IMPACTS OF CORPORATE SOCIAL RESPONSIBILITY ON THE FINANCIAL PERFORMANCE OF THE FIRMS

IMPACTS OF CORPORATE SOCIAL RESPONSIBILITY ON THE FINANCIAL PERFORMANCE OF THE FIRMS BY NGO THI LINH ID: E0700042 Graduation Project Submitted to the Department of Business Studies, HELP University College, in Partial Fulfilment of the Requirements for the Degree of Bachelor of Business (Accounting) Hons APRIL 2011 DECLARATION I hereby declare that the graduation project is based on my original work except for quotations and citations which have been duly acknowledged. I also declare that it has not been previously or concurrently submitted for any other course/degree at HELP University College or other institutions. The word count is 10,668 words. _____________________ NAME OF CANDIDATE Date: Acknowledgement I would like to express gratitude towards Dr. Pham Duc Hieu and Dr. Le Van Lien and to Ms Shumathi for their support and guidance. I would also like to some my friends for their financial support for this project. IMPACTS OF CORPORATE SOCIAL RESPONSIBILITY ON THE FINANCIAL PERFORMANCE OF THE FIRMS by NGO THI LINH April 2011 Supervisor: Dr. PHAM DUC HIEU Abstract Does CSR impact on firms' profits? CSR will lead to increase or decrease of financial performance of the firms. Firms face complex market conditions, external effects and asymmetric information which may lead to market failure and sub‐optimal profits. In the literature, market failures could build the theoretical base for corporate social responsibility (CSR) implementation by firms. In fact, firms in competitive markets could use CSR as a management tool to gain more profits through diversification. Further, the implementation of CSR requires the detection of future trends and developments which makes the firms more stable to sudden events. Therefore, CSR may offer firms the opportunity to gain higher profits than they would get without CSR. Alternatively, CSR could lead to higher costs and thus to worse financial performance. Many studies are taken in which the method of study is quantitative or using the KLD data base. In this study, I will examine the relationship of CSR and financial performance in a different view and different method. This study makes clear relationship in the aspect of identifying the costs and benefits of CRS, how those costs and benefits will affect the accounting earnings or profits of the firms. Those issues will be improved by the case of Vedan and Unilever in Vietnam. TABLE OF CONTENTS Page Declaration of Originality and word count ii Acknowledgement iii Abstract iv Table of Content v CHAPTER 1 INTRODUCTION 1 1.1 Background of study 1.2 Statement of purpose 1.3 Structure of study Chapter 2 LITERATURE REVIEW 2 2.1 Definition of CSR 2.1.1 Historical definition of CSR 2.1.2 CSR in the 21 st Century 2.2 Relevant theory on the relationship of CSR and financial performance 2.2.1 Relevant theory suggest a positive relationship 2.2.2 Relevant theory suggest a negative relationship 2.3 Experiential study of CSR and financial performance 2.4 Relevant literature about benefits and costs of CSR 2.4.1 Economic benefits of CSR 2.4.2 Economic costs of CSR 2.5 CSR and accounting performance 2.5.1 How economic benefits are reflected on accounting earnings 2.5.2 How economic costs are reflected on accounting earnings 2.5.3 Additional accounting issues and implication 2.6 How CSR can reduce the cost of the company 2.6.1 Reduce the financing cost 2.6.2 Reduce the cost of human resourches 2.6.3 Reduce the operating cost Chapter 3 METHODOLOGY 3.1 Research objective 3.2 Research strategy 3.3 Measurement 3.3.1 Measurement of Corporate Social Performance 3.3.2 Measurement of financial performance 3.4 Case study 3.4.1 Vedan 3.4.2 Unilever 3.5 Limitations Chapter 4 ANALYSIS 4.1 Vedan 4.2 Unilever Chapter 5 CONCLUSION 5.1 Summury 5.2 Conclusion 5.3 Recommendation REFERENCES/BIBLIOGRAPHY Chapter 1: Introduction 1.1 Background of study Nowadays, the importance of corporate social responsibility (CRS) has been more considered by firms than ever. Most of the Fortune 1000 companies issue CSR reports, they not only care for their responsibility but also they consider it as a key to business. Many firms know that they can get benefits from their social actions. Some of the most significant advantages of CSR are: improved company image and reputation, raised ability to draw and keep employees, and potentially decreased regulatory mistake. The study in economics and direction on the benefits and costs of CSR is growing very fast. Marketing researches prove that ―70% of European consumers consider important a firm‘s commitment to CSR when buying a product or service and, moreover, 1 in 5 consumers would be willing to pay more for products that are socially and environmentally responsible‖. In 2003, many current studies disclosed that ―more than eight in ten British consumers consider important that a firm shows a high degree of social responsibility, when making their purchasing decisions‖. Also, most of customers feel that firms do not pay attention and take action to their environment and social concern. In a study of Mohr and Webb (2005) about the impact of CSR on price and consumer responses, the results show that CSR has a positive impact on consumers‘ valuation of a company and on their buying habits. The study also discovers that a low price does not emerge to recompense for a low level of CSR. CSR is an important issue which concerns about the ethics, society, natural environment, employees and also working environment as a whole in which how the firm behave. On September 13, 1970, in the New York Times, Milton Friedman wrote: ―There is one and only one social responsibility of business— to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.