tiểu luận kinh tế kinh doanh the impact of corporate social responsibility on firms’ profitability

I CSR Definition: According to Horrigan (2010), there’s no exact definition of CSR due to its vagueness and conversy Definitions of CSR according to various authors can be listed The earliest definition of CSR was given by Howard Bowen his landmark book Social Responsibilities of the Businessman in 1953: “… the obligations of businessmen to pursue those policies, to make those decisions, or to follow those lines of action which are desirable in terms of the objectives and values of our society.” In 1960, Keith Davis wrote that "CSR is the concern and response of businesses to issues beyond satisfying legal, economic and technological requirements while Fredrick defined “ businessmen should oversee the operation of an economic system that fulfils the expectations of the public And this means in turn that the economy‟s means of production should be employed in such a way that production and distribution should enhance total socio-economic welfare.” Later in 1970, on New York Times, Milton Friedman concluded about CSR: “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." In 1983, Caroll: “CSR involves the conduct of a business so that it is economically profitable, law abiding, ethical and socially supportive To be socially responsible then means that profitability and obedience to the law are foremost conditions to discussing the firms’ ethics and the extent to which it supports the society in which it exists with contributions of money, time and talent Thus, CSR is composed of four parts: economic, legal, ethical and voluntary or philanthropic.” Four years later, Epstein wrote that “Corporate social responsibility relates primarily to achieving outcomes from organizational decisions concerning specific issues or problems which (by some normative standard) have beneficial rather than adverse effects on pertinent corporate stakeholders The normative correctness of the products of corporate action have been the main focus of corporate social responsibility.” In one of the most recently study, Matten and Moon (2004) defined “CSR is a cluster concept which overlaps with such concepts as business ethics, corporate 5 philanthropy, corporate citizenship, sustainability, and environmental responsibility It is a dynamic and contestable concept that is embedded in each social, political, economic and institutional context.” The following table summarizes the evolving definition of CSR from the 1950s hitherto Dimensions of CSR definitions Source: Mediterranean Journal of Social Science - 2015, Vol.6 (4): pp 83-95 6 II Literature Review: 1 Brief introduction of theories about positive impacts of CSR: 1.1 Friedman’s shareholder theory (1970): Corporate social responsibility began to be known by the famous American economist Professor Milton Friedman (won the 1976 Nobel Prize in Economics for research “Consumer analysis, calendar history and monetary theory ”) Milton Friedman emphasized CSR would increase their profits In the book “Capitalism and Freedom”, he anticipated: "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." (Friedman, September 13, 1970) This argument quickly occupied the debate forums from the scientific and political circles to the businessmen and other intellectual classes of American society at that time 1.2 Caroll's (1979) theory: Caroll's (1979) theory was also used and developed in many studies The first is a three-circle concentric model with economic, social values and social issues, then evolved into a pyramid model (Carroll, 1991) that can be applied to all sectors, profession This model consists of 4 levels: economic responsibility, legal responsibility, moral responsibility and charity responsibility Because the factors are arranged in order based on CSR's requirements for each specific business, Maslow's demand tower (1954) is related The typical research using this theory is Lee et al (2012), Polychronidou et al (2014), Saeidi et al (2015) (Le Phuoc Huong, 2017) 1.3 Freeman’s Stakeholder Theory (1984): Based on Freeman's stakeholder theory (1984), argues that a positive relationship exists between CSR activity and financial performance such as that of Bragdon and Marlin (1972), Heinze (1976), Sturdivant and Ginter (1977), Grave and Waddock (1994), Hart and Ahuja (1996), Klassen and McLaughlin (1996), Pava and Krusz (1996), Preston and O'Bannon (1997), Russo and Fouts (1997), Waddock and Grave (1997), Judge and Douglas (1998), Orlitzky et al (2003), Bird et al (2007), AragónCorrea et al (2008), Nicolau (2008), Brammer and Millington (2008), Lee and Park (2009), Inoue and Lee (2011), Mustafa et al (2012), Wu and Shen (2013), Rhou et al (2016) In the view of this group, when the company makes decisions and performs activities in the interests of shareholders, it is necessary to consider other 7 objects such as customers, employees, suppliers, the community CSR activities will improve company value through cost savings and reputation enhancement However, this positive positive relationship is evident with some specific conditions According to Charleset al (2001) and Mather and Carstensen (2005), the positive effect comes from the older age group 1.4 Consumers’ satisfaction of Yuhei Inoue (2009-2017): In 2009 and 2017, Inoue found that CSR has a positive impact on customers' satisfaction when using the product Specifically, customers feel confident about the quality of a product