Relationship Between CSR and FTSE 100 Companies
Info: 5459 words (22 pages) Dissertation
Published: 12th Dec 2019
In today’s business world the phrase corporate social responsibility (CSR) has become a relevant and frequently discussed topic. By definition it is the non-profit activities engaged by a business concern that aids the society, economy and the environment. The World Business Council for Sustainable Development has defined CSR as “the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community, and the society at large.” (WBSCD, 2000)
Modern business concerns place CSR in high priority. In the fifth global CEO survey conducted by PricewaterhouseCoopers’ World Economic Forum concluded that 70 per cent of chief executives around the world have the opinion that corporate social responsibility is fundamental in the process of profit making in the business. In the Western European region, 68 per cent of the big companies have joined the triple bottom-line performance namely the economic, social and environmental factors along with financial performance whereas in the United States, this figure is 41 per cent (PricewaterhouseCoopers/BSI Global Research Inc, 2002). However 80 per cent of the company managers in the US are of the opinion that CEO’s status is a factor of major influence on corporate reputation, although interestingly this value is just 56 per cent in the UK. According to Business in the Community, more than 70 per cent of business leaders believe that incorporating responsible business activities makes business concerns more competitive and profitable. (Hancock, 2006)
1.1 Why was this topic selected?
If the topic doing research to find out if there is a relationship between corporate social responsibility (CSR) and the corporate financial performance (CFP) of a company is able to find out with positive outcome and relationship between the two, then it may be an eye opener to various entrepreneurs to the various financial benefits CSR can bring about to business. This is so especially in the medium and small scale industries, which are yet to fully utilise the CSR in their business routines.
From a common person point of view, when large corporations and business concerns take part in community relief and environment friendly activities, it makes a whole lot of difference to the society and the environment. So it is greatly beneficial for humankind to explore and bring out to light the relationship between corporate social responsibility and the firm’s financial performance.
1.2 Background of CSR:
Many of the ideals and customs of the corporate social responsibility have references dating back to the 19th century. But it was during the 1960s and 1970s in the United States that there was resurgence in the mindset of people towards this phenomenon. It was during this period that various modern policies of civil regulation were invented. This includes the social audits, social investment funds, voluntary codes of conduct, recognitions for social and environmental activities and more commonly the use of corporations as potential places for political activity. During that period there were many protests and demonstrations like the boycott of Dow Chemical in 1970. There was also a campus-led movement pressuring firms to retract from South Africa in the 1970s which was similar to the challenges faced by the corporations having investments in countries like Burma and Sudan.
Since the 1990s many companies form America and Europe that have headquarters either in the United States or Europe have taken aboard some voluntary standards for employment states, environmental activities and also regarding human rights. These fresh measures have since then became standardised in many companies, corporations and other agencies. These new measures have been monitored and reported. These initiatives that were not heavily legal have since been the standard setter for what is known today as corporate social responsibility. Some of the fresh changes that were brought about by this civil regulation were:
(1) A positive reduction in the amount of children hired for labour every year. A massive improvement in health and safety in various factories around the world which provide the large firms with products including shoes, clothes, toys, etc.
(2) A cut down in the production of wood from endangered forests and animal habitats, which were used to manufacture furniture for United States and Europe.
(3) Providing reasonable prices for some agricultural producers like coffee growers for their products.
(4) A considerable decrease in the emission of greenhouse gases especially in the wake of the greenhouse effect.
(5) A withdrawal of firms from Burma in the wake of the human rights abuse in that country.
(6) Some more recent examples are the lowering of prices of drugs for AIDS and other diseases.
After that companies have come forward and set examples of CSR initiatives for other companies to follow, even when there is no restriction on them in the countries concerned to limit their activities. For example Home Depot’s policies regarding environment have helped in the sustaining of some of the rainforests in the South America. The government of Chad cannot be trusted in handling their oil reserves properly. So ExxonMobil’s efforts to keep an eye on its royalty payments means that at least some of the money is not wasted. Indonesia does not have adequate policies to protect the environment. Therefore Chevron Texaco’s activities have protected the fragile ecosystem in Papa New Guinea.
