The Definition of Corporate Social Responsibility

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Corporate social responsibility also referred to as corporate conscience, or responsible business has various definitions as perceived by different business and management fields scholars. According to Dahlsrud (2008), there have been numerous attempts to develop an unbiased and precise definition of the term for many years with minimal success. The confusion is primarily attributed to the context-based construct of corporate social responsibility (CSR). In its simplest definition, CSR refers to the way business organisations take responsibility for the impact of operations on the society and the environment (McWilliams, 2015). Companies have an obligation to protect the environment from any harm that may be caused by their activities, an aspect that links CSR to business ethics. The concept of CSR has varied and evolved. The business community concerns about the society can be traced centuries back. However, most of the research on the topic dates from 50 years ago. During the early writings of the topic, CSR was defined as corporate responsibility to society as opposed to corporate social responsibility. The definition has been attributed to the lack of corporation’s dominance and prominence in the business sector. The definition later grew to include the actions and decisions of people in business taken for reasons that are partially beyond the firm’s economic or technical interests (Martínez, Fernández, & Fernández, 2016). The definition further evolved to include the impact of businesses on the environment through an analysis of their carbon footprint and other environmental conservation factors. The definition of SCR is, therefore, based on the contextual constructs of the period with the term being prone to evolve in future.

Research indicates that the success of contemporary organisations is partially dependent on corporate responsibility. Consumers, for instance, consider not only the quality of the commodities produced by a firm but also the reputation of the business, before selecting a given brand. Therefore, a company that integrates social responsibility its business strategy and culture is at the higher advantage of maximising its financial performance potential as compared to one which does not hold itself socially accountable. Findings of the study by Klimkiewicz and Oltra, (2017), conducted on behalf of cone communications to demonstrate the criticality of CSR on the contemporary organisational effectiveness and the society further emphasises on the importance of corporate responsibility. The research reveals that the majority of the American citizens (60%) are hopeful that business organisations will drive environmental and social change in case of failure of government organs and policies. Similarly, 87% of the consumers surveyed in the study claimed that they would buy a commodity from a company that supported related cause and beliefs. Furthermore, 76% of the respondents firmly stated that they would never purchase any good or service from a firm that supported issues that contrast their ethical beliefs. Consumer perception plays a pivotal role in the success of an organisation. Hence, having a good CSR strategy is beneficial for a company seeking to achieve its goals.

Both local and global markets have encountered evolution in the social entrepreneurship and social business sectors. These changes are based on the notion that organisational environment significantly influences entrepreneurial activity (Urban, 2013). The socio-economic environment in conjunction with the political milieu in which an organisation conducts its business activities affects relevant stakeholder goodwill with regards to the firm’s engagement in social activities. The study reveals that the quality and nature of the institution in a nation determines whether an individual will engage in entrepreneurship or not. In the case of South Africa, social entrepreneurship has proved to satisfy the country’s social deficit in areas where the traditional government has failed (Urban, 2013). The phenomenon has been effective in dealing with housing issues, education problems, HIV pandemic, high rates of poverty and unemployment. Social entrepreneurs can exploit such gaps in the society and come up with organisations whose mission is to eradicate these conditions. They would, therefore, act as change agents. The study suggests that the idea of setting up ventures to deal with social misfortunes is influenced by not only the people’s beliefs and environmental factors but also business institutions’ desire to excel. Therefore, companies may change beliefs, occupation patterns, and behaviors of individuals to convince them to take part in social entrepreneurship in countries with emerging economies.

Since many organisations recognise the importance of social responsibility to the customers and the economy in general, they have embarked on the common CSR strategies. One conventional corporate social responsibility measure is the environmental efforts. Majority of business organisations emit significant amounts of carbon to the environment. Therefore, any attempts applied by the firms to reduce carbon footprints are essential for the society and the company. Secondly, philanthropy is an effective strategy for CSR. Firms can donate products, services, or money for social causes. Large corporations with great resources can benefit the local community programs and charities. Another important form of CSR is through ethical labor measures. Organisations can treat its workers, especially international employees, both ethically and fairly even if the labor laws are different from the conventional ones. Finally, by volunteering, firms demonstrate good will to their immediate environment and society. Companies can build a good public image of themselves by engaging in indicated and many other CSR activities without expecting anything in return. Companies have been disclosing information on the CSR to make the public aware of the steps they are taking to become socially responsible.

