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The literature review section provides a background on the research which is being carried out and consists of both theoretical and empirical reviews. It focuses on various aspects concerning CSR by reviewing the works of previous authors. To begin with, the term CSR itself is defined and a historical review on the theories of CSR is made. Further, the disclosure phase of CSR is considered and the different ways of communicating CSR activities is discussed. Next, emphasis is laid on the main purpose of issuing CSR reports and usefulness of CSR reports in decision making is discussed. In addition, the various potential users of CSR reports are identified. The contents of CSR reports are discussed and the components of the IASB framework used for measuring usefulness are explained. In short the objective of the literature review section is to assess whether CSR reports are useful or not.
2.1 Definition of CSR
This section will focus on the definitions of CSR as derived by various authors. It contains the views of different authors giving their opinion on whether CSR is important or not. It also talks about some historical developments in the context of CSR including the theories of CSR.
The concept of Corporate Social Responsibility (CSR) is very permissive in the corporate world today and in the recent years; CSR has emerged as a mini industry both in the business and academic world (Maignan 2002). As till date, there is not a well established definition of the term CSR. "We have looked for a definition and basically there isn't one." (Jackson and Hawker, 2001). According to Van Marrewijk (2003), however, this is not completely true since the actual problem appears to be an abundance of definitions for the term CSR, most of which are based on particular interests, and therefore seem to prevent the establishment of a well defined concept.
Essentially, the definition of CSR can be classified into two general schools of thought. Firstly, there are those who believe that the obligation of an organization is to maximize profits while abiding by the corporate rules that prevail, and ensuring minimal ethical constraints (Friedman 1970, Levitt 1958). The second school of thought places greater emphasis on the organisation's obligations towards the society. (Andrews 1973, Davis and Blomstrom 1975, Epstein 1987, mc Guire 1963).
The discussion on the issue of social responsibility, was started by Friedman (1962, p.133). His point of view is to let business people do what they have to do; that is, business. According to him, the only social responsibility that exists is the use of resources and strategies in order to increase profits while respecting the set of rules that have been defined. Consequently, the use of organizational resources to do social good such as donating to charities, contributing to NGOs, is deemed unfavourable for the firm since it may lead to a fall in profitability of the entity or it may also lead to an increase in the price of products. (Pinkson and Carroll 1996)
Opponents of this view argue that companies exist to serve the society as well as those actors that have a direct link with the organisation. In this view therefore, CSR can be defined as "the obligation of the firm to use its resources in ways to benefit the society, through committed participation as a member of the society, taking into account the society at a large and improving the welfare of the society at large, independent of the direct gains of the company." (Kok et al, 2001, pg 288). In other words, organizations should be accountable for their actions, to the society in which they operate.
In line with this view, Caroll (1991) identified four main components of CSR namely, economic, legal, ethical and discretionary or philanthropic. The economic component of CSR refers to the organisation's principal objective to maximize profitability and growth; the legal component involves abiding by defined corporate rules; the ethical component encompasses the duty of respecting every individual's rights and meeting their responsibilities towards the society and lastly, the discretionary component involves the engagement in benevolent activities. Hence, this became know as Caroll's CSR pyramid (Carroll 1991).
According to Ford (2003), a good company is one that provides good quality products and services, and a great company is one that does all that and also struggle to work towards making the world a better place. Pearce and Doh (2005) portray CSR as a firm's activities which are well beyond the legal requirements, to benefit the society as well as safeguard the interests of its shareholders
In summary, although there is no universal meaning of the term CSR (Godfrey and Hatch, 2007), most authors have defined CSR as a theory whereby entities integrate social and environmental issues in their day to day business operations and in their interaction with their stakeholders on a voluntary basis.
2.2 Theories underlying the term CSR
As discussed above, the concept of social responsibility is a developing concept (Mays Report, 2003, p.12) and means different things to different stakeholders (Arlow & Gannon, 1982). However, according to Anderson (1989), the concept of social responsibility has existed since the very beginning of mankind.
There are several ways through which authors have laid empirical investigations of CSR in its theoretical context. These theories have not only contributed towards the growth of the CSR subject but have also, attempted to explain the importance of the term CSR. These attempts can be classified in two broad group of studies namely the Economic Theory studies and the Social and Political Theory studies. The Economic Theory further gave rise to the Agency view Theory whist the social and Political studies lead to the stakeholder and Legitimacy theories. These theories are discussed below.
