A Study of Current Practice of Corporate Social Responsibility (CSR) and an Examination of the Relationship Between CSR and Financial

Performance Using Structural Equation Modelling (SEM)

Abstract There has been a significant increase in interest in CSR in recent years (Gulyas, 2009; McGehee et al, 2009) and it is regarded as an important topic for research (Burton and Goldsby, 2009). Not only has this topic received academic attention but it is becoming a mainstream issue for many organisations (Renneboog et al, 2008; Nijof and Brujin, 2008). However, it has been noted that research on CSR in SMEs is quite scant (Burton and Goldsby, 2008; Cilberti et al, 2008). A second area of literature that remains unresolved is the relationship between CSR and financial performance (Park and Lee, 2009). Lastly, there also remains a lack understanding concerning CSR in Ireland (ODwyer et al, 2005). After a thorough analysis of the literature in the area, semi structured interviews were carried out with a small sample of large firms and SMEs operating in Ireland, spanning a variety of industries. A survey was then developed and administered via internet and post; the analysis of which contributes toward filling these research gaps. In determining an operational meaning of CSR and uncovering the nature, type and extent of CSR of firms operating in Ireland, the research differentiates between large firms and SMEs. Thus this research contributes to the much needed insight into CSR in SMEs (Perrini and Minoja, 2008). While the majority of small firms believe they should pay attention to their social and environmental responsibilities, the main barrier to undertaking CSR experienced by SMEs is time, followed by cost and lack of human resources. This is in line with literature (Jenkins, 2006; Roberts et al, 2006). The perception that CSR is not related to the firms activities or that it is not a concern to SMEs are not considered major barriers by SME respondents. Described as the holy grail of CSR (Jorgensen and Knudsen, 2005) the relationship between CSR and financial performance represents the most questioned area of CSR (Angelidis et al, 2008). While a lot of research points in favor of a mild positive relationship (Orlizky et al, 2003), this

connection has not been fully established (Neville et al, 2005; Prado-Lorenzo et al, 2008; Park and Lee, 2009) and the mechanisms through which financial performance is enhanced by CSR is not well understood ( Doh et al, 2009). This research uses a more detailed method of analysis than that which has been previously used to assess the relationship between CSR and financial performance, thus goes some way toward answering the call for a more fine grained approach to measuring this relationship (Hillman and Keim, 2001). In line with previous studies (Hitchens et al, 2003) a moderate positive relationship was noted between CSR and financial performance when analyzed directly. However, it is through an analysis of the indirect relationships that insight is developed. CSR was found to have a strong positive relationship with social reputation, employee attraction, motivation and retention and consumer attraction and loyalty but a weaker relationship with other business benefits proposed to result from CSR, namely; access to capital and business reputation. This dissertation concludes with a discussion of the implications of these findings as well as recommendations for further research in the area.

Introduction

There has been a significant increase in interest in Corporate Social Responsibility (CSR) in recent years (Young and Thyil, 2009; Park and Lee, 2009; Gulyas, 2009; McGehee et al, 2009) and it is now regarded to be at its most prevalent (Renneboog et al, 2008) representing an important topic for research (Burton and Goldsby, 2009). Recent corporate scandals have attracted public attention and highlighted once more the importance of CSR (Angelidis et al, 2008; Evans and Davis, 2008). Not only has this

topic received academic attention (Burton and Goldsby, 2008) but it is becoming a mainstream issue for many organisations (Renneboog et al, 2008; Nijof and Brujin, 2008).

This research represents a study of current practice of Corporate Social Responsibility of both large firms and SMEs operating in Ireland and an examination of the relationship between CSR and financial performance through Structural Equation Modelling. Thus, this research aims to contribute to three research gaps in the literature. Firstly, as this research is one of very few concerning CSR in an Irish context it will contribute to the lack understanding concerning CSR in Ireland (ODwyer et al, 2005). The findings of this research provide real insight into the nature of CSR in the Irish sector. It evaluates the type of activities undertaken and the extent to which these arecitivities are undertaken by firms operating in this sector.

Secondly, it has been noted that research on CSR in SMEs is quite scant (Burton and

Goldsby, 2008; Cilberti et al, 2008). This is thought to be the case because the greater public visibility of large firms creates interest in this sector (LePoutre and Heene, 2006) and leads to greater public scrutiny of these firms (Fox, 2005). This research pays specific attention to the SME sector, thus contributes to the limited body of work in this area. Such research is important because SMEs represent a vital part of every economy (Fox, 2005), this is certaintly the case in the Irish economy. According to Spence et al (2001) Semi-structured interviews have been chosen as a form of exploratory research to aid in the development of the mail survey due to the under-researched nature of CSR in an Irish context. Described as a convenient and established method of gaining deeper understanding in social research (Bauer and Gaskell, 2000; Fontana and Frey, 1994), this method has been previously employed in the area of CSR (Whitehouse, 2006) and specifically in relation to CSR in SMEs (Friedman et al, 2000; Tilley, 2000; Spence and Rutherfoord, 2001).

