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Relationship Between Corporate Social Responsibility And Financial Performance Finance Essay

The concept of companies about corporate social responsibility (CSR) has changed over the years. Previously it was viewed only as a phrase that meant administrative conformity and observance of rules and regulations. In recent years however that view has changed and companies are increasingly beginning to realize the important role of corporate social responsibility in winning over the trust and confidence of their customers. Today the business practices of large companies are shaped in such a way as to publicize their ethics and values. Therefore it has become a relevant part of business these days.

According to the European Commission (2008), corporate social responsibility is “a concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis.” (http://ec.europa.eu/index_en.htm)

The various recommendations of the European commission regarding corporate social responsibility were that

CSR covers social and environmental issues even though it’s normally known as corporate social responsibility.

In an organization, CSR should not be separate from the organization’s strategy and functions as the main motto of CSR is about incorporating social and environmental concerns into business strategy and functions. Therefore it is a voluntary concept.

An important part of CSR is about how business concerns deal with their internal and external stakeholders that is their employees, customers, public authorities, neighbours, etc.

Despite of the costs it may bring upon the business, there are various advantages of employing CSR as a major tool in the business:

A company prominently engaged in CSR will be enjoying a better reputation and respect from the public and the good reputation helps the company indirectly in many ways. For example it makes the company easier for recruitment as there is less difficulty for a reputed company to find willing employees. The employees stay longer in the company and are more loyal to the company which is considered as a blessing to the company as they can reduce the costs and effort incurred by recruitment and training. They are also more productive as they are better motivated.

A company practicing CSR will probably comply with regulatory requirements.

It also helps the company in attaining a good relationship with the local authorities. This can help the business in many ways apart from smoothing its functions. This engagement with the local authorities is a good way to generate positive press coverage.

CSR also helps the company to understand the impact of business on the environment which helps to produce new products that are environment friendly.

It can also make the business more competitive.

Finally CSR reduces the chances of the business reputation going down due to some scandals or allegations.

Aim and Objectives:

The objective of this dissertation is to find out status of relationship between Corporate Social Performance and Corporate Financial Performance that is whether it is positive or negative or whether there is no relevant relation between them at all.

In order to achieve this objective, it will be necessary to:

Examine the previous researches done on this topic

Identify an index to measure the Corporate Social Performance of companies in UK

Measure the financial performance of the relevant companies

Discuss the relationship between financial performance and corporate responsibility.

Business in the community’s (BITC) Corporate Responsibility index is one of the leading UK’s benchmark for companies that voluntarily practice corporate social responsibility. According to their survey results of 2008, 8 companies in the UK achieved the Platinum Plus status which is awarded to the companies with highest CSR ratings. Some of the companies in the top were BT, EDF Energy, National Grid, etc. there is also another recognition called the Community Mark which is awarded by Business in the community’s for companies that has achieved various milestones in long term sustainable benefits to both business and the community.

“We want to be known as a responsible business that is making a difference to some of the global challenges society faces. We want to be known as an innovative business that is developing solutions that benefit society while supporting long-term growth, creating competitive advantage and building successful relationships with our stakeholders.”(www.bt.com) This defines BT’s approach to responsible business. One of the top rated companies in the Business in the community’s corporate responsibility index and has been awarder the Community Mark recognition.

Literature review:

Various studies were conducted to evaluate the relationship between corporate responsibility and financial performance:

Konar and Cohen (2001) founded a positive correlation exists between a firm’s environmental performance and its intangible asset value. The study was conducted on 321 manufacturing firms of the S&P 500 firms. They employed two environmental performance measures namely Toxic Release Inventory (TRI) emission levels and pending environment-related litigation. Changes in the intangible asset value were estimated by viewing changes in the firm’s market value. The study also found out that a reduction in the toxic chemical release to the environment resulted in increased market value for the firm.

Stanwick and Stanwick (1998) conducted a survey on 102 to 125 companies listed in Fortune magazine’s Corporate Reputation Index that also include a complete set of Toxic Release Inventory (TRI) data for a five year period from 1987 to 1992. A firm’s profitability was measured by yearly profits and was managed for different sized firms by dividing profit numbers by the firm’s annual sales. And the firm’s pollution level was measured as total toxic emissions, and then divided by annual sales to balance variance in firm’s size. The study discovered a significant relation between low emission levels and high profitability for firms that are reputed for corporate responsibility.

Dowell et al. (2000) found that firms adopting global environments standard that are well above the required legal benchmarks have higher market value than firms that have par or below par environment standards when compared to the legal standards. The study scrutinized 89 companies of the U.S 500 (S&P 500) that have manufacturing or mining operations in developing countries. The samples of companies were then categorize into three ‘environmental’ classification according to Investor Responsibility Research Center (IRRC) data namely (a) firms which follow local environment standards when operating in developing countries (30% firms were positive in this regard). (b) Firms which follow U.S standards while operating in developing countries (10% firms achieved this). (c) Firms which apply internal environment standards which surpass U.S requirements when operating abroad (60% of the firms). (Monks and Minow, 2004)

Jaggie and Freedman (1992) studied specifically 13 firms involved in the pulp and paper manufacturing for the year 1978. An emission index used to measure the environmental performances of the companies was used. The firms that had the highest emission output were categorized with an index of 100 and the rest of the firms were adjusted regarding to that. Then the net income, cash flow/equity ratio and ROA indices were combined, with each of them having equal weights, with these pollutant indices. The outcome of the study showed a negative association between environmental and financial performance. (Shaw and Barry, 2004)

