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A test of the virtuous cycle of corporate social responsibility: testing the relation between corporate social performance and corporate financial performance

Wissink, R.B.A. (2012) A test of the virtuous cycle of corporate social responsibility: testing the relation between corporate social performance and corporate financial performance.

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Abstract:In this thesis, the field of tension between corporate social responsibility and financial performance is addressed in an examination of the relationship between the two concepts. In recent decades, many theories about the relationship between corporate social performance and corporate financial performance were put forward, ranging from a predicted negative impact of corporate social responsibility on financial performance to a positive relation from financial performance to corporate social performance. In the same period, many of these theories and predictions were put to the test. Results from these tests were often contradictory. Partly, this is due to differences in research methodology and different ways of conceptualizing and operationalizing the variables of interest. Overall, the combined results suggest that the relationship between corporate social responsibility and corporate financial performance is at least neutral and perhaps slightly positive. However, the different approaches make it difficult to come to a final answer. In this thesis, the relation was put to the test once more, but only after trying to come to a more universal conceptualization and operationalization of the variables. Corporate social responsibility (CSR) finds its origin somewhere in the 1930’s. In subsequent years, many definitions of the concept were given by different authors, and many concepts related to, or perhaps similar to, CSR were introduced. In retrospect, the development of the definition of the CSR concept, and related concepts, has centered on two themes: corporate relations in the economic, societal and environmental dimension, and sustainability. By combining these themes, the following definition was created: Corporate social responsibility refers to a company’s actions to include the interests of its stakeholders in the economic, social and environmental domain in its business operations, and to a company’s actions aimed at guaranteeing the continued existence, at least at an equal level, of the company, society and the environment at large. Corporate social performance (CSP) was then defined as the extent to which companies are successful in implementing these actions. Corporate financial performance (CFP) was defined as the financial outcome of business operations. Operationalization of corporate social performance is based on inclusion in the Dow Jones Sustainability Index. The DJSI is an independently verified index of the world’s leading sustainable companies. Yearly, the world’s 2500 largest companies are assessed on general and industry specific sustainability criteria by means of self-report questionnaires, media- and stakeholder analysis, and data from secondary sources (company websites, annual reports, etc.) The sustainability criteria are identified through the assessment of economic, environmental and social driving forces and trends. The DJSI approach to identifying sustainability leaders fits nicely to the definition of corporate social responsibility and performance suggested in this thesis, and can serve as a reliable source of information now and in the future. Disadvantages of using the DJSI include the binary nature of the data, and the limitations it imposes on the theoretical framework due to the limited information available. Corporate financial performance was operationalized by means of three different accounting variables: return on assets is used to measure how well a company can turn its assets into revenue, return on equity measures the return on ownership equity, and return on sales is used to determine the operating performance. In determining the relation between CSP and CFP, instrumental stakeholder theory, slack resources theory, and the resource-based view were considered. The RBV claims that companies that are equipped with valuable resources that are rare, difficult to imitate and hard to substitute have a competitive advantage over companies that do not have these resources, resulting in above average returns. Instrumental stakeholder theory and slack resources theory both state that the relationship between CSP and CFP is positive. Slack resources theory describes a positive relation from CFP to CSP based on the availability of slack, financial resources; companies that have resources to invest in CSR will perform better. Instrumental stakeholder theory delineates a positive relation from CSP to CFP based on relations with stakeholders; CSR has a positive impact on a corporation’s relationship with stakeholders, these improved relationships ultimately result in financial performance. │ Abstract Page 7 │60 The combination of these two theories with the RBV results in a virtuous cycle of CSR. Slack financial resources have a positive impact on four intangible, valuable assets (reputation, innovative power, human capital, and culture), resulting in above average social performance. CSP, in turn, positively influences the same four intangible assets, resulting in above average financial performance. Due to limitations in the data, hypotheses were developed based on a virtuous cycle that does not include the resource-based view but does include slack resources theory and instrumental stakeholder theory: hypothesis 1, better corporate financial performance results in better corporate social performance; and hypothesis 2, better corporate social performance results in better corporate financial performance. These hypotheses were tested by means of multivariate statistical tests. Based on the results of these tests, the following conclusions were drawn. Size and institutional context are determinants of corporate social performance; larger firms have a greater chance of being included in the DJSI, as do firms originating from Europe compared to those from North America. Return on assets and return on sales are positively related to subsequent social performance, when firm size is appropriately controlled for, providing evidence of the slack resources theory. Corporate social performance is positively related to subsequent financial performance, providing evidence of the instrumental stakeholder theory. These results show that corporate social performance does not come at a cost to shareholders. Taken together, the results provide evidence of a virtuous cycle of corporate social responsibility. Better corporate financial performance results in better corporate social performance and, in turn, better corporate social performance results in better financial performance. Both return on assets and return on sales take part in this cycle; however, return on equity is not associated with subsequent corporate social performance and corporate social performance is not related to subsequent return on equity. Based on all of the above, the answer to the research question must be: corporate social performance and corporate financial performance are positively related in the form of a virtuous cycle.
Item Type:Essay (Master)
Faculty:BMS: Behavioural, Management and Social Sciences
Subject:85 business administration, organizational science
Programme:Business Administration MSc (60644)
Link to this item:http://purl.utwente.nl/essays/61472
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