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Relationship Between CSR and FTSE 100 Companies

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Chapter 1


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.

Chapter 2


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.

The disadvantages of this Meta analysis was the studies it used could have suffered publication bias, which means that any studies that showed more effects were likely to be given preferences and hence published, while the less dramatic ones could have been ignored. The other drawback is that since the studies spanned over 30 years and were diverse in their production locations, there can inconsistencies in the qualities of individual studies.

2.5 Other studies on the topic:

Various other studies were conducted to evaluate the relationship between corporate responsibility and financial performance. They produced mixed results:

(1) Konar and Cohen (2001) - positive relationship

This research 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.

(2) Stanwick and Stanwick (1998) - positive relationship

They 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.

(3) Dowell et al. (2000) - positive relationship

The study 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)

(4) Jaggie and Freedman (1992) - negative relationship

This research 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.

(5) Christmann (2000) - positive relationship

He 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 firm's financial performance.

(6) Cohen, Fenn and Konar (1997) - no substantial relationship between CSR and CFP

They 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.

(7) Blacconiere and Northcut (1997) - positive relationship

They 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.

(8) Louche (1998) - no significant relationship

He 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)

(9) Preston and O'Bannon (1997) - positive relationship

The author studies the relationship between corporate social responsibility and corporate financial performance using three aspects used in the Fortune Reputation Survey namely selection and retaining of good people, quality of goods and services and communal and environmental responsibility. Financial performance was calculated using ROA, ROE and ROI. A sample of 67 companies was taken from Fortune Survey for a period of 10 years until 1992. A positive relationship between CSR and CFP was calculated using a total of 270 correlation coefficients.

(10) Brooks et. Al - negative relationship

A recent survey conducted by Chris brooks (Cass Business School), Stephen Pavelin (University of Reading) and Stephen Brammer (University of Bath) tried to evaluate the relationship between CSR and stock returns in the United Kingdom for the first time. Their results concluded that none of the CSR measured had a connection with stock returns, but instead companies with companies with little CSR relation performed better in terms of their profits.

(11) Verschoor (1998) - positive relationship

This study concentrated their research on 500 publicly held US companies on Business Week Magazine's 1000 companies in the year 1996. The companies were divided on the basis of their presence and absence in the CSR field. The financial performance of companies with a business code of ethics was found to be on average better than the CFP of companies without them.

(12) Hart and Ahuja - positive relationship

They studied the data of 127 US companies listed in the S&P 500, which were involved in some kind of manufacturing, production and mining. The study measured return on sales, return on assets and return on equity data of companies from 1989-1992 using the theme of regression analysis. The results were found to be positive between environmental sustainability and corporate financial performance.

Apart from these studies, the London Business School carried out 80 studies on the subject of corporate social responsibility. It is listed that out of these 80 studies, 42 showed results of positive relationship between CSR and CFP, 19 studies showed no significant link, 15 studies declared mixed results and only 4 studies showed a negative connection.

2.6 Proof that the correlation between corporate social performance and corporate financial performance is growing stronger:

1) Approximately $1.2 trillion, or nine percent of the total investment assets that are controlled in the United States, including shareholder activism and social screening, has taken part in a socially responsible initiative in the year 1997.

2) A finding released by the Conference Board's Global Corporate Citizenship studies has discovered that assets handled in investments that are socially responsible had multiplied at a rate of 227 percent between 1995 and 1997, compared with only 84 percent for assets that are handled by the total pension funds.

3) In 1996, a study was conducted on 469 companies in the U.S. which clearly showed a positive association between return on assets and good social performance.

4) Industry-balances portfolios of S&P 500 companies were developed by the Investor Responsibility Research Center to evaluate their pro-environmental activities. The results showed that companies that practiced pro-environmental or “green” policies and portfolio did not suffer any setback in their financial performance; rather the low-polluting companies outperformed the high-polluting ones 75 percent of the time.

5) Advanced corporate social performance aids the companies by easing their regulatory approvals, reduction in fines and costs incurable form the nonconformity with the government regulations. CSR can be a helping friend for all companies in any industry where there are narrow regulatory requirements, for example in the banking and healthcare industry. The company can reap benefits from improving social performance as well as keep in close conformity with the regulations, hence killing two birds with one stone.

6) A study done by Cone-Roper also found out that the rewards of good corporate performance is more immediate locally that at national level in both the U.S. and the U.K. 59 per cent customers were of the opinion that businesses should concentrate more on local problems than national or international problems, compared to 26 per cent who favoured nationally, and 9 per cent who preferred internationally.

