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Drivers for Corporate Social Responsibility

Chapter · November 2017

DOI: 10.4324/9781315749495-4

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 Chapter 4 Drivers for Corporate Social Responsibility

Abstract: We began the chapter by considering the main drivers of CSR activity
including market drivers, social drivers, governmental drivers, institutional drivers
and globalisation as a driver. In addition, we consider empirical evidence as to what
CSR meant to businesses, whether is there a way to measure CSR and if CSR would
bring financial benefit to businesses. There is a large literature attempting to analyse
these issues and we would consider the influence of the firm’s size, age,
diversification, ownership, and most importantly profitability on the firm’s level of
CSR engagement.

Key words: Drivers, Determinants, CSR-financial performance relationship

Introduction

As we saw in Chapters 2 and 3, empirical research on CSR began to take shape in the
1970s with an attempt to answer a range of questions: What does CSR mean? What is
the implication of CSR to business? Is there a way to measure CSR? Can a firm really
do well by working towards social wellbeing? Is there a return on investment in CSR?
What are the bottom-line benefits of such activities? Is CSR positively related to
corporate financial performance? What factors might increase CSR at firm level?
And so on.

The link between CSR and a company’s financial performance, in particular, the
direction of causality underlying this relationship has pre-occupied CSR researchers,
both theoretical (see chapter 3) and empirical. This is not surprising given the long
standing primacy given to profit maximisation as a firm objective. In this context, are
profitable companies more likely to undertake CSR or can we say that companies that
undertake CSR are more likely to be profitable? In the former, firms making profits
are better able to bear the costs of CSR. On the other hand, it is possible that
companies engaging in good CSR programmes benefit from the goodwill and positive
publicity that such CSR engenders, resulting in increased sales and, depending on
costs incurred, profitability. Of course, it is possible that both CSR and profitability
are the outcomes of a third factor entirely, and the challenges involved in assuming
cause-effect will be discussed in this chapter. For instance, it may be the case that
well-run companies are profitable and engage in CSR as part of their driving ethos.
There are many published studies in this area though the results remain inconclusive.
We will return to this literature in more detail later in this chapter.

In this chapter we will consider the drivers of CSR and also the proximate factors that
influence it, such as firm size, diversification and manager’s profile. The relationship
between corporate financial performance and CSR will be explored in the last section.

Drivers for CSR adoption

The traditional, Neo-Classical view of a firm is that it is a profit ‘maximiser’ and

therefore any activity that it undertakes must lead to increased profits. Milton
Friedman, a noted Neo-Classical economist, was a critic of CSR and argued that the
objective of the company owners (or shareholders) is profits and therefore the best
outcome is if firms are run to realise this objective (Friedman, 1970). In this view of
the firm, the shareholders remain the main beneficiaries of a firm’s operations. Other
stakeholders are not significant, except in so far as they help increase profits for the
owners. Thus, while Friedman recognized that companies may gain some strategic
advantage by supporting the government and being active in the community, he
argued that these should not be described as being socially responsible as they were
just activities that firms benefited from. Thus, Friedman argued that:

"There is one and only one social responsibility of business – to use its resources and
engage in activities designed to increase its profits so long as it stays within the rules
of the game, which is to say, engages in open and free competition without deception
and fraud." (Friedman, 1970).

Since Friedman published his thoughts in New York Times Magazine in 1970, CSR
has become more central to the mission of many firms and, in the process,
stakeholders other than the shareholders of the firm have become important in
determining the firm’s strategies and actions. We also saw in Chapter 2 with Bowen’s
(1953) definition, how CSR has changed over the decades often in response to
changes in the world economic and social environment. In this chapter, we will
discuss some of these drivers in more detail.

Market drivers

A firm’s activities involve in various markets – input market, labour market, product
market and investment market. Any factors that influence these markets will also
affect a firm’s profitability. Thus, a firm’s market drivers include the attitudes of its
consumers, employees, investors, business suppliers and customers. In recent years,
many of these attitudes have shifted in favour of a more holistic strategy on the part of
firms, one that takes account of the firm’s influence on all of its stakeholders. In this
section, we will discuss three separate market drivers – those in the consumer market,
labour market and investment market.

Consumer Market Drivers: First, and possibly most important, consumers have begun
to demand and expect CSR from firms. Various studies have shown that increasingly
consumers prefer to pay for products and services supplied by companies having
socially responsible attributes, for example Fair Trade (Box 4.1) or organic produce
(Wang et al., 2008; Jiang and Zhu, 2013; Perez and Bosque, 2015; Zhang et al., 2017).
Having said this, it is also the case that consumers cannot be counted on to promote
CSR outcomes and most manufacturing firms would actually not include CSR in their
cost/benefit deliberations due to uncertain associations between consumer behaviour
and their values, perceptions, and attitudes (Haigh and Jones, 2006).
 Box 4.1: The Fair Trade Mark

The Fairtrade mark designates products which have been “produced by small scale organisations
or plantations that meet Fairtrade social, economic and environmental standards” (Fairtrade,
2017)). The standards include protection of workers “rights and the environment, payment of the
Fairtrade Minimum Price and an additional Fairtrade Premium to invest in business or
commercial projects” to improve their social, economic and environmental conditions. It is
especially beneficial for small scale farmers and in some communities (coffee, cocoa, cotton and
rice) only certifies small scale production. When it does certify plantations (e.g. for bananas, tea,
flowers), the standards relate to worker’s rights.

The Fairtrade minimum price is set “to cover the cost of sustainable production”. Payment of this
minimum price is regularly audited. The business case as stated on the organisation’s website is
that by “putting the Fairtrade mark on your products, stocking Fairtrade goods or serving them
to your customers, you can demonstrate your ethical commitment to your customers, have a
positive impact on the producers of the commodities you work with and get closer to your supply
chain” (Fairtrade, 2017). Fairtrade sees itself as contributing to sustainability because it:

1. influences standards of living

2. enables fairer groups to become stronger
3. protects worker’s rights and a safe working environment
4. requires farmers to comply with environmentally friendly practices and helps them to
adapt to climate change
5. provides access to markets at a fair price
6. helps work towards gender equality
7. helps farmers to increase output and its quality and thereby earn sustainable livelihoods.
8. The Fairtrade certification scheme provides annual reports to ensure that its outcomes
can be monitored.

Perez and Bosque (2015) argue that consumer perceptions of the social responsibility
of a company do influence customers’ attitudes and feelings towards the company’s
service/product. Today, niche markets exist for consumers who prefer products and
services provided by socially responsible companies, even if they have to pay a
premium in terms of price. In addition, consumers can have a large impact when they
are mobilized as has been seen from a range of consumer boycotts including those of
Nestle (for advertising powder milk instead of mother’s milk; Boyd, 2012), Nike
(extreme long work hours and child labour; Boje, 1999; Boje and Khan, 2012; Zhang,
2012) etc. Trudel and Cotte (2009) reported that while some consumers would be
willing to pay a price premium for products/services with ethical attributes, they are
much more likely to penalize unethical conduct/services than to pay a premium for
ethical products. This “negative ethical consumerism” (Smith, 2008, p283) can
extend to boycotts, where people refuse to purchase unethical products, and boycott
participation can be highly contingent (Sen et al., 2001).

A recent global survey by Cone Communications (2013), a public relations and

marketing agency, suggested that 90% of consumers would boycott a company if they
learned of irresponsible behaviour and 93% of those surveyed wanted to see more
 corporate social responsibility in the products and services they purchased. As
explained in the survey results:

“Corporate social responsibility is no longer an option – it is emphatically and

indisputably a must do”.

