Corporate Social Responsibility And Impact On Company Performance Management Essay

Traditionally, governments were the main providers of development assistance and were responsible for stimulating social development. In recent years, Corporate Social Responsibility has gained considerable ground and it is now common for corporations to get involved in activities resembling those carried out in the name of development & assistance. Organizations which eventually practice this approach are looking for answers for questions such as does Corporate Social Responsibility really payoff, are the objectives set by the CSR manager really fulfilled, is their money worth spending at such practices? Considering the current financial scenario around the globe, managers are in dire need to make better, precise and eventually correct decisions.

The purpose of the thesis is to investigate (1) if we can reap tangible benefits such as higher financial performance, higher employee commitment, and better reputation by engaging in CSR activities (2) if developing countries would benefit from corporate involvement. (3) Can corporations benefit by gaining access to new markets along with sustaining present markets and will it lead to innovative business strategies.

Appropriate literature for this thesis has been derived from previous research journals, thesis, case studies, news paper articles and magazines which have helped us in acquiring general understanding and finding the scope and nature of the subject.

The conclusion up till now is that CSR has played an important role in enhancing an organizations image and reputation along with bringing positive change in customers purchasing patterns.

I

KEYWORDS

Corporate Social Responsibility; CSR Payoff; Impact on Company Performance

Page No 17

Figure 2-1 CSR and Marketing Strategies – Drivers and Constraints

III

LIST OF TABLES

Page No 6 & 12

Table 1-1 Karachi Sector Division

Table 2-1 Potential Benefits of Being Socially Responsible

III

INTRODUCTION

The introducing chapter of this thesis provides a background of our study along with a concept of corporate social responsibility. It also aims to highlight the subject’s topicality, significance, and the study’s objective on which literature review would be based. Furthermore, the kind of research methodology used along with how the data collected would be interpreted is discussed. Finally, the study’s scope, limitations, and significance are discussed.

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1.1 BACKGROUND OF THE STUDY

In today’s competitive world the concept of Corporate Social Responsibility (CSR) has become one of the imperative strategies for the companies to stand out in the cut throat market environment. In circumstances where market dimensions and customers preferences become more unpredictable and complex, CSR can play an extra pivotal role to cope up with such situations. But even still managers are confused or rather unaware of whether their CSR approach will prove to be beneficial for them as less efforts have been put into finding out the results of their implementation.

Initially CSR was evolved around corporate philanthropy but after passing through several phases it has entered into a new dimension with solidarity movements and environmental activism from the civil sector which is now highly involved in business activities. Accordingly pressures from governments, courts, civil organizations, NGO’s, WTO have compelled corporations to follow stringent parameters of corporate behavior, forcing them towards legal compliance, doing business for betterment of the society and less occurrence of damage to civil society and environment and protecting the consumers.

In Pakistan, however, where poverty, illiteracy, corruption is the talk of the town CSR journey is in its initial phases and is still struggling to be accepted in its first phase i.e. of philanthropy and legal compliance which is society and government focused. But still some leading organizations in Pakistan have realized that the government alone is not in a position to handle this everlasting situation and have finally spread their arms to help them out in this hour of need. The present societal marketing concept has started making inroads into Pakistan. Many leading corporations have accepted this challenge and have adapted this approach and begun to promote themselves and their brands by associating with it. CSR hence has open new ventures of competition and leading and non-leading corporations are in the race to make a mark on general public and show how much efforts they are putting in to CSR.

Companies embrace the responsibility of serving to its stakeholder through different ways; it may be in the shape of improvising their internal operations so that employees, customers, society and environment do not get hurt or doing an act or deed that may increase their customer, employee, supplier loyalty etc. There are numerous ways to show how socially responsible an organization is or wants to be but is this act or deed actually fulfilling the objectives that managers had laid down. What are the success rates achieved by applying CSR? Did customers actually buy their product after looking at a beautiful monument donated to the government? There are many such questions that need to be answered so that managers in future feel confident in taking the right CSR decisions. Ultimately, does CSR payoff or is it a tradeoff between social criteria and investment returns?

