Impact of CSR on UK companies financial performance

According to McWilliams and Seigel (2001), CSR is the conditions where the firm goes away from compliance and involved in action that contribute to a better society and a cleaner environment. Companies can work to strengthen ties with local communities through sustainable development programmes and corporate codes of conduct. Companies can, not only build trust and mutual understanding with stakeholders, but also support the role of governments by conveying clear values and principles, and accepting responsibility for workplaces and workplace conduct. Besides that, the corporate failures, scandals and wrongdoing that have come to light since late 2001 have also increased the global drive for CSR, such as the abuse at Enron and Tyco, have severely impacted investors and other stakeholder confidence in the integrity of those charged with the supervision and management of large companies. All of these give momentum to the emergence of CSR.

Aim of the Study

To investigate whether CSR help to enhance the financial performance of the companies in UK.

Objective(s) of the Study

Analyse the comparative financial performance of two samples of the company that are rated higher and lower according to CSR.

Conduct financial analysis to measure the impact of CSR to the financial performance of the selected companies.

Analyse the result of the financial analysis to investigate whether CSR helps to enhance the financial performance of the companies.

Rationale of the study

Corporate Social Responsibility (CSR) has emerged in recent years as a fashionable and increasingly popular topic in today’s industry and it also appears to be more important year by year. Companies nowadays should not only concern with financial matters but should also concern with non-financial matters, such as CSR. CSR is an idea whereby companies combine social and environmental concerns together in their business operations and in their dealings with their stakeholders voluntarily. However, financial return remains an important outcome but it is not the sole criterion driving investments; ethical concerns are also included. But of course, no companies are willing to suffer losses just to maintain the social responsibility. Therefore it is essential to make sure that the companies are able to gain profit while practising social responsibility as compare to those that do not. The purpose of choosing this topic is to investigate whether CSR will be able to help the company to earn profit in some way, so that incorporating CSR will become more acceptable and broadly apply by companies in the future.

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Literature Review of the Study

This part of proposal provides an overview of existing studies relating to CSR to contextualize the research questions for this study. First, will be the definition of CSR from various studies to help to understand the meaning of CSR. Second, will be the history foundation and evolution of literature on CSR. Third, will be the impact of CSR to the companies that incorporating CSR in its company policy. Forth, will be the arguments found in existing studies regarding application of CSR. Fifth, will be the methodology use in the existing studies to come out with the studies of CSR and its impacts. Lastly, will be the limitation found in previous studies of CSR.

Definition of CSR

Several studies on CSR highlight the lack of a shared definition of corporate social responsibility and performance (McWilliams, Siegel and Patrick, 2006). Windsor (2006) defends the idea that there are three main moral and political perspectives on CSR: the first two are opposed, one called ”ethical” and the other ”economic”; the third, ”corporate citizenship” (Moon et al., 2003) falls between the two, wavering between the ”ethical” perspective that puts emphasis on the ideal role of the company within society and toward its different stakeholders (Freeman, 2001), and the ”economic” view that maintains that the firm must first maximize the value creation for its shareholders, and only subsequently, may be accountable to society (Carroll, 1998; Jensen, 2000). Very often authors either try to demonstrate that CSR can be used as a tool to improve the competitive advantage or the financial performance of the company (Husted and Salazar, 2006) or maintain that it is impossible to demonstrate a connection between financial and social performance and insist upon a normative perspective (Donaldson and Preston, 1995). Two philosophical schools of thought underpin these conflicting conceptions: on the one hand, the reference to the utilitarian perspective as related to the maximization of global or average well-being (Mertens and Dhillon, 1999); on the other hand, Kant (1785) also identifys the defence of human dignity and of individual rights and capabilities.

History and evolution of literature on CSR

History foundation: from the 1950s to the 1980s

According to Carroll (1999), there is a long history for the evolution for the definition and theory of Corporate Social Responsibility (CSR) since the past 60 years. The evolution of the CSR can be traced since 1950s, while definitions extended during 1960s and further expanded during 1970s. However, there were lesser new definitions, more empirical research being done during the 1980s. Besides, there are some important empirical research being done earlier than 1950s, especially during the 1930s and 1940s. However, it makes sense to concentrate on more recent concepts and research of CSR, therefore the literature is start from the 1950s and then move forward to the more recently.