Firms that do not comply see significant consumer retribution in the form of boycotts.
Good examples of this are the US boycotts in the 1990s of branded clothing sourced
from Bangladesh and Burma (Bhattacharya and Sen, 2004), and the more recent
consumer boycott campaigns worldwide during 2012-2014 against multinational
firms that are seen as avoiding taxes including the online retailer Amazon and the
American coffee company Starbucks (see Box 4.2).

.1 Box 4.2: The campaign against Starbucks avoiding tax

The coffee giant, Starbucks, opened its first shop in the UK in 1998. Between 1998 and 2012,
sales were £3 billion and their corporate tax payment was only £8.6 million. From 2009 to
2013, it paid no tax despite sales of 400 million in 2012.

To avoid tax payment in the UK, Starbucks had transferred some money to its Dutch office as
“royalty payments” for using its brand. It also bought coffee beans from Switzerland at high
prices and paid high interests rates to borrow money from other parts of the company.

The scandal caused a big public outcry and a consumer boycott of the company. In 2013,
Starbucks suffered the first ever UK sales fall. Pressure from politicians and campaigners
forced the company to pay 20 million to UK HM Revenue and Customs. The company also
had to close its unprofitable shops in the UK. In addition, it also moved its parent company
from Netherlands to the UK so that the tax campaigner would make sure the UK profits have
not been siphoned elsewhere.

Labour Market Driver: As the second market driver, employees are increasingly
putting pressure on employers to engage in CSR. First, employees want to work for
the good guys. As the labour market is getting more competitive, employers are
becoming aware of the job preferences of their potential employees, particularly the
more skilled ones. If a company wants to attract and keep top talent then CSR matters.
The Cone Communication survey mentioned above, found that 75% of the Millennial
generation (born between 1978 and 1998) want to work for a company that cares
about how it impacts and contributes to society. Some employees would also like to
see their companies get involved in their immediate communities; the places where
they are embedded. Cone Communication’s survey found that 65% of respondents
who already had a job claimed that they were proud of their employer’s social and
environmental activities and this increased their loyalty to the company (ibid).
Certain employee demands are related to work-life balance which is about:

“having sufficient control and autonomy over where, when and how you work to fulfil
your responsibilities inside and outside paid work” (Visser and Williams, 2006, p14).

Work-life balance is a business imperative directly impacting productivity,

recruitment and talent retention, and business performance. Increasingly, the demand
for work-life balance is met not simply by implementing good HR policies but also by
a company’s CSR strategies (Singh and Point, 2004; Grosser and Moon, 2005;
Muthuri et al., 2007; Gross, 2011; Lacey and Groves, 2014). Thus, Wollenberg (2014)
wrote in the Guardian:

“Free massages, office chiropody and a company fruit budget may sound frivolous,
but it makes sound business sense to look after employee health and wellbeing. After
all, it is much easier to attract and retain top talent if you have built a reputation for
taking good care of your workforce”.

Similarly, an Assocham Survey in India found that over 53% of corporate firms are
opting for yoga sessions at the workplace to boost productivity and reduce attrition
rate (Economic Times India, 2016).

Investment Market Driver: Social responsibility has been an aspect of investment for
a long time. Thus, firms that supported the Vietnam War in the USA were screened
out of the Pax World Fund and firms that supported the Apartheid Regime in South
Africa in the 1980s were screened out of other ethical investment initiatives
(Blowfield and Murray, 2011). More recently, Islamic Banking or even microcredit
institutions provide examples of such investment. There has been a dramatic growth
in global socially responsible investing (SRI) assets, rising 61% from 13.3 trillion
USD at the beginning of 2012 to 21.4 trillion USD at the outset of 2014, and the
fastest expanding regions for such investment being the USA, Canada, and Europe
(GSIA, 2015). Socially responsible investment involves the incorporation of extra-
financial factors into investment decision making, and a majority of money managers
and stock exchanges are increasingly giving attention to environmental, social and
governance (ESG) factors so as to improve returns and manage risks (Petersen and
Vredenburg, 2009; GSIA, 2015). The Myners Review in the UK in 2001 published a
list of investment principles for insurance firms and pension funds, which advocated
increased shareholder activism as necessary for ethical investment.

Investors want good financial returns and low risks, workers want good pay and
working conditions and the community demands good community services and
environmental protection. Business managers, who know well how different these
demands are, use CSR as a useful tool to mediate them. CSR is seen by the managers
as part of their competitive advantage, therefore while they strive to optimize financial
growth, they do not take any socially irresponsible actions to jeopardize the
company’s long-term profitability (Zhang et al., 2015).

Social drivers

Although pressures from consumers, employees and investors can also be considered
as social drivers (in addition to being market drivers) for CSR, pressure from NGOs,
media attention, general social expectations and business coalitions as more collective
social drivers are worth considering separately. We have already mentioned these in
Chapter 2 as part of our discussion of the historical trends in CSR, but they remain
important drivers to this day.
 Box 4.3 McDonalds and the Environmental Defence Fund

In the 1980s, public pressure forced McDonald’s to reduce its packaging and waste. The waste
McDonald’s generated included not only visible waste such as foam clamshells that protected
the burgers but also invisible waste generated in food preparation and supply systems.
Actually, 80% of McDonald’s waste is invisible waste.

In November 1990, McDonald’s formed a partnership with Environmental Defence Fund

(EDF) to replace their foam clamshell containers with paper packaging. In the following
decade, McDonald’s (by working with EDF) eliminated 300 million pounds of packaging
waste, recycled one million tons of corrugated boxes and reduced restaurant wastes by 30%
(EDF, 2017). Since then, other restaurants have followed and formed partnerships with EDF
to reduce wastes.

In 2005, the retail giant Walmart launched a partnership with EDF to reduce its environmental
footprint. Following the partnership with McDonald’s, EDF has also worked with top US
poultry suppliers to cut the use of antibiotics by 90% (ibid).

NGOs (including community groups, international advocacy organizations) have

worked by drawing public attention to the socially irresponsible behaviours of
businesses. Ironically, more and more NGOs and companies have entered into
partnerships with businesses to encourage, develop, manage and report CSR (Newell,
2000; Doh and Guay, 2006; Poret, 2014). For example, Coca-Cola Company and
World Wide Fund for Nature (WWF) have formed a partnership since 2007 to help
protect the world’s seven most important fresh water river basins. McDonalds
collaborated with the Environmental Defence Fund in 2010 to reduce the
environmental impact of its packaging (see Box 4.3).

The rise of radio and television during the 1950s and 1960s, with the associated rapid
coverage of major events such as the Civil Rights marches, has reinforced the role of
NGOs. More recently, we have seen the rise of social media which has become
known for its immediate, lasting and extremely public and participatory feedback.
When people are concerned about a company’s social and environmental performance,
social media helps amplify these concerns so that it is impossible for company
managers to ignore them. There are many examples of businesses being forced out of
irresponsible practices by a social media backlash. The Rana Plaza collapse in Savar
Upazila in Bangladesh provides one such example. The Plaza contained clothing
factories, shops, apartments and a bank. When cracks appeared in the building, the
shops and banks closed but the garment factory continued to operate from the
building. When the building collapsed, 1129 people working in the factory died and
approximately 2500 were injured. Following the collapse, companies that outsourced
from Bangladesh came under fierce criticism. This led UK and US retailers including
Walmart, Target, H&M, Zara, Macy’s, Abercrombie & Fitch and Gap to group
together and create a safety plan to improve factory safety in Bangladesh. In 2017,
there was a major uproar over United Airlines, which forced (using violence) a
passenger to deplane. The incident, which was captured on passenger mobile phones,
then went ‘viral’ increasing the pressure on the airlines to such an extent that they had
to refund tickets for all customers on the flight (Guardian, 2017).
In 2012, the Susan G. Komen foundation, the largest breast cancer organization in the
US decided to withdraw breast exam funds from Planned Parenthood due to political
pressure. It was immediately denounced by several editorials, women’s health
advocacy groups and politicians. New Yorker Mayor Michael Bloomberg pledged to
donate a matching grant of $250,000 to Planned Parenthood which at the same time
also received a gift of $250,000 from a foundation run by the CEO of Bonanza Oil Co.
in Dallas. Within 24 hours after news spread out on the internet, Planned Parenthood
received more than $400,000 from 6000 donors on top of the donations mentioned.
The furious public outcry forced the Susan G. Komen foundation to change its
decision in four days. In 2010, Greenpeace exposed Nestle by posting a viral video on
YouTube showing that its sourcing of palm oil from an Indonesian supplier that was
trashing the country’s rainforests to make room for palm oil plantations (Steel, 2010).
Within two months, Nestle suspended its sourcing from the Indonesian vendor and
adopted more proactive CSR strategies by working with Greenpeace.

