Literature review of corporate social responsibility theories

Literature restance of unified fond tariff theoriesCorporate Social Responsibility (CSR), as well kn proclaim as somatic citizenship, amenable credit line, or sustainable responsible channel is all merely a throw of corporate self-regulation integrated into a chore slighton where companies manage the business processes to produce an oerall positive impact on society. Arguably, business and society be interwoven where society has genuine expectations regarding business, thus, implying that stiffs ask responsibilities towards society. Hence, being a steward of the extremitys of society is deemed to be a heartyly responsible, appropriate, and natural act. Corporate describes a business that aims to make a profit for its shareholders, hence this excludes, charities, erectations, NGOs and mixer enterprises.The first book acknowledging CSR is the Social Responsibilities of the man of affairs (Howard R. Bowen) in the mid 1950s. But, the term CSR came in widespread us e in the early 1970s. In fact, it owes its origin due to the globalisation which took place after(prenominal) many multinational weeds were formed, thus, bringing in force the corporate political science mechanicss to ascertain fairness and transparency as well as accessible accountability in the corporate world.CSR is defined in mingled ways in different countries, of just about being the capacity building for sustainable livelihoods from Ghana to about giving back to society from Philippines and of being conventionally presented in a eleemosynary model from the United States to being focuse on operating the warmheartedness business in a kindlyly responsible way, complemented by investiture in communities for solid business pillowcase reasons and voluntary interaction with the stakeholders from the European model.As much(prenominal), according to Caroll (2003), The societal function of business encompasses the economic, legal, ethical and discretionary (philanthro pic) expectations that society has of organisations at a disposed point in time. Hence, ideally and broadly, the concept of CSR is a built-in, self-regulating mechanism whereby business would monitor and ensure its keep to law, ethical standards, and international norms.2.1.1 CSR and CSPIn todays competitive market environment, businesses are confronted with a new set of non economics- matchd challenges. To extend and prosper, firms must bridge economic and social systems. Maximising shareholder riches is a necessary besides is no longer a enough condition for pecuniary prosperity. Despite the concept of CSR addresses such issue, a particularised connotation of CSR and a new surgical process respect called the corporate social runance (abbreviated as CSP) needs to be unified to capture the accomplishment of a business in the social realm, and also to be much(prenominal) precise in thinking about CSR.CSP defined as a business organizations configuration of formulas of social responsibility, processes of social reactivity, and policies, programs, and observable yields as they relate to the firms social transactionhips (Wood, 1991), clearly learns that social performance is not limited to corporations totally, but also applies to any firm and organisation. This comprehensive definition assumes that CSP is broader than CSR, which consists of three norms at different levels of analysis institutional, organisational, and individual. Additionally, it includes organisational processes of environmental valuatement, stakeholder management, and issues management, and also various streaks of its external manifestations and societal effects, such as social impacts. Hence the CSP model expresses and articulates three stages, from less to to a greater goal engage towards stakeholders social obligation, social responsibility and social responsiveness (S.P. Sethi, 1975).2.1.2 Views on CSR tally to Hancock (2005), CSR corporation be viewed through and through 3 ways namelyViews on CSRHancock (2005)Sceptic ViewMilton Friedman (1970)utopian ViewEvan and Freeman (1988)Realist viewPatricia Werhane (2009)Few trim d protests would so thoroughly bring down the very foundations of free society as the acceptance by corporate officials of a social responsibility separate than to make as often m wizy for their stockholders as they possibly can.Notion of CSR is opposed to democracy and emancipation where business focus is on wealth creation Went for Stakeholder surmise A corporation must recognise and respect the vital interests of each of its surround stakeholders.CSR reflects the idea that companies cause a prior duty to anyone touched by their activity, their stakeholders rather than their shareholders, and especially the vulnerable that whitethorn be exploited by the companions operation. Gathers the greatest following of an alliance model CSR is also about the justness with which a company governs itself, fulfils its mission, lives by its values, engages with its stakeholders, measures its impacts and reports on its activities.CSR is not evidently about whatever funds and expertise companies choose to invest in communities to suffice resolve social problems2.1.3 Key Drivers of CSRCSR is seen by Porter and Van Der Linde (2000, p. 131) as a competitive driver that requires appropriate resources. CSR programmes, however, on their own, vex certain main drivers which are as followBottom Line way outThis is the most relevant driver of CSR programmes as it incorporates a socially responsible element into corporate practice. As John Elkington (1997) righteousnessly underlined that many companies acquaint corporate citizenship through charity or philanthropy. Nevertheless, a new sight evolved over time for roughly corporate stakeholders. Success of a corporation is now weighted and defined by evaluating businesses use a three-base hit Bottom