1.2 CSR & ITS DIFFERENT VIEWS

For CSR there exists contrasting point of views, supporters of this concept argue that CSR is the source of value enhancement of any organization, while some organizations argue that the social work is the responsibility of the government and not the business. As awareness regarding pay off of CSR has increased, the debate regarding CSR seems to be disappearing.

Prior goals and strategies evolved only around profit maximization with no view of serving the society at large. There have been controversial statements issued in the past such as “the social responsibility of business is to increase its profits” stated by Nobel Laureate Milton Friedman, September 1970, in New York Times Article. However since the birth of this approach CSR has been touched upon by many authors who show its importance and its inevitable desire to stay in business and society.

The birth of CSR has been a long debate with various researchers having different views over its time period and the individuals involved. There have been different arguments placed over it genesis with some saying that its birth took place when in 1930’s there was a debate between AA Berle and E Merrick Dodd over the role of managers (Post 2003 ; Turner 2006). Others such as Carroll have described Bowen as the modern ‘Father of Corporate Social Responsibility’ and believe that his work marks the beginning of the modern period of literature on CSR.

Peter Drucker was one of the first to explicitly address CSR, including public responsibility as one of the eight key areas for business objectives developed in his 1954 book, The Practice of Management. While Drucker believed that management’s first responsibility to society involved making a profit, ‘he felt it was also most important that management consider the impact of every business policy and action upon society’ (Joyner & Payne 2002, p. 302).

The World Business Council for Sustainable Development in its publication “Making Good Business Sense” by Lord Holme and Richard Watts, used the following definition. “Corporate Social Responsibility is the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large”

The best definition that suits our research is by Mallen Baker published on his website which states that “CSR is about how companies manage their business processes to produce an overall positive impact on society”.

1.3 PROBLEM STATEMENT

Traditionally, governments were the main providers of development assistance and were responsible for stimulating social development. In recent years, Corporate Social Responsibility has gained considerable ground and it is now common for corporations to get involved in activities resembling those carried out in the name of development & assistance. Organizations which eventually practice this approach are looking for answers for questions such as does Corporate Social Responsibility really payoff, are the objectives set by the CSR manager really fulfilled, is their money worth spending at such practices? Considering the current financial scenario around the globe, managers are in dire need to make better, precise and eventually correct decisions.

1.4 RESEARCH QUESTION

Based on previous discussion in the preliminary phase and the problem statement, the following questions arise;

“Does CSR really payoff?”

In order to provide an in depth answer to this question, the following sub questions are derived which are also our

1.5 OBJECTIVES OF OUR STUDY

1. ‘Does CSR influence consumer purchasing decision?’

2. ‘Does CSR provide an opportunity for a firm to have a competitive advantage?’

3. ‘Is there a relationship between CSR activities and corporate performance?’

4. ‘Do people perceive a CSR implementing organization and a non CSR implementing organization as same by keeping all other factors constant?’

1.6 DATA COLLECTION METHODS

Primary Data: In order to measure and quantify our research, survey methods will be used for primary data collection. Questionnaires will be distributed among employees, customers, students and general public. This will help us in getting accurate information regarding the payoffs of CSR and decisions regarding CSR investments.

Secondary Data: Secondary data will involve a thorough analysis of related research articles, journals, publications, magazines, newspapers and studies from both international and local websites.

1.7 DATA ORGANIZATION

The relationship between organizations corporate social responsibility initiatives and its pay offs is of valued importance. This research has both opportunity and potential. Initially, appropriate literature will be derived from previous researches, case studies and news paper articles which will help us acquire general understanding and finding the scope and nature of the subject. Subsequently, unstructured interviews would then be carried out with professionals concerned within the subject of corporate social responsibility. The purpose of the interview will be to discuss the success and failures caused while implementing CSR in their organizations and would also help in further understanding and approaching the topic in a more creative way. Furthermore our subject will also be discussed thoroughly with our thesis coordinator for better guidance and direction.

The literature stage would constitute of thorough understanding of previous researches and theoretical frameworks which are relevant, accurate to our study. Both national and international researches will be considered with no limit concerning the point of time the research was carried out. Internet search engines such as Google will be used comprehensively. Keywords such as “Corporate Social Responsibility”, “CSR payoff”, “Impact on Company Performance” will be used along with other phrases to find the most accurate literature online.