or service when they trust the business and believe that trusted businesses will have greater social and ethical responsibilities Moreover, customers may be more satisfied if the supplier is more socially responsible CSR can increase perceived benefits and values, thereby enhancing customer satisfaction In addition, CSR also impacts customer commitment (Inoue, 2017) when customers trust through corporate social responsibility, they tend to stick with the brand more, reduce brand transformation intentions and brand-customer relationship quality is further strengthened Stable customer base, good product, and reliability of the business will promote profit maximization 1.5 Other related benefits: Becker-Olsen et al (2006) and McDonald and Rundle-Thiele (2008) used marketing theory to study CSR activities that influence the company's benefits through customer buying behavior In addition, some recent theories have been used such as social identification theory (He and Li, 2011); Organizational Theory (Lee, 2012); rational value theory (Carnevale et al., 2012); Bridge theory (Bauman and Skitka, 2012); Benefit-cost theory (Rhouet al., 2016) Hoepner and Yu (2010) proved that investors can exploit this positive effect of CSR Forget (2011) found the relationship with customers and suppliers is crucial for good business Lee and Maxfield (2015) emphasized positive impact on environment 2 Brief intro of theories about negative impacts of CSR: 2.1 Friedman’s precedent towards bad financial performance: The group of researchers based on Friedman's point of view (1970) argued that there was a negative relationship between CSR activity and financial performance through parameters such as stock price changes (Vance, 1975), profitability retained 8 (Wright and Ferris, 1997) and earnings / stock projections (Cordeiro and Sarkis, 1997) From this group's point of view, companies should conduct their own social activities on their own resources to increase profits for their owners, while trying to optimize the distribution of scarce resources will adversely affect to financial efficiency Many studies support this inverse relationship, such as Pomering and Dolnicar (2009), Inoue and Lee (2011), Mustafaet al (2012), Rhouet al (2016), thereby stressing the importance of communicating CSR activities to appropriate stakeholders 2.2 Jensen and Meckling’s representative issue (1976): There is always a conflict of interest between shareholders and business managers This conflict is often referred to as a "representative issue." In general, a company is composed of different interest groups and a unique representation problem can be solved when the equilibrium of different interests can be achieved (Krisnawati et al., 2014) According to this theory, the interests of shareholders and corporate managers will never be linked and social responsibility may be the result of conflicts (Jensen and Meckling, 1976) Therefore, socially responsible activities can lead to poor corporate performance and the wealth of shareholders may decrease This theory holds that resources and investments for corporate social responsibility must be spent effectively to improve the firm's performance, but it will not benefit the managers' interests (Thi, 2018) 2.3 Roper and Parker (2012): Using a sample of 1000 consumers, from UK residents internet survey, Roper and Parker highlighted that fast-food packaging (an action) results in wastes (an effect), that has harmful social, environmental and economic costs to society The result was that the multiple levels of brand evaluation are adversely affected when the brand packaging is seen as a litter and quantifies its financial impact 3 Appendix: SIGN OF EFFECT BENEFITS AUTHO RS Milton Friedman (1970) TITLE The purpose of CSR for METHODOLO GY Tried-and-true method SAMPLE MAIN RESULT Data from primary survey Boosting profits was main aim 9 enterprises through Caroll Canroll’s Experimental, (1979) theory hypothesis testing Freeman (1984) Yuhei Inoue (20092017) Stakeholder A Delphi Theory method Consumer satisfaction is affected by CSR activity of CSR questionnair Economic, legal, e moral and charity responsibili ty CSR activities will improve company value through cost savings and reputation enhanceme nt Increase perceived benefits Stable customer base, good product, and reliability of the business will promote profit maximizati 10 on BeckerOlsen et al (2006) and McDonal d and RundleThiele (2008) The company's benefits through customer buying behavior Marketing theory Hoepner and Yu (2010) Empirical study to analyze the value of Carhart model regression Forget (2011) Effect of CSR activity on customer buying behavior could increase profit maximizati on 196 companies, from Resulted two sectors with higher values, in CSR in ten industries in terms of corporate and investors 16 countries, 2005–2009 which the investors can exploit this positive effect of CSR Investigate OLS regression d the relationship between 1577 observation s on Finding the CSR dimensions has a firm performanc e and CSR 461 large European listed firms different importance , the relationship with customers and suppliers is 11 crucial for good business Lee and Maxfield (2015) DRAWBAC KS The impact OLS regression of corporate analysis responsibili ty activities 126 large companies from CSR and Global Reporting Initiative reporting (CRA-R) on corporate social performanc e (CSP) and (CFP) U.S 2007– 2008 (GRI) activities positively influence corporate