2.2.1 The Agency View Theory
The agency view of the firm and its responsibility toward the society was accredited by Freidman (1962, 1970). He proposed that engaging in CSR is indicative of an agency problem, that is, a conflict between the interests of managers and shareholders. According to him, managers use CSR as a way of promoting their own political, social, or career benefit at the expense of shareholders (Mc Willams & Siegel, 2001, p.118). Freidman's agency view argues that a firm is accountable only to its shareholders and thus, its sole responsibility should be to maximize the value of the firm. (Gelb & Stawser, 2001, p.3).
Hence, this view postulates that a firm's efficiency could be improved, if the resources invested in CSR activities were devoted towards maximizing the firm's profitability. Furthermore, this theory has been empirically tested by Wright and Ferris (1997), who concluded that stock prices were negatively related to the notice of divestment of securities in South Africa, which was thus interpreted as being steady with the agency theory.
2.2.2 The Stakeholder theory
The central proposition behind the stakeholder theory, developed by Freeman (1984), is the idea that a firm's success depends on the success of the relationship between the management and the firm's stakeholders. Stakeholders, as defined by Freeman (1983, p.33), refer to "those groups without whose support the organization would cease to exist". These groups can act formally or informally, individually or collectively, and they are a vital factor in the organisations external environment that can affect the firm favourably or unfavourably (Murray and Vogel 1997: 142).
Moreover, Freeman (1984) also argued that sufficient attention towards stakeholders' interests is vital for the success of the firm and management must take decisions that will benefit the larger class of stakeholder rather than favouring those decisions that will be beneficial to the shareholders only (Gelb & Stawser, 2001, p.3).
This theory is very much in contrast with the agency theory which looks at CSR with an angle of profit maximization. While the agency theory suggests that engaging in CSR reduces the profitability or brings out no change to a firm, the stakeholder theory puts forward that CSR activities are important because the stakeholders play a crucial role in the existence of an organisation.
2.2.3 The Legitimacy Theory
Suchman (1995, p. 574), defines legitimacy as follows ; " Legitimacy is a generalized perception or assumption that the actions of an entity are desirable, proper, or appropriate within some socially constructed system of norms, values, beliefs, and definitions".
The Legitimacy theory has become one of the most important and cited theories in the context of social and environmental accounting. The theory focuses on the responsibilities of firm's managements towards societal expectations (Tilt 1994, Patten 1992, Guthrie and Parker 1989). In other words, the legitimacy theory affirms that companies will take those measures that are supposed to be legitimate from the point of view of the society within which the company is operating. Thus, organisations will carry out their activities by respecting the norms of the society, in which they form part and hence this creates a 'social contract' between the firm and the society. The term 'social contract' is used to explain the countless expectations the society has about organisations that should carry out their activities ( Deegan 2000; Mathew 1993)
Considering the adoption of the legitimacy theory, a firm will voluntarily report on those activities that management considers being expectations of the society. (Deegan 2002; Deegan, Rankin and Voght 2000; Cormier and Gordon 2001).
2.3 Disclosure of CSR activities
This section focuses on the disclosure of CSR activities. It includes the different ways through which companies make CSR disclosure, the concept of voluntary reporting which gave rise to the GRI framework and AA1000 standard for social disclosures.
It is becoming very important for firms to communicate on their CSR activities as these disclosures can influence the decisions of the users of accounts, targeting a particular organisation (APCO, 2004). Also, CSR activities must be appropriately communicated, especially to counteract the mounting belief that firms overstate on their social behaviours (Holme and Watts, 2000).
The FASB defines voluntary disclosure as disclosures outside the financial statements that are not clearly required by the GAAP and SEC law. The voluntary disclosure premise put forward that, for firms to inform stakeholders on their CSR engagements, they should in the first place, want to make themselves different from their less concerned competitors (Verrecchia, 1983; Dye, 1985). Thus, the availability of CSR information will automatically give the stakeholders an idea of the firm's performance. Deegan and Rankin (1997) also found that voluntary environmental disclosures are effective in the decision making process of various users of accounts.