Line comprised of its social, environmental and monetary per formance.Managing RiskAn endeavour to direct CSR programme has been the gain in market share, secern personnel and enthronization which pioneering companies enchant when they seriously address labour and green issues. In fact, corporations appliance such a programme to manage risks and ensure legal ossification as denoted by Levine Michael A. (2008). They try to avoid investigation, litigation, prosecution, regulation or legislation. curve of the Corporate Disasters in that respect has been an increased perception of greed amidst senior business officials in the corporate world following corporate scandals restoreing Enron, WorldCom and the like. CSR is classical in counteracting allegations of corporate greed. As a result, as described by Hancock (2005) in his book, corporations are now shifting away from the philanthropic approach towards CSR and are moving towards the greater alignment of CSR with business dodging and corporate governance.Lower Equity Risk Premium Reput ation focussingCorporations can nerve economic damage when their corporate reputations and brands are assailed or gross revenue are affected by consumer boycotts. As askd by approximately rating agencies, a comprehensive CSR programme will debase a companys equity risk premium. A direct correlation among reputation and pecuniary outcome measures share price and credit rating (Hancock, 2005) has been illustrated through a model designed by the global public relations company Bell Pottinger. In fact, companies may face a variety of legal and reputational risks if they do not meet adequate social entry or corporate social responsibility/sustainability programs in place.Customer truenessIn todays markets, companies have to focus on building and maintaining customer loyalty. As directd by Zhou Y. (2009), this can be done through a CSR programme which builds loyalty with customers by offering a competitive wages in a marketplace where consumers find ethically delivered or p roduced goods and services.Stakeholder Activism coronation IncentivesAs perceived by Visser, W. (2008), CSR is encouraged through the activism of stakeholder or shove groups which often address the alleged failure of the market and government policy. The trend of socially responsible investment gives CSR an incentive where funds are screened on ethical, social and environmental criteria. Thus, this proactively encourages businesses to inform shareholders of potential risks and issues and it helps them to correct understand their stakeholders, including shareholders. concord to Hill Knowltown (2006), surveys have indicated that analysts place as much importance on corporate reputation as they do on financial performance.2.1.4 Theories for CSRThere are some(prenominal) theories that emerged to condone the reasons behind environmental reporting over the time. These areOperational Efficiency suppositionOperational Efficiency occurs when the right combination of people, process , and technology to boost the productivity and value of any business operation, while reducing cost of routine operations to a craved level. In the context of CSR, operational efficiencies can be achieved through managing imminent risks and liabilities more efficaciously and efficiently through CSR tools and perspectives by reducing be streaming information to stakeholders concerning the investment confederation for better transparency and by using corporate responsibility and sustainability approaches at heart business decision-making to result in new market opportunities, newly developed manufacturing processes that can be spread out to another(prenominal) plants, regions or markets as advocated by S. B. Banerjee (2007).Social Contract TheoryThe current practice of CSR by corporations was explained by O. O. Amao (2007) under the social adjure possibility. This surmisal dates from the classic period of history but took its modern form in the 16th and 18th centuries with best known philosophers like doubting Thomas Hobbes, John Locke and Jean Jacques Rousseau who talk on social contract. Rousseau, in fact, conceptualised the individual-society human blood as a symbiotic situation whereby the devil parties mutually confer with some right to the state in order to maintain social order which makes human life and cohabitation better and to gain benefits of community and safety. In parallel to the social contract, the corporate social surmise, pertaining to a firms indirect social obligations, is advanced where businesses are bound by the social contract to perform various socially desired actions in render for approval of their objectives and other rewards.Legitimacy TheorySimilar to the social contract theory, the legacy theory was adopted by corporations to ensure that operations are within the limits and norms of their various(prenominal) societies and the out-of-door parties perceive their activities as being legitimate.Society grants legiti macy and index to business. In the long run, those who do not use power in a manner which society opines responsible will tend to sustain it. This principle developed by Davis (1973) is commonly known as the constrict Law of Responsibility. It expresses legitimacy as a societal-level concept and describes the responsibility of business as a social institution that must avoid abusing its power. Thus, this principle expresses a prohibition rather than an affirmative duty, and it applies equally to all companies, no matter of their particular circumstances.According to A.K.H. Khor (2004), the legitimacy theory is fundamentally a system-oriented theory where organisations are viewed as components of the larger social environment within which they exist.Stakeholder TheoryA key feature of CSR involves the way that a company engages, involves, and collaborates with its stakeholders including