environme ntal performanc e and CFP Friedman Bad ’s financial precedent performanc e of CSR activity Companies should conduct their own social activities on their own resources to increase profits for their owners, while trying to optimize the distribution of scarce resources 12 will adversely affect to financial efficiency Jensen and Meckling ’s (1976) Representat ive issue Socially responsible activities can lead to poor corporate performanc e and the wealth of shareholder s may decrease Roper and Parker Highlightin g that fastfood (2012) methodology packaging (an action) results in wastes (an effect), that has harmful social, environmen tal and economic costs to society Quasiexperimental 1000consu mer, from UK The result was that the residents internet survey multiple levels of brand evaluation are adversely affected when the brand packaging is seen as a litter and quantifies its financial impact 13 4 Sum-up: Current situation of CSR research: There have been several studies on CSR yet the overall impact remains inconclusive with all kinds of impact: negative (6 studies), positive (38 studies), and non-significant (21 studies) ones Friedman (1970) argues that there is a negative correlation between CSR and financial performance through parameters such as stock price change (Vance, 1975), retained earnings (Wright and Ferris, 1997) and earnings/equity forecasts (Cordeiro and Sarkis, 1997) In view of this group, companies should conduct their own social activities with their own resources in order to maximize profits for their owners, instead of trying to optimize the distribution of scarce resources that will have a negative impact on financial efficiency Many studies support this negative relationship, such as Pomering and Dolnicar (2009), Inoue and Lee (2011), Mustafa et al (2012), Rhou et al (2016) Meanwhile, the other group based on Freeman's theory of stakeholders (1984) argues that there is a positive relationship between CSR and financial performance such as that of Heinze Grave and Waddock (1994), Russo and Fouts (1997), Waddock and Grave (1997), Orlitzky et al (2003), Brammer and Millington (2008), Lee and Park (2009), Inoue and Lee (2011), Mustafa et al (2012), Wu and Shen (2013), In view of this group, when a company makes decisions and conducts its activities in the interests of shareholders, it is important to consider other stakeholders such as customers, employees, suppliers, and the community CSR activities will improve the company's value through cost savings and reputation The third group suggests that there is no significant relationship between CSR and financial performance, as reported by Aupperle (1985), Abbott and Monsen (1979), Teoh et al (1999) due to too many factors affecting company performance However, the findings above should be treated with caution because these studies were conducted with different key factors such as time periods and measures of CSR and financial performance About the changes in social responsibility research, Lee (2008) said that CSR studies over time have changed dramatically, moving from research at the macro level (society) to the micro one (organization, company), and from ethical research to research that focuses on management effectiveness 14 III Theoretical Effects: 1 Positive Effects: How CSR boosts profitability? Studying CSR, we focus on the way how CSR helps the firm boost its profitability CSR can promote company’s reputation in the marketplace which results in higher sales, enhance internal personnel and employee loyalty, and focus on sustainability that relates to lower costs and better efficiency We look at these perspectives through various theory 1.1 Shareholder Theory (Friedman, 1970): Friedman introduced this theory on New York Times in 1970 He concluded that a firm has no ‘social responsibility’ to the society but only to its shareholders which is making profits (1970) He wrote, "In a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business He has direct responsibility to his employers That responsibility is to conduct the business in accordance with their desires the key point is that, in his capacity as a corporate executive, the manager is the agent of the individuals who own the corporation and his primary responsibility is to them." Stakeholder is a party having interest in a firm, who can either affect or be affected by the firm’s business Stakeholders can be from internal or external of the firm Having a long term relationship, they mostly concern about the result and some managerial aspects of the firm So how this relationship boosts firm’s profitability? Stakeholders have a financial interest in the success of the firm To satisfy their financial interest, they can directly/indirectly operate the firm, which has effect on the cash flow They also have the right to control the firm (based on the amount of shares they own), manage it based on their visions and concerns In the end, how much the firm earns influences the shareholders’ dividends and their decision on investing Therefore, focusing on the value of the shareholders extends the firm’s profit However, by enhancing their value, this might create a conflict of interest with the stakeholders 1.2 Pyramid of CSR - Economic responsibilities (Caroll, 1979): “Carroll’s CSR Pyramid is probably the most well-known model of CSR…” (Visser, 2006) If going online and search for this on Google, there will be various studies and articles related to it In this theory, Caroll (1979) depicted CSR as a 15 pyramid formed by four components from low to high: economic responsibility, legal responsibility, ethical responsibility and philanthropic responsibility These four component closely link with each other and economic responsibility works as the foundation for the other three Explaining to our question on profitability, we look at the role of the economic responsibility to the firm Economic responsibility may not look like a social responsibility at first, yet it is what the society requires firms to do It works as a fundamental factor for the existence of any firm, which enables the firm to be sustained Making profits means having resources to produce what community needs, to invest and to expand further business Making profits also means that the firm is creating value for its stakeholders, bringing rewards to them and developing a healthy environment for any parties included Undoubtedly, profitability and return on investments are motivators to any business success In a global economy, economic performance and sustainability have proved their importance Moreover, fulfilling economic responsibility gives the firm a base to accomplish other responsibilities The legal, ethical, philanthropic responsibilities concern with creating welfare and conforming norms and rules, which have direct influence on the firm’s reputation in the marketplace and its relationships with the stakeholders Therefore, the economic responsibility in Caroll’s theory is an element that boosts the firm’s profitability 16 1.3 Stakeholder theory (Freeman, 1983): The first person addressing the stakeholder theory was Ian Mitroff in his book Stakeholders of the Organizational Mind Shortly after, Edward Freeman published an article in California Management Review about stakeholder theory without citing Mitroff’s theory According to Freeman (1983), “The task of executives is to create as much value as possible for stakeholders without resorting to tradeoffs Great companies endure because they manage to get stakeholder interests aligned in the same direction.”; stakeholders are “groups without whose support the organization would cease to exist” The theory also notes that under the umbrella of stakeholders, the parties include customers, employees, suppliers, investors, political action groups, environmental groups, local communities, the media, financial institutions, governmental group,competitors and even more The view depicts a corporate as an environment where every party needs being considered and satisfied Therefore, the corporate can be healthy and make profits in the long term Without taking care of the stakeholders, short term profits might exist but the corporate can’t survive in the long term Increasing the value for stakeholders 17 also means improving the business, especially the profits Of course, however, the corporate can’t please all the stakeholders as they represent a large and diverse group In respect to profit, the four stakeholders having the direct impact are employees, customers, suppliers and investors.Treating the workers fairly with reasonable working hours, wages and benefits will increase productivity, the quantity and quality of the products To suppliers, making fair, ethical and equal business with them will build up a long-run success Most of the revenue is spent on the suppliers so a small change in the supplier relationship can result in a difference in the firm’s profitability (CIPS,2014) Regarding to customers, their satisfaction, which leads to repeat purchase, brand loyalty, retention and positive word of mouth, has direct impact on the firm’s profitability: increasing revenue as well as profit To satisfy customers, the firm has to develop and improve their performance Lastly, with regards to investors, they are the stakeholders who provide funds so the firm can expand its business Making profits is how firm remain the relationship with current investors and attract other investors as well There are many other theories that prove the positive effect of CSR on firm’s profitability: customer behavior in concerning with marketing theories (Becker-Olsen et al.,2006), social identification theory (He and Li, 2011), Organizational Theory (Lee, 2012), Bridge theory (Bauman and Skitka, 2012), Yet the three theories above are the most basic and used in many studies On the other hand, the relationship between CSR and the profit can be negative in some aspects 2 Negative Effects: Why CSR harms profitability? 2.1 Waddock and Graves (1997) According to Waddock and Graves (1997), it is possible to assume that the biggest firms are able to have a behaviour more responsible than the smallest ones The biggest ones probably pay more attention to the relationship with external stakeholders Waddock and Graves (1997) assumed that companies with a responsible behavior may have a competitive disadvantage, since they have unnecessary costs These costs which falls directly on the bottom line would necessarily reduce shareholders profits and wealth Meanwhile, a neutral sign from Waddock and Graves, (1997) still exist: Literature’s explanations for a neutral relation agree on the possibility of many ruling variables in the relationship between social and financial performance that make the connection coincidental The author observes that important dimensions are not just social performance and economic result but also 18 “information” about social performance and that only few studies have