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Opinion Vol. 2, No. 1, June 2012

Stakeholders Insight Towards Impact of Organisations CSR Policy on Financial Performance: An Exploratory Study in Indian Context
Dr. Rajbir Singh* Sunita Pachar**

Abstract
The concept of social responsibility of corporations has engendered considerable interest in India in recent years. Nevertheless, there remains a protracted debate about the legitimacy and value of corporate responses to CSR concerns. There are different views of the role of the firm in society and disagreement as to whether wealth maximization should be the sole goal of a corporation. While previous research on the relationship between corporate social responsibility and financial performance has largely been based on international data, this paper examines the relationship between the adoption of corporate social responsibility and the financial performance in Indian context. Using extensive data from 300 Indian stakeholders this study explores the relationship between corporate social responsibility and financial performance. The relationship is tested by using empirical methods. The results indicate that relationship is positive and statistically significant; supporting the view that socially responsible corporate performance can be associated with a series of bottom-line benefits. Keywords: Corporate Social Responsibility, Economic Value Added, Socially Responsible Investment and Environmental Performance

Introduction
The field of corporate social responsibility has grown exponentially in the last decade. There is currently a debate on the extent to which company directors and managers should consider social and environmental factors in commercial decision making. An approach to decision making that routinely encompasses these factors

may be described as corporate social responsibility. Organizations are profit maximizing entities. However, with changing structure of the business environment, the role of organizations has changed dramatically. An increasing number of shareholders, analysts, regulators, activists, labor unions, employees, community organizations, and news media are asking companies

*Professor & Chairman, Deenbandhu Chotu Ram University, Murthal (Sonepat), Haryana **PhD Research Scholar, Deenbandhu Chotu Ram University, Murthal (Sonepat), Haryana

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to be accountable for an ever-changing set of CSR issues. There is increasing demand for transparency and growing expectations that corporations measure, report, and continuously improve their social, environmental, and economic performance. Today, organizations are an intrinsic part of social life. Sunder (1997) has proposed a broader definition on the role of organizations, describing them as being a set of contracts among employees, customers, managers, shareholders, suppliers, auditors etc. This definition directs organizations to be socially responsible. Hence organizations are social agents contracting with other agents, as a part of chain; their aim goes beyond simple profit-maximization. A view is emerging that corporate social responsibility can contribute to the financial performance of a company. This approach, which has been described as the enlightened shareholder approach, suggests that corporate decision-makers must consider a range of social and environmental matters if they are to maximize long-term financial returns.

The Business Case for CSR

It is difficult, in either statistical or quantitative terms, to make a strong causal link between CSR actions and such financial indicators as share prices, market value, return on assets invested and economic value added (EVA). Companies that are socially responsible in making profits also contribute to some, although obviously not all, aspects of social development. Every company should not be expected to be involved in every aspect of social development. That would be ludicrous and unnecessarily restrictive. But for a firm to be involved in some aspects, both within the firm and on the outside will make its products and services (for example financial services) more attractive to consumers as a whole, therefore making the company more profitable. There will be increased costs to implement CSR, but the benefits are likely to far outweigh the costs. What most commentators have done up to now is to argue, qualitatively, that there is a business case. There are following main issues: Equity created in a companys reputation or brand can easily be harmed or even lost. This is particularly
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the case for companies whose brand equity depends on company reputation. Reputation is built around intangibles such as trust, reliability, quality, consistency, credibility, relationships and transparency, and tangibles such as investment in people, diversity and the environment. There is a wider impact as public expectations grow of greater CSR as a result of the heightened public debate on the benefits and shortcomings of globalization and the perceived role of business in this process. For example, installation of energysaving (climate friendly) technologies may generate long-term cost savings that outweigh upfront costs. In some cases socially beneficial actions may yield an increase in revenue. Access to financing is an issue since, as will be seen below, the market for socially responsible investment (SRI), though still relatively small, is growing. This increase is a result of the growing support for the business case for CSR, together with regulatory (for example, United Kingdom pension funds), market and societal pressure. These trends are also supported by the creation of new financial indices, such as the FTSE4Good and the Dow Jones Sustainability Index (DJSI), which publicly rank major international companies according to their environmental and social performance. CSR is an important factor for employee motivation and in attracting and retaining top quality employees. Firms may choose to go beyond full compliance with environment, health, or safety laws in order to improve their position in current or future regulatory negotiations. By doing so, they may be able to deflect or influence future regulation or deflect enforcement of existing regulation. It is easy to think of goods and services that are differentiated along environmental lines, such as clothing made of organic cotton, or wood from forests managed in accordance with some principles of sustainability. Socially beneficial actions could also generate goodwill, improving reputation and sales. Better risk management can be achieved by indepth analysis of relations with external
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stakeholders. Factors such as new technologies and changing societal, regulatory and market expectations are driving companies to adopt a broader perspective when analyzing the range of risks that they may encounter. CSR also helps in compliance with regulation and the avoidance of legal sanctions, while the building of relationships with host governments, communities and other stakeholders can enhance a companys reputation and credibility and be of vital importance should it encounter difficulties in the future with regard to its investment decisions. This paper presents some preliminary findings about the relationship between the adoption of corporate social responsibility and the financial performance and identifies opportunities for further quantitative research in this area.