Having discussed that, it must also be said that the effectiveness of codes, such as the UN Global Compact, Voluntary Principle on Security and Human Rights, the Equator Principles, etc, are not very effective. The improvements are likely to happen, particularly if the monitoring and other measures are effectively carried out. One of the most outstanding obstacle standing in the way of these social changes is of course the cost factor. Many corporations do keep cost aside for these activities, but most of them have not found to be adequate. This is one of the reason researches have to be carried out that point to the connection between CSR and CFP, because CEO’s and managers should be aware of the possibilities created by CSR on the firms’ reputation and financial activities. So that firms can spend more time and money on their CSR and hence create good value for them, their stakeholders and ultimately the society. Today even countries in the developing world have started to demand better working conditions and environmental safety for their environment. In countries like India people have been protesting against big companies for their discrimination. For example there has been a recent outbreak of protests in India against soft drink manufacturer Coca Cola for their indiscriminate usage of underground water and also its contamination, since underground water is a major source of drinking water through wells in many parts of India. CSR is also a factor that is good for a society regardless of it being located in developed or underdeveloped countries. It is a universal phenomenon that is advantageous. This contributes to its popularity and prominence. Some countries practise CSR ideally in their manufacturing hubs located in developing and underdeveloped countries. Some others stick to bringing about local changes and prosperity. For example the constructing of a school, university or a hospital is considered as a valuable contribution to the society. The company benefits from these activities because they indeed sow the seeds for future graduates who may become skilled employees for them. Also environmental activities earn sympathy and support from local authorities who may reduce taxes and other duties for the company on the basis of their humanitarian concerns.
Later on in the 1990s there were protest against companies like Nike and Shell, and since then the importance of CSR has grown significantly. In 2005 a search on Google for “corporate social responsibility” would yield 30000 sites. There are more the 15 million pages on the internet with address dimensions of CSR. This is including 100,000 pages based on corporate websites. In 2005 Amazon had more than 600 books on the subject. More than 1000 business concerns have created and adapted signed codes of conduct which clearly states their individual stand on issues such social, environmental, animal rights and human rights. The numbers of firms that issue reports on CSR initiatives have gone up to 2000 in the year 2005.in the country of United States there were more that 200 social mutual funds in 2005, and they saw their revenues increase tenfold over a span of 10 years. Global organizations, such as the United Nations, the European Union and the World Bank and the Organization for Economic Cooperation and Development (OECD), vigorously endorse the phenomenon of CSR. These governing bodies regularly monitor, advice, and award the efforts and initiatives taken by the companies every year. In the last two decades various charitable organisations have also sprung up, which work together with companies, and aids in their activities.
Previously CSR was used only to address internal business ethics and policies. Nowadays this narrow view of CSR has changed and evolved into a variety of issue. Today a company’s social venture could include initiatives to uplift education, poverty, unemployment, animal rights and other basic needs for community development. Some companies pursue more specific goals like aids relief, cancer research, disability support etc. For example firms established in the automobile industry may come up with safety programmes for motorists.
Today in many countries, households have the chance to invest their money in various non-monetary savings and investments. In many countries, which are listed in OECD (Organisation for Economic Co-operation and Development), special banks offer facilities in savings account where the customers are assured that the money will be used for environmental sustainability programmes, or to help some entrepreneurs, who find it hard to get money from other institutions. The target group for these investments have generally been women and minorities. Today the impact of CSR has grown so much that people even in countries like South Africa and Brazil has the opportunity to invest their savings in socially responsible initiatives that checks the CSR of the firms in which they invest (International Finance Corporation (IFC), 2003).
