Effect of CSR on Financial Performance
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Effect of Corporate Social Responsibility on Financial Performance of Financial Institution in Malaysia
Background of the study
Corporate Social Responsibility (CSR) disclosure in Annual Report has been debated for a long time. Survey done by KPMG in 2013 show that 71 per cent of the 4100 companies undertake CSR reporting in the business practice. Furthermore, among the world’s largest 250 companies, the CSR reporting rate is more or less stable at 93 per cent. The issue on CSR reporting is undeniable, however the question now is on the quality of the report itself and how the information be honestly communicated to stakeholders (M.-W. Wu, C.-H. Shen, 2013).
Financial institution especially banks play an important role in economic development because its safety and soundness create several external benefits to society. By using substantial resources from society, banks are required to provide feedback to the community more often that other industries. For example, bank assets may mainly come from depositors. Therefore, as bank employ public resources paid for by society, they are highly scrutinize by the media, government and academician regarding their CSR activities.
Prior study proved that CSR practices can be considered as effort to enhance the ï¬nancial performance (FP) of PLCs in Malaysia (Mustaruddin, Norhayah and Rusnah, 2011).
Keywords: Corporate social responsibility CSR), Financial Performance (FP), Financial Institution (FI)
Purpose: The current study purpose is to examine the CSR disclosure in Annual Report of the Financial Institution (FI) and to study the relationship between CSR with financial performance (FP) of the FI.
To what extend the CSR disclosure of FI?
What is the relationship of CSR to FP of FI?
Corporate responsibility is replacing corporate social responsibility as an increasingly important factor in how people regard the corporate reputation of organisations (Worcester, 2009).
One way to incorporate CSR with modern banking theories is to relate it to the role of bank reputation. Thus companies use CSR to increase customer loyalty and build reputation. Accordingly, banks conducting CSR can attract more loans and deposits than non-CSR banks because CSR creates a brand name and a sense of identity among the customers (M.-W. Wu, C.-H. Shen, 2013). CSR must be appreciated as a set of actions that companies manage with harmony, when stakeholders have good responses to their CSR practices. The positive relation of CSR information towards CFP indicates that companies could increase their external reputation (Mustaruddin et al. (2011). Furthermore, CSR also been viewed as the continuing commitment by business to behave ethically and to contribute to economic development while improving the quality of life of the workforce and their families (Md Zabid Abdul and Saadiatul Ibrahim, 2002).
CSR will be the independent variable in the current study. A disclosure-scoring methodology will be adapted in the current study. It will be based on the content analysis. The content in CSR disclosure will be scored and the items selected will be categorised into four indicators which are employee relations, community involvement, product dimension, and environmental dimension. There will be sub-item in each category and it will be scored accordingly.
List of CSR items:
- Employee relation:
- Employee health and safety.
- Training and education.
- Employees’ beneï¬ts.
- Employees’ proï¬le.
- Share option for employees.
- Health and safety award.
- Community involvement:
- Cash donation program.
- Charity program.
- Scholarship program.
- Sponsor for sport activities.
- Supporting national pride.
- Public project.
- Product development.
- Product safety.
- Product quality.
- Customer services.
- Pollution control.
- Prevention or reparation program.
- Conservation and recycled materials.
- Award in environment program.
There will be three quality of classification for disclosing value for each item. Each item disclosed will be assign accordingly.
(1) Quantitative disclosure classiï¬cation. This classiï¬cation refers to the greatest weight which has an assigned value of 3. It classifies as the ï¬nancial disclosures. For instance, the CSR practices disclosed in the company’s annual report are as follows:
To promote access to healthcare, Maybank Islamic has made a five-year commitment via the Maybank Foundation to contribute RM1.7 million to Institut Jantung Negara’s new Regional Paediatric Heart centre. This contribution not only provides support in terms of much-needed medical equipment but also assists in subsidising medical expenses for patients from low-income backgrounds. Since 2012, this collaboration has helped 30 children from around the region (Maybank Annual Report, 2013 pg 125).