Christmann (2000) conducted a survey in 2000 which came to the conclusion that chemical companies which employed innovative, proprietary pollution control techniques have managed significant cost savings, especially the companies that had existing facilities to innovate. The survey was conducted focusing on both cost management and pollution prevention on 512 business divisions of chemical companies in the U.S. cost management data were compared to Compustat share price and dividend data to ensure that it accurately replicated the firms financial performance

Cohen, Fenn and Konar (1997) conducted a survey focusing on S&P 500 companies. Their surveyors conducted the survey by creating two industry-balanced portfolios namely the “higher polluter” and “lower polluter”. They then compared the accounting and market return of both the sides. Their research found that either there was some positive return from investing in the environment or there was no return at all from investing.

Blacconiere and Northcut (1997) particularly researched the chemical companies during a period of eight months and determined that companies which were likely to be impacted by adverse environmental legislation suffered collectively negative price returns during the time of the discussion of the legislation and its enactment. They also established that the firms with the largest potential liabilities suffered the greatest share price declines in this regard.

Louche (1998) concentrated his study on 40 European countries from various sectors. The financial measures such as ROE, ROA and earnings per share were regressed in the context of environmental variables like CO2 emissions, water consumption and energy consumption. Their results established that there was no significant relationship between environmental welfare spending and financial performance. The companies selected were the ones with clear environmental reports. (Murphy, 2002)

Since 1970s more than 100 papers have been published that has investigated the relationship between corporate social responsibility (CSR) and financial performance. These studies conclude that there is a strong evidence of positive relationship between a company that is financially sound and socially responsible. For example the London Business School conducted 80 studies on CSR, out of which 42 presented with positive impact, 4 showed negative outcome and 19 showed no correlation. The rest presented with mixed outcomes.

Methodology:

The primary research will be carried out to find the relationship using the market model β for the companies that are listed in FTSE-100. A sample of 35 companies listed in the FTSE-100 taken. The study is conducted using the regression model after taking β for the stock estimated for two periods, one before the inclusion in the BITC’s Corporate Responsibility Index and the next after the inclusion.

The study design to be employed here is the Regression Model with the β for the stocks estimated for two periods, the first before being included in the BITC’s CR Index and the next after their inclusion.

Measurement of financial performance:

The financial performance is calculated with the assessment of Measures of Financial Risk which is summed up by Total Risk (Standard Deviation of monthly returns) and systematic market risk.

Measurement of social responsibility:

The Business in the Community launched its Environment Index in 1996 to help companies benchmark their environmental management and performance. In 2002, member companies requested a mechanism to benchmark their other activities, so Business in the Community developed the broader CR Index to assess their impacts on the community, marketplace and workplace through their operations, products and services, and interaction with key stakeholders.

Performance Band:

Platinum : ≥95%

Gold : 90 – 94.5%

Silver : 80 – 89.5%

Bronze : 70 – 79.5% (www.bitc.org.uk)

In addition to this, interviews with the managers of some companies should be conducted to get a detailed view of their policies and opinion. This is done to compare the results of the previous analysis with the manager’s point of view.

Also interviews and email communications with some research agencies should be carried out to get attain relevant information. Some of the agencies are

European Academy of Business in Society (EABIS)

Business and Human Rights Resource Centre

Ethical Investment Research Service (EIRIS)

The data resulting from these researches will be examined and analysed. This project will involve the analysis of both the quantitative and qualitative data.

The external research will be conducted through reading and identifying the findings of published material like magazines, journals, newspapers and other media.

The financial performance will contain both the quantitative and qualitative data. The market model β coefficient will produce the quantitative data while the financial analysis will require the qualitative data as well. The results could be displayed in the form of graphs, spreadsheets and pictures. Therefore it will contain both the qualitative and quantitative data.

The qualitative data that comes from the managers, for example the relevance of social responsibility will aid in the analysis, verification and conclusion of the relationship between corporate social responsibility and corporate financial performance.

The financial data for the sample of 35 UK companies listed could be obtained from the Financial Times Stock Exchange where the stock prices of the companies are available on a daily, monthly and yearly basis. This will facilitate in the finding of the value β. Then the BITC’s Corporate Responsibility Index could be used to measure the social responsibility variable of the companies which is available on the internet.

Finally data will be acquired from sources like magazines, books, articles, official websites of companies, journals, company reports, research agencies etc.

Conclusion:

This dissertation aims to find out the relationship correlation between the financial performance and the social responsibility of the companies as there is an increasing need in today’s world in the face of issues like global warming, ozone layer depletion, wildlife endangerment, increasing pollution, lack of drinking water, etc. nowadays companies and businesses adopting a policy of social and environmental awareness is essential for making the world a better place to live.

REFERENCES:

Monks, A.G & Minow, Nell, 2004. Corporate Governance. 3rd edition. Oxford: Blackwell Publishing.

Shaw, William.H & Barry, Vincent, 2004. Moral Issues in Business. 9th edition. USA: Thomson Learning Inc.

Murphy, Christopher.J, 2002. Profitable Correlation between Environmental and Financial Performance.

www.bitc.org.uk

www.bt.com

http://ec.europa.eu/index_en.htm

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