1.8 SAMPLING

The sampling frame will constitute of employees (Business Sector) and students (Higher Education Sector) that lie in four different zones of Karachi i.e. North, South, East, and West. The sample for survey will be selected through Non-Probability Stratified/Quota sampling method. There will be two different questionnaires designed for employees and the general public/customers. Questionnaires will comprise of closed-ended questions so that it would be convenient to analyze the findings. The analysis will finally be done on Microsoft Excel.

SAMPLING SIZE

Below is the breakup for the sample size:

Table 1-1: Karachi Sector Divisions

KARACHI

BUSINESS SECTOR

EDUCATION SECTOR

North

75 Questionnaires

75 Questionnaires

South

75 Questionnaires

75 Questionnaires

East

75 Questionnaires

75 Questionnaires

West

75 Questionnaires

75 Questionnaires

1.9 SIGNIFICANCE OF THE STUDY

Our study will be beneficial for organizations as well as for society and the government. Organizations will be able to better realize the importance of CSR and hence can then engage themselves in long term strategies rather than focusing on short term tactics. As a result of this activity society can then be served more effectively. Due to this a multiplier effect can be generated and a cash starved government can also benefit from this approach. Findings of our study will help organization to find out the way to utilize resources on social welfare and up liftmen efficiently and effectively.

1.10 SCOPE & LIMITATIONS OF THE STUDY

The scope of the study is to quantify the impact of CSR activities and measure its performance to see whether the investment done in implementing CSR has really paid off or not. As students we lack sufficient resources to broaden the geographical scope of the study and extend it to whole of Pakistan, which has forced us to limit our study to Karachi, Pakistan only. Also employees, customers, general public and other students will be involved in our sampling frame, which might lead to biased responses as they will consider us premature students rather than professional researchers. In order to measure the impact of CSR we will have to limit our study and findings to only those CSR

initiated projects which are visible to masses. Only then can we be able measure the impact correctly as than our findings will reflect the true scenario.

This study is being conducted for an academic purpose with certain time constraints and has to be completed within minimum resources available. The study will be completed by last week of April 2011.

LITERATURE REVIEW

INTRODUCTION

We have entered the new millennium with countless societal, environmental, political legal, health issues surrounding us but there seems to be no respite when we talk about corporate social responsibility (CSR) and its numerous false dawns that have occurred in the past decades. Perhaps, business shocks and scandals which involved some huge organizations such as Enron, WorldCom and Nike, Shell, together with the impact of rapid climate change on the environment, have played a major role in pushing organizations irrespective of their sizes to rethink their responsibilities towards their stakeholders and rationalize their attitudes according to the societal norms.

The upcoming conversations about CSR suggests that it is a normative, multi-level concept, whose meaning depends on various perspectives and relationships, and, that it changes in response to social trends (Silberhorn, D & Warren, RC 2007) . Corporate social responsibility (CSR) has variously been described as a ‘motherhood issue’ (Ryan 2002), ‘the hot business issue of the noughties’ (Blyth 2005) and ‘the talk of the town in corporate circles these days’ (Mees & Bonham 2004). While earlier thoughts of CSR often had a regional, person-centered philanthropic focus, recent conceptions of CSR are inclusive, broad and diverse (Silberhorn, D & Warren, RC 2007).

Due to the diverse philosophical status that CSR has achieved over the years it has seriously hampered the theoretical development as well as research into the implementation of these policies (Goebbels, 2002). In order to start research, the first step that has to be taken is to explore how corporations are themselves defining and interpreting CSR. Most empirical studies of CSR have been focused on firms in the USA, Canada and the UK, but few have attempted to assess whether definitions of CSR differ between countries (Hopkins, 2004). These are one of reasons that have led to slow development of CSR in developing countries such as Pakistan.