shareholders, employees, debt-holders, suppliers, customers, communities, non-governmental org anisations, and governments. M. C. Branco and L. L. Rodrigues (2007) argued that companies need to use stakeholder engagement to internalise societys needs, hopes, circumstances into their corporate views and decision-making. While on that point are many questions about how far a companys responsibilities extend into communities comparative to the roles of governments and individual citizens, at that place is a strong contention that CSR can effectively improve a companys relations with communities and thereby produce some key features that will improve business prospects for its future.Agency TheoryThis theory comes to explain the relationship that exists among the owners/shareholders and the management. The latter is the agent appointed by the bargainer (owner/subsidiary). In such an agent-principal relationship, problems such as the potential honorable contingency and conflict of interest are likely to occur. CSR comes as a mall way so that both parties can maximise thei r gains. As such, when CFP is strong, managers may reduce social expenditures in order to maximise their own nobble term private gains whereas when CFP weakens, managers will try to offset their disappointing results by engaging in conspicuous social programs, hence alteration magnitude their own wealth and that of shareholders as well, pursuant to the managerial opportunism hypothesis by Preston OBannon (1997).2.22.2.1 Corporate Financial procedure (CFP)Most of the businesses operate with a view of yielding profits. The financial performance of a company is reflected through its policies and operations in monetary cost. These results are reflected through its return on investment, return on assets, value added, return on sale and growth in sales. Managers work in the best interest of shareholders to maximise profits. Financial performance is the most common, however, it cannot be considered as the only indicator used to measure a firms wealth. A broader definition of financi al performance is accompanied by additive indicators such as short-term profits, long-term profits, market value, and other forms of competitive advantage, as noted by Jensen (2001).2.2.2 Corporate Social Performance and CFPMany previous studies have indicated an unclear relationship in the midst of CSR and financial performance. Thus, literature has pointed out towards an innovation in bringing the concept of CSP to better explore its impact upon corporate financial performance (CFP). In todays world, for a firm to achieve a good and high level of CFP, it has to go beyond the limits of its own corporate strategies and adopt views of other stakeholders who may be directly or indirectly related to the company.Since over the three decades, the orbit of the correlation between CSP and CFP has gained much salience. Many studies conducted in this effect have yielded positive correlation, while others produced contradictory results with prejudicious or non-significant different causal directions being found. In effect, there are several competing theoretical models which are proposed to explain three varying findings on the CSP-CFP link. Owing to these differing relationships, I.Y. Maroam (2006) proposes a unified theory of the CSP-CFP link that explain the different relationships that may be sight between CSR and CFP, thus basing itself on the parallels between the business and CSR domains.The concept of CSR instils in corporations the moral responsibility towards society that go beyond the goal of simply making profits for their owners and shareholders (Berman et al., 1999). As Freeman (1984) rightly pointed out that corporations should be socially responsible for both moral and practical (instrumental) reasons, by reflecting a socially responsible posture, a corporation can enhance its own performance. Thus, CSR activities can, inter-alia, be rewarded with more satisfied customers, better employee, improved reputation, and improved attack to financial marke ts, all pertaining to improving financial performance and sustaining the business. However, social accomplishments may equally involve certain financial be which can effectively reduce profits and comparative performance. Hence, Vance (1975) came up with the trade-off hypothesis to show disallow linkage between CSP and CFP whereby corporations displaying strong social credentials follow up declining stock prices relative to the market average.2.2.3 CSP as a Business schemaSo far, it is clear that CSP can be used as a business strategy which can contribute to the competitive advantage of firms. A teach by N. A. Dentchey (2004) on the effects of CSP on the competitiveness of organisations reveals that CSP should not be thought as an innocent adventure for executives. It is rather a strategy for achieving corporate strategies, which if not warily implemented, may harm the firms competitive advantage.Competitive advantage, as seen by Porter (1996), denotes the ability of a company to outperform others from successful differentiation from rivals actions. This strategic fit between the outside environment and companies internal resources and capabilities (Hoskissoon et al., 1999) results in superior financial results, as indicated by various measures of profitability. Hence, as per Burke and Logsdon (1996), a strategic implementation of social responsibility benefits all by resulting in strategic outcomes such as customer loyalty, future purchases, new products, new markets and productivity gains. Arguably, CSP can be a source of competitive disadvantage for firms which regard CSP as an additional cost. Business contributions to social prosperity (CSP) are seen by Keim (1978, p.33) as an investment in public good which is consumed or enjoyed by a subjugate of individuals disregarding the cost