Corporate Social Responsibility In Mauritius Accounting Essay
The purpose of this study is to scrutinize the current practice of CSR that firms in the financial sector and the tourism sector, more precisely banks and hotels, have to engage themselves in CSR activities and to investigate the relationship between CSR and financial performance. In Mauritius Corporate Social Responsibility (CSR) has gained much popularity and has become a subject of concern, after that the government has introduced an innovative legislation about CSR. Previous research on the topic is reviewed, the engagement of Firm in CSR. This study by means of questionnaires, also tries to investigate their motivations behind investing in CSR. Data collected was then analyzed using SPSS. The results highlighted that there are no differences between banks and hotels in the motives to engage in CSR activities. The results also highlighted that there is a relationship between CSR and Financial performance. Also the implications of other findings are discussed and the study concludes with its limitations and directions for future research.
CHAPTER 1: INTRODUCTION
OVERVIEW OF CORPORATE SOCIAL RESPONSIBILITY (CSR)
Mauritius since Post- colonial independence, the country over the last four decades have seen the mono-crop sugar island, our first pillar of the economy has significantly moved from the Sugar industry to Financial services industry on large scale offshore financial institutions from multinational companies to local industries, such as the Giant of Rogers Group, Air Mauritius, Island Blyth, Floreal Textile, Mauritius Commercial Bank (MCB), Barclays Bank, HSBC and others.
The field of Corporate Social Responsibility has developed exponentially in the last decades. In the past two decades, CSR appears to have become more omnipresent and perceived as being actually pertinent to companies all over the world (Aras and Crowther, 2008). It is at the forefront of strategic outlook of contemporary organisations of all kinds. A larger number of companies than at any time before are engaged in a serious efforts to define and incorporate CSR into all facets of their businesses. In recent years a great deal of time and attention has been devoted to the concept of corporate social responsibility. This basis has considered it necessary to take notice not only of the economic and financial transactions in a company, but also the social and environmental consequences a business places on its shareholders and society as well as the ecological "footprint" in all aspects of their operations, which extends beyond their statutory obligation to comply with legislation.
CSR has variously been described as a ‘motherhood issue’ (Ryan 2002, p. 302) ‘the hot business issue of the noughties’ (Blyth 2005, p. 30) and ‘the talk of the town in corporate circles these days’ (Mees & Bonham 2004). In fact, the last few decades have seen a rise in awareness on behalf of corporate bodies, on the issue that they have a moral duty to give something back to the society. This rise in awareness is plausibly the effect of the recent corporate scandals involving well reputed companies, such as Enron, Parmalat and WorldCom as well as the growing impact of climate change on the environment.
One of the fundamental questions still to be answered concerns the effect of corporate socially
responsible behavior on profitability. The answers one finds in the specialized literature are
numerous and often contradictory. Views emerging from Corporate Social Responsibility can contribute to the financial performance of a company.
This approach, has been described as ‘enlightened shareholder approach’, believes that corporate decision makers must consider a range of social and environmental matters if they are to maximize long term financial returns. Even if they sometimes can be, CSR initiatives are certainly not always compatible with other organizational strategic goals (namely growth and money-making).(McWilliams, Siegel, & Wright, 2006).
Even though the link between CSR and corporate performance remains tenuous (Lindgreen, Swaen, & Johnston, 2009), companies are following to CSR principles and practices and incorporating CSR principles and aims into their overall corporate strategy in exponential numbers (Godfrey & Hatch, 2007; Lee, 2008; C. Smith, 2003).
Similarly, as those major scandals have undeniably raised the view of greediness among senior managers, CSR is also seen as a tool for counteracting allegation of corporate greed (Deloitte report, 2008).
Each company integrates Corporate Social Responsibility differently. The differences depend on factors such as company’s size, the specific industry involved, the firm’s culture, stakeholder demands, and how progressive the company is in engaging CSR. Some companies concentrate on areas which they consider more important for them, for example human rights or environment while others incorporate CSR in all aspects fields of their operations.
CSR IN MAURITIUS
CSR initiatives go quite a long way in corporate Mauritius up to 20 years back. According to a report by Deloitte et al. (2008), it was found that the contribution in CSR has ongoing at varying period for the companies surveyed. Many enterprises are involved in CSR initiatives for the welfare of their employees and the society. Due to Government limited means to handle today’s social problem, an appeal was made to the private sector in July 2009 to spend 2% of their profits to CSR activities. Government suggested that all gains from various companies regardless of their size should invest part of their profit into non profitable organization such as charity, scientific research and wild life to restore and preserve nature in order to maintain a good balance in the ecological system which means to ‘give back to nature’. Moreover, the government has set up a national CSR committee comprising of representative members from the public sector, private sector and the civil society. Additionally, the companies need the approval of the CSR committee before the application or investment in any CSR activity. In the occurrence that a company has not spent the total amount of the compulsory two per cent of its profit, it should remit the remaining amount to the MRA.