analyzed this three-dimensional relationship 2.2 Preston and O'Bannon, (1997): fix two separate cases that might justify a negative report: Preston and O’Bannon (1997) implied that because most managerial compensation is linked to short-term CFP, managers reduce CSR costs to boost immediate CFP, thus their own personal compensation I trade-off, similar to the one just presented By producing in a socially responsible manner, the resources are consumed and this creates disadvantages for more responsible companies II "Managerial opportunism"; recognizes in the pursuit of managerial and personal aims the final result reachable by a company When an enterprise financial performance is good, managers usually cut social costs with the intention to increase profit As soon as the performance declines, managers seek to justify bad results investing in social programmes Both short-term analysis based on measurements of the abnormal return (Wright and Ferris, 1997) and measures of market (Vance, 1975), both long-term studies (Vance, 1975) show a negative relationship between performance and CSR Two other theories that take the reverse perspective are: while CSP leads to CFP, CSR results are negative Since it is hard for big company owners to monitor executives, some undertake CSP for their own advantage despite being detrimental to general company performance (Preston and O'Bannon, 1997) The managerial guile theory suggests that managers investing in CSR are not fully using the resources and thus will not maximize CFP It also suggests that if stakeholders knew about these business practices, their attitudes towards the firm would change The private costs theory states that CSP only generates costs without any profits (Aupperle et al., 1985; Friedman, 1970; Preston and O'Bannon, 1997); it believes that CSR is harmful to firms as they fail to maximize CFP Even if CSR may benefit specific stakeholder groups, the firm’s private returns are negative The private costs theory implies that managers who invest in CSR fail to account for the opportunity cost of their actions and therefore forgo more profitable projects for not only themselves but also for society in general (Friedman, 1970) These social practices would eventually lead to poor CFP 19 Conclusion Some of the most popular argument for conducting CSR when considering the profit aspect are involved in its reputation to consumers, impact on such stakeholders as employees, managers, etc.and long-term sustainability To be more specific, it can be observed that contemporary consumers increasingly feel attached to the brands’ vision and tend to support CSR-conducting ones, which subsequently raise their sales and thus profit Moreover, the investment in internal personnel can also help to boost profitability as employees are motivated and equipped to make greater contributions Meanwhile, opponents of these ideas argue that investment in CSR would increase the cost and consequently harm profits In other words, CSR is said to prevent the firm form maximizing its CPF and even block the opportunities to invest in more profitable projects While there has been no unanimous conclusion about the impact of CSR on companies’ profitability, it can be observed that not only the number of studies showing positive correlation is significantly higher but the reality is also that many companies worldwide and in Vietnam are ripping the benefits of CSR Recommendation For companies, it is suggested that they should identify correctly potential customers and especially their concerns Because the target customers strongly influence the development strategies of the company, the investment on CSR should also target the potential customers to increase their loyalty, increase public awareness of company's brands and deepen the connection between brands and CSR in the minds of consumers Focus on the customers will benefit both short-term and long-term business In addition, the company should analyze the social status to apply appropriate CSR strategies Incorporate CSR activities into building business strategies of enterprises according to international practices such as sustainable development At the same time, identify the priority areas for implementing CSR, thereby assessing the impact of CSR on the company's strategy In other words, study each specific aspect to see the impact of CSR on business performance in the short, long term For the government: Introduce incentive policies to encourage businesses to engage in CSR activities that benefit society and the environment There are forms of recognition of company contributions in CSR activities 20 Bibliography Aupperle KE (1984) An empirical measure of corporate social orientation In Research in Corporate Social Performance and Policy Blackburn, M (2019, March 5) What Is Stakeholder Theory? 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These four component closely link with each other and economic responsibility works as the foundation for the other three Explaining to our question on profitability, we look at the role of the. .. (based on the amount of shares they own), manage it based on their visions and concerns In the end, how much the firm earns influences the shareholders’ dividends and their decision on investing Therefore,... introduction of theories about positive impacts of CSR: 1.1 Friedman’s shareholder theory (1970): Corporate social responsibility began to be known by the famous American economist Professor Milton