Corporate Social Responsibility And Firms Performance

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I have chosen this topic because the CSR has got major impact on the trading in the recent days. It shows how the organisation conducts its business in an ethical way taking into account of its impact environmentally, socially and economically. Following the changes occurred during latter stages of 1990 most of the European countries had a continuous process of development over the years. This development has lead to changes in the social and environmental structures which affect the state in one way or the other. State, Government and rules which cannot provide solutions to all social and community problems; hence there was a discussion who's responsible for having a healthy and rewarding society.

This topic affects everyone who is trading because CSR is considered to be an important activity which every organisation must follow. This topic has particularly interested me because in recent days most of the organisation from different industry has increased their investment in CSR which may have helped them to improve the profit or it might have helped them to trade effectively.

CSR has been effective in the recent days because of the recent scandals and mismanagement by organisation. For Example BP disaster in the Gulf coast which has killed living beings and animals and destroyed a whole part of gulf, major organisation employing child labours overseas to take advantage of cheap labour and many more activities.

CSR reduces the risk of damage to reputation and it also increases the buyer's patronage. Human rights activist, Pressure groups, Environmental activist, Eco friendly groups will quickly criticise the business which are not socially responsive. These groups will also start boycott the company products and create adverse publicity in the eyes of the customers to avoid them buying the products. This adverse publicity may lead to decline in company sales resulting in a loss.

By being socially responsible an organisation can have a competitive advantage over its competitors. The organisation which produces and sells environmentally friendly products such as producing green products, reusable and recyclable products and having social welfare programmes will enhance their corporate image. Good CSR will also helps to improve the good relationship with buyers, sellers and general public and it will also helps in developing the tarnished reputation.CSR also helps to gain a competitive advantage internally through employee engagement and welfare schemes.

Therefore corporate social responsibility is emerged as a promising tool for addressing the problems of the society and to broaden the social responsibility issue.

At present in the UK there are many companies which are adopting CSR in order to add credibility to the financial statements and bring on added advantage to the firm. But there are still some companies which do not adopt CSR or adopt CSR to the least extent.

Investment in CSR depends on various industries. Level of investment by food retailers, clothing industry, manufacturing and service industry (Telecom, Electricity, Mining, Fuel rig etc) is high since they require making organic and sustainable foods, using of recyclable and re usable bags, reducing wastage and electricity consumption, fair prices, more greener and organic foods, use of appropriate labour health and safety at work, committing to society, action the other hand level of investment in CSR by banking and other service and labour industry will be low as they tend to perform more of a service function to the society.

"UK businesses are already making a huge impact in many areas, such as raising employment standards, better stakeholder engagement and improving the environment. There remains much to be done, especially in embedding CSR practices into business

Management, or put another way, making it part and parcel of everything we do. The CSR Framework aims to do this, providing a very practical tool for impacting the business mainstream, filling a gap and adding real value. The aspiration is that it will play a key part in CSR becoming integral to the way we do business in the UK and thence around the world".

Clive Mather,

Chairman of Shell UK, Chairman DTI CSR Skills

Steering Group

"The Government aims to transform CSR from being seen as an 'add-on' to being a core part of business practice for more and more organisations. It is not a luxury that only large companies can afford, but something that firms of all sizes can participate in for their own benefit as well as for the benefit of others. The Framework is essential, providing the

means so that CSR will be a valued asset in the life of every company and of every community".

Stephen

Timms MP, Minister for Energy, e-commerce and Postal Services

Literature Review:

CSR can be applied in various ways and in different situations but theoretical studies linking CSR and financial performance are very few.

According to woods 1991 the first CSR definitions were focussing on managerial levels this is because the business executives had obligation which are way beyond the economic interest of the organisation. Woods 1991 focus on how business executive's decisions will affect a society values, stake holder's suppliers and local community.

According to Baron 2001, Mc Williams and Siegel 2001 CSR was linked to profit maximisation by modelling firm's products to contain social attributes competing for socially responsible consumers.

Siegel and Vitaliano 2007 argue that certain organisation exercises CSR in order to signal to its consumers that they are good honest and reliable. Thus CSR helps to create awareness about the products brand and also is a medium of advertisement for their products.

According to Noon 2008 organisation can increase their contribution to society and to sustainable development by using CSR in covering the immediate operation and legal obligations, such as having a employment policies, health and safety at the work place and environmental protection.

Margolis and Walsh 2002 have produced 100-120 published studies between them during 1971 and 2001.They has studied the relationship between the CSR and firms performance. Their study comprises of two types short term and long term financial impact when firm engages in social responsible or socially irresponsible acts. The results of this study were mixed as different results were driven out of their study by different literatures.

Short Term Financial Impact:

According to Welch and Wazznan 1999 the study says there is no relationship between CSR and financial performance.Posnikoff 1997 reports positive relationship exist between a CSR and financial performance. Wright and Ferris 1997 reported a negative relationship exist between the CSR and Financial performance.