In addition to incidents like the above, many global polls and surveys have begun
asking CSR related questions, so that business managers can no longer ignore public
opinion regarding CSR. Thus, public opinion (always important in the context of
customer views) has become exceptionally important because of the speed with which
news of business misdemeanours can now spread.

Governmental drivers

Although CSR has been traditionally defined as voluntary actions that companies take
to contribute to a better society and a cleaner environment, in recent years, many
governments have taken policy initiatives to encourage and promote CSR (Moon,
2004; Ward, 2004; Albareda et al., 2008; Steurer, 2010). Increasingly, new EU
communications on CSR no longer see CSR as voluntary. Instead it is emphasized
that every corporation should be responsible for the impact it causes (Martinuzzi et al.,
2011). The UN Secretary-General Kofi Annan remarked at the World Summit for
Sustainable Development (WSSD) organized by Business Action for Sustainable
Development in Johannesburg in September 2002 that:

“More and more we are realizing that it is only by mobilizing the corporate sector
that we can make significant progress. The corporate sector has the finances, the
technology and the management to make this happen” (WSSD, 2002).

Thus CSR is evolving into a new type of political relationship between governments,
businesses and civil society to promote responsible and sustainable business practices
(Albareda et al., 2008). Governments have been encouraging CSR through the use of
policies in two ways. First, governments can help raise awareness of issues, call for
responsible corporate actions, and build capacity amongst both companies and their
stakeholders for CSR engagement. Some developing countries (for example, India)
have gone further (see Box 4.4).
 Box 4.4 Government and CSR in India

In 2011, the National Voluntary Guidelines on Social, Environmental and Economic

Responsibilities of Business were introduced. These guidelines encouraged businesses to adopt
the triple bottom line approach and consisted of nine principles relating to ethics and
transparency, product life cycle sustainability, employee well-being, stakeholder engagement,
human rights, environmental stewardship, responsible policy advocacy, inclusive development
and consumer well-being.

In 2013, the Government of India passed the Companies Act which mandated that every
company over a certain size must set up a Corporate Social Responsibility Committee of the
Board consisting of three or more directors, at least one of whom should be an independent
director. Each company is expected to spend at least 2% of the average net profits it made
during the three immediately preceding financial years on CSR activities regardless of the
seriousness of the issue and whether or not companies have the capacity (Gajare, 2014). The
CSR Committee is expected to formulate these activities based on Schedule VII (which lists the
range of activities permissible including poverty eradication, schooling, gender equality, health
activities, environmental activities, etc.). If the company spends less than 2%, the Board has to
explain why this occurred. The 2013 Companies Act also suggests that communities should be
the focal point of such activities (Price Warehouse Coopers, 2013).

Section 80G of the Income Tax Act of India also grants tax benefits to Indian companies that
invest in community development projects.

In addition, there are a range of mandatory environmental standards including the Forest
(Conservation) Act 1981, Air (Prevention and Control of Pollution) Act 1986, and the
Environment (Prevention) Act 1986.

Second, governments can play a key role in improving the quality and dissemination
of companies’ CSR reports. They can help facilitate SRI which merges the concerns
of a broad range of stakeholders with shareholder interests. Finally, governments can
lead by example. They can, for example, adopt CSR management systems and audits
in government institutions, apply SRI principles to government funds, make public
procurement more sustainable, and report social and environmental performance of
government institutions (Steurer, 2010).

A very significant aspect of government CSR policy is, of course, its tax policy.
Taxation has become a significant issue in CSR, although arguably in terms of
highlighting how companies balance the financial commitments to society against
their claims of CSR. Multi-national companies in particular often look for low
corporation tax jurisdictions and some countries also provide inducements for
companies to re-locate there. At the time of writing, an ongoing example is provided
by Apple Corporation and its relationships with Ireland, a member country of the
European Union. The EU have investigated the relationship and came to the
conclusion that

“Ireland allowed Apple to create stateless entities that effectively let it decide how
much -- or how little -- tax it pays. The investigators say the company channelled
profits from dozens of countries through two Ireland-based units. In a system at least
tacitly endorsed by Irish authorities, earnings were split, with the vast majority
attributed to a ‘head office’ with no employees and no specific home base -- and
therefore liable to no tax on any profits from sales outside Ireland. The U.S.,
meanwhile, didn't tax the units because they’re incorporated in Ireland” (Sebag et al.,
2016).

Companies with a presence in many countries can move money around their
subsidiaries via a process called transfer price fixing. Subsidiaries based in relatively
high tax jurisdictions would provide their services or any products at a low or zero
cost to a ‘head office’ based in a low tax jurisdiction (see also Box 4.2 on the
Starbucks case). At the same time those ‘high tax’ subsidiaries would be charged a
high price for any services and products provided by the ‘head office’. The result is
that the ‘high tax’ subsidiaries would have little in the way of profit to declare to local
authorities, thus enabling them to minimise their taxes in this jurisdiction. While the
company still has to pay its taxes, of course, it has declared the bulk of its profits in a
low tax jurisdiction although the sales of its services and products did not take place
there. High tax jurisdictions lose out in terms of tax revenue while the low tax
jurisdiction does well, especially if it can attract many companies trying to do the
same. Such transfer pricing is of course not new and while it may appear to be counter
to any sense of business ethics it is as well to remember that many of these strategies
are not illegal and these companies may also have a requirement in law to minimise
their tax bill.

Globalization driver

Globalisation, which has variously been termed internationalisation, liberalisation,

universalisation, westernisation and de-territorialisation, has been a process of:

“widening, deepening and speeding up of worldwide inter-connectedness in all

aspects of contemporary social life, from the cultural, the financial to the spiritual”
(Held et al., 1999).

Globalization has decreased the time-space distance (Giddens, 1990) between

countries and has led to increasing standardisation especially in business activities
across the world. It has also been seen as a process of:

“intensification of cross-area and cross-border social relations between actors from

very distant locations, and of growing transnational interdependence of economic and
social activities” (Scherer and Palazzo, 2008, P415).

The actors here refer to the people, companies, and governments of different nations.
The drivers of globalization are international trade and investment, transport,
communication and information technology.

While globalization brings opportunities for many developing countries to access

developed country markets and export their goods, it has also led to business
exploitation of the under-developed world in terms of labour markets, social standards,
fiscal systems, and guardianship of natural resources (Moon, 2007). This has resulted
in public demonstrations at many of the WTO meetings (Seattle 1999 protests, for
example) or those of the World Economic Forum, held in Davos, Switzerland, each
year. More recently, there has been increasing concern that globalisation has resulted
in extremes of inequality across regions and sections of the population even in
developed countries, giving rise to anti-globalisation democratic outcomes in
elections across Europe and America in 2016.

