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The Financial Impacts of Corporate Social Responsibility

©2014 Textbook 46 Pages

Summary

Corporate Social Responsibility (CSR) is probably one of the most current and evolving issues within the business world today. There is extensive research in to the financial impacts that CSR has upon a business, yet the outcome remains inconclusive due to contradicting findings. This Independent Learning Project presents many of these contentious financial impacts through a literature review. The primary research then focuses on attempts to contribute to current research by questioning employees at a company with a high level of environmental CSR, to discover if it is a determining factor in terms of their recruitment. An online questionnaire has been used to gain information from 66 respondents regarding their opinions and experiences upon environmental aspects when seeking a new job. The research concludes that employees deem environmental aspects of a business to be relevant when applying for a role, yet the majority do not actively seek to find information regarding it, thus overstating its importance through their opinions. Furthermore, the research indicates that utilitarian aspects are rated of higher importance. This may be a result of difficult financial times.

Excerpt

Table Of Contents


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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;

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`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

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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

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`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

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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

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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

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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

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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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Moreover, end state metrics, "such as share price, or accounting measures, such as return
on equity, are impacted by a host of other variables. These metrics do not provide the
necessary level of detail for managers who want to establish an optimal level of CSP
investment for their company" (Peloza, 2009, p.1518). On the other hand these metrics are
still crucial in terms of measurement as some CSR activities may only impact on the likes of
share price, they also present the complete financial stability of a firm.
Intermediate outcome metrics
As mentioned previously, intermediate metrics are those before and those which ultimately
affect end state metrics. Carter (2005) focused his research on CSR supply management
activities and their effects on firm's costs. The research findings present that no direct link
exists between CSR supply management activities and costs. However, responsible supply
management activities were found to lead to organisational learning and improved supplier
performance, ultimately leading to a reduction in costs. This research serves as a reminder
that there are so many variables in terms of CSR and that researchers must make a
conscious effort to capture all of the implications that CSR has, whether positive or negative.
In summary Carter suggests that CSR "not only is the right thing to do", implying
stewardship theory as discussed earlier, but also that purchasing CSR can improve supplier
related costs (Carter 2005, p.177).
Research was carried out by Ekatah et al (2011) to determine whether certain CSR variables
had an impact on profitability of Royal Dutch Shell. This type of integrative metric allows
both cost and revenue measurements to be taken in to account. A separation of Social and
Environmental CSR was made in attempt to make the measurement more focused. Some of
the variables include, `percentages of woman in supervisory/ professional position', `total

13
greenhouse gas emissions' and `total number of spills'. The results show a positive
relationship between all of the CSR variables and profitability. However, as suggested about
end state metrics, it is difficult to pin point the determining factors which resulted in Shell's
increase in profits. A massive limitation of this particular research is that no evidence was
shown to back-up the claims made within the research. The figures could have just as easily
come from natural growth and expansion of the business. The amount to which CSR has
contributed to the increase in profit is also unknown.
CSR has been found to increase company revenues, through obtaining increased loyalty
from current customers and creating new market opportunities (Peloza, 2009). This claim is
further enhanced by a report produce by JP Morgan. The report shows that firms within the
food industry, which offer the sale of a healthy alternative, can acquire greater margins
through entry in to a new market. The new market has been generated through consumer
and government concerns about unhealthy foods (Langlois et al, 2006). A point of interest
within the research is that the trends are more significant within certain countries, such as
the UK. The report puts this down to the high amount of media coverage.
An advantage of intermediate metrics is that they may show value added to a firm which is
not visible in some end state metrics such as share price or ROA. Furthermore it is easier to
pin point whether or not it is actually CSR that is a contributing factor in terms of impacts to
a business. However, this is not always the case as presented through the study by Ekatah et
al (2011), where CSR could easily have been held falsely attributable.

Details

Pages
Type of Edition
Erstausgabe
Year
2014
ISBN (eBook)
9783954897568
ISBN (Softcover)
9783954892563
File size
977 KB
Language
English
Publication date
2014 (June)
Keywords
Corporate Social Responsibility Financial Impacts
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