CSR is nowadays gaining more and more importance especially after the major corporate scandals and due to changes in norms held by the general public. Such changes have given rise of the interest in the field of CSR. However, most studies have concentrated mostly on the consequences or end results of engaging in CSR activities. Furthermore many researchers have worked to find any empirical relationship between CSR and financial performance. Various Studies have identified different kinds of relationship (positive, negative, no relationship), but currently there is no clear empirical relationship. CSR is problematic as it is often perceived that there is a contrast between CSR activity and ﬁnancial performance with one being harmful to the other and companies having an authoritative to follow shareholder value.
OBJECTIVES OF THE STUDY
The main goal of the study is to scrutinize the current practice of CSR and what are the motivations that lead firms to engage in CSR activities. The study also aims at evaluating the relationship between turnover and level of CSR activities undertaken. This is an issue which has been the subject of an ongoing debate and has become a topic of concern, in the Mauritian context, especially after that the local government revised legislation making investment in CSR activities compulsory.
Objectives of the study:
Objective 1: To investigate the current practice of CSR conducted by banks and hotels.
Objective 2: To investigate what factors motivate firms to increase their involvement in CSR
Objective 3: To investigate how these firms benefited from conducting CSR
Objective 4: To investigate the differences between firms in different sector of operation in the reasons to engage in CSR activities.
Objective 5: To investigate whether there is a relationship between level of CSR activities undertaken and Financial performance.
OUTLINE OF THE STUDY
Chapter One: Introduction
This chapter consists of general overview of CSR. It provides a brief overview of the growing importance of CSR in a general as well as in the context of Mauritius. It consists the problem statement along with the aims and objectives.
Chapter Two: Literature Review
This chapter consists of reviewing the existing literature by examining diverse articles pertaining to the subject matter. The literature review helps to have a better understanding of what different researchers found on CSR.
Chapter Three: Research Methodology
This particular chapter describes who are the target population for this survey, what is the sample size, what are the procedures and techniques used for data collection, the methods used to analyze the data to get results and limitation of the study.
Chapter Four: Results and Discussions
This chapter shows how the collected data is analyzed by carrying out various tests.
Chapter Five: Conclusions and Recommendation
In this chapter, conclusions are derived from the study and some recommendations are mentioned forward.
CHAPTER 2: LITERATURE REVIEW
CORPORATE SOCIAL RESPONSIBLE – A DEFINITION
Corporate social responsibility (CSR) is a fast-growing facets of organizations. The European Commission defines CSR as “a concept whereby companies decide voluntarily to contribute to a better society and a cleaner environment.” (Simms 2002). Adams and Zutshi (2004) define it as “the integration of business operations and values whereby the interest of all stakeholders including customers, employees, investors and the environment are reflected in an organisation’s actions and policies”.
In present concept of CSR states that the business enterprises is in their usual process of business decision making should pay due attention to the social interests of the people in the community. A company is not only an economic entity but a social and political entity also. Most of the decisions taken by businesses not only affect the stockholders but also the stakeholders namely, creditors, debtors, employees and the society at large in one way or the other. ( Kapoor and Sandhu, 2010).
CSR is nowadays gaining more and more importance especially after the major events such as the collapse of Enron and the James Hardieasbestos scandal in Australia and due to changes in norms held by the general public. The argument about the place of CSR in the global economy continues with Solomon’s opinion that multinational corporations ‘should take responsibility for the improvement of world-wide social and environmental conditions’. (Scherer and Smid in Windsor 2001, p. 245).
CSR is also looked upon as an umbrella term, including many other business concepts and social practices. Synonymous with some and overlapping a few others, CSR indicates the concept of common relations between businesses and society the world over. Businesses, however small or large, are governed by their place in society and have to take into account the responsibility they bear to the society, people and environment within which they operate.
Economist Theodore Levitt criticizes in the Harvard Business Review that is no longer “fashionable for the corporation to take gleeful pride in making money. What fashionable for the corporation to show that it exists ‘to serve the public’ (Time, 2008). It is now being more and more realized world over that a firm cannot afford to function and continue in the long run unless it performs in a legitimate and socially responsible way.
Moreover, many recent definitions draw attention to the financial benefits gained through CSR. For example, Vaaland et al (2008, p. 931) explain CSR as ‘‘management of stakeholder concern for responsible and irresponsible acts related to environmental, ethical and social phenomena in a way that creates corporate benefit’’. While Mittal et al (2008, p. 1437) define the concept as ‘‘a business approach that views respect for ethics, people, communities and the environment as an integral strategy that improves the competitive position of a firm’’.