Globalisation, and in particular the role of multinational enterprises, provide a push

towards a standardisation of CSR practices across the world. Some of this
standardisation has arisen through multinational enterprises (MNEs) and foreign
direct investment (FDI), increasing trade and the attendant need to meet international
regulations if goods/services are to be traded and some has arisen through the role of
international organisations like the UN, World Bank, OECD, the WTO and so on.
Globalisation might encourage CSR by spreading western business attitudes in
developing countries; because businesses which trade in foreign countries need to
build reputations as good citizens and also because there are more international
watchdogs (NGOs, ethical investment firms and even the World Bank etc.)
(Chambers et al., 2003).

MNEs have larger numbers of stakeholders than other firms and these stakeholders
are diversified based on how many countries they operate in. The expectations of
stakeholders with regard to the environmental and social performance of companies
have grown at different rates in different countries. So, MNEs have often reacted by
standardising these rules across countries because it is more efficient in the face of
varied expectations.

Some research indicates that MNEs are more careful about their CSR than companies
that operate in just one country and they are also sensitive to the local CSR agendas
because these companies operate in multiple cultures and operational environments,
and therefore have to respond to each hosting country’s own CSR expectations rooted
in their unique culture (Chapple and Moon, 2005; Morschett et al., 2010; Godiwalla,
2012). Analysing the impact of geographical diversification on social performance,
Brammer and Pavelin (2006) find that firms that are more geographically diversified
also have better CSR than firms operating in a single country. In particular, they find
that there is greater impact on community and environmental performance and almost
none on employee related aspects of social performance. This may be because norms
regarding labour standards are very well set out and most companies adhere to them.
Or because labour costs and regulations are one of the attractions of a region for a
firm and they are therefore less likely to compromise on them. Region specific
institutional pressures play a significant role in shaping CSR. In a later study,
Brammer et al., (2009) find that while internationalisation does not affect corporate
charitable giving, a firm’s presence in countries with social and political problems
increases charitable giving. But there are exceptions to this rule of MNE expertise and
capacity, and one case that provides us with much food for thought is the oil industry
in Nigeria (Box 4.5).

Should such a spread of CSR be welcomed? Muller and Kolk (2008) argue that global
strategy transmits pro-active CSR practices through the organisation but may result in
lack of ownership and nuance at local level. So, though the MNE can be seen as the
conduit through which CSR activities in host countries can be improved, the localised
strategy is more flexible and responsive. Studying the CSR practices of Mexican
subsidiaries of seven European MNEs, Muller and Kolk (2008) find that the
subsidiaries that see themselves as autonomous are more proactive in CSR. However,
these proactive CSR strategies tend to be largely in accordance with home country
CSR policies rather than host country policies. Similarly, Newson and Deegan (2002)
testing whether MNEs were responding to global expectations rather than meeting the
informational needs of people in their home countries found that there was very little
association between global expectations and the disclosure policies of MNEs. Thus,
home country standards were more important and perhaps this should not be all that
surprising given that this is where the MNE originated.

Box 4.5: Oil in Nigeria

Oil was discovered in Nigeria in the early years of the 20th century, while it was still a British
Colony, but commercial exploitation did not begin in earnest until the late 1950s. It now
accounts for a significant proportion of the country’s Gross Domestic Product (GDP) and the
economy is highly dependent on the price of oil. Most of the oil fields are in the south of the
country, primarily the delta of the River Niger, although there are some offshore fields. This
geographic concentration of oil fields in a few, highly populated, parts of the country has
resulted in a great deal of tension. While the country may be rich in oil its people have a
relatively low GDP per capita. There is significant inequality and the oil companies have
caused a great deal of environmental degradation.

Understandably communities in the delta region began to question the ‘benefits’ of the oil
industry and activists such as Kenule ‘Ken’ Saro-Wiwa took up the cause. Some of the
resistance became violent, and the Military Government in Nigeria during the 1990s took
brutal measures to suppress the ‘resistance’ to oil. Ken Saro-Wiwa, the face and voice of the
resistance although he never condoned violent opposition, was hanged by the government in
1995 after a show trial (Boele et al., 2001a,b).

The impacts of the oil industry in the Delta region of Nigeria became global news in the
1990s, especially after the hanging of Ken Saro-Wiwa. The reputations of oil companies
operating in the region such as Royal-Dutch Shell were significantly damaged by reports of
their involvement in the environmental damage and their perceived collaboration with the
Military regime. Shell is a large multi-national company and the reputational ‘hit’ they took
from the Niger Delta remains with them to this day, even though they have ramped up their
CSR in Nigeria and tried to limit their environmental damage to the region (Wheeler et al.,
2001).

The argument employed by Shell always seemed to be that they paid their taxes to the
government and it was up to the government to look after the communities. Unfortunately,
this does not hold-up that well when governance is weak and Shell paid the reputational price
(Ite, 2006).

International organisations like the World Bank, the UN and the OECD have
committed themselves to increasing adherence to CSR principles through initiatives
like the UN Global Compact (see Chapter 3) as well as the principles underlying their
own involvement in project countries. A study of CSR in Ghana (the Volta River
Authority), for instance, concluded that the main reason for CSR is external pressure
from international organisations like the World Bank (Rahaman et al., 2004). Civil
Society Organisations (CSOs) also work to promote CSR by providing information on
how CSR can be integrated into the business plan, facilitating best practise, building
networks and organising conferences. Many of these CSOs themselves receive funds
from international organisations and private foundations. Of course, this leads to
concerns about whether they are pushing a particular ‘Western agenda’ in developing
countries.

In an increasingly globalised world, CSR is therefore an outcome of links between

national systems and international systems. In fact, the UNGC has often been put
forward as a set of universal values upon which world business could be conducted.
The classic view of CSR, based on the assumption that firms have traditional societal
legitimacy, has changed with globalization. With the current incomplete and fragile
framework of international regulation, the negative consequences of business actions
have intensified due to globalization (Moon, 2007; Scherer and Palazzo, 2008). More
and more companies are regulating themselves by developing their corporate codes to
better articulate their CSR across the different countries that they operate in and
across their global supply chain (Kolk, 2005). Finally, pressure from the supply chain
is also a driver for CSR. Many companies, especially those in global supply chains,
have been imposing CSR standards on their business partners (suppliers and retailers)
through their supply chain assurance systems (Zhang et al., 2014).

Institutional Drivers

It should not come as a surprise that CSR depends at least partly upon the institutional
context of a country. We have seen above how governments, civil society
organisations, international organisations etc. drive CSR. We also saw in Chapter 2
that religion (an informal institution) has long influenced the role that businesses play
in society. In this section, we will consider the institutional drivers in more detail.
Countries are often classified into rule-based and relationship-based governance
environments by institutional theory (Dixit, 2009; Judge 2012). Rule based
governance environments are those where formal institutions are strong and in these
environments, monitoring CSR activities is likely to be effective. In relationship-
based environments, informal institutions (like community bonds, trust and religion)
are stronger. In these environments, therefore, CSR is more likely to manifest in
entirely voluntary philanthropic or community focussed activities. It is less likely to
be embedded in a new way of operating. It is therefore not surprising that in most
countries CSR began as philanthropy (at a time when societies were relationship-
based) and has developed into a whole new way of doing business (in rule-based
societies).

Testing whether rule-based or relationship-based societies tend to have higher CSR,

Li et al. (2010) find that industries in the manufacturing sector which face more
environmental, labour and societal issues are more likely to address CSR issues. They
also find that governance matters significantly and as countries shift towards more
transparent and accountable governance systems, they are likely to see increased CSR
communication intensity. Lattemann et al. (2009), in a study of 68 MNEs, suggest
that the pattern of CSR development varies amongst the emerging economies because
of differences in their governance structure. They find that Indian firms report on CSR
more than Chinese firms do because the former operate in a more rule-based
environment than the latter.