Many companies contribute for the conservation of the environment by finding new methods for recycling and elimination of non-biodegradable compounds etc. Therefore modern businesses have realised the increasing acceptance of socially responsible companies in the minds of people, so much so that it has become a trend to undertake social initiatives by the business enterprises.
1.3 Reason for doing good:
There are many opinions that reason the indulgence of business companies in non profit initiatives. But the commonplace one would be that the companies perform good activities because good things and image are preferred by the masses. The public argue that these activities impress the investors, business analysts, business partners and the potential customers. The whole picture will look good in the company’s annual reports and maybe even the company may have some luck in the courtroom and the parliament. This ultimately gives a vital boost to the company’s brand image and reputation.
There are many distinct and underlying advantages for business concerns. The distinct advantages clearly give the business a boost in monetary terms, hence being a direct contributor to financial performance. The underlying advantages may not directly save money for business, but they indirectly become advantageous to the business and eventually bring about financial gains thereby affecting its performance. For example Chiquita a global leader in the manufacturing of bananas decided to follow an environment friendly approach which saved them more that $5 million in 2002 compared to the year 1997. The trick behind this was the implementation of smaller quantity of agrichemicals and the adoption of a paller recycling program which actually saved them more than $3 million a year. This however was only the tip of the iceberg. Chiquita had bigger, but much more discreet advantages, by adopting a more socially responsible image. The company which was previously a target of media backlash was going through a period of damaged company reputation which was a threat to its business functioning. They turned this around with their environment friendly approach and activities. This change in policy also created a sense of pride among the employees and helped in developing a more open and clear communication with the media. These developments will ultimately increase the financial performance of the companies by ensuring their smooth functionality. A frequently referenced study is by the University of Southwestern Louisiana, called “the effect of published reports on unethical conduct on stock prices” confirmed that publicity about unethical corporate conduct reduces stock prices for a minimum period of six months.
From a truly customer’s point of view, it can be said that in today’s marketplace there are a lot of alternative choices for customers when deciding to by a product in the criteria of product, price and distribution channels. Researchers have shown that consumers base their purchase on reputed companies, that indulge in fair trade and other sustainable business practices including concerned about the society in which they operate, provided the price and quality of the products remains similar. As an example if a consumer had an option of two products that have similar qualities and price tags, the consumer would prefer the product that was produced by a ‘greener’ company (green being symbolic of the community welfare and environmental efforts of the company).
1.4 Aims of the project:
This project aims to answer the following issues:
1) Is there a relationship between corporate social responsibility and financial performance of a company? In addition the relation between the size of a company and the CSR is observed.
2) If there is a relationship, is the relationship positive or negative?
3) Discuss the various relationships between corporate social responsibility and financial performance. (CSR is measured by the value taken from the Business in the Community’s Corporate Index ratings and CFP is measured by the changes in stock prices before and after being rated in the Index ratings).
4) Evaluate the relationship between CSR and CFP in the FTSE 100 companies.
1.5 Structure of the dissertation:
The introduction part of this dissertation includes a description about the aims and objectives of the research and the reasons for choosing this topic. It also contains a brief insight into the background of CSR and some of the previous researches conducted on this topic.
Chapter 2 discusses in detail the various studies and researches conducted on this topic from the period between 1977 until recent times. The literature review also tries to bring out various points of view of different researchers and lays the foundation for this study.
Chapter 3 or the methodology section discusses the various modes of data collection used in this research to arrive at the appropriate conclusion. This research utilises the share prices of a sample of 20 companies in the FTSE-100 for representing CFP and also their comparative ratings in the BITC’s Corporate Index ratings to show the value of CSR. Alternatively questionnaires were distributed to obtain some qualitative data.
Then in chapter 4 comes the primary research section which uses first hand data available regarding the companies to try to find a solution to the questions imposed in this study. It also discusses the 2 styles of data collection namely positivist and phenomenological styles.