Hence, it is important to understand the point that, whether corporation’s appreciate it or not, herein lies the idea of CSR. The matter is not that of profit earning alone for a corporation, but that of looking beyond the profit-making attitude. This awareness has made corporations identify the need of CSR and its application along with their particular businesses (Gupta and Saxena, 2006).
Economics drivers of CSR
Researchers have identified different method in which CSR approach to business decision making may lead to better financial performance.
The following ‘economic drivers’ have been viewed by the World Economic Forum and Business in the Community that have explained the adoption of the concept corporate social responsibility by companies around the world (ADL 2003). It is advocated that these drivers do not operate in isolation, and that different companies may have different drivers. Several drivers may also be stronger in different areas and for different companies. An alteration to adopt corporate social responsibility may arise from a combination economics of drivers.
Employee recruitment, motivation and retention
Recent studies show that corporate social responsibility is more and more an important factor in attracting and retaining a brilliant and diverse workforce (Globescan Inc 2005). Companies that cater for the interests of their employees by offering good working conditions will attain better performance in terms of quality and delivery, and, thus, experience higher levels of productivity.
Learning and innovation
Learning and innovation are serious to the long-term survival of any business. Corporate social responsibility can be a vehicle for business to respond to environmental and social risks and turn these into business prospects.
Businesses function in a market of opinion. Depending on the judgment by customers, suppliers and the broader community on companies will have an impact on their profitability and achievement. Corporate social responsibility offers a means by which companies can manage and influence the attitudes and opinions of their stakeholders, building their trust and enabling the benefits of positive relationships to deliver business advantage.
Risk profile and risk management
Corporate social responsibility offers more effective management of risk, helping companies to reduce unnecessary losses, identify new emerging issues and use positions of headship as a means to gain competitive advantage.
Investor relations and access to capital
The investment community is increasingly viewing corporate social responsibility as similar to long-term risk management and good governance practices. Recent studies show that analysts place as much emphasis on corporate reputation as they do on financial performance (Hill & Knowltown 2006).
Licence to operate - A Global Outlook
Companies that fail to accomplish their duties to society as a whole risk losing their licence to operate — a concept whereby a company’s stakeholder’s grant the company an unwritten authority to do business. This may be supported by favoring competitors, refuses or calls for deregistration.
THEORETICAL PERSPECTIEVS OF CSR IN PRACTICE
CSR activities and practice used are not intended to be exactly the same in different companies. Companies have diverse resources and all cannot take responsibility to the same extent. According to Lantos (2001), organizations may practice three different forms of CSR namely:
It means going beyond the firm’s economic and legal obligations and take actions that is morally mandatory. A corporation is morally responsible towards any individual or group that might be harmed or injured by a particular course of action. For example; reduce shareholders profits and used the money to decrease pollution. Ethical CSR may in the long-run generate goodwill by building the public’s trust in the company. This will probably minimize the cost of fines and also bad publication that otherwise may prevail from unethical behaviour.
It is an activity where there is a win-win situation. Both the company and some of the stakeholder will benefit. This type of CSR actions implies short-run sacrifices which will usually result in long-run gains. For example, Ford campaigned that children should be seated in booster-seats and gave away millions of such seats. This generated goodwill among customers and government regulators. They believe that the investment will be profitable in the end.
It is when organizations are contributing to the common good and making the Society a better place on some sort of expense of the firm, involving corporate competences of the company to societal and community needs. Altruistic CSR goes beyond ethics and are actions that are not necessary for the company to take. The company does not expect any financial gain from it. Examples of altruistic CSR are activities that aid the society to fight drug and alcohol problems, poverty, crimes and chronic unemployment.
The three approaches are mutually exclusive and based on the activities nature (required or optional) and the purpose (stakeholders’ good, firm’s good), or both.
Today businesses are facing high competition which many firms want to perceive as best quality or valuable in customer perception. Moreover, the number of multinational companies has been increasing each year and it demanded a higher responsibility for social, environmental and economic. As the result, the influence of Sustainable Development is growing and accepted from all people. Moreover, due to the environmental issue, many researchers are concerned about environment that many natural resources can be run out if we do not use it wisely.
CSR emphasizes the concern of corporate action and accomplishment in the social sphere with a performance perspective, it is clear that firms must formulate and implement social goals and programs as well as integrate ethic sensitivity into decision making, policies, and actions”(Carrol,1991). As in the present time, CSR turns people’s attention to be the perception of the corporate engagement, in terms of how well corporate is able to engage with stakeholders.
Current practice of CSR worldwide
In practice much of the business activity that has been labeled as ‘CSR’ has been determined by the concerns of investors, companies and consumers based in the world’s richest countries. National CSR agenda in middle and low income countries have been less viewed internationally.