In addition to different historical trajectories, national differences in CSR can also

arise because of institutional differences across countries (capitalism vs socialism vs
communism, dictatorship vs democracy etc.) (Matten and Moon, 2004; Habisch et al.,
2005; Midttun et al., 2006). Of course, institutions are not standalone and they do not
fall into societies like manna from heaven. We saw in Chapter 3 that Gjolberg (2009),
in a cross-country study of CSR, found that consenualist and corporatist traditions in
the Nordic countries resulted in an increase in CSR.

As seen in Chapter 3, US and UK firms are very visible in many of the widely-quoted
CSR indices (DJSI, FTSE4Good and the Global Compact for instance). Of course,
there are a number of other kite marks and standards that firms subscribe to in order to
be seen as compliant with CSR and sustainability. The Goodweave mark in the carpet
making industry is one such kite mark and sees itself as:

“building awareness about the widespread use of child labour in the rug industry and
creating an effective certification system for child-labour-free-rugs”(Goodweave,
2017).

Similarly, the Fair Labour Association is a:

“collaborative effort of socially responsible companies, colleges and universities,

civil society organizations…..to create lasting solutions to abusive labor practices”
(Fairtrade, 2017)

On the environmental side, the International Organization for Standardization (ISO)

14000 is a set of standards which provides practical tools for companies to manage
their environmental responsibilities. ISO 14001:

“sets out the criteria for an environmental management system and maps out a
framework that a company or organisation can follow” (ISO, 2017).

As a guideline for social responsibility, ISO 26000 is a voluntary guidance standard

developed through a multi-stakeholder process for all organizations in all countries. It
aims to contribute to global sustainable development by encouraging business and
other organizations to practice socially responsible behaviour so as to improve their
impacts on their employees, their natural environments and their communities.
SA8000, modelled on ISO standards, is an auditable certification standard that
encourages all organizations in all countries to develop, maintain, and apply socially
acceptable practices in the workplace. It has eight performance criteria in relation to
child labour, forced and compulsory labour, health and safety, freedom of association
and the right to collective bargaining, discrimination, disciplinary practices, working
hours, remuneration.

Determinant factors of firm’s engagement in CSR

In the first half of this chapter, we considered the macro drivers of CSR. In this
section, we will consider the characteristics of firms that might be related with the
firm undertaking CSR. In particular, we consider the factors that incentivise CSR. Are
large firms more likely to engage in CSR or small firms? Do profits cause greater
spending on CSR or are they the outcome of such spending?

Firm size and CSR

There has long been an acceptance that smaller firms are less involved in CSR. In fact,
if asked directly, small firms are likely to respond that CSR is too hard or too
expensive (Jenkins, 2009; Grayson and Dodd, 2007) or even that they have more
immediate survival concerns and therefore cannot engage in it. By this reckoning, it is
only the large firms or even the MNEs that have the capacity to engage in CSR. Of
course, this might well arise from a misunderstanding of CSR and also of operations
of small to medium sized enterprises (SMEs). Almost all SMEs have an impact on
their local communities and environment, their employees, suppliers and consumers.
While they might have fewer stakeholders than large firms, they have closer relations
with these stakeholders. Most SME stakeholders are local and therefore small firms
are much more likely to be closely engaged with their communities and to be
paternalistic towards their employees. If this were true, we might expect small firms
to be more directly engaged in CSR than large firms.

To some extent therefore, the firm size-CSR relationship depends upon the way in
which CSR is defined. If it is defined as formal engagement with rules and regulations,
small firms may ‘fail’ the test because their engagement is largely informal. Second,
the ability of the firm to report on its CSR is crucial and in this larger firms have the
advantage. Small firms are themselves not homogeneous. There are some small firms
that engage in CSR-like activities because of the values and attitudes of their owners.
Others might accede to CSR norms because their customers (often large firms) require
it. Thus, in Kenya, many suppliers to UK supermarket chains have to conform to
labour codes of conduct. Of course, this need not always be the case. Many small
firms (often under price pressure from larger firms) have very poor labour practices
and employment conditions (long hours, poor wages and poor working conditions).
Given these variations in involvement as well as reporting norms, it is not surprising
that the empirical relationship between firm size and CSR is unclear.

Fry and Hock (1976) tried to find a relationship between firm size and the firm’s
social responsibility. They found that the bigger the firm (measured by sales, assets
and equity) the larger is the space in its annual report allocated to social responsibility
activities. However, firm size in Fry and Hock’s research was only considered to be
one of the factors that influences the firm’s social performance (the other factor is the
public image of the firm’s industry).

Since the 1990s, some scholars from the US and Europe have started to specifically
look at the firm size effect on CSR or solely on environmental responsiveness. In
recent years, such empirical analyses have been extended to include firms from
developing countries. Table 4.1 lists a number of the major studies that have focussed
on the relationship between firm size and CSR.

[insert Table 4.1 here]

Table 4.1 illustrates the diverse results of the effect of firm size on CSR. Some of
them suggest that there is a positive relationship between firm size and CSR: the
larger the firm, the more responsible it is. Fombrun and Shanley (1990) analysed
firms’ interactions with the public by focussing on 292 large U.S. firms included in
the Fortune MAC rating of the year 1985. They found that larger firms had higher
reputation ratings, leading them to conclude that larger firms would have higher levels
of corporate social performance. This is based, of course, on an assumption that the
Fortune MAC rating is a reasonable proxy measure of CSR. Their conclusion was
also supported by Pava and Krausz (1996) who examined a group of 53 US firms
which had been identified by the Council on Economic Priorities (CEP) as being
socially responsible over a period of 4 to 6 years, and compared the size of this group
with a control sample. The 53 socially responsible firms represented a diverse range
of companies. They came from 21 industries including food and related industry,
chemistry, apparel, furniture and fixture, paper, printing and publishing, rubber,
leather, electrical, transportation, communication, general merchandise, real estate,
business service, auto repair, recreation services, etc. They found that the socially
responsible firms in their study were significantly larger than the socially non-
responsible control group. In the UK, Moore (2001) also found a strong positive
association between firm size and social performance in eight firms in the UK
supermarket industry.

Why should firm size matter to CSR? Russo and Fouts (1997) suggested that large
firms have more resources with which they can facilitate the socially and
environmentally responsible activities. Henriques and Sadorsky (1996), on the other
hand, suggested that larger firms receive more attention from the public which may
encourage the firm to be more socially responsible. McWilliams and Siegel (2001,
p123) provided a further explanation that:

“when scale economies exist, large firms will have lower average costs for providing
CSR attributes than small firms”

Because the fixed costs of CSR will be spread over a larger output. This argument is
further supported by Knudsen (2011) who found that small firms are more likely to be
ejected out of the UN Global Compact, and by Gamerschlag et al. (2011) who
analysed the CSR disclosure of 130 listed German companies in the hope of finding
the determinants of their voluntary disclosure activities. The results from
Gamerschlag et al. (2011) indicated that company size, as measured by the number of
employees and total assets, does indeed affect the level of CSR disclosure; larger
companies disclosed more than smaller companies. Similar conclusions have been
reached by Wang et al. (2013) and Wang (2015) after investigating determinants of
the CSR disclosure of Chinese listed companies. In addition, Lepoutre and Heene
(2006) reviewed the previous research on the size-CSR relationship in the context of
small businesses. They concluded that, in general, small businesses experience more
difficulty than larger firms when practicing CSR because of:

 Cognitive barriers - small businesses do not recognize specific social

responsibility issues;
 Less pressure from external stakeholders; due to low visibility, small businesses
experience less pressure from external stakeholders to be socially responsible;
 Other constraints such as a lack of financial resources and power discourage the
small firms from taking social responsibility.