sharing. Thus, investing in CSP is likely to bear negative effects for the firms which are incurring be that might otherwise be avoided or that should be borne by others , for example, individuals or government (Aupperle et al., 1985).2.2.4 CSP, CFP and the Stakeholder Theory interest the above arguments, a new perspective of CSP, based on the stakeholder analysis, emerges to argue furthermore that there exists a positive relationship between CSP and CFP. As such, S.A. Waddock and S.B. Graves (1997) propose that a tension exists between the firms explicit costs (for instance, payments to bondholders) and its implicit costs to other stakeholders (for example, product quality costs, and environmental costs). Hence, a firm which tries to outweigh its explicit costs by increasing its socially responsible actions incurs higher implicit costs, resulting in competitive advantage. Thus, high levels of CSP are seen as indicators of superior management by Alexander and Buchholz (1982) which exit to lower explicit costs and enhanced financial performance.The stakeholder theory accompanies the concept of CSR by shedding more light on the issue of social respon sibility. This theory is spread over three sights (Donaldson and Preston, 1995) namely, descriptive, instrumental and prescriptive. While the descriptive aspect describes and explains the theory, the instrumental aspect discloses the cause-effect relationships between stakeholder management practices and improving corporate performance. The normative aspect, on the other hand, as perceived by I.Y. Maroam (2006) empha surfaces on the moral imperatives for practising stakeholder management, rather than the business benefits it may provide. A parallelism between the core business domain and the CSR domain will maximise a firms profitability.The stakeholder theory provides a framework for investigating the relationship between CSP and CFP by examining how a change in CSP is related to a change in financial accounting measures. In fact, the two concepts of CSR and stakeholder share the proposition that social responsibility affects financial performance in some way or other. This baili wick area has been so vastly explored that this trend is now seen as a natural progression which goes associatively with developments in the industrial and business world. There is an increasing concern and emphasizing on humanity, environmental preservation and enlightened social consciousness. Thus, a new area of research began to pave its way within the field of business and society where the relationship between corporate social conduct, both toward the corporations stakeholders and the wider society, and the corporations financial performance was and is still being investigated across several countries. Over environmental issues, research has revealed that businesses which are eco-friendly and demonstrate good CSR practices enjoy increased consumer purchase preference (Gildea, 1994 Zaman, 1996) and good economic performance (Al-Tuwaijiri, et al., 2004).A stakeholder group, as identified and defined by Freeman (1984), is one that that can affect or is affected by achievement of the organisations objectives, that is, which can be harmed as well as can help it to achieve its goals. Therefore, there is a growing need for firms to address the needs and expectations of the stakeholders to avoid negative outcomes and produce positive outcomes for themselves (Donaldson and Preston, 1995 Freeman, 1984 Frooman, 1997). Pursuant to the stakeholder theory perspective, CSP can be assessed in terms of a company meeting the demands of multiple stakeholders, ranging from cost minimisation to societal maximisation. Building on the previous mentioned definition of CSP, Wood and Jones (1995) propose that stakeholder theory is the key to understanding the structure and dimensions of the firms societal relationships thereby expect that firms are responsible for honouring all the implicit and explicit contracts they hold with their various constituents.Therefore, the stakeholder theory provides a system-based perspective of the organisation and its stakeholders where it acknow ledges the dynamic and complex temper of the interplay between them. The various stakeholders of the firms, such as the employees, shareholders, financers, environmentalists, government, communities, customers and even competitors should be positive(p) by the management that it is working harder to satisfy them. The more classic the stakeholders to the firm, the more effort the firm needs to put to uphold its relationship with the former. According to Clarkson, Donaldson and Preston et al. (1995), the stakeholder theory must place shareholders as one of the multiple stakeholder groups which managers should consider in their decision-making process. However, like the shareholders, the other stakeholders may have a scan upon the firm, bestowing societal legitimacy. Notably, Bernadette M. Ruf et al. (2001) asserted that firms must address these non-shareholder groups demands otherwise they might face negative confrontations which can ultimately result in diminished shareholder valu e, through boycotts, lawsuits, protests and so on. Hence, firms have a fiduciary duty relationship not only to the shareholders, but to all stakeholders (Hasnas, 1998, p.32).So far, recognising a companys contractual relationship with the various stakeholders has been instrumental in better comprehending the relationship that CSP and CFP share. Stakeholders have expectations from the organisation. Nevertheless, these expectations may conflict with the firms limited resources leading the firm to evaluate its costs and benefits tradeoffs. familys must thus come with measures representative of the various factors of CSP and stakeholders interests. Unlike neo-classical stockholders who were only interested in financial performance (Grouf, 1994 Shapiro, 