For the past five years or so, governments, companies and NGOs in many middle and low income countries have implemented CSR program from developed countries through greater direct engagement. CSR activities have developed in countries such as China, India, South Africa, the Philippines, Brazil and others. Governments in middle income countries have pressed companies to engage in summiting these tasks, as with Black Economic Empowerment in South Africa encouragement of business efforts to reduce poverty in the Philippines.
CSR has also potential link with government strategies aiming at ensuring better access of certain categories of citizens to the economy. One example of such strategy is the Citizen Economic empowerment in Zambia, which aims in particular at increasing local participation in economic activities.
With detail to developing countries, one major CSR concern is that government will ignore corporate irresponsibility or refuse to enforce protective efforts or environmental criteria in the law as an incentive to foreign investment (Aman, 2001). China for instance, has heavy-duty to collective negotiations, by law, and yet many people in jail for trying to use those rights (Diamond, 2003). Yet some developing country governments are transmitting laws requiring higher standards of responsible environmental or social ways in order to compete for foreign capital and institutional investment, in addition to competing on the more familiar ‘rule of law’ issues of contract and property law rights, financial transparency and reduced government corruption (Hebb and Wojcik, 2004). Comparing these legal improvements in different emerging countries would be further helpful in understanding the contribution of CSR.
Chapple and Moon (2005), have found that CSR in Asia is unrelated to preexisting levels of economic development but is related to the extent to which domestic companies engage in international trade, even where that trade is with other Asian nations.
THE CURRENT PRACTICE OF CSR BY BANKS AND HOTELS IN MAURITIUS
Mauritius is the first country in the world to require businesses to donate a portion of their profits to NGOs or government projects in the name of Corporate Social Responsibility (CSR). Apparently recognising the poor level of corporate citizenship in Mauritius, in 2009, the Ministry of Finance introduced the CSR Fund.
A company using a Corporate Partner to implement its CSR programme will be allowed to spend only an amount not exceeding 25% of the CSR Fund. A company implementing CSR programme is eligible to administrative costs not exceeding 15% of the CSR value.
The company is provided a 12 months period from the end of its financial year to fund project from its CSR fund. If it has not given the 2% CSR fund then they will have to submit it to the MRA. The corporate programme form and Declaration by Applicant is presented below in Appendix D.
Banks in Mauritius especially the leading one such as Mauritius Commercial Bank (MCB), State Bank of Mauritius (SBM), HSBC, Barclays and such that, invest huge amount of money in CSR. Not only Banks but also in the Hotel sector invest in CSR. The role plays by some Banks and Hotels in CSR are briefly described below;
Mauritius Commercial Bank (MCB)
J.Francois (2012), of the MCB Forward Foundation, in the Mauritius l’express Journal talk about “A CSR Budget of Rs 45 millions’’. The creation of the MCB foundation in 2010 was a step in the development of CSR activities of the group. Since its creation, MCB has always affirmed as ‘‘a bank with a heart’’. The foundation gather dedicated professionals concentrated only on CSR and handle projects in medium and long terms. Moreover in 2007-2008, Rs23 millions have dedicated to CSR. In 2008-2009, it has been increased up to Rs30 millions. According to J. Francois (2012) the CSR budget varies with their profits. For the Financial year of 2009-2010, they predicted about Rs45 millions. They invest the money of CSR mainly in Eradication of Poverty, Vulnerable Children, Education, and Environment. The value proposition of the Foundation is described below.
MCB Forward Foundation
Why the Foundation
To help meet the social and environment challenges of the country
To develop and support sustainable initiatives for the benefit of the community in which we live and work
To be instrumental in the creation of sustainable value for the social, environmental and economic well-being of the community
HSBC Mauritius has continued to invest in education, poverty alleviation and environmental sustainability. In the year ending December 2011, the HSBC group in Mauritius has spent 6 million Rupees on community investment. In addition to sustaining communities, HSBC has been continuously involved in environmental sustainability. It also has a long partnership with The Mauritian Wildlife Foundation, engaged in preventing rare species.
Sun Resort (including La pirogue, le Tousserouk, Long beach hotel and such that)
Sun Resort Company has commitment towards corporate social responsibility programmes at both local and national level has proved to be a very influential tool for the advancement of local communities and unprivileged circles of the population. In 2010, the Sun Resorts Cancer Trust helped a number of children and their families in their fight against cancer. The company also has opened a four-bed Cancer Unit at Victoria Hospital in May 2009. Corporate Social Responsibility donations made by Sun Resort Ltd during the year 2010 amounted to Rs3.9 million.
