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Definition of corporate social responsibility and its importance in business

By definition, corporate social responsibility, also known as corporate citizenship, refers to the self-regulating model of business that aids any firm to be accountable socially to the public, stakeholders, and itself (Lee, 2016). Through corporate social responsibility, firms can be aware of the level of influence they cause on every societal aspect comprising of environmental, social, and economic factors. In 1984, Freeman proposed the stakeholder theory suggesting that other than companies considering their interest, they should also take into consideration the shareholder interest as well as that of the broader group of stakeholders, everyone that can adversely be influenced or influence the company welfare. Since its suggestion, several theories have been made on the theory (Waworuntu, 2014). Among these is the instrumental stakeholder theory by Jones (1995) which stated that corporate social responsibility efforts can be vital when it comes to acquiring important resources or the larger support by stakeholders (Carol, 2020). On the other hand, Porter, in 1991, concentrated on corporate social responsibility from, specifically, environmental grounds in which he cited that pollution reduction and profitability may not be reciprocally exclusive aims (Latapí, 2019). According to him, pollution acts as a source of resource wastage and therefore attempts to minimize pollution increase both the firm's corporate social responsibility and the firm's level of competitive position. It is therefore worth noting that corporate social responsibility comes with a range of potential benefits (Tilt, 2016). Such benefits include enhanced reputation, greater chances for attracting investments, advanced levels of risk management, support of market objectives, and the minimization of regulatory oversight. Equally, the proper establishment of a working corporate social responsibility is key to the overall returns of any business (Hongyan, 2018). Take, for instance, a situation where a business with a better corporate social responsibility scheme, then the business forms a harmonious alliance with the community hence smooth running. Besides, the business, having established a better environment for the possible shareholders, is likely to get capital funds any time hence no financial shortage (Linh, 2011). As a result, more produce is likely available for the readily available markets hence high returns. While no established evidence supports this, the opposite is likely true for firms with no well-established corporate social responsibility that’s likely to miss harmony with the surrounding society (Jamali, 2007). Other than the supporting theories, others cite the opposite. In his argument in 2001, Jensen found it a difficult job for the managers to maximize the interest of a heterogeneous group of stakeholders at the expense of the company (Vaaland, 2008). Further, he states that the theory makes managers less accountable for their actions. Finally, Tirole (2001) stated that the employment of corporate social responsibility shifts the wealth to the stakeholders from the shareholders which may, in turn, result in a lower return on equity and hence become the acquisition target (Wamitu, 2014).

From the above arguments, though corporate social responsibility comes with a lot of benefits, there is yet to be established its influence on the overall return to the business thus creating a research gap. Therefore, this study is set to establish the influence of corporate social responsibility on the firm’s return for the FTSE100 index. The particular corporate social responsibility measures included in the study include overall CSR score, social risk, governance, and impact on the environment, and these act as the independent variables.

  1. Is there a significant influence of the overall CSR score on the return for the FTSE100 index?
  2. Is there a substantial effect of firms' impact on social risk by companies on the return for the FTSE100 index?
  3. Is there an evident impact of firms’ governance on the return for the FTSE100 index?
  4. Does the firm's influence on the environmental impact significantly, the return for the FTSE100 index?

Theories on corporate social responsibility and stakeholder management

Being a need to maximize the returns of the FTSE100 index, the results achieved from the study will help identify the significant influencers of the above variable. In return, the significant influencers will be considered and utilized to ensure high returns and thus the study's significance.

This section involves the review of the existing works of literature on the association between corporate social responsibility and financial returns. Imperatively, wide-ranging studies have been performed regarding the relationship between the accounting-based indicators of financial performances and corporate social responsibility (Godfrey, 2016). While many definitions have been stated in regards to corporate social responsibility (CSR), scholars have not arrived at a single definition that’s universally accepted. Nevertheless, after analyzing 37 definitions that are mostly used, Dahsrud concluded that corporate social responsibility has a lot of congruency in its descriptions and suggested the existence of five dimensions which include charity, environmental, stakeholders, economic and social dimensions (Cadez, 2017). As well, there is not yet established a unique CSR definition in the academic world based on the ever-changing roles of corporate social responsibility in the corporate world. However, depending on the dimension used, the impact of SCR can be established (Brammer, 2006).

