Corporate Social Responsibility

Detection the benefits of Corporate Social Responsibility strategies that would serve as a motivation for managers and shareholders in the context of a classical firm, which possesses monetary preferences. Theoretical framework and hypothesis development.

14.02.2016
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Introduction

It becomes increasingly noticeable that more and more companies engage in socially responsible activities, reporting annually on various fields, unrelated to financial performance or business interactions. These social interactions initiated by firms refer to the Corporate Social Responsibility, a perspective, which is broadly defined as the concept through which companies voluntary incorporate social and environmental concerns in their business strategies, basing on the interactions with related stakeholders (The European Commission, 2002). The main intuition behind this notion lies in the fact that in presence of globalization and improved information, companies become more sensitive to the environment of their operational area and to a society at large. Thus, companies engage in interactions with stakeholders via different CSR channels that address main stakeholder groups, such as consumers, suppliers, local communities and many others. Following this logic, when company possesses money preferences, while stakeholders possess social preferences, a certain scenario is possible, when both parties gain through the initiated CSR activities by the firm.

A possible presence of additional channel to generate profits boosted the attention towards this field, however empirical papers do not provide precise information on the impact of CSR activities on profits of the company. Thus, the topicality of this paper is stipulated by the lack of a tangible benefit that would stimuli companies to initiate CSR activities, given the presence of expansion of new production opportunities and increased governments' intentions to develop additional CSR legislation.

The aim of this work, thus, is to reveal benefits of CSR strategies that would serve as a motivation for managers and shareholders in the context of a classical firm, which possesses monetary preferences.

In order to address such aim, a two-step model was developed, basing on the stakeholder theory and on assumptions regarding stakeholders' and shareholders' preferences. The first step is made in order to understand what particular factors influence levels of three large sub-groups of CSR. These sub-groups are: Consumer CSR, Labor CSR and Environment CSR. It is hypothesized that different factors, such as firms' size, age, industry type, profitability, country status and exposure of the company to the media in case of a negative event affects levels of CCSR, LCSR and ECSR. The second step is aimed at revealing that these three CSR sub-groups influence the level of sustainability of a company. The main intuition behind testing such relationship lies in the fact that usually companies may suffer from monetary short-term bias, which means that they fail to generate intertemporal profits, putting more weight on the short-term profits at the expense of the opportunity to raise long-term profits, simultaneously deteriorating interactions with stakeholders (R. Benabou, J. Tirole, 2009). Thus, it is proposed that improved interactions with stakeholders via three large CSR sub-groups positively influence the opportunity to generate long-term profits.

The sample consists of 20 companies from different countries, operating in different sectors, with a six-year time horizon. Levels of CSR sub-groups were calculated in a comprehensive way, using the coding procedure. It was important to account simultaneously for several characteristics of CSR: diversity, actual progress and size effect. Other data was constructed, using different databases. Thus, 3 panel data models were developed in order to test hypotheses from the first step of the model and another pool model was developed in order to test hypotheses related to the second step of the model.

The results of the first-step model showed that all variables tested proved to be significant, determining different relationships with dependent variable, consistent with the logic behind them. The results of the second-step model revealed that implementation of various CSR activities influence positively the level of sustainability of a company.

This paper is organized as follows. In the next section, literature review is provided with an analysis of different ways in which CSR concept was viewed and tested. Then, an essential theoretical framework is addressed, slipping to the development of hypotheses. In the next chapter, a model is presented with analysis and discussions. In the last chapter possible policy implications are discussed and conclusion is provided.

Literature review

Empirical research on corporate social responsibility are generally quite differentiated since the concept itself appears to be ambiguous in its understanding and implementation.

Early empirical studies on corporate social responsibility tried to find the connection between corporate social and financial performance of the firm. Such interest of researchers to explore this particular area arised from the development of theoretical framework which has progressed from the question whether corporate social responsibility can improve total economic welfare as a channel of public good provision to the question of why and how implementation of CSR works within current global state of economy. The crucial question then is why firm should engage in CSR activity and who bears the costs associated with it.