Apart from Hotels and Banks, there are other private companies such as Terra, Ireland Blyth Limited (IBL), Omnicane and such that, they invest much in CSR projects. For instance, the IBL Foundation has financed 80 projects costing Rs17, 9 million. Rs6, 7 million for the socio economic development, Rs6,4 million for education and Rs1,2 million for sports. Moreover, there is the Omnicane Foundation which have spent Rs11, 1 million for vulnerable children, Health care, Education, Eradication of Poverty and on environment.
MOTIVATIONS FOR FIRMS TO ENGAGE IN CSR ACTIVITIES
The motivations for firms to engage themselves in CSR activities can thus be broadly viewed from two main perspectives which are strategic perspective and the moral perspective.
Strategic motive linked with Agency theory
Agency theory put emphasis on the point that managers are recruited in order to work for the company that employs them, thus their major duty is to maximize the value of the firm and therefore the wealth of those who possess the company. Moreover, from an agency theory perspective, engagement in CSR activities is often viewed as a misused of company’s resources which could instead be used invest in projects where profits are maximized. Nevertheless, managers will invest in CSR activities only if such investment will help them to improve the reputation of the firm or simply help them to increase shareholders’ wealth (Jones, 1995). However an agency problem may occur because of ‘‘concern that the agent (e.g, the internal or external recipients of funds)’’ will not follow the ‘‘interests of the principal (e.g., the donor)’’ who wishes to pursue CSR activities (Husted & Allen, 2007). Very often, managers are motivated by their self- interest and therefore cannot be relied on to work in the best interest of shareholders.
Strategic motive linked with the Resource-Based View Theory
The Resource- Based View (RBV) theory regards CSR as a resource that firm must know how to exploit in order to gain competitive advantages over its competitors. According to Branco and Rodrigues (2006) the firm in this model, is viewed as a ‘‘unique bundle of resources and capabilities that is developed overtime as the firm interacts with all its stakeholders’’. This theory assumes that firms are a set of various resources and competences that are not exchangeable among firms.
THE MORAL MOTIVE LINKED TO THE NORMATIVE STAKEHOLDER THEORY
The moral motive is also linked to the normative stakeholder theory, which is commonly known as intrinsic stakeholder commitment. Success of an organization, according to the stakeholder theory, depends on the ability of the firm to handle and manage its relationships with a number of constituents, such as financers, shareholders, customers, employees, suppliers and then community at large (Donaldson and Preston, 1995).
According to Freeman (1984), managers also ‘‘bear a fiduciary relationship to stakeholders’’ instead of having solely fiduciary duties towards owners of the firm. Similarly, Donaldson and Preston (1995) defined stakeholders as ‘‘persons or groups with legitimate interests in procedural and or substantive aspects of corporate activity’’. Thus, CSR is viewed as a means of fulfilling the duties that the company has towards its stakeholders, and therefore it is crucial that the firm engage itself in CSR activities that are significant to the stakeholders. However, the more influential stakeholders are, the more the company has to adjust itself to their demands and this has given rise to questions whether firms engage themselves in CSR activities because they really want to assume their social and moral responsibilities or this is done only to get strategic advantages such as to prevent any stakeholder from withdrawing their support to the firm.
Meijer, Bakle, Smith & Schuyt (2006) argued that despite the fact it is rational to presume that companies want to do good for the society, it is also true that managers of those companies realize that this will benefit their organizations as well. Thus, put in simpler terms even though reporting pure unselfish intentions, firms engage themselves in CSR from strategic perspectives.
On the other hand, Graafland and Van de Ven (2006) exposed through their study that despite some firms strongly believed that engaging in CSR activities might lead to improvement in profitability, enhancement of reputation and more employee commitment, they were also much concerned with making ‘‘ the world a better place to live’’.
BENEFITS OF ENGAGEMENT IN CSR ACTIVITIES
This section will try to examine what are those advantages firms get by investing in social activities which, as many academics found, ultimately leads to improvement in the firm’s financial performance.
According to Galbreath (2009), there are only three main benefits a firm can derive from investing in CSR activities and they are namely: increased customer satisfaction; reduced employee turnover and improved reputation; and. It is these benefits that will consequently lead to improvements in the financial performance of the company.
Increased customer satisfaction
Customers are one of the most important stakeholders of a firm and by meeting ‘‘justice needs of customers’’, CSR is likely to increase customer satisfaction (Galbreath, 2009). Hence, customer satisfaction may lead to brand loyalty and consequently improve and increase future sales of the firm.
Reduced employee turnover
Employee turnover is of the essence since the loss of human capital in companies can have dramatic effects on competitive advantage of a company (Barney, 1991; Huselid, 1995). A key potential gain from CSR initiatives involves establishing the situation that can contribute to increasing the dedication and incentive of employees to become more innovative and dynamic. Galbreath (2009) found that, owing to demonstrated justice, ‘‘socially responsive activities’’ appear to be a means to reduce employee turnover.
