The Financial Impacts of Corporate Social Responsibility

Table of Contents

Acknowledgements

Table of Contents

Introduction
Problem Statement

Development of CSR Theories

CSR and Financial Impacts

Measuring CSR and Financial Impacts
End state outcome metrics
Intermediate outcome metrics
Mediating metrics

Impacts of CSR on Employees

Methodology

Primary Research Data Gathering

Results and Analysis

Evaluation

Conclusion

Reflections

Bibliography

Appendices
Appendix 1 – Respondent demographics
Appendix 2 – Response to research questions
Appendix 3 – Relevancy data graphs and table 42-
Appendix 4 – Survey Monkey response count

Ethics form

Introduction

The modern world has seen large changes in the content of information that businesses disclose to the external domain. Throughout history it has been largely financial, however in recent years there has been a growing trend of businesses publishing information regarding their Corporate Social Responsibility (CSR), as will be discussed. This report will assist in giving some background in to CSR, as well as attempting to establish any evidence of financial impacts of CSR on businesses, through evaluating metrics used within current research. The literature will gain particular focus upon employees and the way in which CSR affects them. The primary research will then further concentrate on environmental CSR and the impact that is has on employee recruitment. An online questionnaire will be the platform in terms of collecting data from employees at a company with high environmental CSR values.

Problem Statement

The definition of CSR itself is highly contested within the research world. The Oxford Handbook of Corporate Social Responsibility comes to the conclusion that although there may be contradicting definitions, “we might at least suggest that at the core of these debates is the subject of the social obligations and impacts of corporations in society” (Crane et al, 2008, p6).

CSR has become the subject of significant debate, theory and research which has continued to grow in recent decades (Carroll and Shabana, 2010). Literature surrounding the subject can be dated back to the 1950s (Crane et al, 2008). A recent growing interest in CSR is largely due to the ever growing publicity surrounding the issues behind it, such as ethical issues and in particular environmental issues. The world’s interest in environmental issues does appear to have grown in accordance with the arrival of large scale government meetings such as The Earth Summit 1992 and The Earth Summit 2002. The United Nations (2011), at the UN Conference on Environment and Development (UNCED), named Earth Summit 1992, “adopted an agenda for environment and development in the 21st Century”, thus highlighting an urgent need to shift the world economy towards a more sustainable future (Visser et al, 2010). CSR could be viewed as the business response to the described urgency. In more recent years the focus on companies’ abilities to reduce emissions and reduce their carbon footprint has grown. Awareness of the importance for businesses to think before acting upon issues that involve the environment has considerably increased since the early 1990s. One well-known case of environmental responsibility is that of ‘Shell’s Brent Spar Saga’. In brief, Shell wanted to dispose of an oil rig in the North Atlantic. The company came against massive opposition from the environmentalists Greenpeace, along with the backing of a large portion of the general public. “Many people in Britain and elsewhere in Europe boycotted Shell products”; “It was a campaign during which the company said lost it millions of dollars” (BBC Online Network, 1998). Companies realise that profitability and their ‘licence to operate’ are determined by their willingness to abide by a responsibility towards social and environmental consequences (Collier and Estaban, 2007).

As the subject of CSR and issues surrounding the global environmental continue to grow, it is important to recognise the financial impacts that it will have within the business world. As a result of this, this Independent Learning Project will be created around the following problem statement;

‘The Financial Impacts of Corporate Social Responsibility: How does being environmentally friendly impact on employee recruitment?’

This Independent Learning Project will initially debate current literature regarding the financial impacts of Corporate Social responsibility. A focus will then be created on a primary stakeholder group and a single CSR variable, as is common practice in CSR research. Specifically, the research will create a primary focus upon how being environmentally friendly impacts on employee recruitment. There is evidence to support that focusing on even one strategy variable could be sufficient to create financial benefit within a business (Husted and Allen 2007). In this case that variable is recruitment.

Development of CSR Theories

An early critic of CSR was Friedman (1970). He argues that CSR has a negative impact on shareholder wealth and if it is abided by, executive decisions will be made on the grounds of serving social purposes, and consequently will not be carried out in the interest of the shareholders, which he believes is the purpose of a business. This theory is based on Agency Theory. Vogel (2005, p19) suggests that if Friedman revisited the topic of CSR today “he would find much less to concern him”. On the other hand, as highlighted by McWilliams, Siegel and Wright, (2006), Friedman warns that managers may act with their own interests in mind and use CSR as a career building tool. This criticism still holds a definite standing in modern business, so does not rule his literature as obsolete by any means.