During the 1950s, CSR is more often referred as Social Responsibility (SR) instead of CSR, because the status and dominance of the modern corporation in the business sector had not yet been noted (Carroll,1999). Bowen (1953) written that the largest businesses were key central of power and decision making, which their actions will directly or indirectly affect the lives of the society and community. There is one important issue raised by Bowen, which is the responsibility of the businessmen to the society which is expected by the society and to what extent the businessmen ready to commit to the society. Further to this, Bowen (1953) set a definition of SR to businessmen that businessmen is obliged to practise SR policies, make SR decisions, or to take those actions that can bring positive values and objectives to the society. In other words, businessmen should take responsible for the consequences of their actions to the society besides those stated in financial statement. Although Bowen argued that there is no fixed answer to SR, but his research contain important message that must guide business in the future (Carroll, 1999).

During the 1960s, the definition of CSR expanded to much clearer. In Carrol’s (1999) research, definition of CSR made significant improvement in the effort to get the more accurate meaning of CSR during the decade of the 1960s. Davis (1960) defined social responsibility by saying that it refers to “businessmen’s decision and activities carried out for reasons at least partly away from the firm’s direct economic or technical interest”. Davis (1960) further argued that social responsibility is an indefinable issue but should be concerned in an executive context and he asserted that adopting social responsibility in business decision making can help to bring long-run economic gain to the firm, thus paying back its socially responsible point of view. This view is commonly accepted in the late 1970s and 1980s (Carroll, 1999). Davis (1960) also states that “social responsibilities of businessmen need to be matching with their social power”. When social responsibility is equal to social power, “the evasion of social responsibility leads to continuing erosion of social power” (Davis, 1960), on the part of businesses. Besides Davis, Frederick (1960) also give important contribution to the early definition of social responsibility, he defined social responsibility as the expectations of the public that the businessmen should fulfil by overseeing the operation of an economic system. This means the businessmen should strive to enhance total socio-economic in the operation of production. Mcguire (1963) also states that “the idea of social responsibilities presumes that the corporation not only liable to economic and legal obligations but also have to take some responsibilities to society which go ahead of these obligations”. In other words, he defined social responsibility as extending a head of economic and legal obligations, although he did not clarify what those obligations were in the definition (Carroll, 1999), but Mcguire (1963) later elaborated by saying that “the corporation must take concern in politics, in the wellbeing of the community, in education, at the point of its workers and in its whole social world. Due to this, business must act “fairly,” as a proper citizen should”. In addition, Davis and Blomstrom (1966) defined social responsibility as “a person’s duty to consider the consequences of his decisions and activites on the whole social system. Businessmen apply social responsibility when they think about the needs and concerns of others who may be affected by business activities. With this, they look outside their firm’s contracted economic and technical interests.” However Davis further expanded his research in CSR in 1976, and he asserted, “The matter of social responsibility comes up from the focus for the ethical consequences of one’s actions as they might have an effect on the interests of others” (Davis, 1967). According to Davis (1967), social responsibility broaden a person’s view to the total social system as it help one to be alert for their actions and effects on others. Lastly, Walton (1967) states that “social responsibility distinguishes the intimacy of the associations between the corporation and society and understands that such associations must be kept in mind by the executives as the corporation and the associated groups pursue their particular goals”. He further states the important element of the CSR include a degree of voluntarism, an indirect association of other voluntary organizations to the corporation, and the acceptance that costs are involved while it may not be able to pay back in a direct measurable economic returns.