‖ According to The Australian Government Corporations and Markets Advisory Committee, Corporate Social Responsibility Discussion Paper (2005) emphasizes that ―as companies‘ play a prominent role in contemporary society, the relationship that exists between a company and society is an important community issue. Through the provision of goods and services, companies have substantial power to impact society. Correspondingly, a firm‘s CSR suggests whether this impact is positive or negative. Thus CSR is a particularly relevant issue for evaluating firms from a community perspective.‖ The Economist Intelligence Unit (2005) global survey showed that in 2000, 54% of company executives regarded CSR as ‗central‘ or ‗important‘ to their business decision- making. In 2005 this response grew to 88%. This shows that companies are more and more focusing on CSR. Thus it is essential to look whether investment in CSR is connected to higher or lower financial performance. The question of how CSR affects financial performance of the firms is still being researched by many people besides many academic researches of this issue were taken before. Although there are many preponderancy evidences showing the positive relationship between CSR and financial performance, it still has some limitations of conclusions and mixed results. Margolis and Walsh stated in a review of 95 empirical studies conducted between 1972- 2001 that: ―When treated as an independent variable, corporate social performance is found to have a positive relationship to financial performance in 42 studies (53%), no relationship in 19 studies (24%), a negative relationship in 4 studies (5%), and a mixed relationship in 15 studies 19%)‖. Moreover, there is no literary deal with the relationship between CSR activities and accounting earning performance; or the affect of the systems on financial performance and accounting earning is not clear so far. 1.2 Statement of purpose The purpose of this study is to figure out the impact of CSR on the company‘s financial performance. The aim of this study does not answer why and how firms behave socially responsible. The study is looking closely at how likely CSR impact the accounting performance. This study is interested in economic benefit and cost of CSR. This study tries to analyse the relationship between CSR and accounting performance. This study also questions how CSR can increase the profit of a company. Furthermore, this study will examine CSR among two companies in Viet Nam: Vedan and Unilever to see the outcomes of adopted CSR. The main question is what is the impact of CSR on the company‘s profitability? This question is divided into three sub problems which must be answered throughout this study:  The economic benefit and cost of CSR. - Economic benefits of CSR - Economic costs of CSR  CRS and accounting performance. - How economic benefits are reflected in accounting earnings. - How economic costs are reflected in accounting earnings. - Additional accounting issues and implications  How CSR can reduce the costs of a company  The outcome of CSR adopted in Vedan and Unilever in Vietnam. 1.3 Structure of study The thesis will be organized as follows: First, the literature review chapter (chapter 2) will provide a basic understanding of the concept of CSR; the relevant theories describe the relationship between CSR and financial performance as well as empirical studies of CSR and financial performance. The relevant theories will be examined in two aspects of positive and negative relationship. In chapter 2, study also includes the theoretical framework which answers three problems of this study: benefits and costs of CSR, how CSR reflects on accounting performance, and how CSR can increase profits (or reduce the costs) of a firm. This will provide the framework for the subsequent analysis. A methods chapter (chapter 3) will precede the analysis in chapter 4, in which the relationship between CSR and financial performance of the firm will be presented and analyzed according to the literature review. Chapter 4 shall also analysis the outcome of CSR adopted by Vedan and Unilever in Vietnam. Study will complete with concluding remarks in chapter 5. Chapter 2: Literature review The impact of CSR on the financial performance will be found on the relationship between CSR and accounting performance. In order to answer this question, it will be divided into three issues: the economic benefit and cost of CSR, the relationship between CSR and accounting performance, how CSR can reduce the cost or increase profits of a firm. This literature review will include three parts of analyzing and evaluating based on those issues. 2.1 Definition of CSR Since Bowen (1953) defined CSR as a method employed by corporations to pursue policies, decisions, and actions for the social purpose and value, many researchers have defined CSR in a number of different ways. Such definitions have typically been based on two representative theories: agency theory and social contract theory. CSR researchers following agency theory have suggested that corporations are responsible only to stockholders because stockholders authorize the management to operate corporations (Friedman, 1970; Jensen, 2000). On the other hand, those researchers following social contract theory have suggested that corporations have an implied contract with society and that this contract necessitates them to be faithful to their roles to develop the society under the contract (Davis, 1967; Donaldson & Dunfee, 1999). Carroll (1979, 1991) provides a notable definition of CSR: ―corporate social responsibility involves the conduct of a business so that it is economically profitable, law abiding, ethical and socially supportive.