CSR Projects on the Corporate Financial Performance

Literature Review

Corporate Social Responsibility initiatives have become increasingly prevalent in the last couple of decades. Scholars define Corporate Social Responsibility as “contributing in a positive way to society by going beyond a narrow focus on profit maximization” (McWilliams, 2015, p. 1). Such contributions could be in the form of donating to charities, adopting ecologically-conscious solutions, developing local communities, supporting progressive business practices, and addressing various other social needs. The large businesses are expected to act in the interests of the communities, society, and even the planet itself. The businesses that have accumulated vast financial wealth and competent staff could provide benefits to more than just their shareholders.

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The view that companies are only beholden to their shareholders is called Shareholder Primacy. The supporters of that position maintain that a business is owned by its shareholders, which means the actions of their employees, and all business decisions must be motivated by creating wealth and benefitting the shareholders. That view was deemed untenable, as the business’ stakeholders include all employees, consumers, suppliers, lenders, communities, and recently the environment. The business must consider its impact on all of these, which became known as the Stakeholder theory. The theory legitimizes Corporate Social Responsibility and opposes Shareholder Primacy.

Scholars have investigated the possible link between engaging in discretionary spending driven by Corporate Social Responsibility with mixed results. Good PR and premium prices can offset the financial losses that socially-responsible programs cause. Even if there is a financial loss, many managers are encouraged to engage in such programs to attract socially-conscious investors and motivated employees. The link between corporate well-being and engaging in these practices has not been empirically proven. However, the perception of that link exists among most shareholders, effectively making it a reality.

The increased prevalence of Corporate Social Responsibility programs has created a need to measure their effectiveness. The outputs are relatively straightforward, as they only entail measuring the resources a company utilizes for the programs, but the outcomes are sometimes impossible to measure. Companies, when measuring the effectiveness of their Social Responsibility actions, often assume outcomes consistent with outputs, which may lead to incorrect results. Numerous different indices attempt to measure the companies’ engagement in both responsible and harmful practices. However, there exists no single accurate way to determine how much good or bad any single business does.

The emergence of international businesses has created a new set of responsibilities. There exist financial incentives for business practices that destroy the environment, employ child labor, or benefit from warfare. An example of such would be the use of conflict diamonds in the production of goods. The international businesses are discouraged from doing that to maintain equal human rights across borders in a global Corporate Social Responsibility movement.

Some scholars have identified several mechanisms that correlate responsible business practices and corporate well-being. Kang, Germann, & Grewal (2016) propose four: Slack Resources, Good Management, Penance, and Insurance. They suggest that the first two are related to the link between Corporate Social Responsibility and the company’s financial performance, while the latter two are related to the link between Corporate Social Responsibility and Corporate Social Irresponsibility.

Slack Resources mechanism explains a firm’s socially-responsible practices from the position of discretionary spending. A company engages in responsible programs because it has done well financially and has an excess of money. Conversely, if there is a shortage of resources, companies may slash some of their socially-responsible programs, as it is not crucial to the company’s success. The supporters of this theory argue that the link between engaging in responsible programs and subsequent performance has not been substantially proven so far.

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Proponents of the Good Management mechanism argue that the benefits from Corporate Social Responsibility programs outweigh the losses. The possible gain to the business can be in the form of increased morale, motivation, and satisfaction of its employees, which helps retain a quality workforce. Corporate Social Responsibility can also be used as a marketing tool to drive prices and outcompete the businesses that do not adhere to socially-responsible standards. Better relationships with stakeholders can substantially increase the company’s performance.

The Penance mechanism explains that a company would want to engage in Corporate Social Responsibility as a form of atonement for Social Irresponsibility in the past. If a business does something that negatively impacts the community or the environment, its public perception can suffer. Launching some socially-responsible programs can help offset that and bring the business back into good graces. The performance benefits are not apparent in this model, but the benefits of avoiding bad PR are obvious.

Similarly, the supporters of the Insurance mechanism argue that positive practices can help against fallout from future Social Irresponsibility. There is a notable difference between the Insurance mechanism and the Penance mechanism. The supporters of the Penance mechanism assert that bad actions in the past lead to good actions in the future to repair relationships with stakeholders. Conversely, the supporters of the Insurance mechanism claim that good actions in the past create a positive reputation, which is an excellent asset in crises and can cushion the blows to the relationships with stakeholders.

Lins, K. V., Servaes, H., & Tamayo, A. (2017) have studied the performance of businesses during the 2008 and 2009 financial crisis and found that businesses with high Social Responsibility engagement outperform others in times of low public trust, such as financial crises. The positive effects also persist in the post-crisis period, leading to more comfortable recuperation from the losses. In this model, the positive effect of Corporate Social Responsibility may be insignificant during regular operation, but it becomes vital in times of strife.