Consistent with the voluntary disclosure theory, Clarkson et al (2006) developed an environmental disclosure rating based on a broad CSR reporting framework, the Global reporting Initiatives (GRI) 2002 guidelines. They argued that firms with good environmental performances will be willing to disclose those environmental information as this will enhance their image of "Green companies", a tool which is impossible to imitate by the bad environmental performers. Hence, the GRI 2002 guidelines has shown its worldwide recognition as a standard for reporting CSR practices as it help companies to decide on what to report and how to report, given the fact that CSR disclosures are voluntary and has no recognized framework of reporting.
The AA1000 is another famous standard set for CSR reporting. It emphasizes on how the principles of sustainability and accountability must be linked by companies. According to Go"bbels and Jonker 2003, this standard can be used to design a proper reporting mechanism as it guides firms on how to identify their objectives, match the firm's progress with the set targets and verify and report the performance.
Even though reporting on CSR is voluntary, some Europeans authorities are employing mandatory regulations on reporting (e.g. Spain and France), while in other countries, the implementation of international reporting standards is growing rapidly, even though no mandatory laws exist in the EU at present (Tschopp, 2005).
2.4 Channels of communicating CSR
Companies use a wide medium of communication for CSR activities such as the annual report, social reports, thematic reports, codes of conduct, web sites, advertising, to name a few (CSR Europe, 2000 a, b). However, as shown by many recent studies, the most common form of communication is the annual report, social reports, newspapers/magazines and websites.
Like mentioned above, there are various mediums of communicating CSR practices. According to a study conducted by Alnajjar, 2000, the annual report was found to be the most commonly used channel for disclosing CSR practices to stakeholders. This is so because companies normally indicate what they perceive as vital through the annual reporting mechanism. Investors, creditors, employees, environmental groups and the government seek annual reports as a primary source of information for their investment decisions (Neu et al., 1998, p.269). In the same way, Mangos and Lewis (1995, p.56) stated that "corporate social responsiveness as demonstrated within the content of corporate annual reports is both a visible and measurable social influence".
Furthermore, Gray et al. (1995, p.82), argued that annual reports are not merely a statutory document but are actually the most important documents in a firm's creation of its social image.
Stand alone social / environmental/ sustainability or CSR reports.
Social/ environmental/ sustainability or CSR reports are CSR disclosures that are disclosed separately. According to Gray et al (1996), social reports/ CSR reports are mostly used to publish the social and environmental effect that a firm's economic actions can have on the society. The decision on whether to issue stand alone reports or include CSR disclosures in the annual report might depend on a firm's availability of resources or a tactical way to reach particular stakeholders.
Although firms are constantly looking for alternate ways of differentiating their CSR activities, the main method of disclosure remains the annual reports ( O' Dwyer, 2003) since the annual reports are the only document that is sent to all shareholders of a company.
2.5 Main purpose of issuing CSR reports
This section of the literature review emphasizes on the main purposes of CSR disclosure which are mainly accountability and decision usefulness. Decision usefulness also includes empirical studies by authors in an attempt to find whether CSR disclosures are useful or not and hence, it meets some of the objectives of this research. Furthermore, this section also deals with the potential users of the CSR reports as well as it identifies the contents of those reports.
The main purpose of CSR disclosure can be broadly classified in 2 main categories:
Gray (1992) came up with the idea that there exists a social contract between a company and the society in which it operates. The contract is one which imposes the publication of social accountability through corporate social reporting. Gray (1992) argued that the society had a right to information in order to assess to what extent organizations have abided by the rules and regulations that govern a society. Thus, Gray et al. (1996) defined accountability as "the duty to provide an account of action or reckoning of those actions for which one is held responsible".
The author further believes that accountability leads to the development of accounting in such a way that contributes to a society in which the players are better informed and more empowered. He also suggests that an increased requirement for accountability will convey three main benefits.
Firstly, there will be improved transparency of the firm as the transactions of the organisation will be more visible as well as the effects both within the company and the society will be more evident. Secondly, better decision can be taken. An increase in the amount of information disclosed both in terms of quantity and quality will help both the society and the firm to make better decisions. Lastly, it will demonstrate greater responsibility by the firm. Making the organization more transparent, will clearly communicate its actions and the results to the society, and hence exhibit how responsible the firm is.