‖ Carroll also developed a CSR pyramid composed of economic, legal, ethical, and philanthropic responsibilities. The present study is based on Carroll‘s definition and analysis of CSR. There are various definitions of CSR from many organizations. But those definitions also have a common ground. McWilliams and Siegel (2001) stated CSR as ―actions that appear to further some social good, beyond the interest of the firm and that which is required by law.‖ It means that CSR is not only obeying the law. According to Business for Social Responsibility (BSR), CSR is defined as ―achieving commercial success in ways that honor ethical values and respect people, communities, and the natural environment.‖ On the other hand, Frooman (1997) represent the definition of CSR should be: ―An action by a firm, which the firm chooses to take, that substantially affects an identifiable social takeholder‘s welfare.‖ 2.1.1 Historical definition of CSR Although the name CSR appear to be new to the business world, the concept of CSR has taken over a number of decades through out many literatures. The fact that the terminology of CSR has modified over this time, and the meaning attribute to concepts of CSR will also continue to grow with the development of business, political and social. [...]... continually consistent with what the public expects of the business community today‖ st 2.1.2 CSR in the 21 Century After the collapse of Enron and the scandal of James Hardie in Australia, the problem of CSR became to public prominence The question is how these concerns of CSR can be st solved in the literature of the 21 Century? Many writers continued the discussions about the position of CSR in the. .. empirically investigated the relationship between corporate social responsibility and financial performance Narver is a person who publish the first his study in 1971 The first type is using the event study methodology to analysis the short run financial impact (abnormal returns) in the whether of the firm carry on either socially responsible or irresponsible action The outcomes of these studies have been... limitations, it is the best approach and most comprehensive measure available (Wood and Jones, 1995) However, because of the available of information and also the situations of Vedan and Unilever in Vietnam, in this study, the case study will be used to improve the impact of CRS on the financial performance or profitability of the firms This study will examine the environment performance of two international... out the impact of CSR on financial performance, especially on accounting performance of the firms This impact will examine on three issues which are the benefits and costs of CSR, how CSR reflect on accounting performance of the firms, and how CSR reduce the cost of the firms More over, this study also try to show the outcome of adopted CSR between Vedan and Unilever in Vietnam in order to improve the. .. Buckee – COE of one of these organizations said that ―it is socially responsible for a corporation to invest in certain places that some elements of popular opinion find objectionable‖ This idea exemplifies exactly the conclusion of Windsor that ―There are fundamental differences of opinions and values in the global economy‖ The argument of Oketch is that ―there is need to ensure that the global market... development and economic growth set the way for future discussion on this problem While there were many examples of earlier studies which subjected to solve the problem of CSR and financial profit, Carroll considered the 1980s as the time when ―scholars were becoming interested in the question of whether socially responsible firms were also profitable firms If it could be demonstrated that they were, this... company Vedan and Unilever in Vietnam, and then see the result they got, the attitude of social and customer to what they have done, additional impact of those things on their profits and operations 3.3.2 Measurement of financial performance of the firm Measurement of financial performance has some specific complication although it is seem to be a simpler task There is not much agreement about which measurement... and Jones who ―posited that CSR ought to be seen not as a set of outcomes but as a process‖ The authors created a conceptual tool which called organizational hierarchy to evaluate socially responsible performance of the firm One of the most emerged events in the 1980s was the global debate on sustainable development The interdependence of protection and development was stated on The World Conservation... that there is no relationship between CSR and financial performance, while Wright and Ferris (1997) found a negative relationship; Posnikoff (1997) stated a positive relationship Studies of McWilliams and Siegel (1997) are in the same way of inconsistent concerning the relationship between CSR and short run financial impact The second type is the examining of the relation between measurement of corporate. .. reduce conflicts and seek to align corporate and social goals Less socially responsible firms ignore some environmental and social impacts of their operating activities Some of these conflicts are likely to be realized in future periods in the form of lawsuits, political or social conflicts in foreign operations, penalties, or significant revenue fluctuations in response to negative social or environmental . in the same way of inconsistent concerning the relationship between CSR and short run financial impact. The second type is the examining of the relation between measurement of corporate social. the problem of CSR and financial profit, Carroll considered the 1980s as the time when ―scholars were becoming interested in the question of whether socially responsible firms were also profitable. methodology to analysis the short run financial impact (abnormal returns) in the whether of the firm carry on either socially responsible or irresponsible action. The outcomes of these studies have