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For the last forty years there has been a vivid debate about the borders of corporate responsibilities. Milton Friedman (1962/1970) and others have argued that the only responsibility of a corporation is to its shareholders and not to society as a whole as their only purpose is to maximize returns to its shareholders. Their opponents however state that corporations are not isolated entities, but are inherently connected with the rest of the society. Entities that operate in the society are therefore expected to take responsibility for their impact on the society as a whole. This consequently broadens corporation's responsibilities from merely shareholders towards a wide range of stakeholders and other members of the public sphere.
Shareholders, being the owners of a company, have a financial interest in the corporation. They have invested their money into a corporation in the hope that its managers will allocate these resources in such a way that it will maximize their return. At the end of the year every corporation publishes an annual financial report which gives an overview of the financial position and performance of the corporation in question.
Stakeholders and other members of the public sphere, that do not have a direct financial interest in the corporation, are less interested in the financial performance of the corporation. They are more eager to understand what impact the corporation's activities have on its surrounding (narrow) and on the society (broad) now and in the future. This can be labeled as the social performance of the corporation. Social performance of a corporation can be measured in different ways and deals with a broad range of topics such as: Does the company use child labor in their processes? Does the company invest in sustainable development? What is the impact of the corporation's activities on the environment and how does it handle scarce natural resources?
Faced with its responsibilities and the ever increasing demand for additional disclosures, many corporations started reporting non-financial information besides the traditional financial information. During the last decades we have seen many trends and developments in the
disclosure of non-financial information. While some companies decided to disclose necessary non-financial information as part of their annual financial report, others chose to reveal this information in separate reports, such as environmental reports, sustainability reports and corporate social responsibility reports. These reports have been undergoing many changes in their format and content; in order to enforce the message and the reliability of the reports corporations even decided to seek assurance for these reports.
Seeing all these developments, however, brings us back to the main question: Does it pay to be socially responsible or is CSR merely a burden on the financial position of a corporation? To answer this question we have decided to dedicate our literature study to the investigation of the relationship between corporate social responsibility and financial performance. By comparing several studies available on this topic we hope to be able to get a better understanding of the methodology used and the diversity of results obtained from these studies. In performing this literature study we hope to perform a preliminary investigation which will provide us with interesting ideas for our empirical study.
The rest of the paper has the following structure. Chapter 2 discusses corporate social responsibility (CSR), the motivations behind CSR and the developments in corporate social responsibility reporting. Chapter 3 explores the relationship between CSR and financial performance by means of a literature review. Chapter 4 concludes.
Chapter 2: Corporate Social Responsibility
The purpose of this chapter is to obtain a better understanding of what corporate social responsibility (CSR) is about. To achieve this goal we will examine the definition of and the motives behind CSR. Additionally we will provide an overview of the state and recent developments in corporate social responsibility reporting. However, before dealing with CSR we would like to start by briefly addressing the issue of (voluntary) disclosure.
In this paper we would like to investigate whether financial performance is a drive behind CSR reporting. Currently, many corporations disclose information on their CSR performance on a voluntary basis. Before having a closer look at the possible drive behind this form of voluntary disclosure, let us start by looking at the term disclosure. Corporations use disclosures to communicate their financial and non-financial information to outside investors and other related parties (stakeholders). Disclosures play an essential role as they assist in diminishing information asymmetry between the corporation and its stakeholders and contribute to an effective allocation of resources in society (Popa and Peres, 2008, p. 1407).
When looking at reporting we can distinguish between compulsory and voluntary disclosures.
Compulsory disclosures are defined as disclosures that are determined by national or international professional organizations or government authorities. For instance, the annual financial statements that have to be issued according to generally accepted accounting principles (GAAP) or the International Financial Reporting Standards (IFRS). Another example of compulsory disclosures are internal control reports by public companies which are required by the Section 404 of the Sarbanes-Oxley Act (2002). Voluntary disclosure forms a much needed addition to compulsory disclosure, which in most of the cases seems to be insufficient in meeting user's information needs. Meek, Roberts and Gray defined voluntary disclosure as follows: 'disclosure in excess of requirements, which represents free choices on the part of a company's management to provide accounting and other information deemed relevant to the users of their annual reports' (1995, p. 555). Management mostly uses voluntary disclosures as an instrument for differentiation of their company from other companies.
What is CSR?