Swanson (1995) suggested that there were three main types of motivation for CSR which helps in engulfing organizations towards this approach:

The utilitarian perspective (an instrument to help achieve performance objectives);

The negative duty approach (compulsion to adopt socially responsible initiatives to appease stakeholders); and

The positive duty view (businesses self-motivated regardless of social pressures)

(Maignan & Ralston 2002)

Companies are primarily reactive with respect to CSR, responding to external pressures rather than proactively defining CSR (L’Etang, 1994; Vogel, 2005). Here, industry-specific issues as well as public visibility play a role. O’Dwyer (2003), Esrock and Leichty (1998) found that companies from sectors with a high-environmental impact had to respond more to external pressures. In addition, societal developments appear to force businesses to evolve their thinking for CSR (Carroll, 1999; Wilson, 2000; Zadek, 2004). Such pressure is said to increase when codified by legislation (Pinkston and Carroll, 1996; O’Dwyer, 2003). Mass media are then also seen to exert control and build pressure by making company behavior public (Pinkston and Carroll, 1996).

There has been a significant growth of CSR firms in the past ten years and the growth is mainly associated with economic development of a region or a state (Poddi, L & Vergalli, S 2009). Preston and O, Bannon 1997, Woddock and Graves 1997, MacWilliams & Sieger 2001, tried to establish if there exists a link between social responsibility and the performance of firms. Their results were ambiguous and did not show any connection. While on the other hand Poddi, L & Vergalli, S 2009 states that there is a clear positive relation between CSR and performance, and it has been proved that CSR influences a firm’s performance.

Lacey, R & Kennett-Hensel, PA (2010) noted that customers’ CSR perceptions are positively linked to their trust in and commitment to the firm. Their findings also show how a firm that engages in CSR initiatives may reap rewards by building trusting and committed customer relationships which, in turn, help forge desirable customer behaviors. It is also been evident from the research that customer’s level of commitment has a positive effect on purchase behavior, word-of-mouth communications, and following the firm’s performance.

Addressing social issues comes at a cost to business (Tim Barnett). Till the businesses internalize the costs of CSR actions, they keep on hurting their competitive position in the market. This argument is truly relevant in today’s context especially after prevailing globally competitive environment, which is if businesses in one country expand assets to address social issues, but those in another country do not. Some argue that employees are not trained to address such problems. This suggests that organizational involvement in CSR may actually make the situation worse. Corporations can best serve societal interests by sticking to what they do best, which is providing quality goods and services and selling them at an affordable price to people who desire them (Tim Barnett)

Reasons behind the failure of the CSR are that people often don’t have enough knowledge regarding the environment and their rights (Vogel, D 2008). Results from CSR practice cannot be seen quickly. On the other hand, it cannot be directly linked to improved financial performance of the company (Bugariska, B 2009).

We can find many examples of organization which have been and are implementing CSR approach but still have not been able to able to increase their reputation and performance (Vogel, D 2008). BP (British Petroleum) is one recent case whose image has been badly affected after its oil spill off Mexico Coast in 2010, before that it was enjoying a strong CSR reputation and had even made a positive contribution towards society and changed its identity. But if we look at the, Goldman Sachs Report (2007) it clearly shows companies that are considered leaders in implementing environmental, social and governance (ESG) policies to create sustained competitive advantage have outperformed the general stock market by 25 percent since August 2005. Additionally, 72% of these companies have outperformed their peers over the same period (Bugariska, B 2009). Any publicized disaster might become an opportunity for good companies to show their social inclinations. The same could be seen with different tsunami or earthquake caused destructions, or the recent floods in Pakistan (2010). CSR strategies may work under certain conditions, but they are highly vulnerable to market failures, including such things as imperfect information, externalities, and free riders (Doane, D 2005).

“I have not been able to find any research that shows CSR to be a bad thing”, states Holme, C 2010. But does it pay? Is it worth doing? We can find enormous web sites of large corporations which only outlay a positive picture. Negative examples are not even touched upon. Research that shows that the ”heaviest polluters are not the heaviest reporters” only serves to confirm the suspicion that the whole story is not being told properly (Brooks, 2009). Holme, C 2010, argues that within organizations CSR activities that support and develop the competitive uniqueness of a business offer considerable opportunities to secure a place in the market. The evidence that he presents is that businesses are still developing their CSR related values during a period of recession which proves its importance for even firms to survive in these harsh times.