In 1984, Freeman assembled Stakeholder Theory. In contrast to Friedman, stakeholder theory suggests a business’s survival is decided not only by the shareholders but by stakeholders as a collective group. Freeman suggests that managers have a responsibility for non-financial stakeholders, including customers, suppliers, employees and the local community (Freeman, 1984). Donaldson and Preston (1995) further recognised the vitality of stakeholders’ interests due to their relationship with a business. This theory was applied to CSR by Jones (1995), whereby he attempted to produce an instrumental stakeholder theory. By doing so, Jones helped to reinforce the importance of the responsibility for stakeholders, in terms of CSR, by proposing that a business would reap the benefits if it was responsible for them.

Shortly before the application of Freeman’s theory to CSR, Donaldson and Davis (1991) proposed a theory unlike any before it. Their theory suggests that managers have a responsibility to do what is right, no matter what the effect is on the business. This theory seems to stand alone in the fact that it does not consider the well-being of the business and so disregards financial impacts. This theory does seem ambitious when attempting to apply it in the real world but does express a deep social message.

Further theoretical developments saw a growing popularity of relating CSR and strategy. In 1995, Hart applied CSR to Wenerfelt’s (1984) resource based theory. Resource-based theory takes the view that resources that are costly to imitate or copy will create a sustainable competitive advantage for a business. Hart relates this to environmental aspects of CSR and in particular discusses obtaining this advantage through three strategies, namely, pollution prevention, product stewardship and sustainable development. Through further application of Hart’s theory, Russo and Fouts (1997) were able to confirm evidence that expresses a positive relationship between a firm’s environmental responsibility and economic performance. Their hypothesis was tested over a period of 2 years on 243 businesses within different industries. They concluded that further research could be completed by means of a ‘before and after’ scenario, in terms of a company installing new environmental technologies. This suggestion holds value as it could help to decipher the environmental policies, which lead to greater benefits and would also help to establish where returns to environmental performance stop (Russo and Fouts, 1997).

The data from Russo and Fouts’ investigation does appear to have great depth, due to the number of companies studied and the multiple industries that they are in. However, firm performance is measured in relation to an environmental rating for each business and the theory lacks evidence to prove that the environmental rating is the determining factor for improved business performance. If proven, this study could prove to be more successful in present day due to the greater knowledge of environmental issues, which may cause an escalated reaction to the businesses that have a higher rating.

Four years later McWilliams and Siegel (2001) established Profit Maximising Theory. The theory suggests that there is an ideal level of CSR that will result in maximised profitability, whilst still encompassing a satisfaction for stakeholders’ demand. Their work produced a cost-benefit analysis framework with the purpose of assisting managers to make CSR related decisions. However, McWilliams and Siegel confess that the theory would be difficult to measure in practice. Their report suggests that managers work alongside the government to measure the demand for CSR (McWilliams and Siegel’s 2001). The report lacks suggestion of how this may achieved.

Interestingly, as theories have progressed, CSR is viewed in terms of a means to benefit a business. The idea that CSR has financial benefits may appease parties at both ends of the scale, with one end consisting of Milton Friedman (1970) and the maximisation of shareholder wealth, and the other of Donaldson and Davis (1991) and managers acting as stewards. The middle would be brought ever closer if financial benefits could be reaped from CSR practices.

CSR and Financial Impacts

There is a definite evolution within CSR theories, along with a growing coupling between CSR and Financial Performance. In the early years it was deemed insignificant by some, such as Friedman, but this argument does now seem out-dated. Research produced by Context (2006) (see Crane et al, 2006, p4) shows that 90% of the largest European companies disclose a large amount of information on social and environmental impacts. Furthermore, KPMG (2005) (see Crane et al, 2006, p4) found that 50% of large global businesses produce a report with the purpose of disclosing CSR related information. This shows a large and ever growing real world backing for the topic which seems to out-rule CSR critics. As such it is widely believed that CSR matters (Hopkins, 2003). In that respect, the debate is no longer about whether there is a demand for CSR within the business world, but how much demand there is for it, especially in relation to the financial impacts that surround it.