Early literature on CSR is related to a so-called corporate philanthropy concept and explores the subject in terms of relationship between CSR and competitiveness. Pioneer of this framework was Michael E. Porter, whose approach to corporate philanthropy criticizes Milton Friedman's argument, which states, the only responsibility of business is to maximize profits (M. Friedman, 1970). According to Porter (1998), the essence is that philanthropy can have a strong influence on creating a more productive and transparent environment for competition (Michael E. Porter, Mark R. Kramer, 2002) since environmental norms and regulations stimulate innovation. Moreover, considering Porter scenario, where social and economic concerns are not counteracting, but rather interconnected, philanthropy can often be the most cost-effective way-and sometimes the only way-to improve competitive context (Michael E. Porter, Mark R. Kramer, 2002). This hypothesis was heavily criticized which led to the development of theoretical foundation of Porter's theory made by Stefan Ambec and Philippe Barla (2001). This work formalizes the idea that environmental regulations induce innovation through an increased productivity and thus lead to an increase of expected profits and it is done in a stylized model of renegotiation (S. Ambec, P. Barla, 2001). The model assumes that there are three agents acting in the economy: firm (F), a division manager (M) and a benevolent regulator (R). The development of a production plant begins with setting an initial investment I in Research and Development, where the outcome of a program is a technology with constant production cost (S. Ambec, P. Barla, 2001); it is also assumed that there exist two types of technologies, one of which doesn't cause environmental damage, whereas the other does. Further development of the model suggests two games played by F and M: unregulated and regulated ones, where the former suggests the absence of environmental regulation and the latter considers the opposite case. The comparison of the outcomes of the two games leads to an ambiguous total effect. The essence is that in case the technology produces environmental damage, regulation has two effects: it reduces information rents; and decreases the private surplus (S. Ambec, P. Barla, 2001). From the one side, it leads to a positive impact on investment in research and development, but from the other side, it causes negative effects on firm's expected profit. It is possible to state the sufficient conditions in order for the total effect to be positive, so that the Porter's proposition holds, but generally it can be concluded that the results are not as evidential as it could be expected. Attention also should be paid to the comprehensive research on the relation between environmental regulations and competitiveness made by Carl Pasurka (2008), which addresses theoretical and empirical overview of a given issue. Regarding empirical research, generally, the attention is paid towards the correlation between pollution regulation costs and production of goods, rather than to the welfare effects arisen from the reduced pollution. Empirical study made by David Pearce and Charles Palmer (2001) revealed that generally each $1 of environmental expenditures raises (marginal) cost of production (D. Pearce, C. Palmer, 2001; C. Pasurka, 2008) which contradicts Porter's hypothesis. However, the study conducted by Richard D. Morgenstern, William A. Pizer, and Jhih-Shyang Shih (2001) demonstrated a positive correlation between environmental regulations and the cost saving of the firm. Observers investigate the issue for the four intensive polluting industries, distinguishing between environmental and non-environmental costs of a plant, particularly, they allow for the possibility that environmental expenditures influence non-environmental production costs, and the test null hypothesis that these activities are, in fact, distinct. Basic approach is to model non-environmental production costs using a translog fixed-effects cost function, and then to include an extra term allowing for the possible influence of environmental expenditures (R. D. Morgenstern, W. A. Pizer, J. S. Shih, 2001). The results generally provide evidence for the Porter's hypothesis, that is, with a pooled model for a large plant data, a significant cost saving was revealed, however, when using a fixed effect approach, for the three of given four industries the distinction between costs was insignificant, whereas null hypothesis was rejected for the remain industry. This gives a somewhat ambiguous inference, however, researchers associate it with a possible omitted variable bias. Attention also should be paid to the fact that labor market is considered to be one of the significant determinants of competitiveness. Several works were devoted to the correlation between environmental regulation and employment, one of the most substantive papers in this field being conducted by Richard D. Morgenstern, William A. Pizer, and Jhih-Shyang Shih (2002). As with their previous work, they took a large data on pollution-intensive industries and revealed that, on average, introduction of regulations doesn't change general equilibrium in the labor market, that is, the amount of labor affected is very small. However, slightly positive and significant effects were recognized for the two industries, but, taking into account the absence of significant effect in the whole market, it means that differences in the intensities of regulation among industries cause factor movements until the market is in equilibrium again. Revising different empirical tests on Porter's hypothesis, we can see that the results are ambiguous and contradictory, with more weight put on the pessimistic justification of the theory, meaning that introduction of regulations leads to a decreased productivity. As mentioned by Pasurka (2008), in order for the results to be comprehensive, there should be a formal unification of models under a given theoretical framework.