(2) Qualitative speciï¬c disclosure classiï¬cation. This classiï¬cation refers to the next highest weight which is the non-quantitative disclosing but with particular information and it has an assigned value of 2. It classify as the non-ï¬nancial disclosures. For instance, the CSR practices which are disclosed in the company’s annual report are as follows:
The Group places strong emphasis on child safety and we uphold this diligently through our Missing Children - Reuniting Families initiative which aims to ensure missing children are reunited with their families. The programme was launched in 2007 in partnership with Polis DiRaja Malaysia (“PDRM”) and offers an alternative channel of communication for members of the public to help locate missing children (RHB Banking Group Corporate Responsibility Report 2013 pg 11).
(3) Qualitative non-speciï¬c disclosure classiï¬cation. This classiï¬cation refers to the lowest weighted value due to its qualitative disclosing in which the description is in general, thus it is assigned as the quantitative value of 1. It classify as non-ï¬nancial disclosures. For example, the CSR practices which are disclosed in the company’s annual report are as follows:
Public Bank Group has always displayed a readiness to invest in its staff right from the onset of their career with the Group, equipping them with knowledge, skills, and attitudes that will enable them to make their mark in the organization. Strong induction and orientation programmes are among the training lined up for staff from day one to inculcate the right corporate values and a sense of belonging (Public Bank Berhad, 2005, p. 171).
Companies that do not disclose any kind of information for the given categorises obtain a score of 0.
Financial performance Measurement
Accounting variables use in the current study to assess the financial performance(FP) will be return on assets (ROA), return on equity (ROE) and return on sales .These are the dependent variables in the current study.
The first objective of the current study is to examine CSR disclosure in Annual Report of the Financial Institution (FI)
H1. CSR will be positive, signiï¬cantly related to FP
The second objective is to study the relationship between CSR with financial performance of the FI. Based on the CSR items therefore create the four hypotheses below:
H2. There is a positive relationship between employee relations dimension and FP.
H3. There is a positive relationship between community involvement dimension and FP.
H4. There is a positive relationship between product dimension and FP.
H5. There is a positive relationship between environment dimension and FP.
This study will examine financial institution listed on main market of Bursa Malaysia and licensed with Bank Negara Malaysia (BNM). The research period is 5 years which covered from 2010 to 2014. The data will be collected from annual report of each company which will be downloaded from the Bursa Malaysia website. Companies’ annual reports constitute the main data for the current study and were chosen because the annual report is the primary source of CSR disclosure, and, in Malaysia, annual reports of listed companies are the most accessible source of information, either in hard copies or electronic formats.
Although the issue on CSR has been debated for a long time and be studied by many academicians and researchers, the current study aims to look on the quality of the CSR disclosure. It is because the question on whether to disclose or not is not a matter anymore. Last but not least, the relationship between CSR and FP of financial institution need to be closely study. The extent of the study could be the motives behind the CSR activities.
The KPMG Survey of Corporate Responsibility Reporting (2013), KPMG InternatIonal
Md Zabid AbdulSaadiatul Ibrahim, (2002),"Executive and management attitudes towards corporate social responsibility in Malaysia", Corporate Governance: The international journal of business in society, Vol. 2 Iss 4 pp. 10 – 16
M.-W. Wu, C.-H. Shen, (2013) “Corporate social responsibility in the banking industry: Motives and financial performance”, Journal of Banking & Finance, 37 3529–3547
Mustaruddin Saleh Norhayah Zulkifli Rusnah Muhamad, (2011),"Looking for evidence of the relationship between corporate social responsibility and corporate financial performance in an emerging market", Asia- Pacific Journal of Business Administration, Vol. 3 Iss 2 pp. 165 – 190
Sir Robert Worcester, (2009),"Reflections on corporate reputations", Management Decision, Vol. 47 Iss 4 pp. 573 - 589
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