Turban and Greening (1997) found that demonstrating CSR is essential for attracting potential employees. In their study on French firms, Maignan and Ferrell (2001) found that CSR is positively linked with employee commitment. Companies employing CSR related perspectives and tools tend to be businesses that provide the prerequisite for increased loyalty and commitment form their staffs.
Such conditions can facilitate recruitment of employees, retaining and motivating them to develop skills, reduce absenteeism, and may also translate into marginally less demands for higher wages (Deloitte Report, 2008). According to Galbreath (2009), firms that are unjust, that does not exhibit comportments that match with employees’ moral or ethical frameworks are prone to obtain negative results that affect profitability. Therefore, reducing employee turnover is crucial so that a firm can improve its performance.
Moreover another benefit of CSR is that it can improve a company’s reputation and branding and this sequentially improves the prospects for the company to be more efficient in the way that it manages its marketing efforts to attract new customers and increase market share.
Roberts & Dowling (2002) argued that good corporate reputations are vital because of their potential for value creation, but also because their intangible nature makes imitation by competitors significantly much more complicated. Their paper complements these findings by showing that firms with reasonably good reputations are better able to sustain superior profit outcomes overtime.
In the same way, as per fombrum and Shanley (1990) superior reputations confer a ‘‘reputational advantage’’ which may lead to improved financial performance, reduction of risks associated with the firm as well as ‘‘pricing concessions’’. CSR activities present visible signals from which stakeholders assume various positive characteristics of companies, ‘‘thus creating a way to increase overall firm reputation’’ (Galbreath, 2009). It can be seen that the reputational benefit is closely related to how stakeholders view the firm.
Financial Performance as a Motivation
Financial performance considers one of the most important studied indicators of the strategic value of CSR (Orlitzky et al. 2003).Profitability is the most important aspect affecting a firm’s growth and existence. It seems improbable that a company could spend shareholders’ funds without providing some kind of return. The argument is that companies who implement CSR will experience increased profits, and those that do not will suffer adverse effect on profitability. Labeled as a stone of important theme of CSR (Jorgensen and Knudsen, 2005) the relationship between CSR and financial performance signifies the most questioned area of CSR (Angelidis et al, 2008).The first researched done on the relationship between CSR and financial performance was Friedman (1962).
It is argued that by disclosing more information, a company is showing investors and the general public that they are honest and responsible. “You are saying you have nothing to hide, you are explaining where there are problems which there inevitably are,” (Adams and Zutshi 2004). Deegan (2002) shared this view, and looked at opportunities for “ethical investment funds” for ethical investors. Adams and Zutshi (2004) also suggest that profitability can be boosted through increased savings due to technological improvements and employee productivity.
Some researchers found a negative relationship, some found a positive relationship and some found no relationship. A negative relationship between CSR and financial performance would suggest that the costs incurred from CSR make the firm less profitable than firms that do not participate in CSR activities (Bragdon and Marlin 1972).
Legitimacy theory is straightly linked to financial performance. It suggests that environmental discloses help to manage reputation of a company. According to Legitimacy theory, it is argued that by not managing reputation a company will experience a drop in sales. Deephouse (2000, p.1093) defined reputation as ‘‘the evaluation of a firm by its stakeholders in terms of their affect, esteem and knowledge’’. According to Roberts (2003) a good reputation boosts the importance of everything an organisation prepares and says. A bad reputation degrades products and services and acts as a magnet that attracts further disrespect. Mittal et al (2008) also mention better reputation as a major motivational power behind CSR.
THE RELATIONSHIP BETWEEN CORPORATE SOCIAL RESPONSIBILITY AND FINANCIAL PERFORMANCE
The relationship between CSR and financial performance has been empirically examined by one hundred twenty-seven published studies between 1972 and 2002 with different measurement methods ( Margolis and Walsh, 2003). This sub-section looks at some of the most important relevant empirical studies that have been carried out.
Positive Relationship Between CSR and Financial Performance
Anderson and Frankle (1980) suggest a different approach by using a firm’s market value to measure financial performance and its relationship with CSR. A positive relationship between market value and CSR was found. This meant that investors were investing more in firms who employed CSR than those who did not. This offers some evidence of the existence of the ‘ethical investors.’
Moreover Waddock and Graves (1997) found a positive relationship between CSR and financial performance that suggest that firms with ‘greater quality management’ achieve better at CSR. In addition, Hillman and Keim (2001) find provision for the ‘greater quality management’ argument when they indicate that managers who focus more to all stakeholders on social fronts are compensated by shareholders when comparing firms. Orlitzky, Schmidt, and Rynes (2003) conduct a meta-analysis of studies comparing firms, concluding that in total better CSR has a positive outcome of firms’ financial performance.