In contrast to the above, other studies have provided us with evidence that firm size
has no effect at all on CSR. For example McGuire et al. (1988) studied data covering
the period of 1983 to 1985 for 98 US firms. In a similar approach to that taken by
many other US authors, they used CSR data from the Fortune MAC rating, and
financial data from COMPUSTAT, a database of financial statistical and market
information on public-listed global companies throughout the world. They found a
small and insignificant positive correlation between CSR and total assets (firm size).
Waddock and Graves (1997) also found a statistically insignificant negative
relationship between firm size and CSR using three different measures for firm size
(total assets, total sales and total number of employees). Rojsek (2001) concluded that
there is no significant difference between small and large firms in their relative
perception of obstacles that affect environmental performance. Baumann-Pauly et al.
(2013) conducted a qualitative empirical study of CSR in both MNEs and SMEs in
Switzerland by triangulating semi-structured interview result with company
documentation and external stakeholder perspectives. They found that smaller firms
are not necessarily less advanced in the implementation of CSR than larger firms.
Based on the relationship between firm size and relative organizational cost, they
concluded that both MNEs and SMEs have their own advantages and drawbacks
when implementing CSR. Small firms possess several organizational characteristics
that are favourable for promoting the internal implementation of CSR practices in
core business operation. However, these characteristics constrain the external
communication and reporting of CSR. Larger firms, on the other hand, have some
characteristics that are favourable for promoting external communication and
reporting of CSR, but these may also constrain internal implementation.

Comparatively fewer studies have shown a negative relationship between firm size
and CSR. One example is provided by Stanwick and Stanwick (1998b) who
conducted an empirical study of 24 US chemical companies. However, it is interesting
to note that these same researchers had found the opposite result in another study in
the same year (Stanwick and Stanwick, 1998a).

Instead of finding a simple positive or negative relationship between firm size and
CSR participation, Udayasankar (2008) proposed a U-shape relationship between
them. He found that firms with different combination of operating scale, visibility and
resources access have different economic motivations for CSR participation, and that
very small firms are just as motivated as very large firms in participating in CSR
activities, while the least motivated ones are the medium-sized firms.

Overall, Table 4.1 leads us to conclude that a majority of studies do find that larger
firms have a better record of social responsibility than small and medium sized ones.
However, there are sufficient studies with no significant relationship and some with a
negative relationship that highlight that this is a complex area, and different
measurements of firm size and CSR contribute to this complexity.
Firm Profitability and CSR

In fact, as another influencing factor of CSR, corporate financial performance has

been increasingly discussed in the academic and business world. With the powerful
drivers for CSR (market, social, governmental, institutional and globalization) noted
earlier in this chapter, it is not surprising that companies have increasingly realized
that CSR is no longer a choice but an obligation. But CSR can be an expensive project
given that it may require dedicated staff to plan and manage it as well as other
resources required for new infrastructure (Hockerts, 2001). Since a firm’s primary
goal is to make profits, it is also not surprising that management is keen to assess the
relationship between firm growth and CSR to decide whether CSR is ‘worthwhile’ for
the firm and if so, how much should be spent on CSR or, more simply, whether
expenditure on CSR can be regarded more as an investment. These are important
questions and the reader will not be surprised to hear that this has been a strong focus
within CSR research.

Holmes (1976) also tried to identify the relationship between a firm’s financial
condition and its corporate social involvement and the perceived outcomes of this
CSR. Her results indicate that most executives thought that their firm’s CSR activities
were only partially decided by the economic condition of their firms and that they
could offer help if society required it. She also found that all executives believed that
CSR would help improve the reputation of their firm and social activities would bring
more positive than negative economic outcomes.

Research to date on the relationship between CSR and corporate financial

performance spans both theoretical and empirical studies. One of the most well-
known of these is Preston and O’Bannon’s (1997) study which provides a classic
typology for this relationship. Empirical research has focussed on testing the
hypothetical relationships and providing empirical evidence for management
decisions. Such studies have often employed the case study approach (Salzmann et al.,
2005) which we will cover in Chapter 5.

Typologies for the relationship between CSR and corporate financial performance

As mentioned earlier, empirical research into CSR started mostly in the 1970s in the
United States where some researchers were especially interested in the
operationalization of CSR. The 1980s saw the flourishing of this type of research
(Cochran and Wood, 1984; Carroll, 1999; Carroll and Shabana, 2010). Moskowitz
(1972) was the first to propose a positive relationship between CSR and corporate
financial performance. He calculated the stock returns of 14 firms with good social
responsibility credentials for the first half of 1972 and found that these 14 stocks had
appreciated above the market average. Thus Moskowitz argued that the “socially
aware corporation possesses the special sensitivity that will enable it to surpass
competitors” (p71). Since then many scholars have attempted to crystallise the nature
of the relationship between CSR and corporate financial performance. Cochran and
Wood (1984) reviewed the studies published up till the early 1980s and found no
conclusive result on this relationship. The same conclusion was also reached by
Ullmann (1985), Pava and Krausz (1996), Griffin and Mahon (1997).
Summarizing the state-of-play of research on the relationship between CSR and
financial performance, Preston and O’Bannon (1997) suggested six possible
hypothetical relationships based on causation of the relationship (positive or negative)
and direction of the causality (what leads to what) as set out in Table 4.2.

[insert Table 4.2 here]

Most of the hypotheses are intuitive and easy to follow. For example, the social
impact hypothesis can easily be explained by stakeholder theory, which is that
meeting the needs of various stakeholders would lead to favourable social
performance which enhances a company’s social image and reputation, thereby
generating positive economic benefits, and vice versa. The available funding
hypothesis also suggests a positive relationship between CSR and corporate financial
performance, with the direction of causation being from financial performance to CSR.
It is assumed that good financial performance may increase a firm’s ability to afford
programmes relating to broader social and environmental objectives, and it works
conversely. The trade-off hypothesis mirrors the classic Friedman view of CSR. It
states that social and environmental responsibility would involve financial costs. Of
course there are other possibilities i.e CSR and financial performance are synergetic.
That is to say companies can be socially more responsible at the same time as they
improve profitability (positive synergy), or reduce CSR and profitability
contemporaneously.

Only one of the hypotheses requires further explanation: the managerial opportunism
hypothesis. This occurs when business managers place their own interests above other
stakeholders, sometimes even the shareholders (Posner and Schmidt, 1992; Chalmers
et al., 2002). For example, when financial performance is strong, such a manager
might cut social investment expenditures to increase their own short-term private
gains. Conversely, managers might invest more on CSR during a time when financial
performance is poor to offset or justify the disappointing financial results in an
attempt to maintain his own or the company’s social image.

Preston and O’Bannon’s typology comprehensively describes the possible

relationships between CSR and financial performance and sets out a number of
hypotheses that can be tested. But it misses one important possibility; no relationship
at all between CSR and financial performance. McWilliams and Siegel (2001) call it a
neutral relationship. This neutral relationship between CSR and corporate financial
performance is based on a supply and demand model of CSR. That is to say, the ‘ideal’
level of CSR is determined by the cost and benefit of engaging in CSR but not the
financial performance of the firm. So to make the Preston and O’Bannon typology
better-rounded, Table 4.2 can be extended to Table 4.3.