Chapter 5 consists of the discussion and conclusion section to analyse and compare the previous information collected in literature review and primary data research to arrive at a final conclusion regarding the topic. The result maybe positive or negative, nevertheless a result should be arrived at as per the available information and also so that possible recommendations can be given for further references and studies.
2.1 Studies explaining the different aspects of CSR-CFP relationship:
According to Peloza (2006), the CSR and CFP can be analyzed from four perspectives
In the above figure show the conflicting side against the knack of CSR as a provider to the firm’s financial ambitions. The far left depicts the antagonists of CSR who are of the opinion that any money spend by the firm on CSR are a complete negation to the firm’s economic gains, whereas in the extreme right are the supporters of CSR who claims it as a supporter of the firm’s financial goals. In the vertical axis separates the above two different views of CSR on the basis of a long term and short term approach. The long term managerial viewpoint on CSR involves a longitudinal approach to the evaluation of the effect of social schemes and the short term is for a static, cross-sectional perspectives that directs more on immediate effect or do not openly consider the time aspect.
There are various arguments against CSR that can be shown on the 1st quadrant. Margolis and Walsh projected three main categories of these objections to CSR on the basis that it clashes with the business’ financial motives. According to them one of the explanations that opponents of CSR give is that the firms benefit society more when they create maximum profits for their shareholders. Another opinion was that individual shareholders should be the deciders of investing in social initiatives; the firms should only focus on achieving maximum profits for its shareholders. Finally they express concern that many shareholders are not aware of the social initiatives of the firm and are not given opportunities to have their say in them. The antagonists claim that the firms may make wrong decisions regarding the allocation of resources for social responsibility and hence they are not eligible to perform it.
In quick contrast to all this, quadrant 2 depicts the protagonists of CSR claiming that it helps in the realization of the firm’s financial objectives. Various studies were conducted in relating to this quadrant. At first a value or positive CSR is paired with a firm’s performance indicator such as the stock price. Then a negative amount of CSR (for example harmful waste disposal) is paired with an amount of firm’s financial performance. The result in each of these cases was a positive relationship between the two. This is supported by a meta-analysis conducted by Orlitzky et. al in 2003 and other various studies conducted over the past 30 years, which generally discovered a positive connection between CSR and CFP. Also negative CSR has been associated with negative impacts on share prices. For example Shell Oil Company suffered a setback in share prices after an oil spill in 2001 in Nigeria. This is caused due to the negative CSR. A large number of researchers have favoured a short- term view of the time factor. They argue that majority of the firms expect to get positive returns on their investments in the same year. Former Chrysler CEO Bob Eaton once said that the organizations have a common goal of getting constant year-in and year-out profits from their companies in their portfolios. They do this because the shareholders everywhere follow a common rule: “if they are not satisfied, they sell” (Reich, 1998). According to Werbel and Wortman (2000) suggest that firms use these initiatives to temporarily ward off negative media coverage.
However when we consider the ability of CSR to affect CFP in a bad way, several investigators are of the opinion in extending the short term perspective to a long term one. Taking the case of quadrant 3, even though the impact of environmental regulations on the business is only a limited one, still there would be a long term effect in the form of productivity slowdown Stavins (1994). Also there is an argument that when a firm takes up a social initiative, its competitors will start to match its actions and hence it will result in a competition which will prove to be costly and a subsequent decrease in profits. The researchers say that nowadays it has become a trend among big companies so much that every large companies are expected to do some investments in socially responsible activities by their customers; hence making it as a sort of tax.
Nowadays researchers are beginning to consider CSR as complimentary to CFP taking into consideration the long term perspective as depicted in quadrant 4 in the According to the researchers the social objectives need not necessarily be in conflict to the economic objectives, but rather be a supplement to it. For example if a company funds a school or university in its locality, it actually paves the way for future employees that are well educated and support and develop the company’s cause and also at the same time changing the social climate in the locality for the better. Another long term advantage that companies can muster by indulging in social responsibilities is the building up of reputation. A good reputation has always been associated with positive financial returns. Bhattacharya and Sen (2004) are of the idea that CSR builds a large pool of goodwill that firms can rely upon in times of crisis. Similarly McWilliams and Siegel (2001) say that positive CSR produces a reputation that a company is reliable and honest.