7) The Conference Board study found out that marketing affiliated to any social causes were more likely to boost company's image and reputation. The 1997 report by Cone-Roper proved that 76 per cent of consumers were likely to transfer to a product relate to a good cause, provided the quality and price remained the same. They would also move to another retailer if it was associated with a good social or environmental cause. (Corporate Board, (1999))

8) Paul Monaghan, who is the sustainable development manager at the Co-op Bank, says that the ethical and ecological benefits from becoming socially responsible and environmentally friendly has brought in more than £20 million profit input to products and services (Evans, 2004).

9) British Telecom in its annual sustainability report of 2003 laid out that it saved over £600 million over 10 years due to its focus on energy and fuel savings (Evans, 2004).

10) A survey of employees in an American firm in 1999 and 2000 discovered that the usage of ethics and guidelines were very common. Around 79 percent of the respondents said their company had formed a set of printed moral codes and guiding principles, 55 percent agreed that their company gave them some sort of ethics teaching, which was up from 33 percent in 1994. In organizations with more than 500 employees, this ratio was better at 68 percent (Joseph, 2000).

11) A survey found out that more than 400 companies in the Forbes 500 had implemented ethical values, codes of conduct, or corporate credos had made or altered these documents in the 1990s (Berenbeim, 1999 & Murphy, 1995).

12) In 2002 the number of members of the Ethics Officer Association, which is an organization of corporate ethics officers, had gone up to 780 members from 12 members, when it was established 10 years earlier. The company had ethics officers form half the Fortune 100 companies in 2002.

A large number of studies were conducted to establish the relationship between corporate social responsibility and financial performance of a company. Many of them concluded that there is indeed a positive relationship between CSR and CFP, while some were of the opinion that is a negative relationship and a few others did not find any connection at all. According to Peloza and Papania (2008), this inconsistency in the results can be due to the lack of acknowledgement of stakeholder's opinion and interests in CSR, by the managers. This is supported by the fact that the stakeholders have in fact the power to reward or punish the company. According to Margolis and Walsh (2003), much of the present confusion in the studies about CSR-CFP relationship is because of lack of clearness about the definitions and the assumptions.

However, on one side, there is a case that CSR is currently becoming one of the most famous and trendiest issues that are being discussed in competitive business today and, on the other hand, the effectiveness of CSR in bringing about a change in profits and value is still not clear yet. However it is also true that it s an important issue that is to be undertaken by businesses because of the good changes it can bring about in the community and the environment.

There are several reasons that are cited to have caused this uncertainty in the results. First of all it is difficult for the company to determine the exact value of the social performance done by the company. Also, they are trying to find a solution to the problem of defining, burdening, and evaluating the multidimensional aspects of CSR, which in itself is difficult (Waddock et al.1997). The overall idea is that CSR could be indirectly affecting the company's financial performance by increasing the firm's reliability, increasing the ties with the stakeholders and also reducing the risk.

A different explanation for the inconsistencies in the previous studies comes from Scholtens (2007), who believed that socially responsible savings and investments and their relation to CFP have not been researched before. He agrees with Munoz-Torres et al. (2004), who had investigated the CSR performance of Spanish investment funds by taking into account the social ratings.

2.7 A case study:

One of the stories of CSR can be cited in Wipro Ltd., a company run by Azim Premji, which was India's largest company in terms of market capitalization in 2000. The company's leaning towards ethical guidelines started in the days of Premji's father, M.H. Hasham Premji, who started Wipro in 1945 to make vegetable oil. In those days it was a matter of personal interest to Premji's father to do things the right way, even though it made no monetary sense (Paine, 2001). Later on even when the company started to evolve into a much larger company under Azim Premji, it still hung on to its values and practices of involving in CSR activities. Azim Premji himself explained on several occasions to insist on honesty, which sometimes contradicted their financial interests. This eventually helped the company's reputation and attracted quality staff and minimized transaction costs. In 1998 the company took a self survey for market research programs and confirmed the importance of core values that identified the company in the market.

2.8 A case against the CSR-CFP relationship:

According to Margolis and Elfenbein (2008), of all the 167 studies which were conducted over 35 years, none of the studies succeeded in proving a strong bond between CSR and CFP. They also only managed to find a small correlation between CSR and CFP. This correlation, according to them could be due to the impact of the availability of large funds for a company, which prompts them to make investments in CSR. They studied that direct cash funding to charities seems to have more effect than investments in community projects or other policy adoption.

They established the following findings:

(1) Corporate misdeeds will prove costly to the companies concerned. Recent events and scandals involving companies help in proving that this is true.

(2) They found out that only 2 percent of the studies showed that companies which spend resources to social initiatives impose a direct cost to shareholders. Hence proving that going “green” need not necessarily mean huge expenses to the companies.

(3) The study suggests that managers should not involve in taking CSR decisions with a view to attain profit from them simply because they are not a good source for profits. There are several other ways o obtain better profits.