[insert Table 4.3 here]

Empirical studies on the link between CSR and financial performance

As well as theoretical work outlined in the previous section, the relationship between CSR
and financial performance has been the focus of empirical research spanning a number of
decades. Table 4.4 summarizes some of this research (73 studies in total), including the data
sources and the results. You will be able to see that the findings are mixed. The majority of
the studies (51) suggest that there is a positive relationship between CSR and financial
performance, although the cause-effect (if any) may be complex. Of the remainder, 14 studies
suggest that there is no link at al between CSR and financial performance while 26 suggest
that it is negative. The latter suggests that the cost of CSR is not outweighed by any financial
benefits. We will return to this in Chapter 5 when we discuss methodological issues in CSR
research, but at this point we note that three methodological approaches have been employed
to empirically analyse the relationship between CSR and the firm’s financial performance:

1. Portfolio analyses
2. Event studies
3. Econometric approaches

Portfolio analyses usually compare the risk-adjusted returns of two mutually exclusive stock
portfolios with distinctive social and environmental performances. This involves the
estimation of alphas within multifactor models such as the Fama and French Three Factor
Model in most of the recent studies (e.g. Derwall et al., 2005; Bauer et al., 2005; 2007;
Kempf and Osthoff, 2007; Ziegler et al., 2011). However, portfolio analysis is not a good tool
for estimating the causal effects of isolated CSR-related events on corporate financial
performance, so event studies have been employed by some scholars to investigate the mean
stock returns for companies experiencing a specific positive or negative CSR-related event.

The impact of the event on the value of a company is measured so as to examine the CSR-
financial performance relationship (e.g. MacKinlay, 1997; Kothari and Warner, 2006). The
advantage of such studies is that they help the researchers to identify the causal direction in
the CSR-financial performance relationship. Oberndorfer et al. (2013) studied the impact of
the inclusion of German companies in the Dow Jones Sustainability index on stock
performance, Chollet and Cellier (2011) analysed the impact of Vigeo corporate social rating
(see chapter 3 for more information on both the Dow Jones Sustaianbaility Index and the
Vigeo rating) announcements from 2004 to 2009 on short term stock returns. Wright and
Ferris (1997) investigated the impact of the withdrawal of investment from South Africa.
Other researchers who employed the event study approach in their CSR research include
Hamilton (1995), Posnikoff (1997), Dasgupta et al. (2001), Gupta and Goldar (2005), Curran
and Moran (2007), etc. However, one weakness of this approach is that it only analyses short-
term effects of the event and the effects are limited to shareholders only (only the impact on
stock returns is assessed) (McWilliams et al., 1999; Arx and Ziegler, 2013). We will say
more about methodological issues such as these in Chapter 5.

More recently, therefore, econometric approaches (see Chapter 5) have become popular
methods for testing the CSR-financial performance relationship. Such studies take into
account both the long-term effect of CSR strategy and the interests of all stakeholders, not
just the shareholders. Once again, the results from these estimations vary depending upon the
particular CSR measure employed by the study and the particular measure of financial
performance used (see Table 4.5).
[insert Table 4.4 here]

We have already discussed the various measures of CSR that can be used in such studies in
Chapter 3. There are both single and multi-dimensional measures and researchers have used
both. In contrast to CSR measurement, measures of financial performance are relatively
straightforward but even so there are various measures that could be employed and
researchers do vary in terms of the ones they favour. For example, stock returns were used by
Filbeck and Gorman (2004) and Ziegler et al. (2007) as a financial performance indicator.
Accounting data such as earnings per share, return on assets, return on investment, return on
sales and return on equity have also been used as indicators of corporate financial
performance by Hart and Ahuja (1996), Russo and Fouts (1997), Waddock and Graves
(1997), McWilliams and Siegel (2000), King and Lenox (2001; 2002), Elsayed and Paton
(2005), Telle (2006), Becchetti et al. (2008), Guenster et al. (2011) and Ziegler (2012). After
reviewing 51 previous studies, Griffin and Mahon (1997) noted that 80 different indicators
have been used to measure financial performance. The list of financial measures that have
been used by researchers is set out in Table 4.5 along with the number of times that the
measure had been used in their sample of papers. The indicators range from growth to
profitability, risk/market measures, asset utilization and liquidity.

[insert Table 4.5 here]

The precise measure used by each researcher depends upon the data available to them and the
exact hypothesis that they are testing (Griffin and Mahon, 1997). Thus, hypotheses relating to
liquidity will require different measures from those relating to stock market returns, for
instance. Despite the wide range of measures of financial performance, only a few have been
used frequently. For example, 57 out of the above mentioned 80 financial measures have
been used only once in just one single study. It is therefore not surprising that the results
across studies are not comparable.

Thus, although considerable research has been undertaken to investigate the relationship
between financial performance and CSR, the findings are far from conclusive. In the 73
reviewed studies, 35 positive relationships, 13 negative relationships and 10 neutral
relationships were found. While the evidence to date can be regarded as indicative of a
positive relationship, but clearly there are other factors at play that cloud the story. For
example, Vance (1975) investigated financial performances of two groups of firms, one that
was regarded as having high levels of social and environmental performance by an officially
conducted survey and the other that was regarded as a group of low CSR performers by the
same survey, found a negative relationship between financial performance and CSR. Hence
Vance concluded that socially responsible firms are not necessarily good choices for
investment. But, other researchers do not agree with this conclusion. Preston and O’Bannon
(1997) investigated a group of 67 large corporations in the United States using CSR data
from Fortune magazine’s MAC rating list and financial performance data from
COMPUSTAT. They conducted 270 correlation analyses between CSR and financial
performance indicators in both prior and contemporaneous terms, and found no single
negative result.

Griffin and Mahon (1997) tested the relationship between CSR and financial performance in
the chemical industry using four sets of indicators to measure CSR, including the KLD index,
Fortune MAC rating, TRI database and corporate philanthropy. They also employed multiple
accounting indicators to assess the financial performance of the sample companies. From this
analysis, they conclude that there is a neutral relationship between CSR and financial
performance.

Even within a given study, some of the outcomes are contradictory. Both positive and neutral
results were found in four of the 73 studies (as indicated by shading in Table 4.4), and
positive and negative relationships were found in 13 of them (as indicated by bold type in
Table 4.4), while all three relationships (positive, neutral, and negative) were found in
Ziegler’s et al. (2007) study (as indicated by both bold and shading). By investigating the
connection between companies’ claimed social responsiveness and a few of the company’s
financial factors, size and the public image of the industrial sector in which the company
operates, Fry and Hock (1976) attempted to find out the drivers for the company’s
willingness to disclose their CSR activities in their annual report. A sample of 135 US firms
in 15 industries was investigated. Content analysis of the annual report was employed to
assess CSR, and financial performance was measured by assets, earnings, sales, and return on
investment. Fry and Hock also assessed the public image of each of the 15 industries by
consulting a group of business students regarding perceived social responsiveness of the 15
industries in question. After analysing the annual reports of the companies and counting
either the lines of prose or figures that contain evidence of social responsibility, Fry and Hock
found no obvious relationship between the social responsiveness of the firms and their
financial performance. However, the social responsiveness was found to be strongly
correlated to firm size and the public image of the industry that the firm belongs to.

Moore (2001) also tried to investigate the relationship between CSR and financial
performance in the context of the UK supermarket industry. By looking at the annual report
of each supermarket, he found that contemporaneous social and financial performance were
negatively related, but prior-period financial performance is positively related to subsequent
social performance.

The varied results of previous research regarding CSR-financial performance are both
intriguing and frustrating to researchers. There would appear to be a positive relationship
between CSR and profitability in some studies but not all. Many researchers have tried to
find the reasons for this inconclusiveness. As early as in the 1980s, Ullmann asked whether
there was enough theory to guide empirical research on the CSR-financial performance
relationship (Ullman, 1985). This question still stands today. To begin with, there is still no
consensus regarding the CSR definition and measures, and there are also multiple types of
financial performance data that are being used as we have seen. Secondly, there is inadequate
data relating to CSR measurement. These reasons are also agreed to by many other
researchers including Cochran and Wood (1984), Waddock and Mahon (1991), Wartick and
Cochran (1985), Wood (1991), Rowley and Berman (2000), Moore (2001), Gregory et al.
(2010), Cavaco and Crifo (2014), etc.