2.2 CSR in stakeholder theory:
Stakeholder theory suggests that a company must not only try to meet the demands of its shareholders, but also those with the lesser explicit, or implicit claims (Gornell and Shapiro, 1987). Stakeholder theory also brings to light that implicit claims like product quality are actually less costly to a firm than the demands of its shareholders which are more explicit. The low social responsibility of the company may place doubt in the minds of its shareholders about the ability of the company to fulfill its implicit claims, and hence the shareholders may demand more explicit claims which may prove costly to the company. For example if the firms manage to evade from its environmental responsibilities (dumping of waste, usage of recyclable materials, etc), the government agencies and officials may impose strict regulations like duty, fines etc on the company. These circumstances may raise doubts in the minds of implicit stakeholders, who may question its efficiency. On the contrary socially responsible and environmentally friendly companies may be favored by the government and they might even get a reduction or exemption from certain taxes and duties on account of their actions.
2.3 CSR as insurance cover:
Another important aspect that consolidates the positive relationship between CSR and the financial outcome of a company is the conceptualization of CSR as kind of insurance for the business which is especially helpful in the time of a crisis. CSR may help the company to create a good impression among the government authorities and helps the company to evade government impositions. This is difficult to evaluate when examining the relationship between CSR and financial performance, even though it indirectly affects the financial outcome. Davidson and Worrell (1992) advocated that the losses incurred by the firm due to a dent in their reputation is much higher than the physical costs incurred from actual event itself, such as product recall. Also in the same manner Blacconiere (1997) and his co-workers conducted various studies, and found out that firms with active environmental activities had a lower reduction in market value.
A research carried out around the Seattle riots in 1999 against the WTO meetings came up with two conclusions. The research was conducted on 400 firms across a cross section of firms and found out that firstly there is a noticeable industry effect where companies with negative CSR ratings suffered incrementally over companies from neutral industries. They also concluded that once the industry effect has been removed, the positive outcome of the CSR ‘insurance’ is distinct. Specifically companies that had negative CSR had to undergo a stock market decline of double the times that of companies that were known for the CSR activities. Researchers have previously argued that firms with good name and status can overcome crises. For example is the Tylenol tampering in the 1980s, were Johnson & Johnson suffered lesser economic problems, when compared with companies with bad reputation (Fombrun, et al. 1996). Fombrun (2001) also says that reputations have considerable concealed value that acts as a storage house of goodwill. During the time of crises they act to minimise the moral and financial damage to the company. Jones et al. (2000) have conducted a study taking taken a large number of companies to find out if their reputations can help them during a crisis. They discovered that firms in the better part of the Fortune Magazine’s annual survey of the ‘Most Admires Firms in America’ experienced lower market valuation losses in the stock market plunge that took place in 1983(S&P 500 went down 7 per cent on that day), than the companies that were in lower part of Fortune’s ratings.
The capital in socially responsible investment funds have greatly increased in the last ten years. In 1990, only seven US firms issued their annual reports citing their social performance. But by 2004, 745 of these reports were release due to the increasing pressure on the corporate managers to do so. (corporateregister.com)
These developments clearly brings to light not only the incremental profits by increasing sales, but also the capability of CSR to maintain sales and stock prices in the time of crisis.
2.4 Major studies done to evaluate CSR-CFP relationship:
Researchers Sandra Waddock and Samuel Graves (1997) of Boston College made a study on two aspects of the topic:
(1) Whether there is a positive or negative relationship between corporate social responsibility and financial performance of a company, or if no relationship exists at all between them.
(2) If the exists a relationship then, whether the financial performance was due to the previous practises of CSR or if CSR was a succession as a result of high financial performance.