During the 1970s, Heald (1970) have a near definition to those in the 1960s, he added that in a community-focused business, business people were significantly preoccupied with corporate compassion and society relations. Besides Heald, another important author in the 1970s, Johnson (1971), also written that a socially responsible firm is a firm which executive staffs balance a diversity of interests, instead of determined only for higher returns for its shareholders, a firm should also takes into account its stakeholders like employees, suppliers, dealers, communities and the nation. Johnson (1971) then said, in such approach, social responsibility in business is effort to achieve socioeconomic goals through the expansion of social norms in a given business roles or business takes place in a socio-cultural system that summarizes through norms and business roles particular ways of reacting to particular circumstances and sets out in some detail the given ways of performing business relationships. Johnson (1971) then came out with the second definition of CSR that social responsibility seems as a profit added elements to the organisation, meaning that, one can make profits by applying CSR or conducting CSR related program. Johnson (1971) further presented the third definition of CSR, which is, the main inspiration for the business to apply CSR is utility maximisation, where the business people seeks for a variety of goals rather than solely to get high return. In short, a socially responsible business person is concerned not only about his own benefit, but also about the benefits of others, for example the stakeholders. Lastly, Johnson (1971) came out a fourth definition that stated the goals of the business are ranked according to the importance of each goal and that targets are assessed for each goal, and these target levels are formed by a range of factors, but the vital one are the businesses past experience with these goal and the past performance of related businesses as one will normally wan to do at least as good as others in similar situations. According to this, Johnson (1971) said that once the profit-driven businesses achieve their profit targets, they will take CSR as an important goal and may engage in socially responsible behaviour. Another important author on CSR was Steiner (1971) who state that business is and must remain primarily an economic association, but it does have responsibilities to help the public to achieve their basic goals and thus, the business have social responsibility. The bigger a business becomes, the greater are their social responsibilities, but all businesses can assume some share of them at no cost and usually at a short-run and also a long-run profit. Carroll (1999) explained that Steiner’s theory of social responsibility is more of an attitude, of the way a manager handles his decision making job, than a great shift in the economics of decision making. It is a viewpoint that looks at the social interest and the open-minded self-interest of business over the long term as compared with the previous, contracted, uncontrollable short term self-interest (Steiner, 1971). Steiner did not stress on definitions, but expanded the meaning and situations under which CSR might be interpreted and applied, and this is an important research done for CSR (Carroll, 1999).

There are many more important authors during the 1970s, such as Manne and Wallich (1972) debated over the meaning of CSR. Manne (1972) argued that to be eligible to become as socially responsible business action, a business expenses or action should be one for which the marginal returns to the business are lower than the returns available from some other expenses, must be solely voluntary, and must be an actual business expenses rather than a channel for individual largesse. Manne (1972) further added that even so, in practise, it is always hard to differentiate a solely business expenses only supposed to have been incurred for the public’s good from one actually made with real charitable purpose. With this, Manne (1972) came out with a more modern view that business expenses may have numerous goals rather than single, therefore, this is not a very good principle for judging social responsibility. Carroll (1999) said that Manne’s element of volunteerism had been carried forward into many contemporary definitions of CSR, but still, is too hard to judge as it is impractical to differentiate between that which is solely voluntary and that which is in response to social norms. Wallich (1972) argued by defining CSR in broad terms, he takes responsibility to represent a circumstance in which the business is anyhow in some measure a free agent; to the point that any of the earlier social goals are imposed on the business by regulation, the business takes no responsibility when it applies them. The application of CSR involves three basic elements which seems to be involved through three basic actions: (1) the setting of goals, (2) the decision whether to achieve the set goals, and (3) the financing of these goals (Wallich, 1972). He identified situations in which CSR might be justifiable, but he helps to get shareholder directions to the business, to make businesses appropriately responsible to the shareholder interest (Carroll, 1999). In 1973, Davis refers CSR to the business’s consideration of matters beyond the constricted economic, technical and legal requirements of the business (Davis, 1973). In other words, it is the business’s duty to evaluate in its decision making procedure the consequences of its decisions to the society in such a way that will achieve social benefits along with the business’s economic gains which it seeks. Therefore, social responsibility starts where the law ends. A business is not being socially responsible if it only fulfils with the minimum requirements of the regulation, as this is what any good resident would do (Carroll, 1999). It is clear that Davis had a restricted definition of CSR as in his latter statement he seemed to be excluding legal compliance, as a part of corporate citizenship, from social responsibility (Carroll, 1999).