Ruf, Muralidhar, Brown, Janney and Paul (2001) found that growth in sales was positively related to social initiatives, revealing that long term financial benefits may exist if a firm devotes itself more to social activities. In their investigation, on the link between participation in social activities and financial performance of firms in the banking sector, Simpson and Kohers (2002) found that indeed the link between social and financial performance is positive. Graves and Waddock (1997) also, established that indeed Corporate Social Performance is found to be positively correlated with financial performance of a firm.
Van de Velde et al. (2005) reached to the conclusion that there is a positive relationship between CSR and firm financial performance. In this study, the data from Vigeo Corporate Social Responsibility ratings Agency has been useful for evaluating the variable of CSR. The Fama and French model has been used for measuring Firm Financial Performance.
In the most recent study, Hill et al. (2007) investigated the outcome of corporate social responsibility on financial performance in terms of market-based measures and provided a positive result in the long-term scope. An additional matter of the relationship between CSR and Corporate Financial Performance that Griffin and Mahon elevated is about the causality. In an effort to meet stakeholders’ expectation, every company should try to develop corporate social performance from time to time and, at the same time, the economic/financial should also be improved.
According to Parket and Eilbirt (2006) a company may be more likely to disclose CSR when there is some excess in the company financial statements. That is a company that has spare money to invest in CSR is more likely to do so (Parket and Eilbirt 1975). This motivates companies to increase financial performance when reporting CSR, as the company could use this surplus money to invest in other returns earning investments such as bonds, or even in the bank instead of investing in CSR. Parket and Eilbirt were able to find a positive relationship between profitability and CSR providing more evidence of the relationship between the two variables.
Negative Relationships Between CSR and Financial Performance
The first researcher who found a negative relationship between CSR and Financial performance was Vance (1975). The study regarded at share price and noticed that investors would be more contented investing in companies who reported little or no CSR. His final remark, “companies have more reasons to cater for social needs/ be socially responsible than only how it affects the per share value of their corporate stock” concluded by Vance’s research.
Furthermore according to the liberal view, they suggest a negative relationship as social responsibility implicates costs and as a result deteriorates a firm's competitive situation (Friedman, 1970). Linked is the view that social limits on firms and socially responsible behavior may clash with value maximization (Brummer, 1991; Jensen, 2001). There may also be a negative link between social and financial performance when managers follow their own ideas, which may conflict with shareholder and stakeholder objectives (Williamson, 1964; Jensen and Meckling, 1976). 1976). Sethi (1979) says that firms will put social responsibility over financial performance in a pursuit for legitimacy and when they are under pressure from stakeholders. Preston and O'Bannon (1997) argue that an increase of funds to invest in social performance can worsen the financial performance due to adverse concerted effort.
Similarly Riahi-Belkaoui (1992) also found a negative relationship between a company’s CSR activities and benefit schemes, giving a new perspective on the relationship. Riaha-Belkaoui’s results advocate that even large corporation may be not undertakes CSR activities. This is due to the disagreement of shareholders who do not like that their profits are used on activities that they do not consider beneficial to them.
From Preston et al., (1997) point of view, they argue that manager can lessen investments in corporate social responsibility in order to increase short term profitability. This opinion seems to be really stimulating, due to the fact that other authors (Barnea and Rubin, 2006) point out the existence of a contradictory trend linked to the same phenomena that are ‘Managerial opportunism’. Waddock et al., (1997) supposed that companies with responsible performance may have a competitive disadvantage, since they have unnecessary costs.
These cost, fall directly on the outcome and would necessarily reduce shareholders profits and wealth. Both short term studies based on evaluating abnormal returns (Wright and Ferris, 1997), and long term analyses (Vance, 1975) have negative relationship between financial performance and corporate social responsibility.
No Relationship Between CSR and Financial Performance
McGuire, Sundgren and Schneeweiss (1988) find that a firm's prior financial performance conditions corporate social responsibility more than its subsequent financial performance. McWilliams and Siegel (2001) argue that firms invest in social activities because they want to satisfy the demands of their stakeholders. In market equilibrium, the costs and the profits of socially responsible conduct will compensate each other. This is the basis for a neutral interaction between financial and social performance.
Fry and Hock (1976) argue that the relationship between CSR and profitability may be different from businesses. They have an investigation among members of the oil industry such as Texaco and determined that the amount of CSR did not increase or decrease the profitability of the firm. Fry and Hock concluded that the firm’s size and public image management also determine the amount of CSR reporting undertaken. They also suggest that the industry a firm operates in may have a strong effect on the results that are found when observing the relationship between CSR and economic returns. Firm size is possibly a difficult variable that must be controlled (Fry and Hock).