(4) They also recommend that investments should be evaluate based on its merits, and that it can be influences by the leaders vision. However they do not support the view of leaving this decision in the hands of the shareholders. And of course doing good may be its own reward.

2.9 Keeping stakeholders happy- The key to achieve financial stability:

Some researchers argue that the inability of previous studies to come into a definite conclusion about the existence of the connection between CSR and CFP can be due to their lack of acknowledgement of the importance of stakeholder's involvement in the subject. Corporate reputation review (2008). According to Griffin (2000), there may be difference of opinion among stakeholders regarding where to invest the money for CSR. Griffin (2000) says that universal norms are not agreeable as they may contradict the opinions of the different stakeholders. According to the author the stakeholder's view must be given preference because ultimately they are the support and stability of the firm. And also their views and opinions will largely impact the share prices of the firm, loyalty of the staff, consumer base and the media relations.

Even though some previous studies contained references to the importance of stakeholders, studies of CSR-CFP relations assume generally that the behavior of stakeholders is consistent in each case. For example is the massive use of KLD (a research organization) databases for the measurement of CSR. The database consists of CSR appraisal by internal stakeholders, supposing that these stakeholders share a universal measure and appraisal of CSR. Managers highly value the stakeholders who are not consistent across all companies. For example customers may be more important stakeholders for companies engaged in consumer products category while companies involved in high regulatory industries may consider government and regulatory agencies as their preferred stakeholders.

According to Barnett (2007), in the ongoing discussions about the linkage between CSR and CFP, the raw potential of the demands of the stakeholders are not given priority. Henriques and Sadorsky (1999) shows us that the priorities assigned by the company to different stakeholder groups may be dependent on the environmental position they are in, that is reactive, accommodative, defensive or proactive. For example if a firm is shown as reactive to their approach to environmental practices, it will be more unease about the relationship with the media but not their relationships with customers or employees.

According to Neill and Stovall (2005), the power and capability of stakeholders are an important factor in determining whether or not the firm will respond to their demands.

Therefore stakeholders who are more influential are better able to influence the CSR policy of the firm than those who are weaker. The stronger stakeholders will do a greater scrutiny of the firm to make sure that everything is done because of their greater dealings with customers and employees.

Having looked at the various positive effects of CSR, it will be unjustified to look at some of its negative effects. A typical CSR phenomenon called “greenwash” is not suitable as insurance for firms. For example in the case of Enron, an energy giant in the United States, whose fraudulent activities are well known, cannot get away with CSR initiatives because stakeholders will only view it as a deliberate attempt for cleaning up their bad reputation. Therefore in such cases it is not possible for positive CSR to take place but its effect only becomes negative. Similar situation has also been face by British Petroleum (BP). Although the firm is widely regarded for its environmental concerns, (it even changed its name from British Petroleum to Beyond Petroleum) critics view their efforts made to greenwash their stakeholders. They raise concerns about BP by showing the example of investments made by BP in Russia's petroleum industry that eclipses the initiatives the company has taken in sustainable energy development. This has made Greenpeace has named BP the biggest “corporate climate culprit” on earth in 2004.

Wal-Mart has also come under scrutiny for its plans to provide health insurance to its workers. This however was initially praised, but it came under fire after the true motivation for this policy was revealed by a company memo. In another high profile case that was under heavy accusations was the Merck case, where it was informed that the company knew about the dangerous side effects of its drug Vioxx. These situations result in the public opinion about the company to go down and are likely to affect the financial performance of the company concerned.

However there are other less hateful cases were a specific incident is something that happens accidentally or without intention. For example the famous petroleum-spill case at Intrawest's famous ski resort called Whistler-Blackcomb, which was a case that stood out form an otherwise good history of environmental efforts. Therefore they were supported by some people as it was only an accident.

Chapter 3


3.1 Introduction:

A research methodology should contain information regarding what the research is, how the data needed for research is to be produced and the appropriate measurements to calculate data and how to implement them. The objective of this research is to find out if there is any relationship between the corporate social responsibility and the financial performance of a company; if so whether the relation is positive, negative or if there is no relationship; and the various relationships that supposedly exist between CSR and CFP. It is of high significance that the data collected must be credible, relevant, accurate, timely and specific. This chapter gives an overview of the methods used to carry out the research. There are two main types of data depending on the collection method - primary data and secondary data.

3.2 Primary data:

Primary data refers to the data that has not been previously recorded. It is a firsthand analysis of data. There are various approaches to collecting primary data:

(1) Interviews

(2) Case studies

(3) Laboratory experiments

(4) Questionnaires

(5) Field experiments

In this research in order to establish the relationship between corporate social responsibility and corporate financial performance of a company, a case study of the FTSE 100 is done by taking the data sample of 20 companies. The data collected is compared and analyzed with other sources to obtain relevant and useful information. Interviews will be conducted with managers at different levels in order to obtain their view and opinions. Questionnaires are useful for obtaining quick, specific and easy data from different places, especially from situations from where it is difficult to carry out interviews.