If to step aside from a large amount of articles devoted to the framework proposed by Porter and to consider the case of why companies engage in CSR activities from a different angle, we will discover a literature that generally suggests that corporate responsibility projects result from the private politics. The essence of this perspective is based on the famous stakeholder theory proposed by R. Edward Freeman (1984), where stakeholders are defined as any group of people that can affect or can be affected by the firm's actions (Freeman, 1984). This theory pays substantial attention to external stakeholders, who, by definition do not have contractual agreements with firm; examples of such groups are social activists, religious groups and other types of NGO-s. Despite the fact that these groups do not have internal influence on firms operations, they can implement a set of different actions (such as lawsuits and strikes, for example) that can force companies to follow their particular interests. The sphere of influence of stakeholders on the firm can be decomposed into two parts: first one targets direct costs in the form of fees, for example, and the second one targets company's reputation that can affect internal stakeholders and regulator authorities. Considering the reputational aspect of the firm, the earliest studies were conducted by Phillip B. Shane and Barry H. Spicer (1983) and K. Mattew Gilley, Dan L. Worrell, Wallace N. Davidson, Abuzar El-Lelly (1995). The former study revealed that the share price of a particular firm dropped significantly in the day of the announcement of poorer pollution performance and vice versa, concluding that share prices reflected overall market's perception that increased pollution event caused negative financial consequences, while the latter showed that investors were more interested in the new eco-friendly products rather than in changes in organizational process, boosting company's reputation. Going back to the stakeholder theory, Charles Eesley and Michael J. Lenox conducted a comprehensive study on the factors that influence firms' responsiveness to the secondary stakeholder demand. Researchers created a database, including 331 firms and 307 stakeholder groups, where each firm was at least once subject to a civil suit, letter-written campaign or other types of actions mentioned above. Results of this work are evidential in the sense that secondary stakeholders' demand is most likely to be met in case if their actions are implemented by the more legitimate groups and by groups whose power is greater in comparison to target firm (C. Eesley, M. J. Lenox, 2006). These results are also important in the context of regulation. Traditionally, economists believe that only a governmental impact can provide incentives for the firm to implement social responsibility activities, being skeptical about self-regulation concept, which is the voluntary initiative of the firm to reduce its negative impact beyond rules established by the state (A. King, M. Lenox, 2000; C. Eesley, M. J. Lenox, 2006). This work, thus, provide evidence for the possibility of self-regulation, particularly, firms can find it plausible to address the social impact of its operations, thus, reducing disadvantageous practices of stakeholders, which generally contradicts famous Friedman's argument and sets a new perspective in comparison with the one introduced by the Porter. This idea was further developed in the work written by Robert Innes and Abdoul G. Sam, where scholars investigated factors that influenced firm's participation in the Environmental Protection Agency's 33/50 program. The study directly refers to the determinants of voluntary reduction of pollution, since participation in the program was not obligatory and could not promise any benefits for the participants regarding scrutiny of governmental authorities. However, observers revealed that actual rewards to participated companies took place in the form of lower environmental inspections and enforcement actions, which proved to be a significant incentive for firms to participate in the program, together with such interesting in our case factor as an incentive to prevent potential strikes and pressure for tighter regulations by stakeholder groups (R. Innes, A. G. Sam, 2008). It also should be noted here that observers didn't find sufficient evidence for the popular hypothesis, which states that the voluntary pollution reduction serves as a channel to attract green market consumers. What is specifically remarkable is that Innes and Sam found out that releases of targeted chemicals fell significantly not only for the program participants, but for the non-participants as well (R. Innes, A. G. Sam, 2008). Thus, this work simultaneously addresses significance of the concept related to correlation between private politics and level of CSR and possibility of the self-regulation by the firms. However, such behavior of the firms to initiate actions in order to decrease toxic releases might be originated from the possibility of being rewarded by the authorities, which is very rational proposition. Jacob Brower and Vijay Mahajan in their recent study on the relationship between company's level of social responsibility and stakeholders community (2012) do not doubt the fact that the presence of stakeholders groups as representatives of surrounding environment influences CSR activities of the firm, basing this view on previous studies that prove stakeholder theory to be one of the most convincing answers to the question why firms should engage in CSR. Citing such observers as Waddock and Graves (1997), Hoeffler (2010), Basu and Palazzo (2008), Brower and Mahajan aim at understanding what features of a firm's particular stakeholder society influence the diversity of its social performance, proposing the following features: sensitivity of a firm to stakeholder demand, diversity of this demand and exposure to stakeholders actions (J. Brower, V. Mahajan, 2012). KLD database and the 400 Social Investment Index was used and 10 hypotheses, consistent with three main drivers of CSR noted above, were proposed, including those that address marketing techniques of a firm, degree of globalization, size, branding strategy and other, representing possible channels that firms may have in order to obtain information on stakeholders' demand and to respond to it correctly. Considering the results of this paper, observers revealed support for the major of hypotheses tested and provided empirical evidence that supports the general idea of stakeholder theory. Going into details, Brower and Mahajan showed that firms respond with an increased CSR diversity in cases when firms are more sensitive to stakeholders demand and when they have greater exposure to the risk of disadvantageous actions from stakeholders (J. Brower, V. Mahajan, 2012). The work might also be noteworthy since it emphasizes empirical evidence on targeted strategy of the firm regarding CSR, which is an important feature since in todays' global economy framework more and more firms engage in CSR activities with nearly 75% of executives believing their firms need to consider CSR in their strategy (The Economist, 2008), but, as mentioned by many scholars and academics (Berns, 2009; Lubin, Esty, 2010; Crittenden, 2011) generally, managers do not have a sense of what corporate social strategy should be. Taking into account papers that provide empirical evidence on the stakeholder theory it might generally be concluded that observers found that public politics should be considered as an important channel of CSR mechanism.