Despite the many works of literature regarding corporate social responsibility and financial returns, no valid conclusions have been made considering the high level of result inconsistency (Sameer, 2021). Thus, the knowledge body can be regrouped into three in which case, some researchers state that CSR is key towards improving the rate of returns; others argue that corporate social responsibility influence negatively the firm’s financial performances; and the last group argue that there is no established significant correlation between financial returns and the CSR (Jamali, 2007). In support of this argument, in a study by Odemilin et al (2010), there existed a positive but weak relationship between CSR (product, human rights, economic, societal, and social responsibility) on the financial returns. Similarly, Lita (2020) established that there is no substantial difference in the financial returns of CSR and non-CSR firms hence no relationship between CSR and financial returns. In a different case, Oeyono et al (2011), established a negative association between the financial returns and corporate social responsibility whereas Crisostomo et al (2011) found the relationship to be not only negative but also strong having used product, economic, societal, human rights, decent work and labor practices as CSR indicators. Using the linear regression modeling, Ahmed and Adeneye (2015) found that corporate social responsibility had a negative influence on financial returns. In a different study, Qian (2012), while comparing CSR and non-CSR banks stated that the former displayed a better financial performance than the latter. Besides, the CSR-based firms give a better return than the non-CSR firms and therefore a positive relationship between the variables (Estefania et al., 2020). Differently, charitable events were established by Metaxas (2015) to positively and significantly contribute to financial returns in the selected firms. As well, there was proven a strong significant positive correlation between the environmental disclosure, a dimension in CSR, and return on investment and equity (Clacher, 2012). A significant positive impact was also established on the financial and stock returns by corporate social responsibility (Yusuf, 2015). A positive partial correlation was also found for the firm value arising from corporate social responsibility and the firm's profitability (Hongyan, 2018).

Potential benefits of corporate social responsibility

In the study by Brammer et al (2006), though there is stated a lack of an exact quantitative measure of the CSR on the returns, established a wide positive influence of the same on return for any given firm. Particularly, he states that the heterogeneous environment plays a key role in the internal success of a business including the surrounding communities, and government among other factors. Specific to the environment and surrounding community CSR activities, Clacher (2012), stated that industrial firms with well-equipped methods for controlling pollution cause less harm to the surroundings and as such, operate in a well-placed environment that enhances peaceful operations with the community. Besides, firms that extend hands of charity to the surrounding communities create a harmonious environment for operations hence attracting more customers (Crisóstomo, 2011). In different study by Estefania et al (2020), since customers are the core towards the returns accrued for both the goods and service industries, argued that proper utilization of corporate social responsibility by the firm towards customers is key towards high returns for that particular firm. In addition, Savvas and Stelios (2016) found in their empirical study that with a five-dimensional corporate social responsibility, possible derailing factors such as legal battles, unhealthy competition with firms having better CSR, and the general reputation of a firm is enhanced, a step that's healthy to the socio-economic growth of the firm.

From the above literary works, it is evident that corporate social responsibility plays a significant role in the financial return index of firms. Therefore, a conclusion is made in this section that depending on the social responsibility category used, different benefits are accrued by the implementing firms. Besides, other than the benefits, corporate social responsibility also have negative impacts on the financial returns of the firms. The justification of the study topic choice is enhanced by the fact that the above works of literature have no valid conclusion regarding the influence of corporate social responsibility on the return index of different firms.

  1. Null Hypothesis (H0): There is no significant influence of overall CSR scores on the return for the FTSE100 index.

Alternative Hypothesis (HA): There is a significant influence of overall CSR scores on the return for the FTSE100 index.

  1. Null Hypothesis (H0): There is no significant influence of a firm’s impact on the environment on the return for the FTSE100 index.

Alternative Hypothesis (HA): There is a significant influence of a firm's impact on the environment on the return for the FTSE100 index.

  1. Null Hypothesis (H0): There is no significant influence of a firm's social risk on the return for the FTSE100 index.

Alternative Hypothesis (HA): There is no significant influence of a firm’s social risk on the return for the FTSE100 index.

  1. Null Hypothesis (H0): There is no significant influence of a firm's impact on firm governance on the return for the FTSE100 index.

Alternative Hypothesis (HA): There is no significant influence of a firm's governance on the return for the FTSE100 index return.