South Africa, India, and Malaysia represent the most applicable examples of a country with a transpiring economy studied during this research. According to Urban (2013), the prevalence rate of new ventures in South Africa was six times less than that of efficiency-driven countries in 2009. These findings do not paint a good image of the economy of the nation regarding employment creation and economic growth. The main aim of this study is to indicate how corporate social responsibility can be applied to enhance the economy of such countries through measures such as social responsibility programs that may include social entrepreneurship, philanthropy, ethical practice, and environmental protection among others.

This paper entails the following structure. After the introduction that features a description of the problem statement, research objectives, and research questions, a review of the relevant literature follows. The chapter is then succeeded by the methodology section, which precedes the results chapter. After the results, the discussion part of the paper that explains the findings of the study. The final section is the conclusion and brief possible future research undertakings on the subject.

Statement of the Problem

Most transpiring economies including South Africa, India and Malaysia are characterised by underdevelopment, poverty, environmental negligence, harsh weather conditions, and poor healthcare among others problems. Such countries not only need business organisations to provide goods and services, employment and other profit-oriented ventures but also require the mentioned establishments to engage in corporate social responsibility programs actively. The problem of underdevelopment and poor economy faced by transpiring economies can be better comprehended via detailed research on the role of the corporate sector on the alleviating issue particularly through strong consideration of the social and environmental impacts of doing business in such nations.

Purpose and Significance of the Study

The primary purpose of the study is establishing the role of corporate social sustainably on transpiring economies and how the adoption of the strategy may have mutual benefits to both the country and the business organisations. Limited scholarly research addresses the importance of socially responsible practices by institutions in developing the countries. Therefore, the findings will be critical in filling the available information gap and can be used by organisations in transpiring economies.

Primary Objectives of the Study

I. To identify the impact of CSR disclosure.

II. To analyze CSR effects on the firm’s financial performance.

III. To analyze how CSR influences corporate governance.

Research Questions

I. What is the impact of CSR disclosure?

II. How is CSR related to corporate governance?

III. Is the financial performance of a firm related to CSR?

IV. What is the relationship between Islam religion and CSR?

Literature Review

Various researchers have conducted scholarly studies into the concept, definition, and importance of corporate social responsibility. In spite of the many investigations in the field, CSR still lacks a conclusive definition (Malik, 2014). Among the more popular definition is that it is a stakeholder-oriented concept that is related to the external activities of a corporation, determining the ethical responsibility of the said business (Abu Bakar & Yousef, 2016). Malik’s (2014) definition also extends to the importance of voluntary activities provided by organisations to enhance the welfare of employees, customers, suppliers, investors, regulators, and communities. Other studies define the term as an expression of intent with regards to how firms apply and place themselves in industry. Therefore, it may affect the voluntary activities that they offer (Abu Bakar & Yousef, 2016). In Carrol’s 1999 study, the author analyzed numerous previous studies to seek definitions of CSR from the first time the term was introduced. Carroll (1999) defined the CSR as all activities by an organisation including social, political, environmental, economic and ethical actions. The author also notes that definition of the time has experienced tremendous evolution over previous decades due to the variation of critical factors of a business environment such as the impacts of society, religion, culture, and the community (Carroll, 1999). It is evident that the definition of CSR is still surrounded controversy even though many studies have sought to define it to better aid its application and use.