Literature that addresses a question of why and how firms should implement CSR strategies not only explores the case under the presence or absence of environmental regulations as it was emphasized by the empirical studies written on the Porter hypothesis and stakeholder theory proposed by the Freeman, but it also explores the concept in a broader sense, particularly, scholars investigate the correlation between CSR and financial performance of the firm. Regarding studies written on this particular field, it would be most appropriate to mention paper made by Joshua D. Margolis, Hillary Anger Elfenbein, James P. Walsh: Does it pay to be good? (J. D. Margolis, H. A. Elfenbein, J. P. Walsh, 2007). This paper is unique in its field since authors take a neutral position and perform a meta-analysis of 167 previous studies written since year 1972 to year 2007, detecting 192 interactions between corporate social and financial performance of the firm. The choice of past works in order to perform a meta-analysis was somewhat comprehensive since each particular research paper should have satisfied three general criteria, including measurements of CSR, of corporate financial performance (CFP) and of size-effect of the correlation between CSR and CFP for individual companies. All statistical values showed in past papers were coded in such a way that positive and negative effects represent financial benefit for the former and loss for the latter (J. D. Margolis, H. A. Elfenbein, J. P. Walsh, 2007). Since generally investigations in this area are very differentiated in methods and explanatory variables used due to the lack of unified theoretical basis, Margolis, Elfenbein and Walsh detected five specifications of each paper to be coded, including: types of CSR and CFP used, number of companies, timing and control variables. Probably, one of the most non-trivial specifications is types of CSR, since, as it was already mentioned, the concept of CSR is extremely broad and each observer builds on his own vision of what CSR is and how to quantify its performance. Taking it into account, academics created nine sub-categories, distributing indicators used in previous studies to the appropriate one. These sub-categories include: charitable contributions, corporate policies (meaning ethical actions of a firm), environmental actions, revealed misdeeds (meaning voluntary disclosure of socially disadvantageous behavior), transparency (voluntary disclosure of information regarding company's performance), self-reported social performance, observers' perceptions (experts, opinion of other firms' managers and other), third-parties audit and screened mutual funds (J. D. Margolis, H. A. Elfenbein, J. P. Walsh, 2007). Regarding the measures of CFP, observers coded them in accordance with two classes: accounting-based or market-based ones. Control variables included those that correspond to the tidy logic when talking about CSR and performance of the company, specifically, these are size of a company, risks associated with it and industry type. When talking about results of this meta-analysis it should be noted, that more than a half of effects studied revealed no significant relationship between CSR and CFP. Taking into account nine sub-categories used to show different approaches to CSR activity, observers revealed that firms with better accounting-based measures of CFP tend to invest more in charitable foundations; in case when company reveal its socially-irresponsible behavior, market tends to induce penalties in the form of decreased stock returns; transparency of a firm is proved to be a valuable characteristics; but other effects appeared to be insignificant (J. D. Margolis, H. A. Elfenbein, J. P. Walsh, 2007). Overall correlation between CSR and performance of the firm appeared to be significant and positive, but extremely small, that generally represents pessimistic result, since, general opinion on this subject before this paper's results conformed that CSR could be a promising mechanism to achieve higher returns. This study is the additional confirmation of the complexity and ambiguity of attempts to measure CSR and its mutual relation with company's performance. However, it is essential to note that this paper is written generally in order to reveal effects of Non-for-profit CSR, a concept, according to which CSR activities originate from the shareholders' preferences which arise from a wish to either sacrifice profits for socially responsible actions or to avoid moral hazard (Friedman, 1970). Strategic CSR framework is based on the resource-based-view-of-the-firm, as examined by the Abagil McWilliams, Donald S. Siegel, Patrick M. Wright (2005), where CSR can appear to be a sustainable competitive advantage of a firm. Generally, such view on CSR is related to a mechanism that should be set in accordance with particular market conditions, technological issues, political context and stakeholder environment. Thus, this view is more vague with implementations originated from different theoretical contexts presented above. One of the papers made by Paul C. Godfrey, Craig B. Merrill and Jared M. Hansen is relied on the strategic model that associates CSR performance with shareholder's value, where CSR is viewed as an effective mechanism that creates goodwill and protection from stakeholders' penalties. Thus, observers test