To achieve the study objectives, the data set was secondarily acquired from yahoo finance (https://uk.finance.yahoo.com/quote/RR.L/sustainability?). A total of 50 firms existing in the FTSE100 index were selected under the criteria that only firms with sustainability data were selected. The data contained six variables which included company name, the overall score of corporate performance, community impact score, governance score, social risk score, percentage return on the index, and FTSE return index based on the closing value percentage dated 31st December 2021. Thereafter, the data was exported to SPSS where descriptive and inferential statistics were conducted. The variables, except for company names and the FTSE100 index, were analyzed descriptively as shown in table 1 below.Descriptive statistics

Existing literature on the association between CSR and financial returns

Table 1. Descriptive statistics

From the table, the selected firms recorded an average overall score of 19.23 (SD=7.51) with minimum and maximum values respectively of 0.7 and 36. The environmental risk score was the lowest on average (M=6.20, SD=7.75) of the three measures followed by the governance score (M=7.24, SD=8.35) while the social risk score was the highest of the three (M=9.04, SD=7.18). The minimum and maximum values were 0 and 51 for environmental risk score, 1.7 and 51 for the social risk score, and 3.0 and 63 for governance correspondingly. These variables had standard deviation values larger than their respective means showing that there was a higher level of variability in the recorded data for each variable. Finally, the average value of return as per the FTSE100 index was -.20%(SD=1.89%) with the lowest and highest values of -8.00% and 8.64% respectively. In terms of distribution, the overall score was slightly skewed to the left (-.09) and this is shown by the histogram below.

Histogram for overall CSR

Fig 1. Histogram for overall CSR

Secondly, the environment risk score was highly skewed to the right (4.08) showing most firms recorded a lower score and this is shown below.Histogram for environmental risk score

Fig 2. Histogram for environmental risk score

Similar to the second case, the social risk score was highly skewed to the right (4.24) showing that most firms recorded lower scores and this is displayed below.Histogram for Social Risk Score

Fig 3. Histogram for Social Risk Score

Fourthly, there was recorded a large positive skewness (6.31) of all the variables which also indicates that most scores were low for the firms. This is displayed below.Histogram for Governance score

Fig 4. Histogram for Governance score

Finally, the FTSE100 index return for the companies was also skewed to the right (.61) which displays most values were lower as shown below.Histogram for the FTSE100 index return by companies

Fig 5. Histogram for the FTSE100 index return by companies

For this study, a multiple linear regression was used. This is an econometric model which compares the linear relationship between a dependent variable with a group of two or more independent variables. This is considering that the dependent variable is continuous and as such, allows for the use of this kind of model. the general model embraces the form,

y = β0 + β1x1 +…+ βnxn

In which case, β0 is the intercept, β1 is the first variable coefficient, x1 is the first variable value, and βn and xn n coefficient and value respectively. This analysis was done and the results are presented below.

Model Summary

Model SummaryTable 2. Model Summary

The independent variables (overall CSR score, governances score, social risk score, and environmental risk score) explained 45.8% of the model variation which is an average percentage. Moreover, the variables jointly significantly predicted the FTSE100 index return for these firms at a 5% level of significance (F (4, 45) = 9.51, p<.05). However, there was no individual variable that significantly predicted the model (p>.05) and hence the corresponding null hypotheses were all rejected. The resulting linear regression equation is,

The study sought to establish the influence of corporate social responsibility, categorically social risk, environmental risk, governance score and the overall CSR score on the FTSE100 index return score by percentage. It was established that there was a joint influence of these variables on the FTSE100 index return for the stated firms at the end of 2021. The joint correlation was positive showing that the independent variables significantly improved the rate of return of the FTSE100 index. Nevertheless, the individual predictors did not portray significance in predicting the returns, a factor that’s likely to be attributed to the smaller size of the sample and available confounders that affect the rate of return, particularly the coronavirus pandemic that hit the companies, of the FTSE100 index other than the corporate social responsibility factors. Comparing the study to past works of literature, then the joint significance result is similar to that of Metaxas (2015) who found that the financial returns of different firms are strongly dependent on the different corporate social responsibility factors alongside external and internal business environmental factors. Equally, the study result on the individual variable influence is similar to that by Lita (2020) who found that there is no evident impact on the individual CSR factors on the financial returns of firms. In a different study, Yusuf (2015), while investigating the influence of social and environmental risks as well as governance score, established that these three variables, being the core components of CSR, were key in coming up with the best returns for firms, a finding that was different from the one in this study.

Study design and methodology

Conclusion

From the study, it is evident that the overall score of CSR, environmental risk, social risk, and governance score when combined, significantly and positively improve the FTSE returns. Nevertheless, this is not the case with individual variables which displayed no significant influence on the returns. In answer to the research questions, therefore, it is clear that governance score, social risk score, environmental risk score, and the overall score of CSR have no impact on FTSE100 index return. The study results, therefore, open the way for further research to establish the exact influence of both individual and joint variables (overall CSR, environmental risk, social risk, and governance scores) on the FTSE100 index return. Besides, the study is important both for data analysis and report writing. To establish concrete harmonious results for both individual and joint variable influences, I suggest a future study that will incorporate a larger sample size of between 500 and 1000 using the same variables then a comparison of results be made with the one from this study.