The Triple Bottom Line
According to Elkington (1994), firms that only concentrate on making profits could be said that they are companies which are operating for a short term period. John Elkington and Simon Zadek were credited with the term Triple Bottom Line (TBL). TBL does not only focus on profits, but it also concentrates on the social and environmental aspect of a firm. It can be seen as the commitment of companies towards their stakeholders as well as a prerequisite to achieve sustainability (Henriques et al, 2004). Thus, a TBL report is the bookkeeping of a firm's performance, not only in terms of profits, but 1234567890-also in terms of its impact on the society, environment and the economy. The term 'CSR report' is sometimes used instead of TBL report, but both have the same meaning.
According to Wilmhurst and Frost (2000), management considers typically the shareholders needs and legislation while making their environmental disclosure decision making course. Deegan (2004) stated that regulators also have the tendency of fulfilling the information needs of shareholders by disclosing environmental and social information.
Thus, to fulfill the information needs of stakeholders and attract potential investors, companies should correctly disclose not only its financial position, but also communicate the non- financial issues which portray the organization as being socially responsible. Institutional investors perceive social, environmental and ethical information as significant for decision making process (Solomon & Solomon 2006). Furthermore, research have illustrated that analysts and shareholders will consider both good or bad environmental information while making up their investment decision, given the information is provided to them (for example, Chan & Milne, 1999 ; Milne & Patten, 1999; Liyanarchchi & Milne, 2005 ; Holm & Rikhardsson, 2008).
This means that not only the investors, but shareholders also make use of environment information in planning their investment decisions. In a survey of Australian shareholders, brokers, analysts, academics and financial institutions conducted by Deegan and Rankin's (1997), is was found that 72% of these participants considered CSR information as being material, implying that these information will be used in the decision making process regarding investment.
Additionally, Cormier et al (2005 p. 6), found "extensive evidence that environmental information is useful for the decision making by financial stakeholders" while Hassel, Nilsson and Nyquist, (2005), that the provision of collective environmental and financial disclosure increases the relevance of the firm's financial statement information.
Moreover, in an empirical study conducted by Hai Yap Teoh and Godwin Y Shiu, it was concluded that CSR disclosures in annual reports did not have any effect on investor's decisions. However, they also found out that if CSR information was offered in a quantified financial framework with particular attention on product improvement and within reasonable business practices, that information may be perceived not only important but also useful in decision making processes.
Fombrun and Shanley (1990), advocates that the more a company contribute towards the society, the better reputation it will earn. They argue that better reputation may allow the entity to charge premium prices, increase their access to capital markets and ultimately, attract investors. Thus, once again CSR disclosure can prove to be useful in its contribution towards the decision making process. Another experimental study conducted by Hendricks (1976), discovered that investment decisions concerning stocks were affected by the inclusion of human resource accounting information in companies reports.
Conversely, the decision usefulness of CSR has been largely criticised by various author. In a study conducted by Buzby and Falk (1979), it was found that investors did not demand much of CSR disclosure. In the same way, McNally et al. (1982) concluded that environmental and ethical information was of less use to the society. Mahaptra (1984), said that expenditures to control pollution was seen by investors as being a waste of resources, which could have been invested more wisely and did not reward firms for their socially responsible behaviour. Belkaoui (1984) and Benjamin and Stanga (1977), also concluded that environmental and ethical information was of modest use to the financial population.
2.6 Potential users of CSR reports
The main users of accounts are the shareholders, employees, suppliers, customers, local community, the government and the public at large. However, in developing financial reporting standards, the standard setters have presumed that those people using the information have reasonable background knowledge in the field of accounting and business, and are able to interpret the data in a financial report.
Shareholders are constantly looking out for companies in which they can place their trusts. Thus, many shareholders, guided by their ethical principles choose companies which are engaged in CSR activities. According to a RARE research project, "a company indulged in corporate social responsibility efforts can strengthen the voice of shareholders in sustainability matters. On a better information basis, they can assess their company's sustainability performance and assert their rights to promote more corporate responsibility (shareholder activism)".
People, in search of a job, make the use of annual reports in order to know more about the working conditions of the firms they are planning to apply. These information can be obtained in the CSR disclosures. Furthermore, according to Crowther (2003), "employees are increasingly looking to work for companies that reflect and embody their values and who are as concerned about principles as they are with profits." Hence, CSR disclosures are important for employees who want to know more about the working environment of a firm.