Empirical Studies of CSR and Financial Performance

According to Margolis and Walsh (2002), one hundred twenty-two published studies between 1971 and 2001 empirically examined the relationship between corporate social responsibility and financial performance. The first study was published by Narver in 1971. Empirical studies of the relationship between CSR and financial performance comprise essentially two types. The first uses the event study methodology to assess the shortrun financial impact (abnormal returns) when firms engage in either socially responsible or irresponsible acts. The results of these studies have been mixed. Wright and Ferris (1997) discovered a negative relationship; Posnikoff (1997) reported a positive relationship, while Welch and Wazzan (1999) found no relationship between CSR and financial performance. Other studies, discussed in McWilliams and Siegel (1997), are similarly inconsistent concerning the relationship between CSR and short run financial returns. The second type of study examines the relationship between some measure of corporate social performance (CSP) and measures of long term financial performance, by using accounting or financial measures of profitability. The studies that explore the relationship between social
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responsibility and accounting-based performance measures have also produced mixed results. Cochran and Wood (1984) located a positive correlation between social responsibility and accounting performance after controlling for the age of assets. Aupperle, Carroll, and Hatfield (1985) detected no significant relation between CSP and a firms risk adjusted return on assets. In contrast, Waddock and Graves (1997) found significant positive relationships between an index of CSP and performance measures, such as ROA in the following year. Studies using measures of return based on the stock market also indicate diverse results. Vance (1975) refutes previous research by Moskowitz by extending the time period for analysis from 6 months to 3 years, thereby producing results which contradict Moskowitz and which indicate a negative CSP/CFP relationship. However, Alexander and Buchholz (1978) improved on Vances analysis by evaluating stock market performance of an identical group of stocks on a risk adjusted basis, yielding an inconclusive result.

Hypothesis
In our study, the sign of the relationship between corporate social responsibility and financial performance is tested. The sign may imply negative, neutral or positive linkages. The argument for a negative relationship follows the thinking of those such as Friedman (1970) and other neoclassical economists. According to their view, socially responsible firms have a competitive disadvantage (Aupperle et al., 1985), because they incur costs that fall directly upon the bottom line and reduce profits, while these costs could be avoided or borne by individuals or the government. On the other hand, many empirical results reveal no significant relationship between CSR and financial performance. According to this line of thinking (e.g., Ullman, 1985), there are so many variables that intervene between the two that a relationship should not be expected to exist. The third view proposes that there is a positive linkage, since the actual costs of CSR are covered by the benefits. A firm that attempts to decrease its implicit costs by socially irresponsible behavior-by, for example, neglecting to take measures against pollution-will eventually incurs higher explicit costs. Socially responsible companies
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have less risk of negative events. It is less likely for these companies to pay heavy fines for excessive polluting, to have costly lawsuits against them, or to experience socially negative events that would be destructive to their reputation. Theoretically, if there could be two identical companies, where the one is socially responsible and the other is not, it should be expected that the former would have less downside risk for value and encounter fewer events which would be detrimental to its line of profit. In the present study, empirical techniques will be used to identify the sign of the relationship. Therefore following hypothesis can be framed after reviewing the literature review

policy and its impact on financial issues. For this it was decided that the right mode of approach could be a combination of surveys which is a mix of exploratory and descriptive research. To be more specific the paper will focus on achieving the following objectives. 1. To know the stakeholders perception about Social responsibility and financial performance 2. To know whether Organization has Pressure from investors being socially responsible

Research Methodology
This study is based on Primary data gathered with the help of questionnaire. Data was collected from 300 Indian stakeholders who comprised of company employees, customer, shareholder and community. Random sampling method has been used for the study.