whether CSR possesses insurance property. Specifically, authors hypothecate that specific CSR activities create a goodwill that doesn't generate value of the firm, but rather protect it in case of negative events (P. C. Godfrey, C. B. Merrill, J. M. Hansen, 2008). Observers distinguish between technical CSR activities and institutional CSR activities, meaning that the former is related to CSR policies that target primary stakeholders, while the latter targets the secondary stakeholders. Using a panel data of 160 firms with 254 possible disadvantageous events for years from 1991 to 2002, observers, together with hypotheses regarding types of assets of a firm, size of a firm and types of negative events, propose a hypothesis that in case of negative event, value protection feature of institutional CSR dominates that of technical CSR. For the dependent variable, authors chose stock prices data around a negative event. Results showed, in general, a significant evidence for the risk management implications of CSR mechanism, detecting that value protection effect holds for institutional CSR activities, but it doesn't hold for the technical CSR, with a note that technical CSR revealed its possible benefit only for the large firms, while institutional CSR benefited all firms regardless its size (P. C. Godfrey, C. B. Merrill, J. M. Hansen, 2008). Authors found these results to be consistent with their initial theoretical proposition, which states that technical CSR activities that address primary stakeholders, namely, those who have direct, contractual relationships with a firm, doesn't create the same type of goodwill. Despite the fact that studies, which investigate strategic implications of CSR report more optimistic results, still, academics argue that up to the time when unified conception of what constitutes CSR is agreed, papers will continue to report disparate and inconsistent results (A. McWilliams, D. S. Siegel, P. M. Wright, 2005). Recent studies continue to investigate different causal relationships between CSR and a firm; this could be a question of what influences implementation of specific CSR actions or vice versa, how introduction of CSR influences firm's performance. Following this trend, Ramin Gamerschlag, Klaus Mller, Frank Verbeeten investigated the question of what factors influence voluntary CSR disclosure by German companies (R. Gamerschlag, K. Mller, F. Verbeeten, 2010), showing that the relationship holds for shareholder structure, size of a firm and interactions with stakeholders. Nagib Salem Bayoud, Marie Kavanagh and Geoff Slaughter, who investigated the same issue for Libyan firms (2012), received similar results. Recent paper, written by Johan Graafland and Corrie Marereeuw-Van der Dujin Schouten (2012), is relatively less specific, since authors observe factors that influence executives' involvement in CSR activities targeted at labor, environment and other social aspects. Observers do not classify stakeholders as primary and secondary, as it was done in papers observed previously, rather they build a classification based on the impact of CSR on a particular group, specifically they refer to two main aspects of CSR: social and environmental ones, where social aspect includes labor, safety, health and other, while environmental refers to firm operations' impact on nature. The main goal of this paper is to investigate what particular motives drive CSR activities, analyzing a sample of 473 executives. Researchers' propose a classification of channels that drive CSR decisions: extrinsic and intrinsic motives, where the former is related to the possible financial gains from the CSR as a way to improve reputation, competitive advantage or as a way to reduce costs for energy, transportation, waste and also through mitigation of government regulation; whereas the latter refers to the non-financial motive, based on the executives personal beliefs (J. Graafland, C. Marereeuw-Van der Dujin Schouten, 2012). Moreover, observers divide the intrinsic motive into two types: a moral duty and an expression of altruism (J. Graafland, C. Marereeuw-Van der Dujin Schouten, 2012). Despite the fact that these intrinsic motives may seem to be alike, they are quite different in that sense that moral duty type refers to the situation, when manager implements socially responsible actions because she believes it to be a right thing, but not because she finds it enjoyable, whereas altruism refers to a case, when manager wishes to contribute to a social welfare. In other words, the main difference between these two types is that in case with moral duty, a manager would not implement CSR strategy if she was not obliged to by a certain set of beliefs. Basing on this classification, researchers performed an analysis, using 2500 questionnaires of CEO as a data. Results are conclusive almost for all suggested hypotheses, except for the linkage between CSR and manager's income. Authors revealed that intrinsic and extrinsic motives influence equally on labor CSR strategy, whereas environmental CSR activities are explained mostly by the intrinsic motives. It is also shown that on average, intrinsic motives outperform extrinsic, and moreover, managers who possess intrinsic motives may prefer higher level of CSR engagement instead of income generation (J. Graafland, C. Marereeuw-Van der Dujin Schouten, 2012).