Suppliers make use of CSR reports in order to choose with which company they want to do their dealings and not. Normally, a company with CSR disclosure and fair business practices will be considered more reliable in the eyes of the suppliers.
According to Rubik et al. (2000), "Through CSR activities reporting companies provide more (non-financial) information to customers who can then take better informed decisions on purchasing or rejecting the company's products." Nowadays customers have become more conscious about the organization with whom they are dealing. Thus, the disclosure of environmental and social information can help customers in their where to buy decisions.
2.6.5 Local Community
The local community is very much interested in knowing the actions of the firms which operate in their surroundings. Glautier and Underdown (1994) put forward that "the local community has an interest in the activities of local industries and requires much more information on social benefits and costs than the public relations-type information."
According to the magazine 'Company news' North America (2002), "government makes use of social information disclosures to 'name and shame' companies that do not achieve satisfactory performance." Hence, the state can make use of CSR reports to find out more about the effects of companies on the society. If a company is not operating within the norms of the society, for example is causing pollution, the government can devise strategies to counter these negative impacts as the aim of the state is to promote social welfare.
2.7 Contents of CSR reports
The contents of CSR reports are different from firm to firm yet, some of the aspects are similar for all entities. Guthrie and Parker (1990) observed the annual reports of 150 companies in three countries (the U.S, U.K and Australia) and found out that the major contents were: human resources, community involvement, environment, energy and products and others. On the other hand, Ernst and Ernst (1979), scrutinized the CSR disclosures of Fortune 500 firms between 1972 and 1978, and they found out that the contents were mainly related to the environment, energy, human resources, community involvement, and product issues.
Contrary to these, the 'Code of Corporate Governance Section 7' for Mauritius offers guidelines for CSR disclosures on four main key aspects : Environmental, Social, Health & safety, and the Ethical aspect.
A firm's corporate social responsibility is often linked with its environmental policy and environmental information disclosure. Deegan & Gordon (1996) analysed the environmentally related issues disclosed in the annual reports of Australian firms from1980 to 1991, and concluded that disclosure of information related to the environment was positively associated with an increase of environmental groups concerned.
The Environmental aspect mainly contains issues like: environment protection, environment conservation, Global Warming, pollution prevention, energy conservation, recycling and environmental education to name a few.
The Social Aspect is a combination of the human resource and community activity. Ruzevicius & Serafinas (2007) claim that in the first place, a firm has to take care of its employees. Snieka & Juscius (2008) sustain that developing human resources does not only mean providing training, but it also mean employee participation in decision making and appropriate working conditions. Community activity demonstrates a company's initiatives in supporting charity, children education support and care for the disabled amongst others.
Thus the social aspect mainly includes issues like: employees training, promotion policies, employee motivations, educational aid schemes, sponsorship of sporting activities and so on.
The health and safety aspect contain issues like health policies, safety policies, sound working conditions and so on. The ethical aspect show that the company abides by some ethical principles. The issues normally include integrity, responsibility, honesty, code of ethics and etc.
2.8 CSR in Mauritius
This area gives an overview of CSR in Mauritius. It talks about the CSR fund which has been recently introduced in the country and also illustrates how firms prefer to disclose their CSR activities in Mauritius, by making reference to the survey carried out by Deloitte.
CSR traces back its origin in the 1970's. At that time, CSR was mainly limited to its conformity with the laws and regulations. CSR in Mauritian corporations, date back to 20 years ago. According to a survey on CSR, carried out by Deloitte (2008), the majority of respondents, or 39% of companies said that they started CSR activities since the incorporation of their firm while 25% recently joined the line. Also, they found out that most organizations engaged in such activities in order to enhance their image with regard to the (i) internal community (60.3%) and (ii) the external community (54%). Thus, adoption of CSR was mostly viewed as a mean for image building. Multinationals companies, on the other hand, does not only engage in CSR activities for their image but also for compliance with their global policies. The other reasons given by firms include: transparency, compulsory banking guidelines, preservation of jobs, corporate reputation and image, employee retention and loyalty.