Hypothesis of the Study

H0(1): There is no significant difference between perception of Stakeholders as company employees, customer, shareholder and community regarding Social responsibility and financial performance are positively core related. H0(2): There is no significant difference between perception of Stakeholders as company employees ,customer ,shareholder and community that for Being socially ,ethically and environmentally responsible is linked to organisational success H0(3): There is no significant difference between perception of Stakeholders as company employees ,customer ,shareholder and community that Shareholder expectations from business organizations are changing as Shareholders expecting more disclosure of performance of social responsibility H0(4): There is no significant difference between perception of Stakeholders as company employees, customer, shareholder and community that socially responsible organization can easily attract and retain investors

Reliability
The data so collected was tested for its reliability and validation. The Cronbach alpha was calculated for the data and value for the same has been 0.93. Since the calculated value is higher than 0.5, therefore it shows that data and construct of the study are valid and reliable.

Results and Discussion

The data has been analyzed in view of the objectives and hypotheses outlined above in the study. The researcher collected demographic details of the respondents comprising gender, age and profession status. According to gender category respondents comprised of 51 % Male, 49% respondents were Female. According to age 41 % respondents belongs to the age group of below 30 years, 36 % respondents belongs to the age group of 31-40, 18% respondents belongs to the age group of 41-50 and 5% respondents belongs to age group of above 50 years. According to profession wise 25% respondents belongs to Company employees , 25% belongs to Customers , 25 % belongs to Shareholders and 25% respondents belongs to Community or other stakeholder As the study are exploratory in nature, therefore for the purpose of analysis, the techniques of Average and ANNOVA have been used.
Opinion: International Journal of Management

Objectives of the Study

The purpose of the paper is to understand the Stakeholders perception about organizations CSR
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Respondents Perception Regarding Social Responsibility and Financial Performance is Positively Core Related Table 2 shows that 64% stakeholders have favorably perceived that Social responsibility and financial performance is positively core related, 20% stakeholders were not agree whereas 16% were found neutral about the statement .Table further reveals that mean values of the responses towards the social responsibility and financial performance are positively correlated were found as company employees 3.45, customer 3.60, shareholder 3.77 and community mean score 3.36. Results shows that shareholders mean score is highest it means that shareholders thinks that social responsibility has positive impact on companys financial position. Significance level taken for analysis is .05 level of significance. It is noticed that stakeholders does not differ significantly. As the f-value (F= 2.357, p > .05) is not significant at .05 level of significance. Therefore the null hypothesis, i.e. There is no significant difference between perception of Stakeholders as company employees, customer, shareholder and community regarding Social responsibility and financial performance are positively core related stands accepted and it can be said that Indian respondents thinks that social responsibility has a positive impact on organizations financial performance . Respondents Perception Regarding Being Socially, Ethically and Environmentally Responsible is Linked to Organizational Success Table 3 depicts the perception of stakeholders regarding being socially, ethically and environmentally responsible is linked to organizational success. The results highlights 70% stakeholders were found agree , 19% respondents were disagree and 11% respondents had no idea that organizations who are involved in social ,ethical and environment responsibility are more successful .The results further indicates that mean values of stakeholders regarding the statement are company employees 3.57, customer 3.75, shareholder 3.80 and community mean score 3.73. significant level taken for analysis is .05 level of significance .ANNOVA values found (F=.574,P> 0.05) which shows that respondents does not differ
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significantly or we can say that all respondents have more or less same opinion about the statement therefore the null hypothesis There is no significant difference between perception of Stakeholders as company employees, customer, shareholder and community that for Being socially ,ethically and environmentally responsible is linked to organisational success is accepted . Respondents Perception Regarding Shareholder Expectations from Business Organizations is Changing as Shareholders Expecting More Disclosure of Performance of Social Responsibility Table 4 reveals that 64% respondents have favorably perceived that shareholders expectations from business organizations are changing as Shareholders expecting more disclosure of performance of social responsibility, 22 % respondents were not agree and 14 % respondents said they had no idea whether shareholders expectations from business organizations are changing or not changing. Furthermore, ANNOVA was applied to check the differences in stakeholders perception. Results shows mean value towards the results are company employees 3.56, customer 3.43, shareholder3.61 and community mean score 3.63, which exhibits that the community and shareholders have more concerned towards the changing scenario. The ftest ( F= .503, p > 0.05) shows that respondents does not differ significantly therefore the null hypothesis There is no significant difference between perception of Stakeholders as company employees ,customer ,shareholder and community that Shareholder expectations from business organizations are changing as Shareholders expecting more disclosure of performance of social responsibility stands accepted . Respondents Perception Regarding Socially Responsible Organization can Easily Attract and Retain Investors and Business Partners and can Reduce Financial Risk Table 5 exhibits that 68% respondents were in favor that socially responsible organization can easily attract and retain investors and business partners and can reduce financial risk,20 % respondents were not agree
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with this and 12 % respondents said that they had no idea that socially responsible organization can easily attract and retain investors and business partners or cant. Table further reveals that mean values of responses of the respondents regarding the statement are company employees 3.67; customer 3.48, shareholder 3.69 and community mean score 3.75, which shows that social responsibility has positive impact on organization and they can easily attract and retain investors and business partners and can reduce financial risk. The ANNOVA results shows that ( F=.840, p>0.05) there is no significant difference between the stakeholders perception therefore the null hypothesis There is no significant difference between perception of Stakeholders as company employees, customer, shareholder and community that socially responsible organization can easily attract and retain investors is accepted and it can be said that stakeholders have more or less same perception that socially responsible organization can easily attract and retain investors and business partners and can reduce financial risk.