Rowley and Berman (2000) further pointed out that CSR measurement has been handicapped
by two fundamental flaws. First, CSR is inherently a multidimensional construct (see chapter
3), yet some researchers have been using single factor proxies (for instance using pollution
data alone) when carrying out empirical CSR-financial performance studies. In addition,
when some researchers used multidimensional data to measure CSR, they use a confused
mixture of uncorrelated variables, which makes correlation and ordinary least square
regression results inaccurate and misleading. Rowley and Berman proposed two suggestions
to address the existing problems in CSR-financial performance relationship research. First,
researchers should generate research questions based on a contingency approach. That is to
say, instead of just employing the traditional barefoot-empiricism (or ‘fishing’) approach
which simply involves scanning data for statistical patterns between CSR and financial
performance, researchers should conduct a sincere examination of the conditions under which
a positive or negative relationship is expected by frequently asking the question ‘under what
conditions…’ so as to force them to build theoretical models that can guide the empirical
investigations. For example, under what conditions are CSR and financial performance
related? What is the nature of the relationship? Second, CSR is a complex collection of
factors that do not mean the same thing in different contexts, the responsibilities of a specific
firm within the specified boundaries are determined by the unique characteristics of its
operational setting. So instead of trying to build a grand CSR theory, researchers should build
theory that is closely related to the operational setting, and perform empirical studies on that
specific area. However, with various reasons for the inconclusiveness being discussed, there
is an obvious need for more focussed research in this area.

Firm age, diversification, ownership and CSR

In the above sections, we have discussed in some detail the relationship between firm size,
firm profitability and CSR, both of which have been considered to be central factors
influencing CSR. In this section, we will discuss a range of other factors that have often been
considered by researchers including the firm’s age, its diversification and type of ownership.
Such factors can be hypothesised as being of importance in terms of their effect on CSR
because a firm’s “reputation and history of involvement in social responsibility activities can
become entrenched” (Roberts, 1992, p605). CSR is not a ‘once off’ engagement and any firm
that engages in CSR would be expected to be socially responsible in the long term. In
addition, it could be argued that over time firms discover what they are good at and learn how
to do things better, so age could help firms become more efficient in terms of how they
manage their social responsibilities (Ericson and Pakes, 1995). Some evidence exists to
support this assumption. Roberts (1992), for example, found a significant positive association
between the age of the firm after incorporation and social disclosure. Moore (2001) also
found a positive association between age and social performance in the UK supermarket
industry, as did Wang (2015) amongst Chinese listed companies.

Diversification is when a firm operates in multiple business areas for the purpose of reducing
vulnerability to market competition, increasing growth and profitability, or seeking
cooperation (Dooley and Fryxell, 1999). Dooley and Fryxell investigated 555 diversified
parent companies in the US Chemical industry in 1987 and found that subsidiaries of
conglomerates have higher pollution levels than less diversified firms because subsidiaries of
more broadly diversified firms seek to reduce their financial risk by investing in short-term,
low-risk projects and they do not have incentive to invest in long-term pollution control and
improve the manufacturing process, so diversification discourages the commitment of top
management to environmental protection, inhibits the implementation of environmental
policy and development of the environmental management system. However, McWilliams
and Siegel (2001) proposed a supply and demand model of CSR which views CSR as a form
of investment that allows the firm to differentiate its products. They hypothesized that a large,
diversified firm can spread the cost of CSR provision over many different products and
services and can lower the average cost of providing CSR attributes. They concluded that:
“the presence of scope economies in the provision of CSR attributes results in a positive
correlation between the level of diversification of a firm and the provision of CSR attributes.”
(McWilliam and Siegel, 2001, p124)

As the main player in any company’s strategic decision-making, the owners, be they
individuals or shareholders, are likely to be strongly involved in decisions relating to CSR.
Thus, the owner’s attitudes to CSR are likely to be crucial. Jin et al. (2008) investigated
Chinese food companies regarding their Hazard analysis and critical control points (HACCP,
a systematic preventive approach to food safety), and found that managers of food companies
with a fully operational HACCP system in place were better educated than those companies
without an HACCP system in place.

As part of this, it can be assumed that government ownership of a firm, even if partial, would
act as a catalyst for promoting CSR. Ghazali (2007) researched large and actively traded
stocks in Malaysia with regard to the ownership structure and CSR disclosure of the
companies. The results suggest that companies in which the director held a higher proportion
of equity shares (owner-managed companies) disclosed significantly less CSR information
than companies in which the government had substantial shares. The same conclusion was
reached by Sukcharoensin (2012) regarding the voluntary CSR disclosure of Thai listed firms.
Sukcharoensin also found that companies under mandatory disclosure requirements provide
more CSR information than voluntary disclosure firms. This result is confirmed by Wang et
al. (2013) after investigating Chinese companies regarding the determinants of their CSR
disclosure. Sufian and Zahan (2013), after investigating listed companies in Bangladesh,
found a positive relationship between the percentage of shares held by sponsors or the
government and CSR disclosure.

However, Sukcharoensin (2012) found a positive and significant relationship between CSR
disclosure and firms that have a more dispersed ownership structure. This can be explained
by agency theory which concerns the difficulties in motivating one party (the agent) to act on
behalf of another (the principal). In case of corporations, the management is agent and the
shareholders are the principal. Management and shareholders have different interests and
asymmetric information. Managers in firms with more dispersed ownership structure are
more likely to be opportunistic and this would create conflicts with the shareholders. The
outcome of this conflict would eventually be a higher level of disclosure and information
symmetries between the two parties. Oh et al. (2011) studied 118 large Korean firms with a
view to investigating the effect of ownership structure on CSR. They broke down the
shareholder ownership into three groups: institutional, managerial, and foreign ownership.
They found that different owners had different impacts on the firm’s CSR engagement. A
significant positive relationship was found between the company CSR rating and ownership
by institutions and foreign investors, while a negative relationship was found between the
CSR rating and shareholding by top managers.

Summary

In addition to exploring the definitions of CSR as discussed in Chapter 2 and its relationship
with sustainable development and means of assessment in Chapter 3, CSR scholars and
practitioners have tried to find empirical evidence regarding the drivers (or motivation)
behind adoption of CSR by businesses and the impacts that CSR has on them. We began the
chapter by considering the main drivers of CSR activity including market drivers, social
drivers, institutional drivers and globalisation as a driver. In addition, we consider empirical
evidence as to what CSR meant to businesses, whether is there a way to measure CSR and if
CSR would bring financial benefit to businesses. There is a large literature attempting to
analyse these issues and it has been found that the firm’s size, age, diversification and
ownership influence the firm’s level of CSR engagement. One of the most important of these
factors is firm profitability and while the literature on its relationship with CSR is wide
ranging, it remains inconclusive.

Further Reading

Hawkins D. E., 2006. Corporate Social Responsibility: Balancing Tomorrow’s Sustainability

and Today’s Profitability. Palgrave Macmillian.

McIntyre J. R., Ivanaj S., (ed.) 2009, Multinational Enterprises and the Challenge of
Sustainable Development, Edward Elgar.

Nicholls A., Opal C., 2005. Fair Trade. Market-Driven Ethical Consumption. Sage, London.

Tolhurst N., Pohl M., 2010. The A to Z of Corporate Social Responsibility. 2nd Edition. John
Wiley and Sons Ltd.

Discussion questions

1) Discuss the relationship between CSR and financial performance.

2) Discuss whether CSR should provide benefits for a business.
3) Discuss the drivers and factors that influencing a firm’s CSR performance.
4) Discuss the factors that influence a company’s decision to engage in CSR and its
selection of the type of CSR.

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