Long Term Financial impact study was measured based on accounting and financial performance such as profitability. This study has also produced various mixed results, such as

Cochran and wood 1984 located a positive correlation between social responsibility and financial performance after controlling for age of assets.

Waddock and Graves 1997 derived some positive relationship between an index of CSP and performance measures such as ROA in the following year.

Auprelle,Carroll and Hatfield 1985 has proved that there is no relation between CSR and firm's risk adjusted rate of return this is specifically due to, varying levels of social orientation were not found to correlate with performance differences.

All the above said literatures give mixed results about the CSR investment by the firms. My proposal aims at providing a solution by analysing whether an investment in CSR will leads to improved profitability and sustained growth to the firm. This proposal has been linked into various above said literature as some industry or organisation investment in CSR may not have a big impact on their profitability hence there won't be any relation between CSR and financial performance, it is merely a cash outflow to the organisation.

Some industries or organisation will have a massive investment in CSR and will enjoy a maximum benefit out of their investment, these industries and companies will have a direct or positive relationship between CSR and the firm's financial performance.

Academic Theories Models Frameworks and Concepts

.

ENVIRONMENTAL AND SOCIAL REPORTING

Most companies present environmental and social reports (ESR) to their shareholders as part of their annual report. Usually the finance team become involved in creating this report. There are 2 issues which are difficulties of measuring environmental and social performance and the challenge of communicating these sensitive issues.

OPERATING AND FINANCIAL REVIEW (MANAGEMENT COMMENTARY)

The operating and financial review (OFR) is presented along with the financial statements to make up the annual report. Essentially, it repeats the information within the financial statements, but makes that information more accessible for users. Recently, it has swallowed up the environmental and social reporting and so now it includes sections on green performance and human resource management. More recently still, the report has begun to look forward as well as back and so now has large sections on future risks to the company and the strategies used to address those risks.

Making the leap from awareness to leadership - CSR Academy Framework

Awareness

A broad appreciation of the core CSR characteristics and how they might impinge on

business decision-making.

Understanding

A basic knowledge of some of the issues, with the competence to apply this to specific

activities.

Application

The ability to supplement this basic knowledge of the issues with the competence to apply

it to specific activities.

Integration

An in-depth understanding of the issues and an expertise in embedding CSR into the business decision-making process.

Leadership

The ability to help managers across the organisation operates in a way that fully integrates CSR in the decision-making process.

Industry Background

CSR has been followed by all the industries from manufacturing to mining, advertising to automobile Etc. I have selected various types of industries because each and every industry requires different level of investment in CSR. There is a difference between i selected My research was based on various industries and the size of data collection ranging from minimum 10 and maximum 15.Each and every industry will be having at least 5 organisations on which my research and analysis will be based upon.

My research and analysis on this industry is purely to analyse whether the company is investing in CSR and how it affects the company operations and performance. My study also helps to understand whether or not the businesses are capable of investing heavily during these recession period when many businesses are shutting down their business at the same time. It also helps me understand how these industries are adopting CSR as a tool for sustainable development and improving the society.

Although measuring financial performance is a simpler task but measuring CSR with company performance is a bit difficult one.

Research Questions and Objectives

Research Question:

The main aim of the research is to ascertain the impact of the investment in CSR during this recession period towards achieving sustainable business operations and profitaility

And also to analyse the relationship between the corporate social responsibility and the financial performance.

Research Objectives:

Define the CSR and what are all the benefits it will add to the market, society and business sector by adopting the CSR

Application of CSR on business strategies and benefit will it bring to the organisation as a whole

Investment in CSR and how it can generate a sustainable growth.

Comparison of the performance of the organisation in relation to CSR in order to achieve the relationship exist between them by using various financial measures such as Return on Equity (ROE), Return on Assets (ROA) and Return on sales (ROS).

Hypothesis:

In my study the relationship between the CSR and financial performance is tested. The test may imply positive, negative or neutral relationships. According to Friedman 1970 socially responsible firm have a competitive disadvantages so hence they have negative relationship. This is because those organisations assume the cost incurred on CSR will have no added advantage and will only reduce the profits.

On the other hand there are various researches which propose that there is no direct relationship between CSR and financial performance; this is due to the fact the expenses incurred which does not give rise to the income or sales directly which is visible.

Third view is that the firm takes advantage of CSR because the actual cost of CSR is covered by benefits it derives. Socially responsible companies have minimum risk of negative events happening. For Ex a company which has a high pollution but on the other hand it very much socially responsible then the chances of that company get high fines are reduces. When we compare 2 companies producing same amount of pollution but one with high level of CSR and another with least level ,then the company with least level of CSR will be affected the most which will affect its reputation.