University of Michigan business administration professor Aneel Karnani believes that companies do what they do because they are responsible to their shareholders. One of the members of top management of the Best Buy Public Affairs Company said that they don’t allocate budget for CSR separately but they consider it as the integral part of their company’s business model, they are of the opinion that success lies behind CSR.

2.1 CSR & CUSTOMERS

CSR is rising sharply as a corporate priority: by 2011, the percentage of executives giving high priority to CSR is expected to be 70% (Franklin 2008). There is a belief that firms designs CSR actions because they care and consider CSR activities as company’s moral obligation (Vlachos, PA, Tsamakos, A, Vrechopoulos, AP, Avramidis, PK 2008). Some studies (McWilliams and Siegel 2000; Mohr et al., 2001) suggest there is no effect of CSR on consumer loyalty. But according to Casteldo (2008) consumers are interested in the social behavior of firms and the CSR profile of a firm largely influences their purchasing decisions. Sen and Bhattacharya (2001) suggest that CSR can affect consumers’ intentions to purchase.

It is important for firms to communicate and advertise firms CSR initiatives to its customers (Du 2007) which provides greater credibility, and strength to its brand with competitive advantage (Teresa, T, & Uncles, MD 2006). It may appear that the strength of CSR as a communication tool can be affected by factors such as consumer involvement and/or switching costs. Not all individuals perceive CSR actions in the same way (Bénabou, R & Tirole, J 2009). CSR is more beneficial when it is not promoted as per normal advertisements, by doing this a favorable impact on the organization’s goodwill can be reaped (MOHR, LA, WEBB, DJ & HARRIS, KE 2001).

A recent study in Pakistan (Ali 2010) confirms that in a developing country context, there is no positive relationship between awareness of corporate social responsibility activities and consumer purchase intention. In developed countries though a lot of pressure has been forced on companies to consider CSR practices which has given rise to organic products and products created according to fair trade ethical and environmental principles (Azmat, F, Samaratunge, R 2009).

Table 2-1

Source: Swaen, V 2002, p 7.

2.2 DOES CSR AFFECT PURCHASING DECISIONS?

Consumer’s need to be aware of a firm’s level of social responsibility before the affects can be quantified (Varadarajan & Menon 1988). Ross, Stutts, and Patterson (1990-91) found that 53 percent of a sample could recall a CSR based advertisement, while Webb & Mohr (1998) found 79 percent of a sample could describe a specific CSR based campaign only after the concept was explained to them.

Customer lacks responsiveness towards CSR because they don’t have much knowledge regarding CSR (MOHR, LA, WEBB, DJ & HARRIS, KE 2001). Though people study regarding CSR as its clear from the quantity sold of a renowned book “Shopping for a better world” which is explaining multiple angles of corporate social responsibility (Council on Economic Priorities 1994). As mentioned above we can easily figure out that consumers really desire knowledge on how to spend their money better. Most of the previous studies shown that organization have put less efforts to make people aware first and then taken initiative rather they assumed that people know regarding initiative.

However, CSR can be used as a strategic tool to enhance the reputation and public image of a business institution, while at the same time, prove to be profitable for an institution in the long-run (Dusuki, AW & Dar, H 2005).

The 1999 CondRoper Cause Related Trends Report has researched upon consumer responses to companies’ participation in CSR based marketing (Cone Communications Press Release 1999). Studies that were conducted since 1993 have shown that more than 80% firms have reported a positive image if it is involved in promoting particular cause. Furthermore, two-thirds of the sample said they are likely to switch brands or retailers to those participating in CSR activities.

When research was conducted by Ross and his group members based on 225 sample regarding CSR initiatives by firms, they identified that 55% respondents would purchase a product if they get to know that the firm is supporting a cause. More than 50% respondents were also inclined to switch their brand in near future as the result of the CSR involvement of the company.

In another research conducted by Smith and Alcorn (1991) identified that majority of the respondents were of the view that they would switch their brands because the company make donations to nonprofit organizations, and nearly a third (30%) stated that they sometimes buy products simply because the manufacturer supports charitable causes.