Representing one of the most common research methods (Babbie, 2004), the survey method has been employed in the area of CSR for decades (Parket and Eilbirt, 1975;

Aupperle et al, 1985; Dooley and Lerner, 1994; Gulyas, 2009; McGehee et al, 2009). The use of both methodologies allows for greater depth of knowledge to be obtained. According to Bryman (1988) such a strategy would seem to allow the various strengths 5 of each methodology. Indeed the strength of one methodology may overcome the weakness of another.

Organisation of the Thesis

The first three chapters of this research comprise of a literature review. Chapter One introduces the reader to the topic of CSR. It provides an in depth discussion of stakeholder theory. In line with the argument that CSR is most comprehensively studied through the lens of stakeholder theory (Wang, 2008; Agle and Mitchell, 2008), this research draws quite extensively on this theory. The concept of CSR is then defined and its legitimacy debated.

Chapter two focuses on the relationship between CSR and financial performance.

Previous studies are outlined to uncover the findings of these studies and to analyse the methodology employed in the studies in an effort to learn from and improve on past studies. While the majority of studies point in favour of a positive relationship between these two variables it is well documented that the mechanisms through which financial performance is enhanced by CSR is not well understood (Doh et al, 2009). Thus, a possible explanation for this is outlined.

In the final literature chapter attention is turned to an important sector of any economy: SMEs. The different nature of SMEs and large firms is outlined and in particular their implications for CSR. The proposed barriers experienced by SMEs when conducting CSR are also outlined. These include resource constraints such as human, financial and time constraints and a perception that CSR is an issue that is not of concern for organizations of their size.

Adopting a similar approach to Spence and Rutherfoord (2001) semi-structured face to

face interviews were conducted with fourteen firms operating in Ireland. These include both large firms and SMEs spanning a wide variety of industries. Chapter four outlines these in-depth interviews which have been employed as exploratory research. The main 6 findings of this stage of research are outlined along with their implications on the second stage of research, the survey which is the focus of chapter five.

The mail survey is introduced and both the advantages and drawbacks of this method are outlined in chapter five. One drawback that is of particular importance to this research is Social Desirability Bias, this is discussed and possible methods to overcome it are explored. Next, the development of the survey used in this research is outlined. The pretest and pilot test are also described along with the main findings from this test.

Chapter six outlines the initial findings of the questionnaire analysis. Background information on the respondents and their firms is provided. Findings are then analysed under each objective. This chapter focuses mainly on the first two objectives which

uncover an operational meaning of the term CSR and the nature, type and extent of CSR activities. Objective three is then analysed in chapter seven.

Chapter seven provides an introduction to SEM. The necessary data screening for SEM is outlined, followed by a review of the main steps of SEM. Next, an analysis of the development process for the scales of the model is outlined. From an analysis of previous studies it became apparent that a measure of CSR would have to be developed for this research. Drawing on the relevant literature a scale was developed which incorporated activities geared toward customers, employees, the community and environment. The findings of the proposed model are then discussed in detail.

Chapter eight concludes the thesis; emphasis is placed on the contribution this thesis has made to the body of research on CSR. This chapter then outlines the limitations of the study and outlines recommendations for future research. Finally, the chapter concludes with the managerial and practical implications of the study. 7 Chapter One Chapter Two

Corporate Social Responsibility & Financial Performance Chapter Three Corporate Social Responsibility in SMEs Chapter Four Interview Research Methodology & Findings Chapter Five Survey Research Methodology & Pilot Chapter Six Questionnaire Findings Chapter Seven Structural Equation modelling Chapter Eight Conclusions Chapter One Corporate Social Responsibility

Figure 2: Structure of the Thesis

8 Chapter One: Corporate Social Responsibility

1.1 Introduction

Societys expectations of business have increased in recent years (Turker, 2009a). In the face of high levels of insecurity and poverty, the backlash against globalisation, ozone depletion and mistrust of big business, there is growing pressure on business leaders and their companies to deliver wider societal value (Jenkins, 2006). This is heightened by more extensive media reach coupled with advances in information technology, in particular the internet, which has allowed rapid and widespread exposure of alleged corporate abuses in even the most remote corners of the world, such as Shell Oil spills in Nigeria and Nikes exposure of Sweatshop labour conditions in its subcontractor operations in Asia.

There has been a significant increase in interest in CSR in recent years (Basu and Palazzo, 2008; Angelidis et al, 2008; Young and Thyil, 2009; Park and Lee, 2009; Gulyas, 2009; McGehee et al, 2009) and is now at its most prevalent (Renneboog et al, 2008; Turker, 2009a) representing an important topic for research (Burton and Goldsby, 2009). Recent corporate scandals have attracted public attention and highlighted once more the importance of CSR (Angelidis et al, 2008; Evans and Davis, 2008). Not only has this topic received academic attention (Burton and Goldsby, 2008) but it is becoming a mainstream issue for many organisations (Renneboog et al, 2008; Nijof and Brujin, 2008). It is now widely recognised by business leaders that their companies need to accept a broader responsibility than short-term profits (Knox et al, 2005). One study found that more than 80% of the Fortune 500 companies address CSR issues (Bhattacharya and Sen, 2004).

