under the good management theory. The linkage between CFP and CSP which is under slack resource theory is stronger than the linkage between CSP and CFP which is under good management theory. The availability of firm resources drives the implementation of CSR rather than only take into account the awareness regardless the resources the firm has.

According to Yang, Lin, and Chang (2010), causal relationship between CSP and CFP had been studied and also the impact of CSP on CFP and vise versa. This study used ROA, ROE and return on sales (ROS) to measure CFP, while CSP is determined through employee relations, environment, shareholder relations, product quality and relations with suppliers and customers, and community. Data was collected from CMoney database and corporate sustainable development (CSR) reports. Results showed CSP has positive impact on CFP, while the impact of CFP on CSP is uncertain. When a company is on good relationship with its employees, suppliers, and customers or it contributes to or feedback into the community with higher CSP, it will boost the image of a company (Yang et al., 2010). The researchers also conclude that if more research and development (R&D) investment is made by a company, thus CSP has a positive impact on CFP, while CFP would not affect CSP. Researchers found out that more R&D which brings innovation could increase the profits of a company.

Crisostomo, Souza Freire, and Vasconcellous (2011) examined CSR, firm value and financial performance in Brazil. This study is carried out due to research in prior studies are mainly focus in well-developed countries and the results in prior studies show that the linkage between CSR and CFP is inconclusive. This study also carried out to seek for the relationship between CSR and CFP, taking into consideration value creation and financial accounting measures. ROA and ROE is used to determined financial performance, while CSR is determine from the dimension of internal social action, external social action and environmental action. CSR data was collected from IBase and financial data was collected from Economatica database. According to Crisostomo et al. (2011), segments that are most popular are relationship with employees and environmental actions. Results showed that there is a negative effect of CSR on firm value in Brazil. It is strongly affect by employees and environmental action. Employees (internal social action) have a negative effect on financial performance, while external social action and environmental action have neutral effect on financial performance. In addition, results also show there is a neutral effect of firm’s financial performance on CSR. This may be due to it is impossible for companies to expend cash flow in social action or there is a low concern.

Many studies have been done across the world to examine the relationship between CSR and financial performance. Many of previous studies had shown either positive, negative or mixed results. The most commonly used variables to measure firm financial performance are accounting-based measures which include return on assets (ROA) and return on equity (ROE), and market-based measures which is Tobin’s Q ratio. CSR can be divided into many dimensions such as employee relations, community involvement, products and environmental dimension.

Read also  Hofstede Model Strengths and Weaknesses

Table 1 provides a summary of selected empirical studies, where the second column indicates the relationship between CSR and corporate financial performance. As you can see in the table, some of the studies show a positive relationship and mixed relationship. The mixed results may consist of neutral, positive and negative relationships.

Table 1. Summary of selected previous studies

Authors

Sign

Measure of CSR

Measure of firm performance

Mustaruddin Salleh et al. (2011)

mixed

CSR disclosures

ROA, Stock market return, Tobin’s q ratio

Uadiale et al. (2012)

+

Voluntary disclosure index

ROE, ROA

Shveta Kapoor and Sandhu (2010)

+

CSR score (in %)

– No. of CSR items

ROS, ROA, ROE, Growth in Sales (GSALES), Growth in Total Net Assets (GTNA)

Maman Setiawan and Darmawan (2011)

+

CSR disclosures

Stock return, ROE, ROA

Hichem Dkhili and Henda Ansi (2012)

mixed

CSR disclosures

ROE, ROA

Choi et al. (2010)

+

KEJI index

ROE, ROA, Tobin’s q ratio

Juanita Oeyono et al. (2011)

+

GRI indicators

EBITDA, EPS

Sarwar Uddin Ahmed et al. (2012)

neutral

Reputation index

ROA, earnings per share and price earnings ratio

Hasan Fauzi and Kamil M. Idris (2009)

+

MJRA’s dimensions

Growth dimension, Profitability dimension

Yang et al. (2010)

+

AReSE rating

ROA, ROE and ROS

Crisostomo et al. (2011)

mixed

MJRA

ROA, ROE

2.3 Theory discussed in prior studies

There are a few theories discussed in prior studies such as trade off hypothesis, social impact hypothesis, supply and demand theory, theory of stakeholder, good management theory, and slack resources theory. According to Mustaruddin Salleh et al. (2011), trade off hypothesis is when a company participates in social and environmental activities; these activities will incur additional disbursement and reduce the earnings or profits of the company. When they participate in such activities, they need to spent on extra resources and hence it can decrease the profitability of a company. CSR is an investment that shows an increment in costs and incurs expenses on financial performance which can generate competitive disadvantage (Hichem Dkhili and Henda Ansi, 2012).

The social impact hypothesis means when there is more CSR activities carried out, CFP will show a better results. This indicates that when more CSR activities have been carried out, business reputation can be improved, relationship with financial institutions will also get better and risks of the company can be minimized (Mustaruddin Salleh et al., 2011). Improvement in social activity will also lead to special relationships with key stakeholders and this means that the performance will be better (Hichem Dkhili and Henda Ansi, 2012).

According to Mustaruddin Salleh et al. (2011), supply and demand theory states that when there are more demands for participation in CSR activities, company’s profits will definitely increase. From prior studies, there are no studies shown that there is relationship between CSR and CFP using this theory.

Stakeholder theory explained the cost of ‘explicit claims’ and ‘implicit claims’ on company’s resources which will affect the value of a company (Mustaruddin Salleh et al., 2011). Stakeholders have an explicit claim on a company such as employees, government and owner-lenders, while implicit claim means claim on the management of the company from external stakeholders. By involving CSR practices in a company, it is match with stakeholder theory claim. This implies that with active participation in CSR activities, financial performance of a company can be enhanced (Mustaruddin Salleh et al., 2011).

Through stakeholder theory, it affirms that the cooperation agreements can build trust between firm and its stakeholders. This can provide a competitive advantage to a company (Hichem Dkhili and Henda Ansi, 2012). According to Hichem Dkhili and Henda Ansi (2012), by including stakeholders in a company, it will results in higher financial performance. Instrumental stakeholder theory explained that firms may employ different degree of effort to different level of CSR and results in different outcome for different CSR level (Choi et al., 2010). When CSR is determined by taking into consideration firm-specific stakeholders’ interests, there will be positive relationship between CSR and CFP (Choi et al., 2010).

Besides that, company is only able to carry out its activities based on the resources owned by the company which is called the slack resource theory (Hasan Fauzi and Kamil M. Idris, 2009). For slack resource theory, a company should have a good financial position in order to carry out activities which can contribute to social performance. Positive relationship between CFP and CSP can be explained through the availability of firm resources which driven the implementation of CSR rather than only take into account the awareness irrespective the resources the firm has (Hasan Fauzi and Kamil M. Idris, 2009). According to Crisostomo et al., (2011), there is no impact of financial accounting performance on CSR was discovered, in contrast to the predictions of slack resources theory.

Furthermore, good management theory means a company should try to satisfy its stakeholders without taking into consideration the financial condition (Hasan Fauzi and Kamil M. Idris, 2009). From the research done by Hasan Fauzi and Kamil M. Idris (2009), they found that there is a positive relationship between CSP and CFP under the good management theory. The theory promotes managers of a company to continuously find a better way to improve the competitive advantage of a company which can intensify the financial performance of a company. Based on the theory, a company viewed by its stakeholders as having a good image will help the company to get a better financial performance (Hasan Fauzi and Kamil M. Idris, 2009).

Order Now

Order Now

Type of Paper
Subject
Deadline
Number of Pages
(275 words)