With the rise of multinational corporations in the early 1970s, the term 'corporate social responsibility' (CSR) came into use. During the past years CSR and other terms like corporate social performance (CSP), citizenship or sustainable responsible business have been used interchangeably as synonyms. The main idea of CSR is that it includes public interest into corporate decision making, simultaneously implicating a shift in the corporation's focus from merely shareholders to stakeholders. The term 'stakeholder', referring to 'those groups without whose support the organization would cease to exist', has been used for the first time in 1963 during an internal memorandum at the Stanford Research institute (Freeman and Reed, 1983, p. 89). The stakeholder concept indicates that there are other groups to whom the corporation is responsible in addition to stockholders. These are groups that are directly or indirectly affected by the corporation's actions. According to this theory, a corporation should be used as a mechanism to coordinate stakeholders' interests, instead of just maximizing the profit of its shareholders. The stakeholder theory has been shaped and further developed in the 1980s under the influence of the American philosopher and professor R. Edward Freeman  .
In line with the view that the corporation's responsibilities lie with its stakeholders rather than its shareholders, the notion of CSR is build upon the triple-P bottom line theory which was introduced by John Elkington in the 1970s: people, planet and profit. According to this theory a corporation is a value-adding entity whose success can be measured by its economic (profit), ecological (planet) and social (people) performance. The economic aspect relates to the value creation through the production of goods and services, and the creation of employment. The ecological aspect concerns the corporation's effect on the natural environment. Finally, the social aspect refers to the effect on human beings, both inside and outside the corporation (Graafland et al, 2004).
There are many definitions of CSR in circulation. The wide range of definitions can be explained from the fact that CSR reporting is voluntary and is not supported by generally accepted reporting standards that provide a uniform definition. According to Baker  however, definitions of CSR that have been framed by different organizations have a fair amount in common. The following diagram illustrates the interaction between a business and society.
In his diagram Baker distinguishes between the inner and the outer circle. The inner circle captures the quality of management, both in terms of people and processes, while the outer circle demonstrates the nature and quantity of the corporation's impact on society in the various areas  .
In our paper we will depart from the definition of the European Commission: 'CSR is a concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis'. 
2.3 Divers and motives behind CSR
More and more companies throughout the world report information not only about their economic performance, but also about their social- and environmental performance. The drivers for CSR do not operate in isolation and different companies may have different motivations. Various drivers may also be stronger in different industries than others. There are not only economic-, but also social and political drivers and a move to adopt CSR may arise from a combination of those drivers (Brine, Brown and Hackett, 2007)
Employee recruitment, motivation and retaining
Companies see CSR as an important factor in attracting and retaining talented and diverse employees. Good working conditions for employees could lead to better performance in terms of quality and delivery. The company can directly benefit from this higher level of productivity.
Learning and innovation
Learning and innovation are important to the long-term existence of any business. CSR can be a medium for business to respond to environmental and societal risks and turn these into business opportunities.
Companies see CSR as an effective tool for improving its reputation. How companies are judged by customers, suppliers and the broader community will have an impact on their profitability and success. CSR offers a way by which companies can manage and influence the attitudes and perceptions of their stakeholders, building their trust and enabling the benefits of positive relationships to deliver business advantages.
CSR offers more effective risk management, helping companies to reduce avoidable losses, identify new emerging issues and use positions of leadership as a means to gain competitive advantage.
Competitiveness and market positioning
Companies could use CSR branding as a way to differentiate its products in its product market en draw consumers away from competitors and thereby improve profitability.
CSR can offer opportunities to reduce present and future costs to the business which leads to increasing operational efficiency. Adopting CSR and good corporate governance can reduce litigation risk. A company could avoid costly government imposed fines and in that way be more cost efficient. Certain types of CSR activities translate into an increased value for a company, hence increasing the value for its shareholders. For example, the decision to become more energy efficient has a cost-saving effect.
Investor relations and access to capital
The investment community is increasingly viewing CSR as an assurance of long-term risk management and good governance practices. Investors therefore place rising importance on corporate reputation as they do on financial performance.
License to operate
Companies that fail to manage their responsibilities to society as a whole risk losing their license to operate.
2.4 Corporate Social Responsibility reporting
The number of companies that disclose information on their environmental, social and governance performance has significantly increased in the recent years. The current financial crisis draws even more attention to the disclosure and transparency of CSR performance.