Waddock and Graves (1997) utilised the data collected from and independent research organization. The data was collected of all the companies in the S&P 500. The data was calculated for each company’s CSR performance based on a rating scale that integrated eight important attributes of CSR namely environment performance, staff diversity, staff relations, community relations, product features, military contracts and involvement in South Africa. The above attributes were then ranked according to their relative significance. This scaling method involving eight aspects of community welfare solved the problem of measuring the largely diverse CSR activities, which was faced by previous researchers.
Waddock and Graves studied the links between CSR and CFP of 469 firms during the year 1989 through 1990. The firms were from different sectors of business industries including hospitals, aerospace, mining, publishing and utilities. The study made use of different figures of finance like return on assets (ROA), return on sales (ROS) and return on equity (ROE). The analysing of data from two consecutive years meant that the duo researchers could test the slack resources theory, which tests if better CFP leads to a better CSR in the consecutive year. The theory which finds out if a good CSR leads to improved financial performance, was called the good management theory. This theory was studied with CSR data in the year 1990 and compared with the CFP figures of 1991, therefore with a time lag of one year.
The following results were unearthed from the survey:
(1) The slack resources theory was found to be true. CSR of the firms were increased by the precedent financial success of the firms.
(2) The good management theory was also proved as fine CSR activities contributed to the firm’s financial performance when measured using ROS and ROA.
They came to the conclusion that the correlation between CSR and CFP can be attributed to a virtuous circle, in which both of them are mutually correlated. It is difficult to predict whether the cycle starts with CSR or CFP, but it is evident in the investigation that they are mutually correlated.
A prominent study conducted by Marc Orlitzky and Frank L. Schmidt titled “Corporate Social and Financial Performance: A Meta-Analysis,” was awarded the Moskowitz Price by the Social Investment Forum. The aim of the study was to establish the relationship between corporate social responsibility and corporate social performance. The research was conducted by examining 52 studies that were published between 1972 and 1997, that contained a total of 33,878 observations. This Meta analysis utilises statistics to evaluate results of each different studies and adjust for the statistical errors.
The Orlitzky Meta analysis concentrates on four major hypotheses:
(1) In various industries and study contexts, CSR and CFP are normally positively linked.
(2) Between CSR and CFP there is a bi-directional causality.
(3) CSR is positively connected with CFP because of two reasons:
(i) CSR boosts managerial proficiencies and organizational efficiency and supplies to knowledge about the company’s political, technological, social, market, and other environments.
(ii) A positive status and goodwill is created among the company’s external stakeholders through CSR.
(4) Most of the differences in results of some studies are due to statistical or methodological errors.
The researchers then selected studies that carried out a quantitative assessment of the connection between CFP and CSR by taking into account at least one characteristic of firm’s economic performance, and met the given description of CSR. The CFP in this study is calculated by dividing into three forms namely accounting based, where accounting outcomes determine a firm’s efficiency; market-based where the investors returns are the determinant of market value and finally the survey results that shows the subjective estimates of a firm’s current position. While CSR is normally measured from CSR rating indexes, social audits, CSR disclosures and the organization’s codes and values.
The findings of the research were phenomenal. The researchers claimed that there exists a positive relationship between CSR and CFP across various industries and other study contexts. The following were their conclusions:
(1) CSR had a stronger connection with CFP when using the accounting measures of analysis than when market-based measures where used.
(2) Environmental development as CSR affects CFP of a company to a lesser extent when compared with other aspects of CSR.
(3) The relation between CSR and CFP could be described as a virtuous circle in which a higher CFP motivates the companies to spend more on CSR, and a good spending on CSR will allow the firms to become more successful, hence increasing their CFP.
The message of the research to the managers of companies were that money spend CSR is a good investment for the development of CFP. The research also found out that the managers use CSR as a tool for building reputation as previous studies have established that there is scope for reputation development through CSR.
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