In the 1970s, the focus of corporate social performance (CSP) is as well as CSR (Carroll, 1977). This is differentiated by Sethi (1975), who discussed “scope of corporate social performance”, and meanwhile distinguished between corporate behaviour that might be called “social obligation”, “social responsibility” and “social responsiveness”. In Sethi’s (1975) view, “social obligation is corporate behaviour as a result of market forces or legal constraints”. Economic and legal are the only criteria here (Carroll, 1999). Sethi (1975) stated that social responsibility mean carrying corporate behaviour up to a point where it matched with the general social norms, values, and expectations of performance. Sethi (1975) stated that “while social obligation is reactionary, social responsibility is regulatory”. Lastly is social responsiveness. He referred this as the alteration of corporate behaviour to social needs (Sethi, 1975). Following Sethi’s thinking, Fitch (1976) defined CSR in terms of resolving social problems. According to Fitch (1976), CSR is defined as the serious effort to resolve social problems caused wholly or partly by the business. This problem solving approach on CSR was that businesses must identify and define a social problem and then decide which ones to attack first from the array of social problems, in order to be socially responsible. This also included differentiating social and non-social problems, and then identifying methods for resolving social problems.

During the 1980s, the research done on CSR is focusing into alternative concepts and themes such as corporate social responsiveness, corporate social performance, public policy, business ethics and management or stakeholder theory, despite developing new or sophisticated definitions of CSR (Carroll, 1999). In other words, the awareness on CSR began to be reconstructing into alternative concepts, theories, models or themes. Jones (1980) defined CSR as the idea that businesses have a commitment to constituent groups in society rather than shareholders and beyond that required by law wan union contract. There two important side of this definition, first, the commitment must be voluntarily committed or in simple words mean should not be influenced by the force of lay or union contrast; second, the commitment is extending beyond the conventional duty to shareholders and commit to other society groups such as clients, suppliers, and the community (Jones,1980). Jones (1980) then said that whereas Preston and Post’s (1975) emphasis on public responsibility may sharpen some of the ambiguity in the CSR concept, it still does not solve all the issues of CSR. The major contribution of Jones (1980) was his emphasis on CSR as a process, arguing that it is very hard to come to the agreement as to what make up socially responsible behaviour, therefore, he stressed that CSR should not be seen as a set of results but as a process. This is a revised concept about CSR (Carroll, 1999). Besides, Jones (1980) also had shown how a business could engage in the process of CSR decision making that should compose CSR behaviour. After Jones (1980), Tuzzolino and Armandi (1981) tended to come out a better method to assess CSR through recommending a need-hierarchy framework designed after Maslow’s (1954) need hierarchy. Tuzzolino and Armandi (1981) accepthed the definition of CSR in the 1970 and further said that it would be useful to have an analytical framework to assist the implementation of CSR. Their organisational need hierarchy did not redefine CSR, but it suggested that organizations, like individuals, had requirement that have to be met, just as the public do, as illustrated in the Maslow hierarchy (Carroll, 1999). In the authors’ eyes, the hierarchy is a “theoretical instrument where a socially responsible organization’s performance could be realistically assessed” (Tuzzolino and Armandi, 1981). Then, Dalton and Cosier (1982) stated that appropriate CSR policy for businesses to follow is “legal-responsible”. Indirectly, if a business is operating “legally” and “responsibly”, then it is so called socially responsible, although this may be hard to define (Carroll, 1999).