The rise of reporting related to social and environmental aspects of a corporation goes back to the 1970s. During this period social reporting and accounting was adopted by several US and West European corporations. Epstein defined social reporting and accounting as: 'the identification, measurement, monitoring and reporting of the social and economic effects of an institution on society, intended for both internal managerial and external accountability purposes' (Epstein et al., 1976, p. 24). The number of companies involved in social reporting grew rapidly during the 1970s, resulting in 90% of the Fortune 500 companies reporting on social performance in their annual reports by 1978 (Kolk, 2005, p.35). However, as a result of recession and unemployment during the 1980s, social reporting lost its prevalence and moved to the background. By the end of 1980s the topic of social reporting made its comeback, this time with a particular focus on environmental issues (Kolk, 2005).
Since then, social and environmental reporting (later known as sustainability reporting or corporate responsibility reporting) has grown substantially: from 13% in 1993 to nearly 80% across the largest 250 companies worldwide (G250) in 2008 (KPMG, 2008, p. 13). The survey of KPMG on the state of corporate responsibility reporting shows that the rate of reporting amongst the largest 100 companies in 22 countries is 45% on average. Japan leads with 88%, followed by the UK (84%). The Netherlands share fourth place with Canada (both 60%).
An increasing number of companies prefer to issue separate reports, instead of including information on corporate responsibility in their annual financial reports: from 52% in 2005 to 79% in 2008 (KPMG, 2008, p. 14). Almost 70% of the companies surveyed by KPMG applied the Global Reporting Initiative's (GRI) Guidelines as the basis for their reporting (KPMG, 2008, p.21). GRI's Guidelines assist companies in measuring and reporting their economic, environmental and social performance. Currently, G3 Guidelines (2006) is the latest version available and replaces former issues: G1 (2000) and G2 (2002). 
We would like to conclude this chapter by mentioning the development in assurance of corporate responsibility reports. The number of G250 companies that make use of formal assurance in their reports increased to 40% in 2008, opposed to 30% in 2002 and 2005 (KPMG, 2008, p.56).
Chapter 3: Literature review
A recent call by a wide range of stakeholders (e.g. customers, employees, governments) has encouraged many companies to undertake additional investments in corporate social responsibility (CSR). However, not every company has responded positively to an allocation of their resources towards CSR. Some firms argued that increased investments in CSR prevent them from maximizing their profits. The wide-spread concerns regarding a trade-off between CSR investment and profitability, motivated numerous researchers to explore the relationship between CSR and financial performance (McWilliams and Siegel, 2000, p. 603). Since the beginning of the debate in the 1970s, many studies have been published on this topic. Yet, there is no consensus in the literature on whether CSR leads to superior financial performance.
Griffin and Mahon (1997) have provided us with an overview for the period 1972 until 1997. They reviewed 51 studies that examined the relationship between corporate social and financial performance, and were published during a time span of 25 years (1972-1997). Each of these studies has been reviewed for: population tested, methodologies employed, data sources, corporate financial performance measures, corporate social performance measures, control variables, results and significance level and reliability/validity testing. The authors divided the 62 obtained research results into three categories: results that show a positive correlation; results that show a negative correlation and results that show no effect or are inconclusive. Analysis of these results provided the following overview: 33 research results found a positive relationship, 20 research results found a negative relationship and 9 research results found no relationship or were inconclusive (Griffin and Mahon, 1997, p 8-9). Two years later, the paper of Griffin and Mahon was reconstructed by Roman, Hayibor and Agle. Their reclassification caused an even greater gap between the number of results indicating a positive relationship (33 studies) and those indicating a negative relationship (5 studies). Margolis and Walsh (2001) present a detailed overview of the literature and apply a simple "vote counting" technique to pool results. The outcome of their study shows that approximately 50% of the empirical studies found a positive relationship between CSR and financial performance, 25% found no relationship, 20% had mixed results and 5% had a negative relationship. Orlitzky et al (2003) criticized the vote-counting technique used by Margolis and Walsh (2001) as this technique has been shown to be statistically invalid. They argued for a more rigorous analysis: the psychometric meta-analysis. However, their results support the positive relationship between CSR and financial performance. They conducted a meta-analysis of 52 studies and found in general a positive interaction between CSR performance and financial performance, in which CSR performance measures were correlated more highly with accounting-based measures than with marked-based indicators. Van Beurden and Gössling (2008) reviewed 31 studies, 68% had a positive relationship, while 28% show no significant relationship, and only 6% had a negative relationship between CSP and financial performance.
3.1. The relationship between CSR and financial performance
An examination of previous studies' results shows us that four possible relationships between CSR and financial performance have been proposed by the literature: positive, negative, mixed and neutral relationship.