As it is evident from the literature review, issue of corporate social responsibility remains open for further empirical researches, since papers as well as theoretical base can not conclude on a unique solution to a question of why increasing number of corporations involve in socially responsible activities. This paper is aimed at resolving a long-standing conflict between Porter and Friedman, using best practices and at the same time introducing a new approach and understanding of motives that drive CSR activities.

1. Theoretical framework and hypothesis development

1.1 Theoretical perspectives on CSR involvement

Before entering the theoretical framework relevant for the analysis of corporate social responsibility practices, it is needed to define the term itself. As it is stated by the World Bank: Corporate social responsibility - is the commitment of business to contribute to sustainable development, working with all relevant stakeholders and society at large to improve quality of life in ways that are both good for business and good for development (2003). It is needed to add here that a certain socially responsible action is considered to be CSR if its level exceeds that enforced by the regulatory authority; in other words, CSR is a certain contribution to society that goes beyond the law. As it was emphasized earlier, the proposed definition is extremely vague, so that empirical and theoretical base lack the unified vision of what constitute CSR, which in turns leads to contradictory results of research papers aimed at showing drivers and motives for socially responsible investments. In order to address the construction of possible unified theoretical framework, which serves as a base for the further empirical research, three main approaches to CSR should be considered.

The first approach to the existence of CSR is insider-generated corporate philanthropy, which refers to a pure philantrophy case, when socially responsible investments arise due to a particular willingness of top management of the company to initiate giving. Moreover, charitable contributions in this case are made not because of the wish to trade income for some socially beneficial practices, but due to the individual preferences of a manager or CEO (R. Benabou, J. Tirole, 2009). In this sense, CSR is viewed as a static cost parameter that may lead to a sub-optimal firm's value. Such practices are heavily criticized, with the most famous critics emphasized by Milton Friedman, who stated that the only responsibility of a company is to maximize profits and managers should contribute to social welfare using their own money, rather than investing from company's income, however, it should be noted here that usually governments at least restrict the number of possible contribution channels by deciding which particular NGOs or other institutions can serve as a target of tax-deductible contributions (Friedman, 1970). Friedman's critique was in turn criticized for the simplicity of its approach and theoretical literature investigates different processes that may result in more positive treatment of not-for profit CSR. For example, one of them explains the existence of pure philanthropic CSR activities as a way to resolve the moral hazard problem, which arises between shareholders and managers. It is stated that shareholders may prefer to sacrifice money for charitable contributions rather than enhancing top managers' bonus payments.

The second approach to CSR views this concept as a delegated philanthropy, which refers to a situation when company can be viewed as a channel to enhance social value. The essence is that different stakeholder groups may have a demand for corporations to trade money for contributions to social welfare, following this logic, income reduction due to CSR contributions reallocates to stakeholders given their demand (R. Benabou, J. Tirole, 2009). The intuition behind this view is very similar to that employed in financial intermediation theory of delegated monitoring, that is, the core incentive to delegate contributions is the presence of transaction costs. Corporations, being involved in tight financial ties with its suppliers have a significant cost advantage in transferring CSR in comparison to individuals. Moreover, companies may not only perform a transferring function, but they can also implement a value restoring function in a way, which is better in comparison to governments and NGOs. Examples of such function are evident from every-day life, when people prefer to buy organic products, thus, fostering companies to continue implementation of CSR activities. Despite that both views on CSR may look quite similar, they are different in two senses: first refers to the coincidence of stakeholders' and shareholders' social and environmental concerns and the second one refers to the determination of the party that bears the cost of responsible investments. This determination depends on the relative strength of preferences in case if they coincide.

Third view on CSR that should be considered under theoretical framework refers to a case, when a company can do well by doing good. That means that a company, using a CSR channels to address relevant stakeholder demand, may enhance long-term maximization of profits. Porter, who proposes a strategic view on corporate philanthropy, heavily emphasizes this view. He argues that Friedman's argument on CSR is based on the assumption, which states that social and business objectives are separated, so that CSR is a pure expenditure that distorts economic results. As stated by Porter, this assumption is violated when corporation uses a strategic context when implementing philanthropic actions. A company, consolidating CSR into its business strategy may improve the quality of economic environment of the community in which it operates, which in turn leads to a long-term sustainability (Porter, 2002). The main idea is that, actually, companies do not operate in isolated environment from its local community and their competitive advantage depends on the characteristics and attributes of the local environment, where operational facilities are set (Porter, 2002). A good example of this dependence may be the case of improvement of educational programs, since education is usually regarded as social concern, however, enhancing educational level of the local labor by the company may substantially increase its competitiveness. Nowadays, productivity of labor, effective usage of resources and capital are main factors that influence the long-term performance of the firm. Thus, addressing thoughtful CSR strategies, such as educating labor, improving its health and working conditions, may lead to superior results. Moreover, exploring emerging countries and improving their social and economic conditions may lead to a new beneficial allocation of production facilities and new market creation. Porter demonstrates this strategic view on the CSR by the Convergence of Interest graph (Graph 1) that illustrates the area, where stakeholders' and shareholders' area converge, producing an effective win, win strategy (Porter, 2002).

