Topic: Corporate Social Responsibility and Financial Performance
Author: Vaishnavi Parkar
Impact of CSR on Investors.
Phang et al (2021) examine whether combined assurance communication can add incremental effect to the reliability of CSR information and thus increase investors’ decisions to invest in a company with negative trending financial information. They found that the effect of communicating combined assurance, as compared to when only CSR assurance is communicated, on increasing the reliability of non-financial information and investors’ willingness to invest is greater when the company’s financial performance is negative than when the company’s financial performance is positive. Their study contributes to the CSR literature by demonstrating that professional investors tend to rely more on information assured by combined assurance than traditional assurance for companies which present positive CSR information in order to protect against the effect of negative financial performance. The study also sheds light on professional investors’ processing of sustainability information. Social and environmental performance information is becoming more relevant to all companies’ financial performance. In terms of regulatory implications, their study provides experimental evidence to the standard setters, such as the IAASB Integrated Reporting Working Group, FRC Financial Reporting Lab, ASX Corporate Governance Council, and the International Integrated Reporting Council (IIRC), that both non- professional investors and professional investors with significant investment experience and expertise rely on combined assurance as a credibility-enhancing mechanism for companies with negative financial performance during critical times.
CSR and Financial Performance.
This study makes an attempt to examine the impact of CSR disclosure on ROA of NIFTY 50 Indian firms. The findings of the study revealed that CSR disclosure does not influence the financial performance of the sample firms. These results are not consistent with the prior literature, which mainly indicate a positive relationship between CSR disclosure and financial performance However, consistent with the few important studies (Fiori et al., 2007 and Galant and Cadez, 2017), this investigation is also report a neutral relationship between CSR disclosure and financial performance. These findings are unique and surprising because India is the only country with legislated CSR in the world. Moreover, this study suggests that Indian firms have taken initiatives for being corporate socially responsible and have publicly disclosed their efforts in their annual reports. However, sample companies seeing CSR disclosure as an extra cost burden. Thus, CSR does not generate economic benefits for the firms. This work is a contribution to CSR literature since it presents an investigation of the CSR-CFP relationship in India, an emerging market with increasing international visibility, where such kind of research is still absent. Finally, it is considered that this work may have implications for academics, managers and other stakeholders.
Material and Immaterial CSR Issues
Badia et al (2022) emphasizes that CSR is becoming increasingly important in the corporate arena, yet its expansion is dependent on the supply chain relationship (Chen et al ., 2019). Creditors exhibit a positive view of the long‐term perspective and stability that CSR implies, and also the local community, given its sensitivity to issues such as a good working climate or caring for the environment. On the other hand, CSR strategies may provide firms with a reduction of corporate risks related to environmental concerns. Firms concerned with environmental aspects are better equipped to deal with environmental requirements and to innovate in cleaner manufacturing processes. The participation of firms in ESG activities provides a stimulus to the mechanisms for building firms’ innovation capacity, which in turn has an impact on their performance levels. By improving CSR strategies and showing them to stakeholders, firms can enhance the reputation associated with the brand and increase their financial performance. Reputation is a bottom determinant in the relationship between CSR and financial performance of firms (Javed et al ., 2020). Reputation benefits consumer perceptions and tends to decrease consumers’ price sensitivity and increase their brand loyalty. They consider that materiality is important to both firms and investors, as it allows firms to focus their CSR strategies on the most important issues, and it permits investors to evaluate portfolio exposure to specific material and immaterial CSR risks and opportunities. In the European market, our results show that using different cut‐offs allows financial performance to be discriminated the ESG quality hierarchy moves to a priority in financial performance, and this is improved by using material issues. As for the US market, the evidence is less significant, although the relationship between ESG and financial performance improves when using material issues. Different results for the US and EU markets are in line with prior studies identifying cultural and ideological geographical differences affecting the financial performance of SRI portfolios. Their results confirm regional and cultural idiosyncrasies in SRI.