Recently, the Mauritian government came up with a policy whereby any company making profit must contribute 2% of their book profit after income taxation, to CSR activities. Any company failing to comply with this regulation will have this 2% of their book profits contributed to the CSR fund, set up to finance CSR activities such as, poverty, by the state. It is surprising to note that developed countries, which engage massively in CSR activities, do not have such to comply with such a regulation. Then the question which arises is that, do Mauritian firms which contribute 2% of their book profits to CSR activities act as such because they really care or by mere obligation to the law?
Following the research conducted by Deloitte, the majority of the firms surveyed, or 68%, communicate about their CSR actions mostly via their annual report and Newspaper/ magazine. This is a way of enhancing their image towards the external community, by informing the society about their social responsibilities. Only 9% of companies issued a social report to communicate their CSR activities.
2.9 The IASB framework and its qualitative characteristics of usefulness
This part of the literature review deals with the IASB framework and its qualitative characteristics of useful information as well as their importance to CSR reports.
There are several criteria for measuring the usefulness of information such as relevance, reliability, comparability, understandability, completeness, timeliness and verifiability. However, the main components of usefulness are relevance, reliability, comparability and understandability.
In order to be relevant, accounting information must be able to make a difference in a decision by helping the user to assess the effects of past, present, and future events on future cash flows or correct prior expectations (IASB). Information with no bearing on a decision is irrelevant.
Reliability depends on the extent to which accounting information is faithfully represented and verifiable. For information to be reliable, it must be externally verified.
According to a report 'The second world wide survey on stakeholder's attitude to CSR reporting', it was found that a preponderance, (59%), of international stakeholders want CSR reports to be 'verified by a professional assurance or verification body'. Many stakeholders want CSR reports to be audited so that they can be more relying more on those reports. Also, letters of assurance or CSR auditors' statements provide confidence that companies' reporting processes are reliable. Dr. David Bickerton, head of external communications at BP sates that, "We believe that external assurance is a key component in providing credibility to our reporting."
According to the IASB, information concerning a particular firm is perceived to be very useful if it can be compared with similar information about other firms or with the same information about the same firm but at different points in time. Comparability enables the contrast of information concerning relative economic opportunities or performances to be made.
The users of CSR reports will find the ability to make comparison of a company's performance relative to its competitors or relative to its own performance from year to year, predominantly useful. However, to do so, data must be reported in a comparable format which is not always easy to find. This is so, because till now, there has not been a defined framework for CSR reporting, but only guidelines have been issued. Thus, firm report their CSR data, in their own way which make it difficult to be compared.
Understandability refers to the quality of information that allows users who have sufficient knowledge of business and accounting, to recognize its meaning. Understandability is improved when information is categorized, portrayed and presented clearly and concisely (IASB).
The GRI provide guidelines on what should be included in the CSR reports, what data is meaningful and how those data can easily be made understandable to the company's stakeholders.
2.10 Do people really read CSR reports?
Throughout the literature, we have seen that there are considerable studies that have been conducted on the various aspects of CSR. However, there are limited studies on whether the CSR reports are useful or not. Firms spend large amount of money in their annual reports for CSR disclosures or in issuing colourful CSR reports, but the question is: do people really read these reports? Furthermore, it is important to note that, most research has concentrated only the environmental aspect of CSR, but CSR goes much further than the environmental aspect. CSR includes social, health and safety and ethical aspect together with the environmental aspect. So, by considering the CSR disclosures vis a vis the Environmental disclosures, the public at large has more information available to them by the firms. Yet, do they take the time to read those information? The answers to these issues are inadequate due to the fact that the literature itself does not clearly provide an answer to these queries.
The legitimacy theory lays much emphasis on the term 'social contract' which requires an organization to be accountable for its actions towards the society. But, does this society really care about what the organization is doing to make itself a social corporation? Do those CSR reports really give a good impression or help to build a good image of the firm in the eyes of the society? There are very limited studies which attempt to bring clarity to these questions.
If we classify the public at large in different group of users, (Investors, employees, suppliers, government and customers), then we may find answers to some of the questions. These were discussed above in the section of potential users of CSR reports. Nevertheless, if we take the public at large, it is difficult to say whether these CSR reports are useful or not, especially since there are limited studies in this area.
That is why; this research will try to answer these questions by considering the usefulness of CSR reports in the eyes of the investors as well as from the public point of view.