As aforementioned, CSR as a term has been largely associated with social responsibility. The evolution of CSR, throughout history, has tended to point more towards addressing the needs and wants of the society (Dusuki, 2008). The term was in existence as early as 1930, where it was positively correlated to a firms’ responsibilities to society at large (Malik, 2014). In business literature, the first category to be researched was that of management; many scholars of CSR have since focused on the influence of this important field (Malik, 2014). The debate then took into account the opinions of accountancy scholars who began to discuss topics such as CSR disclosure. In addition, there have been a few studies in the area of finance literature, for example, the relationship between CSR and the stock market (Malik, 2014). Lately, the growth and significant of CSR has led to researchers and industrialists attempting to explain the term within the confines of the area of strategy (Rahman, 2011). As with any new term, the concept has been open to debate; it has been both accepted and ignored by many over the years. Milton Friedman famously did not support the idea of CSR arguing that the negative impact of social responsibility weighs heavily on the businesses (Dusuki, 2008). The rationale behind Milton’s opposition to CSR is explained within two fundamental constructs. Firstly, shareholders may be expected to cover the costs of CSR with little or no discernible return in the long term. Secondly, the supposed benefits of CSR can, in fact, may be subverted by the interests of personal or political gain (Mackey, Friedman, & Rodgers, 2005). Friedman thus emphasised that the only reason behind CSR as a business strategy is profit maximisation.

Many researchers in the contemporary business and scholarly fields accept the idea of CSR and link to enhanced performance among corporations (Lee, 2008). Lee’s study reviews the case of two companies that were disputed on whether to implement CSR in their businesses. Ford’s company founder was concerned with the CSR and thus integrated it into the company overall business strategy (Lee, 2008). He believed in a healthy relationship between a business entity and society as given credence by Ford’s company vision which is

“to do as much as possible for everybody concerned, to make money and use it, give employment, and send out the car where the people can use it … and incidentally to make money…Business is a service, not a bonanza” (Lee, 2008).

Dodge Brother’s company, on the other hand, was ignorant of the importance of the CSR and perceived it as wasting the corporation’s money (Lee, 2008). The postulation demonstrates that CSR is both accepted and rejected by various scholars and people in business in both literature and industry. While CSR faced multiple difficulties during the inception stage, studies have continuously tried to explain and argue the positive sides for society clearly.

CSR and Financial Performance

The notion of CSR has gained significant popularity over time. Scholars have linked it to different variables with the intention of measuring its significance. One of the variables to investigate related to CSR is financial performance. Researchers have debated over the relationship between CSR and financial performance, with different results in their theoretical discussions. In general, the correlation between CSR and financial performance could be positively associated, with scholars agreeing on this result (Mishra & Suar, 2010). For example, a popular study by McGuire, Sundgren, and Schneeweis (1988) found a positive relationship between corporate social responsibility and financial performance. It used the Fortune survey of corporate reputation to test the two variables, which was first research to use it. Another common study to discuss the correlation is by Margolis, Elfenbein, and Walsh (2009) which also showed a positive connection analyzing more than 251 studies to reach its conclusion. Another research study reviewed more than 128 studies to present the connection between CSR and financial performance, with around 59 per cent of studies identifying a positive association (Feng, Wang, & Kreuze, 2017). As a result of this positive association, the high corporate social responsibility will lead to improved employee and customer satisfaction, with CSR supporting the relationship with government and community, and assisting the organisation with low financial risk (McGuire, Sundgren, & Schneeweis, 1988).

On the other hand, some scholars found that the association between CSR and financial performance is negative. Barnea and Rubin (2010) found a negative correlation and disadvantages, including managers using corporate social responsibility for their private benefits. Other researchers have argued that CSR indicates high responsibility with high costs, which is an economic disadvantage (McGuire, Sundgren, & Schneeweis, 1988). Furthermore, researchers found CSR costs shareholders, and the management can use the strategy to cover up corporate misconduct (Feng, Wang, & Kreuze, 2017). It is thus evident that a variety of scholars have found a minimal constructive relationship between the CSR and financial performance.

Studies have applied and measured CSR using three common measures. Firstly, the reputation index method which represents the degree of corporate social responsibility (CSR) of organisations in the industry. Additionally, two popular indexes are the Council of Economic Priorities (CEP) founded in the late 1960’s, and the Milton Moskowitz (Cochran & Wood, 1984). Secondly, content analysis, which indicates the way of finding and examining the reporting of corporate social responsibility activities in different publications such as annual reports (Cochran & Wood, 1984). Thirdly, corporate reputation index, which was first used in McGuire, Sundgren, and Schneeweis’s (1988) study. These three methods for measuring CSR have been criticised due to their inability to incorporate stakeholders (Mishra & Suar, 2010). Therefore, scholars need to identify new measures for measuring corporate social responsibility to lead to sufficient and effective results.