Research Methodology

Research Approaches:

Research has been carried out using Empirical and non empirical research approach in order to attain the objective of the research.

Empirical research requires data which is based on experience and observation. Empirical research which includes qualitative and quantitative approach to data gathering by way of survey and focus groups and by filling out questionnaires.A survey will be carried out in order to obtain necessary information regarding the present or existing condition that can be compared or used to determine the relationship between specific events.

Non empirical research includes a review of existing literature, conceptual research that already available for the research work that i am doing which includes research work which was previously done based on CSR. Non empirical research helps me to explain my understanding of the research work and also able to keep me up to date about the research work i am doing. It helps me to identify the strength and weakness of previous work and also to identify any bias on the conclusion made.

Measurement problems at research work:

Financial Performance Measurement:

Financial performance is considered to be a simpler task as it contains only ratio and numbers, it becomes difficult when choosing a measurement instrument to apply. Many researches use market measure which is based on forward looking and focuses in market performance and other use accounting measures which are based on historical aspects of the firm which are subject to manipulation by the management. Some of them use both market and accounting measures. These two measures always provide with different values and may be subject to biases when evaluating a firm's financial performance. Use of these two measures will complicate the comparison of the results of different studies.

Corporate Social Responsibility Measurement:

Determining the connection between the social and financial performance are complicated because of the lack of the synchronization of measurement attitude as it relates to corporate social performance. Hence in many cases subjective indicators are used such as survey, Questionnaires and feedbacks. In some cases organisation official corporate disclosures such as annual reports to shareholders, CSR reports can be used to evaluate the social performance, but the there is no guarantee that the data revealed by the organisation are under reported or over reported. Some companies which have their CSR report verified externally but most of the organisation do not do that hence CSR performance may be leads to management and subjective bias.

Market Sectors

The market sectors and the industries selected for my research work is listed below in a table format

Industry

Organisation Sample

Mining, Construction

Minimum 5 - Maximum 10

Food, textiles, apparel

Minimum 5 - Maximum 10

Forest products, paper, publishing

Minimum 5 - Maximum 10

Chemicals, pharmaceutical

Minimum 5 - Maximum 10

Refining, rubber, plastic

Minimum 5 - Maximum 10

Containers, steel, heavy manufacturing

Minimum 5 - Maximum 10

Computers, autos, aerospace

Minimum 5 - Maximum 10

Transportation

Minimum 5 - Maximum 10

Telephone, utilities

Minimum 5 - Maximum 10

Wholesale, retail

Minimum 5 - Maximum 10

Bank, financial services

Minimum 5 - Maximum 10

Hotel, entertainment

Minimum 5 - Maximum 10

Hospital management

Minimum 5 - Maximum 10

The reason for choosing various sectors is to identify how different sectors are treating CSR.CSR requirement varies from industry to industry because some organisation such as Tesco, sainsbury's which fall under retailing will require more investment in greener foods and re usable plastics and on the other hand the organisation which are under hotel and entertainment which are less socially responsible by adopting CSR to their least extent.

Selecting various industries will help me to identify the co relation between the various industries and how they are socially responsible it also helps me to identify the relationship between the financial performance and corporate responsibility among the various industries as some industries have negative and some will be neutral and some will be positive.

Relationship between research questions, objective

And Approach:

The research question was aimed at 2 things, firstly whether the investment in CSR will lead to profitability and sustainability of operations and is there a relationship between the CSR and financial performance of the organisation. The research objective was clearly focussing on both these questions as the research objective was the outcome based on the 2 questions. The objective is to prove that investment in CSR wills leads to increase in profitability and sustained continuity in operation for some industries and decrease or constant profitability for some industries. This is mainly due to the level of CSR requirement varies for different industries. There is also positive, negative and Neutral relationship exist among the various industries and the various organisation this is also due to the level of CSR requirement.

Time scale

Week Ending

Work In Progress

21/11/2010

Selection of organisation for each industry

28/11/2010

Data collection ,Preparation of Questionnaires*

05/12/2010

Analysing the data collected to ascertain whether it is adequate or not**

12/12/2010

Preparation of slides for presentation of dissertation proposal

19/12/2010

Preparation of Outline for Dissertation

26/12/2010

Start of with introduction

02/01/2011

Introduction

09/01/2011

Writing dissertation

16/01/2011

Writing dissertation

23/01/2011

Writing dissertation

30/01/2011

Writing dissertation

06/02/2011

Writing dissertation

13/02/2011

Writing dissertation

20/02/2011

Writing dissertation

27/02/2011

Analysing work done

06/03/2011

Analysing work done

13/03/2011

Analysing work done

20/03/2011

Submission of dissertation

27/03/2011

Submission of dissertation

*Questionnaires will be received throughout the dissertation writing period

**If the data collected is not adequate the additional data will be collected over

the dissertation writing period

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