There is a vast amount of modern literature that suggests that CSR can benefit a business’s profitability, and that taking the initiative in terms of environmental management can result in a competitive advantage (Lee, 2007). 82% of businesses questioned by Boston College’s, US Chamber of Commerce and Corporate Citizenship Centre, believe that upright corporate citizenship assists profitability (Rochlin et al, 2004). There has been growing investigation in to the financial benefits of CSR. Schuler and Cording (2006) produced a model which showed and explained relationships between CSR and consumer purchasing. Kanter (1999) argues that well-doing can enhance business reputation and in turn customer loyalty. Kolter and Lee (2005) (see Lee, 2007) suggest that CSR can attract socially conscious consumers and good employees. Finally, Epstein (2009, p22) suggests that, “Sustainability can also create financial value for the corporation through enhanced revenues and lower costs”. These theories and studies do seem to suggest that CSR can result in positive financial impacts on businesses. To this end, the question that current literature seems to propose is ‘how does CSR impact on financials?’ This leads us to the issue that is apparent in current research, which is the difficulty of measuring those financial impacts.

Measuring CSR and Financial Impacts

Previous research shows an array of methods that have been used to measure the financial impacts of CSR. John Peloza (2009) categorizes these methods in to three categories which are assumed to follow a process of stages. He suggests that the most common metrics are named “end state outcome metrics”, which are “those at the end of at the end of the chain, such as share price or ROA”. The second classification he describes as “intermediate outcome metrics”, which “measure outcomes that eventually create business value in end state outcomes” (John Peloza, 2009, p1522). For example, a reduction of expenditures (intermediate) will in turn increase share price (end state). Finally the third category is named “mediating variables”, an example of which is employee motivation, which in turn leads to increased profits (intermediate), finally resulting in an increased share price (end state financial result). These methods of categorisation help to create perspective and present the range of research methods that have already been carried out within this field of study.

Furthermore, after viewing the growth of CSR and the link to financial benefits, it is important to remember that CSR is an evolving issue. The way that society views business responsibilities is different today than it was 20 years, or even 10 years ago. For this reason it would be wise to view a wide spread of metrics that have been carried out within the past 10 years.

End state outcome metrics

Schnietz and Epstein (2005) attempted to examine whether or not companies known for their CSR were as likely to obtain financial harm during a crisis, through measurement of share price. Using share price as a method of measurement allows researchers to capture any positive or negative affect caused by CSR because investors take in to account the firms’ future prospects (Peloza, 2009). The study showed that fortune 500 companies that were known for being responsible suffered lower declines in share value, than those which are seen as irresponsible. Their results add to evidence that a positive relationship between financial performance and corporate social responsibility does exist. As duly noted in the research itself, a limitation of the study is that there are so many contributing factors impacting share price, which makes it difficult to determine whether CSR was the determining factor of the results. A benefit of the research is that the results gathered were broken down in to specific industry groups which does allow for any variations between industries. This breakdown concluded that the same positive correlation was consistent throughout all of the industries.

Due to the inconclusive nature of many forms of financial performance related studies, such as that of Schnietz and Epstein (2005), alternative studies have been carried out in attempt to gather data with increased reliability. Methods using perceptual data may be more reliable, as the outcome is determined by fewer variables. Through interviewing high level managers of Spanish firms, Husted and Allen (2007) determined that managers perceive CSR as a tool for value creation. The managers questioned also believe that when CSR related projects, which have the purpose of creating economic benefit, are more likely to create value when made highly visible to the public. Husted and Allen conclude that it has not yet been established whether or not CSR does create value. Their research poses credibility due to its unbiased nature when obtaining information from managers, through use of tactical questioning and making sure that no single response was favoured over another. The main issue with the research is that it is extremely subjective and although managers may believe that value is created through use of CSR, the study does not prove that they are correct.

An alternative method to the highly subjective perceptual based research discussed above is that of accounting based methods. Laan, Ees and Witteloostuijn (2007) focused their research on accounting based methods, namely return on assets (ROA) and earnings per share (EPS). A data set of the S&P 500 (Standard and Poor’s, 2012) corporations over 1997 – 2002 was explored, with use of reputation rankings from the Fortune Corporation Reputation Index along with the Kinder, Lydenberg and Domini Corporation. The large dataset provides for a significant area of research. However all of the companies are extremely large American companies, which implies that the results cannot be generalised to companies that are not of the same size and nature. The results determine that positive CSR has little effect on ROA and EPS. Furthermore, it is found that negative CSR does have a significant impact.

It is duly noted that accounting based research does tend to find a greater link between CSR and financial benefit than that of most metrics (Margolis et al., 2008; Orlitzky, Schmidt and Rynes, 2003). However, an issue with accounting based measures is that it reflects the past, as appose to share price which views the future performance of a company, this highlighting the importance of measurement method choice (Peloza, 2009).

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