Researchers have used various methods for financial performance measurement. The measurement methods for discussion are investor returns and accounting returns. Investor returns indicate that returns should be measured from the shareholders perspective, and one of the first studies to apply investor measurement was Moskowitz in 1972 (Cochran & Wood, 1984). The idea behind the method is to change the price per share plus dividends (Cochran & Wood, 1984). Furthermore, the significant measure under investor returns is beta, used to calculate the risk of a company’s stock, which can be categorised into aggressive or a defensive stock. If the beta of the stock is greater than 1, it means it is an aggressive and high movement can happen, while lower than one means defensive, which indicates low movement of the stock (Cochran & Wood, 1984). The second measurement method is accounting returns, such as the emphasis on how firm earnings are measured with the managerial policies (Cochran & Wood, 1984). Cochran and Wood (1984) cite various scholarly investigations that analyse CSR from an accounting returns perspective with many using the price/earnings ratio. However, the best indicator measure belonging to accounting returns is Return on Assets (ROA), which is not affected by any other variable (Mishra & Suar, 2010). High returns on assets is a sign of the increase in shareholders’ wealth.

CSR Disclosure

Many scholars have reviewed CSR disclosure and studied it through various variables, such as the impact of nature, disclosure quality, degree bias of content, determinants of firm’s performance, cost of debt, and cost of equity capital. One of the studies has paid special attention to the association between a firm’s disclosure and measurement of CSR (Gelb & Strawser, 2001). As a result, there is a positive relationship between the disclosure level and corporate social responsibility of a firm, meaning the higher a firm discloses CSR activities, the more likely it is to continue carrying out the CSR activities. This study used the ratings provided by the Council of Economic Priorities (CEP) and disclosure rankings by the annual Association for Investment Management and Research Corporate Information Committee Reports (AIMR Reports) (Gelb & Strawser, 2001). By analyzing the content of any CSR disclosure, the terms that must be considered are the language and verbal tone in order to identify the presence of self-serving bias.

When researchers discuss CSR disclosure, the most significant term is the disclosure quality that differentiates one firm’s disclosure from another. The disclosure quality can affect different variables such as the cost of debt and the cost of equity capital. Sengupta’s (1998) study indicated that firms with high disclosure quality ratings enjoy a lower interest cost of issuing debt, and it emphasised the fact that time and detail of the disclosure decreases the external entities’ perception of default risk, which leads to a reduction of the firm’s cost of debt. As a result, internal management is motivated to disclose CSR activities to avoid the effects of the firm’s external financing (Sengupta, 1998).

Disclosure quality is positively associated with environmental media coverage (Rupley, Brown, & Marshall, 2012). This study used statistics from 127 firms over a six-year period from 2000 to 2005. Consequently, the CSR disclosure quality improved and increased over time (Rupley, Brown, & Marshall, 2012). CSR disclosure can influence the cost of the equity with a reduction or increase in the capital of the firm. Dhaliwal, Li, Tsang, and Yang (2011) examined the firms’ initiation of CSR disclosure in the annual reports and the impact and association with its cost of equity. In particular, this research showed that there is a subsequent decrease in the firm’s cost of equity capital when initiating voluntary CSR disclosure. Furthermore, the initiating firms can have the opportunity to raise equity capital (Dhaliwal, Li, Tsang, & Yang, 2011).

CSR and Corporate Governance

Some scholars have investigated the relationship between CSR and corporate governance (CG). The meaning and definition of CG must be outlined, and it is defined by the Organisation for Economic Cooperation and Development as a term that ‘specifies the distribution of rights and responsibilities among the different participants in the organisation – such as the board, managers, shareholders and other stakeholders – and lays down the rules and procedures for decision-making’ (Pintea, 2015). Another relatively clear definition of corporate governance is ‘a flexible system of action incorporating strategic and monitoring activities that determines the way a company enacts its responsibilities to shareholders and stakeholders and which is determined at any given time by the interrelationship of institutional drivers and behavioural norms’ (Young & Thyil, 2014). The high quality of corporate governance ensures that the company reduces the risk, and improves performance and opportunity for the company to have efficient financial markets and an attractive investment climate (Pintea, 2015). Specifically, the main objective of corporate governance is to guarantee the sustainable growth of the company, taking into account globalisation (Pintea, 2015).