References

Brammer, S. B. C. a. P. S., 2006. Corporate social performance and stock return: UK evidence from disaggregate measures. Financial Management, 5(3), p. 97116.

Cadiz, A. G. &. S., 2017. Corporate social responsibility and financial performance relationship: a review of measurement approaches. Economic Research-Ekonomska Istraživanja, 30(1), pp. 676-693.

Carol, N. J. R. F. T. &. N. T., 2020. Corporate Social Responsibility in a Competitive Business Environment. The Journal of Development Studies, 56(8), pp. 1455-1472.

Clacher, I. a. H. J., 2012. Do announcements about corporate social responsibility create or destroy shareholder wealth? Evidence from the UK. Journal of Business Ethics, 106(3), pp. 253-266.

Crisóstomo, L. V. d. S. F. F. a. C. d. V. F., 2011. Corporate social responsibility, firm value, and financial performance in Brazil. Social Responsibility Journal, 7(2), pp. 295-309.

Estefania et al., 2020. Exploring Arbitrage Strategies in Corporate Social Responsibility Companies. sustainability, 12(6293).

Godfrey, A. J. B. A. R., 2016. BUSINESS ETHICS AND CORPORATE SOCIAL RESPONSIBILITY FOR BUSINESS SUCCESS AND GROWTH. European Journal of Business and Innovation Research, 4(6), pp. 26-42.

Hongyan, Z. Z. J. K., 2018. Corporate social responsibility research in international business journals: An author co-citation analysis. International Business Review, 27(2), pp. 389-400.

Jamali, D. &. M. R., 2007. Corporate Social Responsibility (CSR): Theory and Practice in a Developing Country Context. Journal of Business Ethics, 72(3), pp. 243-262.

Latapí, A. M. J. L. &. D. B., 2019. A literature review of the history and evolution of corporate social responsibility. Int J Corporate Soc Responsibility, 4(1).

Lee, S. a. J. H., 2016. The effects of corporate social responsibility on profitability: The moderating roles of differentiation and outside investment. Management Decision, 54(6), pp. 1383-1406.

Linh, C. V., 2011. Corporate social responsibility and SMEs: a literature review and agenda for future research. Problems and Perspectives in Management, 9(4).

Lita, C., 2020. ANALYSIS OF THE INFLUENCE OF CORPORATE SOCIAL RESPONSIBILITY ON RETURN ON EQUITY (ROE). International Journal of Economics, Business and Accounting Research, 4(4).

Metaxas, D. T. A., 2015. A theoretical framework on CSR and urban development. Munich Personal RePEc Archive, pp. 1-15.

Oeyono, J. S. M. a. B. R., 2011. An examination of corporate social responsibility and financial performance: A study of the top 50 Indonesian listed corporations. Journal of Global Responsibility, 2(1), pp. 100-112.

Qian, W., 2012. Revisiting the link between environmental performance and financial performance: who cares about private companies?.

Sameer, I., 2021. Impact of corporate social responsibility on organization's financial performance: evidence from Maldives public limited companies. Future Business Journal, 7(29).

Samy, M. a. O. G. a. B. R., 2010. Corporate social responsibility: A strategy for sustainable business success. Ananalysisof20selectedBritishcompanies. corporate governance, 10(2), pp. 203-217.

Savvas, K. S. M., 2016. Corporate Social responsibility and Stock Market Performance: An Event Study Approach. International Journal of Advanced Technology and Engineering Exploration, 6(2), pp. 1-8.

Tilt, C., 2016. Corporate social responsibility research: the importance of context. Int J Corporate Soc Responsibility, 1(2).

Vaaland, T. H. M. a. G. K., 2008. Corporate social responsibility: investigating theory and research in the marketing context. European Journal of Marketing, 9(10), pp. 927-953.

Wamitu, S., 2014. Corporate Social Responsibility: Intentions and Practice. Open Journal of Business and Management, Volume 2, pp. 116-126.

Waworuntu, S. R. a. W. M. D. a. R. T., 2014. CSR and financial performance analysis: Evidence from top ASEAN listed companies. s.l., s.n.

Yusuf, B. M. A., 2015. CORPORATE SOCIAL RESPONSIBILITY AND COMPANY PERFORMANCE. Journal of Business Studies, Quarterly, 7(1).

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