According Ullman, (1985), there are so many variables that intervene between the two that a relationship should not be expected to exist.
McWilliams and Siegel (2000), found that, when research and development (R&D) and industry factors are excluded, the coefficient on corporate social performance (CSP) (a measure of CSR), is positive and statistically significant. However, when research and development (R&D) and industry factors are included, the degrees of the coefficient reduce dramatically and are no longer significant and CSP showed a neutral effect on profitability.
The reasons to engage in CSR are diverse. However, while morally fulfilling the needs of its stakeholders, this can as well provide important benefits to the firm in terms of increased customer satisfaction, reduced employee turnover and enhanced reputation, which all contribute to finally improve financial performance of the company. This chapter also reviewed previous research assessing the relationship between CSR and financial performance with various methods to do their research.
h enough while on the other hand, if the turnover of firms are relatively low, the level of investments in CSR will be low.
The findings are in line with other studies, for instance, as mentioned in the literature review Parket and Eilbirt (2006) a company may be more likely to disclose CSR when there is some excess in the company financial statements. That is a company that has spare money to invest in CSR is more likely to do so (Parket and Eilbirt 1975).
CHAPTER 5: CONCLUSIONS AND RECOMMENDATIONS
This chapter reviews the central findings of the research of the current practice banks and hotels have to engage in CSR. Initially, the main findings and summary of the study are provided. Following the recommendations for improvements are discussed and finally, an overview of the study and future research opportunities are as well provided.
MAIN FINDINGS AND SUMMARY OF THE STUDY
The results of this study revealed some noteworthy insights into the current practice firms have to engage in CSR activities and whether corporate social performance is linked to financial performance. Similarly, the results are indicative that CSR is not yet implanted in the corporate culture in Mauritius as CSR is still carried out by most firms on an ad hoc basis and the majority firms have no organizational CSR structure. Moreover as far as benefits are concerned, most firms have experienced an improvement in their reputation and also better motivation amongst employees.
The results of this study also indicates that firms which have strong financial performance have more resources available to invest in social performance areas, such as environmental concerns and 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 social care for workers. On the contrary, companies with financial problems usually allocate their resources in attracting and retaining talented personnel and for their internal business improvement.
The findings also indicates that CSR is positively related to better financial performance and therefore, the view that socially responsible corporate performance can be linked with a series of bottom line benefits. Most firms revealed that the financial implications of CSR are experienced in the long term.
CONCLUSIONS AND RECOMMENDATIONS
The conclusions and recommendations are as follows:
Evidence from this study showed that CSR should be increasingly embedded in the corporate culture of Mauritius. The vision of CSR in Mauritius feeds in the notions of sustainable development. Though there has been a fair bit of media coverage of the concept of CSR in Mauritius, there are still some confusions revolving around the concept. Therefore, there must be more information campaigns about the concept itself for companies, NGOs and the society at large.
The study has revealed that firms’ approach to CSR needs to be re-organized. It is therefore advisable for firms to develop a much more structural approach to CSR and this can be done by setting up a department responsible only for carrying out of CSR activities. With a department devoted only towards such activities, the efficiency and effectiveness of these activities will improve.
Similarly, as revealed through the study, the resources firms devote to CSR activities usually determined by the request of the stakeholders. Thus, it is vital to have more forums where needs of the various stakeholders can be easily identified. This will lead to a better allocation of resources and increase usefulness of CSR activities.
The ‘‘Maurice, ile Durable’’ vision of the Mauritian Government is a main pillar of its plan for sustainable development and for protecting the quality of life of its citizen. Therefore, the collaborative partnerships among the different stakeholders namely government, private sector and NGOs should be reinforced.
The government should allocate finance for treating CSR as an investment from which returns are expected and optimizing available resources by ensuring that efforts are not duplicated and existing services are strengthened and supplemented.
LIMITATIONS OF THE STUDY AND PROPOSALS FOR FUTURE RESEARCH
All studies have limitations; hence this section depicts the limitations of the current study and presents suggestions for future research. One limitation comes from the decision of exploring the current practice of banking and hotel sector have to engage in CSR activities. More specifically, owing to the exclusive role of banks and hotels fulfill in society and given that they both form part of service oriented ser. It might be complex to generalize the findings and results to other sectors in business community. As a recommendation, it is suggested to widen the scope of this research to non-service oriented sector as well.
Similarly, an additional limitation of the study is that firms which have been surveyed, have not properly been in a position to appropriately measure the benefits they have received from conducting CSR activities. Also, information on CSR activities for some hotels and banks conduct has been subtracted from company websites and annual reports.
In light of future research the source of the connection between CSR and profitability has been rarely investigated. 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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