Consumers also expect firms to protect the environment and behave ethically and that they sometimes base their purchasing decisions on these factors (MOHR, LA, WEBB, DJ & HARRIS, KE 2001). However, no surveys could be found that attempt to measure the proportion of people whose purchasing is actually affected.

2.3 OVERVIEW OF DIFFERENT SECTORS

In Stock Markets, CSR activities do not generate shareholder value in short run but it is also not correct to say that CSR activities do not generate a negative impact on the market value of a company. This is usually because investors think that CSR activities do not affect the future cash flows of a firm (Karlsson, J & Chakarova, Y 2008). Research findings in housing sector showed that a great majority of buyers in Malaysia expected a socially responsible developer to provide more CSR features. However, less wealthy buyers were more sensitive to house price. However all participants were ready to pay for extra CSR features (Yam, LHS 2008).

In the banking sector, unless the stakeholders perceive CSR investments as being beneficial, these investments may prove to be ineffective. It would appear that CSR activities have been employed too hastily (Calabrese, A & Lancioni, F 2008).

2.4 CSR PAKISTAN & SOCIETY

In Pakistan, mostly multinationals are implementing CSR, competition being the reason behind. Organizations like Unilever’s, P& G Nestle, Siemens, ICI Pakistan, Pepsi, and Coca Cola have led the scene in Pakistan. Many national companies such as Engro, Jung Group, National Foods Pakistan, English Biscuits Manufacturing have also entered the race. Lately banks have also started following this new trend.

In developing countries such as Pakistan, the concept of CSR has been intermingled with the concept of philanthropy or charity (Visser, W). Aga Khan Foundation and Resource Centre NGO conducted a survey of senior officials in over a hundred major companies working in Pakistan and found out that there is enormous potential for involving businesses in community improvement activities. Corporations in Pakistan are donating cash to education and health sectors. Generally pharmaceutical, chemical, food and beverage industries donate their products on a customary basis to different charities and beneficiaries, and also actively react to disaster relief contingencies resulting by floods and other unforeseen natural calamities by donating required products to the affected areas (Ali 2004).

Unfortunately the local industry not completely realizing the importance of CSR; proper investment in this area is not been done. Electronic media as well as print media are often silent on this topic.

According to a research conducted by Ali, I, Rehman, K, Yilmaz, AK, Nazir, S & Fatima Ali, J 2010, they found very low awareness level in customers about CSR, with no linkage between CSR activities and customer purchase intentions. On the other hand D.Dodd, M in his research states that a positive association exists between an organization’s involvement in CSR programs and consumer’s purchase intentions.

It can be pointed out that while making a buying decision, customers in Pakistan do not consider corporation’s contribution towards society. But significant relationship was found between service quality and customer satisfaction. The results showed that customers are ready to pay more attention to pricing strategies than CSR activities of service providers.

CSR is now a core business management issue the world over including Pakistan. The “stakeholder” has finally arrived to share the boardroom agenda with the “stock-holder” says Waheed, A (2005) in a UNDP report. From labor unions to watchdog organizations, there are multiple organizations available that have the responsibility of establishing and awarding credential to organizations that wishes to be judged for its impact on society. These include ISO 14000 (for environmental management systems), the SA 8000 (social accountability standard) and numerous more. At national level, Securities and Exchange Commission of Pakistan (SECP) has made a first contribution by forming Code of Corporate Governance, and the 2002 Trade Policy formed by the government of Pakistan. Pakistan itself has had to learn quickly in adapting to the CSR paradigm. The country has suffered billion of dollars of damage through the 1990s and still are. International buyers are now continuously asking for CSR credentials from Textile and other edible good industry. Within this environment, it is unavoidable for Pakistan to stay away from CSR (Waheed, A 2005) or the whole economy might collapse.

2.5 CSR & PERFORMANCE

Belu, C & Manescu, C (2009) in their research have found a continuous positive correlation between socially responsible initiatives and financial position of a firm. This proves that there is potential for increased profitability when conducting business with CSR in sight.

There is a positiv