Other than those mentioned above, Strand (1983) also came out with a system idea of organizational adaptations to the social environment that wanted to show how such associated concepts as social responsibility, social responsiveness and social reactions linked to an organization-environment model. Again, Strand (1983) also did not stressed on the definition of CSR, but his model is famous because it stands for another in continuing the hard work to relate such concepts as CSR to other related philosophy and to the organization environment border (Carroll, 1999). Besides that, Cochran and Wood (1984) had brought up the issue of the relation of financial performance with CSR. They thought that it would be more queries from the researchers as to whether socially responsible firms were also profitable firms. If it could be proven that they were, then this would be a new argument in support of the CSR movement (Carroll, 1999). Cochran and Wood (1984) surveyed several ways for the relation between social performance and financial performance in the past, and decided to use a reputation index to assess CSR. According to Carroll (1999), this reputation index used by Cochran and Wood was the Moskowitz index, which developed by Milton Moskowitz in the early 1970s, had a reputational index in which firms being categorised as “outstanding”, “honourable mention”, or “worst”. However, at the end, Cochran and Wood (1984) declared the limitations of this CSR measurement and looked for new measurements. This research is then conducted by Aupperle, Carroll and Hatfield (1985). They are the first one that started to use a definitional construct of CSR from the academic literature to measure CSR. Aupperle, Carroll and Hatfield (1985) prioritised four vital elements for CSR definition in the sequence as: economic, legal, ethical and discretionary. Carroll (1999) said that they further divided the four definitional elements to separate the “economic”, which they categorized as “concern for economic performance” (on the business’s part), from “legal, ethical and discretionary”, which they categorized as “concern for society” (on the business’s part). So, not every person sees the economic responsibility as a part of social responsibility but considers it as something businesses do for themselves. They further added that in order to assess the social orientation of a business, attention should be placed on the importance the business places on the three non-economic components as compared to the economic component. On the other hand, Epstein (1987) relates social responsibility, social, responsiveness and business ethics to redefine CSR. In his definition, CSR relates largely to getting results from organizational decisions pertaining to specific issues or problems which have favourable rather than unfavourable effects on the relevant business stakeholders.

As of the above, CSR has a long history in the literature. In the 1950s and 1960s, the literature of CSR is mainly focusing on the definition aspects, however in the 1970s and 1980s, the definition of CSR turned to be more specific and lesser new definition been brought out. More hard work been carried out to measure and to conduct research on CSR, and alternative frameworks during the 1980s.

Evolution literature on CSR: from the 1990s until now

After all the more in depth researched being done on CSR during the 1980s, CSR became a core construct but suffers from a fundamental weakness, that CSR has no widely accepted definition, and therefore no common model in the 1990s (Argandona, n.d.).

During the 1990s,

Impact of incorporating CSR in company policy

CSR and company’s stakeholders

Ray, Geoffrey and Vinay (n.d.) state that since a firm functions with several different stakeholders, CSR activities are audience specific, example they are targeted towards community (visible CSR), employees (internal CSR), regulators, lawmakers and judges (political CSR), but if the extents to which these different audiences can affect firm value differ, there is no reason to believe that a firm active in one of these types would also be active in another, meaning that: a firm that is considered socially responsible by one group of stakeholders might not be viewed as the same by other group of stakeholders. Therefore, it is important for a company to satisfy as many stakeholders’ expectations from different group as possible.

On the other hand, Derick and Jason (2010) states that the main CSR impact, that the stakeholders concern, toward the company is the growth in company’s reputation. This view is supported by Stephen, Noushi and Corinne (2010) who state that stakeholder expect the company to consider CSR in the business as they believe this can help to enhance the reputation of the company. The importance of reputation is that reputation can positively affect financial performance, institutional investment, and share price (Stephen, Noushi and Corinne, 2010). Besides, a positive reputation also enhances corporate branding which enable a company to use its brand equity to launch new products and enter new markets (Dowling, 2006) as this may in turn generate a new source of income.

In addition, Dowling (2006) argues that successful firms have a greater chance of sustaining superior performance over time if they also possess relatively good reputations. This is important for a company as it will be meaningless if a company unable to sustain its performance that helps to generate profit. A positive reputation for CSR can reduce the damage from negative publicity during a crisis (Vanhamme and Grobben, 2009). This again proved that reputation in an important issue and it will bring benefits to the company.

The CSR impact to the company that applied CSR

The main advantage for company to incorporate CSR is helping the company to meet its stakeholder expectations whom majority are expecting the company to apply CSR. According to Derick and Jason (2010), the gap between stakeholder expectations of a company’s CSR initiative and observable outcomes should be minimal as this will directly reflected to its financial market. Therefore, while in the effort of meeting stakeholder’s expectations, the company should also strive to reduce the expectation gap of the stakeholder regarding the CSR’s initiative.