Graph 1. A Convergence of Interests (Porter, 2002)

Implementation of CSR activities, following this logic, may also serve as a way to gather support from the governmental authorities and public opinion in order to escape from a strict supervision on correspondence with imposed regulations.

Taking into account all three different views on CSR activities, it is possible to sum up interactions between stakeholders and shareholders given possible scope of their preferences and illustrate the resulting taxonomy of CSR (Table 1), proposed by Markus Kitzmueller and Jay Shimshack (2012) in the form of the following matrix:

Table 1. Taxonomy of Corporate Social Responsibility

Shareholders

Social preferences

Monetary preferences

Stakeholders

S

Not for profit CSR - delegated philanthropy

Mixed effects on financial performance

Strategic CSR -

win, win scenario

Maximization of profits

M

Not for profit CSR - insider-generated philanthropy

Reduction of profits

No CSR activities

Maximization of profits

As it was discussed earlier, insider-generated philanthropy and delegated philanthropy views on CSR are similar in the sense that corporation's shareholders possess certain social preferences, however stakeholders may possess either social or monetary preferences which in turn determines the resulting motive for CSR and the financial performance of a firm. In case when stakeholders possess monetary preferences, shareholders perform socially responsible contributions basing on their own individual willingness to enhance social welfare, which leads to a situation, when CSR is an expenditure, which reduces profits and may lead to a sub-optimal firm's value. In case when stakeholders possess social preferences, they may have a demand for the corporation to act ethically on their behalf, which appears to be a not for profit CSR initiative viewed as a delegated monitoring concept. The determinant of the resulting effect on the firm's financial performance depends on the question of who bears the cost of CSR, which in turn depends on the relative strength of considered preferences. A case when both groups possess monetary preferences, there is no motive to implement CSR strategies. Finally, a situation, when a firm possesses monetary preferences, while stakeholders have a demand for a firm to implement CSR activities, refers to a strategic CSR case or a win, win view, where firm maximizes profits. However, it is important to address relevant stakeholders' demand in order to enjoy benefits that could be generated from the interaction between CSR and business aims discussed above.

It should be noted that almost all definitions and views on CSR refer to the connection of underlying concept with stakeholders. Such unity in understanding of a particular social group influenced by CSR arose from the stakeholder theory proposed by Freeman. This theory introduces two definitions of stakeholders, first one emphasizes that it is any group or individual who can affect or is affected by the achievement of the organization's objectives, while the second defines it as any group that is vital for the survival of a company (Freeman, 1984, 2004). Main groups of stakeholders refer to customers, local communities, labor, suppliers and shareholders. The main idea behind the development of this theory lies in the fact that nowadays corporations, due to variety of factors such as improved informational channels, globalization and increasing demand for environmental regulations, become extremely sensitive to the state of communities that surrounds its operational area.

Practice shows that large corporations increasingly adopt stakeholder approach into its strategies; nearly half of the Fortune Global 250 companies disclose the information about its various CSR activities, addressing different stakeholder groups, providing information about their environmental concerns, labor and consumer responsibilities.

However, empirical and theoretical literature contradicts on the effects of CSR activities on the financial performance of the firm. Studies which test the relationship between CSR and financial performance show the modest positive correlation, which means that involvement in CSR strategies does not actually enhance profits even when companies disclose to improve local community in the ways described by the strategic management theories.

Nevertheless, each year an increasing number of companies initiate CSR, certificating its plants with LEED, improving labor conditions and spending facilities on research and development in order to improve product quality and safety. Moreover, corporations prefer to disclose this information, acceding to Global Reporting Initiative, an organization that develops standards for voluntary reports on sustainability. Given that these companies do not have a return from such responsible investments, a natural question occurs - if not profits, then what motivates corporations to involve in socially responsible strategies?

Following the aim to address this question and basing on the stakeholder theory, a two-step model is to be constructed, where the first step is set in order to identify factors that influence the level and diversity of CSR and the second step is aimed at showing how implementation of CSR strategies, targeted at different stakeholder groups, affects the capacity of the firm to earn profits in the long run.

1.2 Development of hypotheses, step 1

The first step is performed in order to reveal factors that influence different channels of CSR that can be used to address stakeholder groups. Total level of company's CSR performance is then divided into three large categories: level of Consumer CSR (CCSR), level of Labor CSR (LCSR) and level of Environment CSR (ECSR).