Reviewing and analyzing the literature provides various results regarding the relationship between corporate social responsibility and corporate governance across various variables. Young and Thyil (2014) discovered that the relationship described as corporate governance is an integral component of corporate social responsibility and not vice-versa. However, Pintea (2015) indicated that both variables act as two sides of one coin. Gul, Muhammad, and Rashid (2017) explored the association between CSR and CG across different firm-levels, and this study used a sample of firms listed in the Pakistan Stock Exchange. Consequently, the higher the companies are governed, the higher the corporate social responsibility disclosure. It reveals the important differences in the effects of CG and other empirical determinates of CSR across various-sized organisations (Gul, Muhammad, & Rashid, 2017). Jo and Harjoto (2011) examine the aspects of corporate governance, including internal, such as ownership concentration or board structure and external which include monitoring by security analysts. It indicated the positive relationship between CSR choice and internal and external corporate governance. Furthermore, CSR focuses on the firm’s efforts to promote effective corporate governance, and it also details the extent of the company’s sustainability in the long-term.

Islamic CSR

Many scholars have analyzed and explored the corporate social responsibility in the western world, but not many academics have discussed CSR in relation to the Islamic law which is derived from Al-Quran. The Holy Book of Islam described many aspects such as literature, law, economics, and politics and Al-Sunnah which is generally records of deeds and sayings of Prophet Muhammad and has been practised for over 14 centuries ago (Harun, Isa, & Najuna, 2015). Nearly, 1.6 billion Muslims believe that Islam is not only a religion but also a guideline for the complete way of life (Chamhuri & Tareq, 2009). Islamic corporate social responsibility could be a guideline for the company for applying CSR activities. In Islam, ICSR which provide the good life for each person in the community which depends on brotherhood and fairness (Harun, Isa, & Najuna, 2015). ICSR programs impact employee’s behaviour due to the voluntary contributions of some employees which encourages others to also engage in the philanthropic activities. For example, PCSB which is a government agency that employs CSR programs invited their employees for various events to share knowledge, interests and create a network for the staff (Harun, Isa, & Najuna, 2015). CSR is different in the Islamic countries because of the religion and spiritual values. Moreover, the Western CSR may be described as ‘strange’ compared to Islamic perspective due to differences in moral and religious obligations (Abu Bakar & Yousef, 2016).

By analyzing and reviewing various studies in the literature, Harun, Isa, and Najuna (2015) study argues that the way ICSR programs are implemented in the organisation might have a positive or negative impact towards employees. Thus, it founded that ICSR has a significant influence on employees’ behaviors. The study by Abu Bakar and Yousef (2016) is one of the earliest studies based on the Quran and Sunnah on the corporate social responsibility of Bank Islam Malaysia Berhad to have new evidence on CSR in Islamic perspective. This study has used a case of the Islamic Bank which is Bank Islam Malaysia Berhad (BIMB). Moreover, the purpose of this study improves managerial guidelines of the process of CSR activities based on the Islamic law which is derived from the Quran and Al-Sunnah. Therefore, it results in managing CSR activities at BIMB which has become more structured and well-planned. In addition, this study gives new knowledge to the corporate social responsibility (CSR) and could help business organisations to enhance its CSR activities and guide for effective systematic (Abu Bakar & Yousef, 2016). The aim of the study by Chamhuri and Tareq (2009) study was to find out the relations between Islamic concept and corporate social responsibility. It compared opinions of the Malaysian managers about the (CSR) to society in Malaysia with Islamic concept. Thus, it found there are two significant results which are as follows: there is a symmetry between the manager's opinions about CSR and the concept of Islam, and it understands Islam and encourages responsible behaviour to the society, environment, and economy (Chamhuri & Tareq, 2009).