3.1.1 Positive relationship
Many results of performed literature studies reveal a clear empirical evidence for a positive correlation between CSR and financial performance. This theory is based mainly on the stakeholder view which holds that satisfying stakeholders' interests will result in an improvement of the firm's financial and economic performance in the long run (Freeman, 1985). Managers have a fiduciary responsibility to all stakeholders (including customers, employees and even communities or societies) and not just to shareholders. The findings suggest that although investments in CSR incur increased costs for companies, they have a positive effect on the value of a firm. Investment in CSR will lead to positive financial performance over the medium to long term due to the impact of social performance on reputation and brand and the attractiveness of such companies to high quality managers and employees.
3.1.2 Negative relationship
Fundamental for this line of thinking are the arguments of Friedman (1970) and other neoclassical economists' who state that social responsibility involves costs and therefore worsens a firm's competitive position. Managers' only responsibility is to increase shareholders' wealth. More recent studies (Brammer et al, 2006: Boyle et al, 1997) argue that social constraints on firms and socially responsible behavior may conflict the value maximization. Companies that decide to improve social or environmental performance, incur additional costs, which does not contribute to enhancing shareholder value. The theorists expect some measurable economic benefits to socially responsible behavior; however these benefits do not outweigh the numerous costs.
3.1.3 Mixed relationship
A mixed relationship indicates that the relation between CSR and financial performance is not constant over time but shows the form of a 'U' or an 'inverted U'. The first theory can be explained by the fact that the company's implementation of a CSR program will increase the costs and lower its profits in the short run. This decrease in profits and therefore in financial performance of the company will however be reversed in the long run. The theory of the 'inverted U' on the other hand, beliefs in the existence of an optimum level of corporate social responsibility. Beyond this level being socially responsible will no longer be economically advantageous for a company. Several studies that do not differentiate between short and long run in determining a relationship between two variables, have classified results that indicated a 'U' or 'inverted U' form under positive cq negative relationship (consequently leading to a three-type instead of four-type classification).
3.1.4 Neutral relationship/No relationship
Neutral relationship implies that there is an absence of association or relation between two variables. According to this outcome no correlation is found between CSR and financial performance, meaning that corporate social responsibility has no impact on the profitability of a corporation. A neutral relationship was found by McWilliams and Siegel (2000) who argue that a relationship between social and financial measures exists by chance since there are too many variables which influence the relationship. The neutral relationship is found when the regression model is properly specified and controlled for R&D expenditure. However, the measurement problems of CSR could also cover any linkage that exists.
3.2 Biases and problems in literature
On the whole, social and financial performance research seem to show the existence of a positive relationship, but recent research points at numerous biases and problems of previous work (e.g. Elsayed and Paton, 2005 or McWilliams and Siegel, 2000). By reviewing Griffin and Mahon (1997), the authors identified three key issues. The studies were all characterized by a clear focus on multi-industry samples, the multiple dimensions of financial performance and a shared need for multiple measures to assess corporate social performance. Other problems revealed by the literature regarding the link between social and financial performance are related to: model misspecification (endogeneity), omitted variables in the determinants of profitability and limited data (very small samples, old periods).
Focus on multi-industry samples
From the studies that have been reviewed more than 78% (40 studies) used a population that contained multiple industries. However, the use of multi-industry samples can have a big biased effect on the results as this approach does not distinguish between industries, assuming that all industries are equal and comparable. Yet every industry is unique in its own way, which creates a 'specialization' of social interests (Holmes, 1977). Therefore it is important to account for the specific context of each industry.
Financial performance measures
During the 25 years of research 80 different financial performance measures have been used. Over 70% of the measures were used only once. This absence in overlap makes it very difficult to draw any solid conclusions on the validity and reliability of these measures. However, these single financial performance measures can be divided in 2 categories: market-based measures and accounting-based measures (Van Beurden and Gössling, 2008). Examples of market-based measures are stock performance, market return, market value to book value, price per share and share price appreciation. Accounting-based measures which are more commonly used are: size (logarithm of total assets), asset age, return on assets (ROA), return on equity (ROE) and 5-year return on sales (ROS) (Griffin and Mahon, 1997, p. 11-14).