Size

It is expected that the size of a company influences the level of CSR activities. The intuition here is based on the fact that larger size or market presence implies relatively greater amount of transactions and bigger diversity of operational areas. This leads to a situation, when larger firms face a superior number of stakeholder groups who may demand socially responsible actions, in comparison to small-or-medium size companies. Moreover, larger companies, due to bigger scale of transactions, possess a higher probability of negative outcomes, which in turn means that a company becomes more vulnerable to the attention from regulators, media and other groups. In this case CSR activities implemented by larger firms may have a greater level due to a higher capacity needed to meet reputational risks. Thus:

Hypothesis 1: There is a positive and significant relationship between size of the firm and level of CCSR

Hypothesis 2: There is a positive and significant relationship between size of a company and level of LCSR

Hypothesis 3: There is a positive and significant relationship between size of a company and level of ECSR

Age

Companies that have a longer history tend to be more visible, so that they have tighter interactions with society. In this case CSR may be viewed as a channel to maintain these interactions and boost reputation, thus:

Hypothesis 4: There is a positive and significant relationship between age of a company and level of CCSR

Hypothesis 5: There is a positive and significant relationship between age of a company and level of LCSR

Hypothesis 6: There is a positive and significant relationship between age of a company and level of ECSR

Profitability

As companies become more profitable and prosperous, they may face pressures from two sides. First side refers to governmental authorities and political pressures, thus, more profitable firms may find it useful to show, via CSR channel, that they operate in accordance with social and ethical norms, otherwise it might occur to be costly. Local communities and society at large represent the second side, since highly profitable firms may generate certain expectations from the society regarding its benevolence. Thus, a company may ease the pressure, implementing CSR activities aimed at improving local environmental conditions, for example. Also, it should be noted that higher levels of profitability generate resources that can be used to strengthen social interactions, thus:

Hypothesis 7: There is a positive and significant relationship between profitability of a firm and level of CCSR

Hypothesis 8: There is a positive and significant relationship between profitability of a firm and level of LCSR

Hypothesis 9: There is a positive and significant relationship between profitability of a firm and level of ECSR

Type of Industry

Type of industry determines, first of all, regulation aspects. Firms that refer to heavy equipment industries, such as oil, gas or mining have significant constraints on the amount of, for example, CO2 and Green House Gases emissions and governmental organizations continue to impose new regulations and harden those in existence. In this sense, CSR activities clearly address the problem, aiming at preventing such situations. Moreover, basic industries also face highest public pressures, which is evident from many cases, when local communities sue companies for environmental distortions, such as water pollution or destructive logging, here CSR may serve as an insurance against pressures outside classical market interactions. However, regarding the relationship between basic industries and the level of Consumer CSR it should be noted that heavy equipment industries do not have a constant and direct contact with customers, since a larger proportion of their production is not devoted to consumer goods, thus they may find it unreasonable to invest intensively in Consumer CSR.

It also should be noted that CSR occurs to be a good way to ensure the presence of competent labor. A pharmaceutical company, for example, may launch educational programs in order to attract and prepare labor, appropriate to specific industry requirements, boosting effectiveness of production.

Another factor that explains the intuition behind the relationship between industry type and level of CSR lies in the competitive nature of the market. Companies that operate in the household chemistry sector may signal safety and quality of their products by implementing related programs, such as ensuring the certification of suppliers. Thus:

Hypothesis 10: There is a negative and significant relationship between industry type and level of CCSR

Hypothesis 11: There is a positive and significant relationship between industry type and level of LCSR

Hypothesis 12: There is a positive and significant relationship between industry type and level of ECSR

Country Status

Country status of the company's operational area is an important factor since it affects heavily the initial state of the world. Country might be a member of various global organizations that impose tougher environmental and labor standards, so that excessive regulations may lead to a decline in the incentive for the voluntary investments in environmental enhancement. However, it might also be true that consumers differ across countries in their perception of what a high quality product is and in their expectations about company's involvement in the state of social welfare, thus:

Hypothesis 13: There is a positive and significant relationship between country status and level of CCSR

Hypothesis 14: There is a positive and significant relationship between country status and level of LCSR

Hypothesis 15: There is a negative and significant relationship between country status and level of ECSR

Media Accident

It is argued that companies, whose various business activities are more intensively covered by media, tend to have higher levels of socially responsible investments. The intuition behind this logic is quite simple, companies that are more visible attract higher levels of attention from the public and thus become more vulnerable to stakeholders' actions and political pressure.

This may lead to disadvantageous outcomes especially in case of a negative event. Following this logic, Media Accident factor implies a degree of public awareness related to negative events, caused by companies' actions or failures. A negative event here implies cases of labor injuries, fatalities or accidents that harm environmental conditions.

Following this logic, a company may turn to invest more in related spheres, such as Labor CSR and Environment CSR in order to reduce possible costs associated with high visibility, thus:


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