One of the other drivers of Corporate Social Responsibility that is closely related to the Penance mechanism is the plummeting legitimacy of a corporation in the public eye. Schrempf-Stirling, Palazzo, and Phillips (2016) note that as corporations begin to outclass governments in terms of authority, power, and flexibility, the public starts to notice their misconduct. The corporation that exists in the present is seen as the same corporation it was in the past. That can be detrimental to the reputation of corporations that have engaged in some unethical behavior that directly harmed a large number of lives. One way to remedy that is to engage and make amends with the people that a company might have wronged. That can be described as Historic Corporate Social Responsibility.

A good example of such wrongdoing is engagement with totalitarian regimes, such as in Nazi Germany. Businesses were pressured by the government to use forced labor and violate human rights. A particular form of Corporate Social Responsibility borne of that is to denounce the regime and reconcile with its victims. Another example would be for some companies to denounce the current regime and advocate for change, such as in the South African Apartheid. Sometimes the company may have acted unethically without any external pressure, and a particular form of socially-responsible action would be to adopt a transparent approach and own up to the past mistakes.

The specific focus of research on Corporate Social Responsibility has changed over time. Wang, Tong, Takeuchi, and George (2016) have studied publications across six decades and described the changes across several axes. Most importantly, the number of publications has increased dramatically by 2010s in comparison with the 1960s. There have been relatively little or no publications on the process of Corporate Social Responsibility implementation until the 2000s, and the relevant publications in the 1960s and 1970s were mostly descriptive. The publications that describe pre-conditions of engagement were always relatively high, with a sharp increase in the 2000s.

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The 1990s saw an increase in publications that studied the outcomes, and the number has remained relatively high. The categories of outcomes were solely described in financial terms in the 1960s and 1970s, but in the 1990s, there was an explosion of publications that described non-financial gains. The non-financial benefits are still more prevalent in publications that financial ones, but the numbers have started to equalize in the 2010s.

Moreover, in the 1970s and 1980s, the description of Social Responsibility measures was mostly aggregate and broad. In the 1990s, the specific dimensions have become popular, and by 2010s, the specific measures dominate the publications in comparison with aggregate descriptions. Another thing of note is the publications’ country of origin. Until the 1990s, all publications originated exclusively from the US, but in 2010s, there is an equal number of US and non-US publications.

These changes mean that the interest in Corporate Social Responsibility has grown consistently and included many other nations other than the US. The number of studies of specific categories and different aspects of Social Responsibility is growing steadily, which can only benefit the businesses and the public. The more is known about the phenomenon, the better decisions can the stakeholders make, and the more informed the public can be about the business practices of which they should be suspicious.

UAE Company and Its Sustainability Initiatives

An example of a UAE business that adopts a variety of sustainable business initiatives is Rotana, a successful hotel chain. Rotana’s initiatives include but are not limited to: supporting employee wellness, taking part in green festivals, sponsoring events that raise awareness of breast cancer, transparent governance, responsible procurement policy, and many others. The company has received multiple commendations for its conduct and has released Sustainability Reports to the public in 2012, 2014, and 2017.

Rotana even participated in a beach clean-up, having collected ten bags of garbage and restored some areas of the Amwaj Islands for the wildlife and tourists. The company runs a website rotanaearth.com, which describes all their environmental and social programs to the public and hosts all of their Sustainability Reports.

Conclusion

Corporate Social Responsibility is a set of actions that a company takes to bring benefits to its stakeholders, the community, and the environment. Responsibility goes beyond pure monetary gain for the shareholders. It can encompass its care for the employees, ethical business practices, green solutions, transparency, and the support for human rights initiatives even when the governments ignore them. There may be many incentives to engage in socially-responsible practices, but even for the wrong reasons, they can bring tangible benefits to society. Research indicates that there is a growing interest in academia, which can lead to better and more effective practices. Many large and successful businesses consider their Social Responsibility, which is inarguably a commendable process that should be recognized.

References

Kang, C., Germann, F., & Grewal, R. (2016). Washing away your sins? Corporate Social Responsibility, Corporate Social Irresponsibility, and firm performance. Journal of Marketing, 80(2), 59–79.

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Lins, K. V., Servaes, H., & Tamayo, A. (2017). Social capital, trust, and firm performance: The value of Corporate Social Responsibility during the financial crisis. The Journal of Finance, 72(4), 1785–1824.

McWilliams, A. (2015). Corporate Social Responsibility. In C. L. Cooper, J. McGee & T. Sammut‐Bonnici (Eds.), Wiley Encyclopedia of Management. Web.

Schrempf-Stirling, J., Palazzo, G., & Phillips, R. A. (2016). Historic Corporate Social Responsibility. Academy of Management Review, 41(4), 700–719.

Wang, H., Tong, L., Takeuchi, R., & George, G. (2016). Corporate Social Responsibility: An overview and new research directions. Academy of Management Journal, 59(2), 534–544.

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