CSR Theories

Several theories have been developed by scholars that attempt to give a plausible explanation for CSR practices in organizations. Some of the theories that have been developed include the social contract, legitimacy, stakeholders and instrumental theories. The main aim is to provide a framework that promotes an understanding of the motivations behind CSR practices.

Instrumental theory

The instrumental theory perceives CSR as a strategic tool for the achievement of economic benefits. The approach views profit maximization for the shareholders as the only responsibility of business to society given that it is done within the expected ethical custom and legal framework (Garriga and Melé, 2013). The concern for the maximization of profits does not, however, exempt a business from taking into account the interests of the stakeholders because the satisfaction of these interests in certain conditions contributes towards the maximization of shareholder’s value. The justification for the theory is that philanthropy by an organization has the potential to improve its financial performance a concept that has been proven by various scholars such as Mishra & Suar (2010) whose findings indicate a positive correlation between CSR and the financial performance of firms.

Legitimacy theory

The foundations of the legitimacy theory lie in the paradigm of political economy which suggests that economic spheres cannot exist independent of social, political and institutional frameworks. The theory recognizes the power struggles in existence between organizations and the society. Based on the theory, the existence of an organization is a result of its market strength as well as the social expectations of the society. An understanding of the public’s perspective and expectations is, therefore, a prerequisite for the success of organizations (Islam, 2017). The legitimacy theory can be best explained through the use of CSR disclosure by firms. The key motivations towards CSR disclosure are usually for firms to seek legitimacy by making sure that they meet the social expectations of the society. Legitimacy in this context is defined as the approval that organizations get from the surrounding society in the business environment in which they operate.

Social contract theory

The social contract theory is a view that the political or moral obligations of a person or organization are dependent on the agreement among them to form the community that they live. It is a normative theory in which the agreement terms are acceptable to both impartial and rational bargaining standpoints (Sacconi, 2004). A social contract is fundamentally an implied contract between the society and organizations where the latter is granted permission by the former to operate by the societal expectations with failure to comply resulting in the revocation of the contract. The social contract theory has been meaningfully evolving over the years due to pressing externalities, changing social concerns as well as rapid global changes. Thomas Hobbes presented a scenario that life was chaotic with the society being forced to form rules of engagement that guided the transactions between agents. The social contract theory has also been influential in the political context with Hobbes arguing that people submit to a political authority because they are self-interested and would wish to live in a civil society for their benefit. The concept implications for organizations is that they engage in CSR activities because the end goal is to benefit themselves.

Stakeholder’s Theory

The theory posits that the primary goal of businesses is to create value for their stakeholders. The maximization of shareholder’s value can be achieved through taking into consideration societal interests. The theory recognizes that business organizations are part of the society and do not exist as independent entities (Freeman and Dmytriyev, 2017). While the theory acknowledges the importance of corporate social responsibility, it argues that it is just one part of the various business responsibilities.

Methodology

Design

This study was conducted using a review of literature with the credibility of the articles being analysed through the use of the critical appraisal method and evidence-based approach. Critical appraisal refers to the process of systematic and careful analysis of specific research studies (evidence) in an attempt to judge its relevance, value, and trustworthiness in relation to a particular topic (Burls, 2014). The study relied on secondary scholarly sources that utilize qualitative or quantitative methods when addressing the relevant facets of CSR. This evidence-based approach is effective because of its positive correlation various merits. First and foremost, critical appraisal of academic sources is a widely used tool for conducting evidence-based research. Hence, it is the appropriate choice for this study considering that CSR is a global issue in the contemporary business and educational societies. Secondly, the method can mirror any coding system by providing a variety of checklist items that simplifies the process of reviewing academic sources and the data contained in them similar to as literary analysis techniques such as AMSTAR described by Faggion (2015). This study will thus enjoy conveniences of AMSTAR such the checklist which was updated recently to enhance the quality of reporting and systematic review thus making a review of relevant literature as effective as possible. Apart from enjoying benefits similar to other research methods that base on literary analysis, the approach also benefits from a high degree of accuracy prim

January 19, 2024
Category:

Business Economics

Subcategory:

Corporations

Number of pages

18

Number of words

4830

Downloads:

28

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