Corporate social performance measures
Several studies have been using different types of corporate social performance measures. However, it remains a challenge for many researchers to find a good measure for corporate social performance. As these measures do not deal with hard data, usefulness of some measures that were used in the past is questionable. Some of these measures are merely an assessment of the corporation's social performance by an outsider. However, such assessments are not always a good reflection of the real performance. Certain relative rankings of corporate social performance, that are mainly based on the image of a corporation rather than the firm's actual CSR performances, are hardly suitable to explain the relationship between CSR and financial performance. In order to obtain a representative corporate social performance measure Griffin and Mahon (1997) proposed to base empirical research on multiple corporate social performance measures instead of a single one. This approach will help in mitigating both constraints and impact that come with the use a single measure. Van Beurden and Gössling (2008) divide the different measurements of corporate social performance in three categories: social concern, corporate action (such as philanthropy, social programs, and pollution control) and corporate reputation ratings (KLD and Fortune). Each of these measurements, while offering some benefits, has limitations. The Fortune rating of corporate social performance tends to be viewed as a measure of overall management of a firm rather than being specific to corporate social performance. Further it is highly correlated with other measures. Many measures are either one-dimensional and may not properly reflect the overall level of a company's corporate social performance or are difficult to apply consistently across the range of industries and companies that need to be studied.
This problem refers to the nature of the data used in some existing literature. In some surveys very small samples are used and this could lead to results that are not representative. The use of a small number of studies decreases the validity and generalizability of the results. Furthermore, many studies base their theoretical framework and findings on literature and material that is outdated. The relevance of studies undertaken in the 1970s and 1980s may be limited because concern over corporate social performance was still in its infancy and may not be entirely relevant to practices considered to be socially responsible by today's standards. Cross-sectional empirical studies tend to measure both corporate social and financial performance in the same single year, and therefore, the long-term consequences of certain decisions affecting stakeholder are left unexplored.
Model misspecification and endogeneity
Studies sometimes use models that are misspecified in the sense that they omit variables that have been shown to be important determinants of profitability (McWilliams and Siegel, 2000). Without the inclusion of variables that may influence a firm's financial performance, estimated parameters on corporate social performance will be biased. The most commonly used controls are; the intensity of R&D investment by the firm, firm size, market risk and industry effects.
Direction of causality
This aspect has to do with the direction of causality of the corporate social performance and financial performance relationship. It is still unclear whether financially successful companies simply have more resources to spend on corporate social performance and therefore attain a higher standard (slack resource theory) or whether better performance along various dimensions of corporate social performance itself results in better financial outcomes (good management theory). If slack resources are available, then better social performance would result from the allocation of these resources into the social domains, and thus better financial performance would be a predictor of better corporate social performance. Good management theorists argue that there is a high correlation between good management practice and corporate social performance, simply because attention to corporate social performance domains improves relationships with key stakeholder groups resulting in better overall performance (Waddock and Graves, 1997). Some theorists argue that corporate social performance is both a predictor and consequence of firm financial performance.
During the last two decades we have seen a tremendous increase in interest towards the issue of corporate social responsibility (CSR). The shift in focus from shareholders towards stakeholders forced corporations to revalue their goals and responsibilities. The idea that profit is the only goal of a company was replaced by a much wider spectrum, the so-called triple bottom line theory: people, planet and profit. From now on corporations realized that the only way to ensure their profits now and in the future was by including the aspects 'people' and 'planet' in their strategy. This gave birth to corporate social responsibility reporting.
In our paper we had a closer look at CSR and explained several motives behind it. However, in our literature review we focused on one motive: financial performance. As our title indicates we wanted to examine whether corporations' involvement in CSR improves their financial performance. To answer this question we examined numerous studies that investigated the relationship between CSR and financial performance.
The relationship between CSR and financial performance has been a hot topic for half a century. Until now, empirical studies have never been in agreement, as some studies determined a positive correlation, some determined a negative correlation, while others determined no correlation at all. Some theorists argue that the benefits of CSR do not offset the additional cost and therefore do not contribute in enhancing the shareholders' value. Others find no correlation between CSR and financial performance. They believe that there are too many variables which influence the relationship and that any correlation appears by chance. On the whole, most research shows the existence of a positive relationship, whereas several papers point at numerous biases and problems.
Another important aspect is the direction of causality of the corporate social performance and financial performance relationship. It is still unclear whether financially successful companies simply have more resources to spend on corporate social issues and therefore attain a higher standard or whether better performance along various dimensions of corporate social performance itself results in better financial outcomes. Based on this, we conclude that there is no definitive answer to our question. Further empirical research on this topic could assist us in answering our question.