Corporate Social Responsibility, Tax Avoidance, and Earnings Performance
Watson (2015) In this paper considers the moderating effects of current and future earnings performance on the relation between CSR and tax avoidance. He used the data from a large sample of U.S. firms to investigate the possibility that earnings performance influences firms’ commitments to acting responsibly in the tax realm. He provides evidence that a lack of social responsibility is positively associated with tax avoidance when firms face low current or expected future earnings performance. This is consistent with poor earnings performance exacerbating a lack of attention to non-shareholder demands. Next, he finds that social responsibility is positively associated with tax avoidance when current earnings performance is low but not when it is high, evidence that resource constraints make firms unable and/or unwilling to apply their commitment to CSR to their tax planning. No other study has identified conditions under which U.S. firms’ CSR can inhibit tax avoidance, so this finding is important to CSR research because it exposes a condition under which CSR is socially beneficial through higher tax payments. It indicates that poor earnings performance precludes socially responsible firms from allocating resources to non-shareholders. He concluded that earnings performance moderates the relation between CSR and tax avoidance. His study highlights that the effects of CSR on corporate decisions are more precisely identified when considered in relation to other first-order drivers of corporate behavior, such as earnings performance. In particular, resource scarcity is an important moderator of the impact of CSR on firm behavior.
Casual effect of CSR.
Flammer, (2015) presents evidence on the causal effect of CSR on financial performance. on the causal effect of CSR on financial performance. To obtain exogenous variation in CSR, he exploits the passage of shareholder proposals on CSR that pass or fail by a small mar- gin of votes. The outcome of such close call proposals is as good as random and hence provides a randomized assignment of CSR to companies. Using an RDD methodology, He find that the adoption of close call CSR proposals leads to a significant increase in shareholder value by 1.77%. He also finds that the value gains are stronger for firms with relatively low levels of CSR prior to the vote. This suggests that CSR is a resource with decreasing marginal returns; i.e., the CSR–CFP relationship is concave. I then examine the mechanisms through which CSR increases shareholder value. He found that the passing of close call CSR proposals has a positive impact on operating performance (return on assets, net profit margin, and return on equity). When he further examined what explains the increase in operating performance, he found that the adoption of close call CSR proposals has a positive impact on labor productivity and sales growth. This evidence suggests that these proposals improve employee satisfaction and help companies cater to customers that are sensitive to sustainable practices. When he characterized close call CSR proposals, he found that compared with proposals away from the threshold—they are more likely to address employee satisfaction and the mitigation of environmental hazards. Also, a textual analysis of their support statement shows that they more frequently contain performance-related arguments. Finally, close call proposals are more frequently found among companies operating in “stakeholder-sensitive” industries, i.e., industries in which performance depends greatly on the relationship with employees and customers. These differences indicate that close call CSR proposals are more closely tied to performance, which may explain why they are value enhancing.
CSR and the Quadrants
Jackson et al (2009) states that the Corporate Socially Responsible and Financial Performance (CSRFINP) model proposes that a firm can be assessed and assigned a score based on its performance on predetermined CSR dimensions as well as it financial performance on predetermined financial criteria. Firms can fall into one of the model’s four quadrants based on their CSR and financial performance scores. If a company is pursuing purely financial initiatives and performs well on those initiatives, it will find itself in the black or the “Aggressive” quadrant. Conversely, if a company is a nonprofit entity and pursues purely social responsibility initiatives, then this company will be a truly “Green” company and be placed in the “Green” quadrant. Companies that perform well on both social responsibility and financial initiatives will fall into the “Blue” or progressive quadrant. Companies that underperform on both financial and socially responsible initiatives fall into the yellow or “Repressive” quadrant. and as such could be prone to subjectivity bias since it uses information, prepared by or distributed by the firm. While annual reports are audited and attested to for accuracy, CSR initiatives or data shared or revealed by corporations can be either under or over reported and are usually not verified by external entities. In this regard, the model is developed under the assumption that all financial records used are accurate and reliable, and that the CSR initiatives reported by the company are accurate, honest and precise. If such information is not accurate, it could skew the overall placement of a company on the model. Caution should also be exercised based on the age of the company. For example, it is conceivable that companies that have existed for long periods will be more financially stable that those that recently entered the marketplace.