1992), the major stakeholders of today, that is, the stockholders are more interested in the firms current and future financial benefits and social performance.2.3 empirical ReviewThis section reviews the works done and methods used by r esearchers on the relationship of CFP and CSP. Empirical results on the latters correlation are mixed whereby some yielded in positive, some in negative and some in non-significant relationships. Basing on the stakeholder theory approach, several models on the CFP-CSP relationship have been proposed, where the largest number of investigations found a positive CSP-CFP linkage. Notably, different methods to compute indexes for CFP and CSP have been used since info on both cannot be possibly obtained in absolute figures.As such, using aggregated weights assigned to K dimensions of social performance obtained through questionnaire for CSP and using change in return on equity (ROE), change in return on sales (ROS) and growth in sales as financial measures on a sample of 496 firms, Bernadette M. Ruf et al. (2001) came up with a positive relationship between CSP and CFP. They, in fact, regressed change in CSP on change in CFP. The results revealed a significant positive relationship betwe en change in CSP and change in ROE and change in ROS in the long term but that with growth in sales was significantly positive only in year 0 and 1. The study suggests that improvements in CSP have both immediate and continuing financial impacts. The authors have furthermore suggested that since many financial performance measures follow a random walk or mean reversion1, it is important to use lead/lag studies to establish a causal sequence of CSP and CFP. Concerning time period, one year may be short in strategic terms and could well be distorted by rogue figures, hence, it suggested to take two or five age data in analyses.A newspaper publisher by S. A. Waddock and S. B. Graves (1997) also found positive linkage between CFP and CSP. An index for CSP was computed using eight attributes relating to shareholder concerns and were rated consistently across the finished Standards Poors 500 by a rating service. The firms profitability was measured using three accounting variables, n amely, return on assets (ROA), ROE and ROS used to assess CFP by the investment community. Factors such as size, risk and industry which affect both CFP and CSP were taken as control variables. Used on a sample of 469 companies and using CSP as both take careent and self-sustaining variable, the results revealed that CFP does depend on CSP and vice-versa and also indicated the importance of controlling for industry in assessing such a relationship.Size has been suggested in previous studies, like that of Ullman (1985) and McWilliams, A., and D. Siegel (2000), to be a factor which affects both CFP and CSP. Size remains a relevant variable because there had been evidence that smaller firms may not demonstrate the equivalent obvious socially responsible behaviours as larger firms. Authors like Pinkston and Carroll (1993), for instance, investigated the extent social responsibility orientations, organisational stakeholders, and social issues can differ among firms of differing sizes. P. A. Stanwick and S. D. Stanwick (1998), on the other hand, found a significant positive association between size (annual sales) and CFP at the 10% level for three of the six years of their study. Firm size is particularly the scale of operations in an organisation (Price and Mueller (1986, p. 233)). preceding literature has indicated a need to control not only for industry, and size (Ullman, 1985 Waddock and Graves, 1997), but also for risk (McWilliams and Siegel, 2000) to render research results more complete. The argument to use risk as a control variable is back up by the fact that the degree of risk is seen as the other important component of firm performance assumed by a firm in order to achieve a given level of financial performance as stated by Bettis and Hall (1982). Baird and Thomas (1985) also advocated risk as being both as a strategic variable (firms choose a given level of risk) and as an outcome variable (strategic choices lead to a level of risk) which ultimately leads to improved financial performance. As such, M. Brine, R. Brown and G. Hackett (2004) used risk alongside size as control variables to assess financial performance of 277 companies. Their preliminary results stated that the betrothal of CSR does lead to increases in turnover and also an increase in equity, which in turn improve the CFP level.According to Mahoney L. and Roberts R.W. (2007), there is no significant relationship between a composite measure of firms CSP and CFP. Using four years panel data of Canadian firms, they calculated a composite measure of CSP score by summing all dimension strength ratings, such as, community relations, diversity, employee relations, environment, international, product safety, and amongst others and subtracting all dimension weaknesses ratings. Following Waddock and Graves (1997a), ROA and ROE were used separately to measure a firms CFP. As CFP was expected to be positively related to CSP, a one-year lag between CFP and all independent var iables (CSP, firm size, debt level, and industry) was used. Inconsistent with their expectation, they found no significant relationship between the composite CSP measure and either ROA or ROE. However, the use of individual measures of firms CSP regarding environmental and international activities and CFP resulted in a significant relationship providing mixed support for the business case for CSP. A study, using the Granger causality approach, by Rim Makni et al. (2008) reaffirms Mahoney and Roberts (2007) works on the non-significant relationship. However, there may also be a simultaneous and interactive negative relation between CSP and CFP, forming a vicious circle.