Another advantage of CSR is identified by Balmer and Gray (2000), Hatch and Schultz (1997) and Hooghiemstra (2000), that projecting good CSR practices can influence a corporation’s corporate image since corporate image is the result of interactions between organizational members and consumers as well as a corporation’s attempts to engage in impression management. Fombrun and Shanley (1990) also recognized that investing in CSR aspects and events may be vital part of product differentiation and reputation building, where product differentiation and reputation building are essential to ensure high profitability to the company.

Besides, Windsor (2006) defines that the economic viewpoint focuses on the firm’s capability to use CSR as a device to create wealth, involves minimal government intervention to uphold CSR, and support that the firm adopt prevailing business ethics. Du, Bhattacharya and Sen (2010) also state that CSR will help the company to get high return through an investigation of a real world CSR initiative, which shows that the company, which had participated in its CSR initiative, can reap superior business returns among consumers, relative to those who were merely aware of the initiative.

Bruyn (1987) has also predicted a positive link between social performance and economic performance by said that, “in reality, social concerns in the investment procedure can in fact improve the possibilities of economic return. The fact is that the two values are not inevitably exclusive. Social and economic values can be maximized mutually, this innovative synergism is the realistic direction taken by social investors nowadays”.

The CSR impact towards companies in the consumer-orientated industry

In the corporate world, many laws and general government regulation influence almost every aspect of business activities, which include nearly every business decision includes the production of goods and services, the packaging, distribution, marketing, and of course service (Carroll, 1989).

Fisman, Heal and Nair (n.d.) find that CSR is more prevalent in advertising-intensive

(consumer-oriented) industries (i.e., those most likely to be affected by consumer perceptions) and CSR is more positively related to profitability in these industries. They drawn their conclusion by saying that firm performance is negatively correlated with visible CSR in industries with low advertising-intensity, but this effect vanishes in industries with high advertising intensity. This proven that CSR has a positive relationship to the financial performance of companies in the consumer-orientated industry. Thus, the financial performance of the companies (in the highly consumer-orientated industry) can be improved if they applied CSR.

Sonnenfeld (1981) also suggests that those who are distant from the pressures of the market place, such as outsiders (in the consumer-orientated industry); see a close link between a decision maker’s personal views and support for socially responsible behaviour. However, insiders, who are corporate executives and closely involved in day-to-day corporate decisions, would attribute questionable corporate practices to competitive pressures. The study here clearly demonstrate that, by having outsiders on the board of directors, a company in the consumer-orientated industry is more likely to engage in socially responsible activities as the outsider’s view is more fair and unbiased by taking into consideration the benefit for the company as whole, because applying CSR can improve the financial performance of the company (Ibrahim, Howard and Angelidis, 2003).

Arguments between the relationship of CSR and company’s financial performance

There are several viewpoints according to this issue, which mainly can be categorised into three groups: one group is not supporting the incorporation of CSR, the other group is supporting while the third group is referring to those who view this in an equal and neutral way.

First group: opponent of CSR

The first view largely believes that companies face a trade-off between social responsibility and their financial performance.

This view is supported by Aupperle, Carroll and Hatfield (1985), who propose that companies incur costs from socially responsible actions put them at an economic disadvantage as compared to other less responsible companies. Besides, Baldwin et al. (1986), in investigating the relationship between CSR and financial performance, wrote that the purpose of their study was to produce quantitative estimates of the penalty, as non-market risk, that companies would have to bear as a result of not being able to invest in various equity securities. The implicit assumption to this investigation is that there must be a cost for company to apply CSR and if the cost is material, then it will adversely affect the company’s financial performance (Moses and Joshua, 1996).

Basically, this opponent view is most closely associated with the traditional view of the corporation (See Friedman, 1962; 1970; Friedman and Friedman, 1980). This traditional view been summarized by Moses a