as employee relations, environmental concerns, or community relations. Financially strong companies can afford to invest in ways that have a more long-term strategic impact, such as providing services for the community and their employees. Those allocations may be strategically linked to a better public image and improved relationships with the community in addition to an improved ability to attract more skilled employees. Companies that adopt the CSR principles are more transparent and have less risk of bribery and corruption. In addition, they run less risk of having to recall defective product lines and pay heavy fines for excessive polluting. They also have less risk of negative social events, which could damage their reputation and costs millions in information and advertising campaigns or litigation. Nevertheless, the findings indicate that CSR is positively related to better financial performance and this relationship is statistically significant, supporting, therefore, the view that socially responsible corporate performance can be associated with a series of bottomline benefits.

Conclusions and Implications

There is an extensive debate concerning the legitimacy and value of being a socially responsible business. There are different views of the role of a firm in society and disagreement as to whether wealth maximization should be the sole goal of a corporation. Most people identify certain benefits for a business being socially responsible, but most of these benefits are still hard to quantify and measure. This study attempts to address the question whether corporate social performance is linked to financial performance. Using empirical methods, we tested the sign of the relationship between corporate social responsibility and financial performance. Arguments exist that support the view that firms which has solid financial performance have more resources available to invest in social performance domains, such

Future Research
Future research in this area could proceed in a number of directions. First, more extensive studies are needed to explore the causal mechanisms linking CSR to profitability and to determine whether or not those relationships hold consistently over time. The source of the connection between CSR and profitability has rarely been systematically investigated. It is also important to posit the timing in the relationship, since it would be valuable to investigate and to ascertain how long it takes for the impact of CSR on financial performance to be revealed. For the above to be realized, more data on CSR should become available. The reliability of the CSR data is also an important issue, as data from different sources have significant differences regarding how to evaluate the CSR performance of a firm.