3.3 Secondary data:

It refers to the data that has already been gathered, analyzed and published by others so that it is accessible to everyone. It can also be called as borrowed data. It also has its importance as it can be used as a substitute or as an extension for primary research. It can be handy because it is difficult for some to access certain data during certain periods. Therefore it is quite useful.

In this research an extensive literature study was conducted to find out relevant information that brings to light the relationship between CSR and CFP. Since many previous studies and researches were done on this topic as well as several books was written about this topic, it was possible to gather reliable information.

The study design employed here is the correlation model. Stock prices of companies are taken before and after their induction into the BITC's corporate index. Then the result is calculated using the correlation analysis of the company's stock prices and their respective rankings in the corporate social index.

3.4 Measurement of financial performance:

The financial performance is calculated using the stock prices from two different periods. The first one is calculated by taking the change in stock prices in the preceding year of corporate index ratings, and the second calculation is done for the succeeding year of corporate index. The calculations are taken as different.

3.5 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.

In addition to this, interviews with the managers of some companies should be conducted to get a detailed view of their policies and opinion. Questionnaires will be distributed to manager's who are not available for a one on one interview. 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

Ø European Academy of Business in Society (EABIS)

Ø Business and Human Rights Resource Centre

Ø Ethical Investment Research Service (EIRIS)

Advantages of doing interviews:

(1) Interviews enable us to learn about things that cannot be observed.

(2) It clearly presents us the inner perspective of the interviewee.

(3) It is possible in interviews to change or alter the questions according to the previous responses, while conducting a questionnaire it is not possible as the questions will be fixed more or less.

(4) The interviewee can relax more and raise concerns and doubts about the questions if any.

(5) It provides more detailed and precise first hand information.


(1) Interviews are very time consuming as it may take time to fix the meeting and also for a detailed questioning.

(2) Interview can only be conducted when the target population size is small. It is not suitable for a mass data collection like a census survey.

(3) The reliability of information provided depends upon the interviewee. It is possible that his response is biased.

(4) The quality of information obtained depends on the interviewer.

Advantages of doing a questionnaire:

(1) Questionnaires can be use to collect information from a large number of respondents or groups.

(2) The responses are collected in a standardised way making them more precise and efficient.

(3) Usually the information can be collected very quickly and easily especially in places when one on one interviews are not achievable. It can also be communicated through post and other mediums, etc.

Disadvantages of questionnaires:

(1) Questionnaires are standardised. Therefore it is not possible to give any explanations regarding any points, which the participant might misinterpret.

(2) Open-ended questions can produce large quantity of data that can take long time to process and analyse. This can be sorted by limiting the space of the response.

(3) If the questionnaires are lengthy, then the respondents may answer questions superficially.

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 analysis provides with the quantitative data. This is done by taking into account the changes in stock prices of the 20 sample companies taken from the FTSE-100, that are also present in the Business In The Community's corporate index rankings. The stock prices are also taken for two periods. This is done primarily to distinguish the causal effect. That is to determine whether a company's involvement in CSR activities affect the financial performance of the succeeding year, or whether the good performance of the company will lead them to engage in better CSR activities the succeeding year. In short it determines the effectiveness of the slack resources theory and the good management theory by Waddock & Graves (1997). In the first test the stock prices of 20 random companies, listed in the FTSE-100 as well as the BITC's corporate social index, is taken for the year 2002. In the next test the stock prices of the same companies are taken for the year 2004. This is to evaluate if the CSR activities done by the company had any effect on its financial performance.

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 20 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. Then the BITC's Corporate Responsibility Index could be used to measure the social responsibility variable of the companies which is available on the BITC website.

Chapter 4


4.1 Introduction:

Primary research is the first hand collection of data that can be processed later to derive meaningful observations. There are two styles of doing primary research - positivist style and phenomenological style. Positivist research is conducted from an objective point of view, without hindering with the phenomena that is being researched (Levin, 1988). Positivists believe that the phenomena should be isolated and the observations should be repeatable. This includes manoeuvring the reality with variations in only a single independent variable so that regularities can be identified and connections can be drawn between some constituent elements of the social world.

However interpretivists or phenomenological researchers are of the opinion that only through subjective understanding of and intervention in reality can that reality be better understood. Interpretivists study the phenomena in their natural environment, and they state that scientists cannot avoid unknowingly manipulating the phenomena they study. They admit that even though there may be different interpretation of reality, these interpretations are themselves a part of their trailing scientific knowledge.

4.2 Differences between the two styles of research:

Various differences are perceived to be present between the phenomenological and positivist approach to research. Some of them are:

(1) Positivists are of the opinion that reality is separate from the person who observe

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