Manufacturing firms and CSR
Farhan et al (2022) in their report state that the concept of CSR has become a topic of great interest to many as it has become a popular topic of discussion among practitioners, academics, and administrators. The core aim of this empirical inquiry was to determine the financial implications of the social responsibility expenditure of Indian manufacturing enterprises. Along with that their investigation sought to unearth the impact of the Covid-19 outbreak on the financial performance of Indian enterprises. They derived our data from the IQ Prowess repository for the period from 2014 to 2020. Earnings after taxation was classified as the response variable, CSR is the independent variable whilst leverage and enterprises’ size were considered as the control variables. We adopted a fixed regression approach to scrutinize the dataset. The outcome of their empirical analysis established that enterprises’ expenditure on social responsibility schemes creates a positive and significant influence on financial efficacy. Based on the above observation, they suggest that; for enterprises to attain a competitive edge and improve their long-term financial efficacy, social aspects of their operational environment should be incorporated into their core business strategy. The more manufacturing companies spend on social activities, there more they create business goodwill and overall brand awareness. Such goodwill and awareness ultimately attract customers and consumers leading to improved operational prospects and financial performance.
Measurement Approach
Nizamuddin (2018) emphasizes that despite myriad empirical investigations on the nature of relationship, the literature has been unsuccessful in providing conclusive results. All the approaches of CSR performance measures are found to be biased in investigating the positive relationship between CSR and CFP. These problems and shortcomings can be overcome through precautions as researchers’ subjectivity can be overcome by retrieving data from standardized CSR reports. Ramanathan (1976) articulated that corporate social accounting should be implemented with the aim of providing required information about firm’s social performance systematically, even though we today fail to iron out the problem of accepted CSR reporting standards. However, many standardization initiatives are in progression worldwide, e.g., Global Reporting Initiative (GRI), United Nation’s Global Compact Communication of Progress, Accounting Ability’s AA1000 and ISO 26000. The potential solution to the problem of biasness in responses by the respondents is mandatory disclosure of information. Thus, firms publishing stand-alone CSR reports have increased drastically (Dhaliwal et al (2012), though in most of the countries CSR disclosure is still not mandatory (Tschopp and Nastanski, 2014). In the European Union, the new directives on disclosure of non-financial and diversified information have been mandated into effect from 2017 (European Parliamentary Council, 2014), whereas India has already made enactment of mandatory disclosure under the Companies Act,2013 (GOI, 2013). The review of operationalization and measurement approaches for the CSR concept reveals that all the methods deployed in empirical literature suffer from some shortcoming that may potentially influence the investigation of CSR-CFP relationship. It was found in the literature that the problems inherent in most of the approaches are researchers’ subjectivity and selection bias. Researchers argue that the potential solution for the former is standardization of CSR reporting, and that for the latter is mandatory disclosure of CSR information. In this way standardization and disclosure will not only be beneficial for testing the validity of CSR CFP relationship but also for taking decisions and making policies by policy makers and various stakeholder groups.
Decision makes and Policy makers.