This chapter unfolds as follows; firstly, the debate between shareholder and stakeholder theory is presented. Stakeholder theory is dealt with in quite some depth in this thesis,

because CSR is conceptualised through the lens of stakeholder theory (PradoLorenzo et al, 2008; Wang, 2008; Vaaland et al, 2008; Agle and Mitchell, 2008; Agatiello, 2008). 9 The term ethics is briefly introduced to differentiate between this term and CSR. Next attention turns to defining CSR: the evaluation of definitions provides a guide to the changing thought on the subject. The debate surrounding the legitimacy of CSR is then discussed; arguments both in favour of and against the concept are discussed.

1.2 Stakeholder versus Shareholder Theory

From the time of Adam Smith, through the age of industrialization, the Great Depression and the recent half-century globalization and prosperity, the purpose and role of business has been a focus of debate (Post et al, 2002). Much of the debate has revolved around two hierarchal positions; namely shareholder theory and stakeholder theory (Rugimbana et al, 2008). Shareholder theory represents the classical approach to business, according to this theory a firms responsibility rests solely with its shareholders (Cochran, 1994). On the other hand stakeholder theory argues that

organizations are not only accountable to its shareholders but should balance a multiplicity of stakeholders interests (Van Marrewijk, 2003). These two competing views of the firm contrast each other so sharply that stakeholder and shareholder theories are often described as polar opposites (Shankman, 1999).

Both theories are explained and arguments in their favor are set out. The basis of stakeholder theory is then set out before turning attention to the practical issue of defining individual stakeholders.

1.2.1 Shareholder Theory

Referred to a classical (Karake, 1998; Rugimbana et al, 2008) or fundamentalist (Curran, 2005) theory, shareholder theory holds that the firm is (and should be) managed in the interests of the firms shareholders (Cochran, 1994). According to this theory the purpose of the company is to provide return on investment for shareholders and thus corporations are seen as instruments of creating economic value for those who 10 risk capital in the enterprise (Greenwood, 2001). It is believed that the sole constituency of business management is the shareholders and the sole concern of shareholders is

profit maximization. Any activity is justified if it increases the value of the firm to its shareholders and is not justified if the value of the firm is reduced (Cochran, 1994). Corporate expenditure on social causes represents a violation of management responsibility to shareholders to the extent that the expenditure does not lead to higher shareholder wealth (Ruf et al, 1998). This theory is precise, makes sense in a mechanistic way and provides clear guidelines for managerial behavior (Mudrack, 2007). According to Levitt (1958) such an approach enhances the long term survival and success of the firm.

Moore (1999) justifies Shareholder Theory on the basis of Property Rights and Agency theory. Property Rights posit that shareholders own a firm by virtue of owning equity shares and moreover, that they wish to maximize the value of those shares. Managers who fail to maximize shareholder wealth are violating a moral property right by spending, if not stealing shareholder money (Philips, 2004). According to Sternberg (1996) owners organized (or alternatively purchased) the firm and are constitutionally entitled to the residual fruits of their investment, otherwise the organization is by

definition a not-for-profit.

In relation to Agency Theory, the conventional argument is that company managers and shareholders are involved in an agency relationship. The managers, acting as agents to their clients (the shareholders), have a responsibility to pursue their clients best interest (Moore, 1999). In relation to shareholder theory, this implies that company managers are obliged to adhere to the objective of maximizing long-term owner value.

Shareholder theory has been widely misrepresented; often quoted at its most extreme. For example, it is sometimes misstated as urging managers to do anything you can to make a profit (Smith, 2003:86). Most followers of shareholder theory quote Friedmans (1970) argument that the only social responsibility of business is to increase profits, however, many omit the latter half of his quote which argued that a firm should abide by 11 legal and societal expectations (Carroll, 1998). Further, it is sometimes claimed that shareholder theory prohibits the use of corporate funds for social use. In fact,

shareholder theory supports those efforts insofar as such initiatives are in the best interest of shareholders. Friedman (1970) believed that the only acceptable reason for engaging in CSR was if it is motivated by self-interest and for the purpose of promoting the companys interests. If corporate charitable giving contributes to profit making then it is fully acceptable.

Shareholder theory and the belief that companies should be run purely in the interests of their shareholders has been challenged over the last decade (Low and Cowton, 2004). As far back as the early 1980s, Van Auken and Ireland (1982: 1) argued the era is past when the business community could make profit and stockholder interests its only considerations. Agatiello (2008) argues that the notion of profit maximization as the sole objective of the firm is an observable fallacy. He argues that the nature of the firm in modern times is too complex to be explained through such a reductionist approach. Indeed Agle and Mitchell (2008: 153) found its opposing theory, stakeholder theory to

be alive, well and flourishing.