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References 1. Alexander, G. J., and Rogene A. Buchholz (1978).Corporate social responsibility and stock market performance. Academy of Management Journal, 21 (3), 479-486. 2. Aupperle, K. E., A. B. Carroll, and J. D. Hatfield (1985), An empirical examination of the relationship between corporate social responsibility and profitability, Academy of Management Journal, Vol.28 (2), pp. 446-463. 3. Cochran, P. L., and R. A. Wood (1984), Corporate social responsibility and financial performance. Academy of Management Journal, Vol. 27 (1), Vol. 42-56. 4. Epstein, M J. and Freedman, M. (1994), Social disclosure and the individual investor, Accounting, Auditing & Accountability Journal, vol. 7, no. 4, pp. 94-109. 5. Friedman, M. (1970), The social responsibility of business is to increase its profits. New York Times Magazine, September, Vol.13, pp. 32-33 6. Hillman, A. J., and G. D. Keim (2001), Shareholder value, stakeholder management, and social issues: Whats the bottom line?, Strategic Management Journal, Vol. 22 (2),pp. 125-139. 7. Martin, R. (2002) The virtue matrix: Calculating the return on corporate responsibility, Harvard Business Review, March 2002. 8. McGuire, J. B., A. Sundgren, and T. Schneeweis (1988), Corporate social responsibility and firm financial performance, Academy of Management Journal, Vol. 31 (4), pp. 854- 872. 9. McWilliams, A., and D. Siegel (2000), Corporate social responsibility and financial performance: Correlation or misspecification?, Strategic Management Journal, Vol.21 (5)pp. 603-609. 10. Moskowitz, M. (1972), Choosing socially responsible stocks, Business and Society Review, Vol.1,pp. 71-75. 11. Roman, R. M., S. Hayibor, and B. R. Agle (1999), The relationship between social and financial performance, Business & Society, Vol. 38, pp. 109-125. 12. Turban, D. B., and D. W. Greening (1997), Corporate social performance and organizational attractiveness to prospective employees. Academy of Management Journal, Vol. 40 (3), pp. 658-672. 13. T. Donaldson and L. Preston, (1995) The Stakeholder Theory of Corporation: Concept, Evidence and Implications, Academy of Management Review, Vol. 20, No.1, 1995, p.65. 14. Vance, S. C. (1975), Are socially responsible corporations good investment risks?, Management Review, Vol. 64, pp.18-24. 15. Waddock, S. A., and Samuel B. Graves (1997), The corporate social performance financial performance link., Strategic Management Journal, Vol.18 (4), pp. 303-319. 16. Wood, D.J. (1991), Towards improving corporate social performance, Business Horizons, Vol. 34, No. 4, pp. 66-73.

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Annexure Table 1 Respondents Profiles

Variable Gender Classification Male Female TOTAL Marital Status Married unmarried TOTAL Age Below 31-40 41-50 Above 50 TOTAL Profession Company Employee Customer Shareholder Community or other stakeholder TOTAL Source: Field Survey 154 146 300 155 145 300 124 109 53 14 300 75 75 75 75 300

N=300
Frequency Percentage 51 49 100 52 48 100 41 36 18 5 100 25 25 25 25 100 Test

Table 3 Being socially, ethically and environmentally responsible is linked to organizational success
Variable Strongly Disagree Disagree Neutral Agree Strongly Agree Total Frequency 12 45 32 138 73 300 Percent 4 15 11 46 24 100

Test of Significance
Company Customer Shareholder Community F-VALUE Employee Mean Mean Mean Mean 3.57 3.75 3.80 3.73 .574=NS

F-test

NS=Not Significant

Table 4 Shareholder expectations from business organizations are changing as Shareholders expecting more disclosure of performance of social responsibility
Variable Strongly Disagree Disagree Neutral Agree Strongly Agree Total Frequency 15 50 41 141 53 300 Percent 5 17 14 47 17 100

Table 2 Respondents Perception Regarding Social Responsibility and Financial Performance is Positively Core Related
Variable Strongly Disagree Disagree Neutral Agree Strongly Agree Total Frequency 11 47 49 153 40 300 Percent 4 16 16 51 13 100

Test of Significance
Test Company Customer Shareholder Community F-VALUE Employee Mean Mean Mean Mean 3.56 3.43 3.61 3.63 .503=NS

F-test

Test of Significance
Test Company Customer Shareholder Community F-VALUE Employee Mean Mean Mean Mean 3.45 3.60 3.77 3.36 2.357=NS

NS=Not Significant

Test of Significance
Test Company Customer Shareholder Community F-VALUE Employee Mean Mean Mean Mean 3.67 3.48 3.69 3.75 .840=NS

F-test

NS=Not Significant

F-test

NS=Not Significant

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Table 5 Socially responsible organization can easily attract and retain investors and business partners and can reduce financial risk
Variable Strongly Disagree Disagree Neutral Agree Strongly Agree Total Frequency 10 52 35 140 63 300 Percent 3 17 12 47 21 100

Test of Significance
Test Company Customer Shareholder Community F-VALUE Employee Mean Mean Mean Mean 3.67 3.48 3.69 3.75 .840=NS

F-test

NS=Not Significant

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