Wang et al (2022) concludes that the findings of this study have several practical implications for firms’ decision‐makers and policymakers. For decision‐makers, first, their results show that low and high levels of CSR may impact CFP negatively and that only a moderate level of CSR can result in improved CFP. The results suggest that the core question for decision‐makers is not to ask whether CSR can improve or harm CFP but rather to investigate the range of CSR that can benefit firms the most. Their research provides firm managers with useful criteria to manage the amount of resources invested in CSR activities; namely, CSR activities should exceed the stakeholder reward threshold but should not surpass the threshold at which the sharp raising opportunity costs and agency costs can harm CFP. Second, the moderating effects of firm size and industry dynamism help decision‐makers answer the question of who can receive more benefits from CSR in further detail. The findings of this study suggest that firms operating in more dynamic industries and smaller firms have more profound positive slopes at a moderate level of CSR. Therefore, it would be helpful for these firms to engage in active CSR activities to realize the associated financial benefits fully.
Moreover, their findings can also provide practical implications to policymakers to allow them to produce a win–win situation for both stakeholders and firms. The results show that CSR that can attract stakeholder attention and satisfy stakeholder expectations may be rewarded with critical resources. Therefore, on the one hand, policymakers should create effective policies to improve informational transparency regarding CSR to ensure that stakeholders have full access to firms’ CSR information. Based on this information, stakeholders can evaluate firms’ CSR activities and either reward or punish firms. Thus, transparency can ensure that firms’ active CSR activities can be rewarded by stakeholders. On the other hand, policies should be developed to enhance the accountability of firms’ CSR information. Stricter policies should be implemented to require firms to disclose CSR concerns as well as CSR strengths, encourage firms to abide by international CSR reporting standards, and incentivize firms to verify their CSR reports in collaboration with independent nongovernmental organizations (NGOs) or accounting firms. The enhancement of CSR information accountability can encourage firms to engage in noteworthy CSR activities to satisfy stakeholder expectations.
CSR for Stakeholders Benefits.
Licandro et al (2024) concludes the confirmation of the results obtained in numerous studies carried out previously, which found a positive relationship between CSR and financial performance. This study is an aid to those who manage companies and to organizations that promote CSR. Firstly, it ratifies the argument that including CSR might prove profitable for companies. Secondly, it informs that such positive effects of CSR are not automatic, requiring companies to generate previously or simultaneously the satisfaction of their main stakeholders. This is a very important aspect, for it indicates that CSR is a management philosophy based on the proper functioning of the typical components of adequate management. Thirdly, demonstrating that the relation functions in all types of companies is very important because the corporate world tends to think that including CSR is only possible in large-size companies.
To measure stakeholder satisfaction, it was decided to focus on the four stakeholders more directly related to the company, namely shareholders, employees, customers and suppliers, for they are the ones with greater exposure to the externalities that generate satisfaction or dissatisfaction. The same question was used for the financial performance indicators. In this case, the term company’s results referred to the satisfaction of each of these stakeholders. An index was defined for the satisfaction of each of them. These indices were evaluated with the same scale used for both profitability and sales. Data were also included concerning some of the companies’ segmentation variables, such as company type (public or private), origin of capital (domestic or international), size, field of activity, and years in the market.
Conclusion
Today, more and more firms are embracing the concept of CSR, since firms that embrace and implement. CSR initiatives have been found to have a positive impact on the choices made by the firm’s key stakeholders in deciding to enter a relationship with the firm, especially Consumers However, in general, there has been a lack of consensus regarding the relationship between a firm’s CSR initiatives and its financial performance. One line of reasoning is that rather than being complementary, the CSR initiatives of a firm and its financial performance are in fact business trade-offs. According to this, firms that engage in CSR initiatives are in fact at an economic disadvantage compared to other firms, since they incur costs to implement such initiatives. On the other hand, others have argued that implementing CSR initiatives will be beneficial since it can improve employee morale which leads to improved productivity and ultimately improved performance. Stakeholders such as employees, consumers, investors etc do lookup to the CSR activities of the firms they want to invest in. Financial performance is no longer the lone aspect taken into consideration while investing in the firms but reputation, goodwill, customer satisfaction and the social activities of the firm are also being considered. CSR contributes a lot to the reputation and goodwill of the firm. Now, whether CSR can cause the firm to grow financially is still a debatable topic.
References
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