Internal corporate social responsibility and performance: A study of publicly traded companies.
| Autor | Cavazotte, Flavia |
| Cargo | Report |
Abstract
Research on the relationship between social responsibility and the financial performance of companies has yielded ambivalent results. Since investments on different areas of social responsibility can promote distinct outcomes, in this study we focus on internal corporate social responsibility (I-CSR), that is, investments on employees. The objective of the study is to verify if outlays on I-CSR affect organizational performance. We analyzed financial information from companies listed in the Sao Paulo Stock Exchange, and their social balance sheets filled with the Brazilian Institute of Social and Economic Analysis between 2001 and 2007, applying Two-Stage Least Squares (2SLS) equation model to minimize endogeneity and reverse causality problems. The results indicate that overall I-CSR was associated with revenue contemporarily, one and two years after the investments. Corporate outlays on healthcare, pension plans, employee education and profit-sharing all had positive effects on revenue in the years that followed such investments.
Key words: corporate social responsibility; internal social responsibility; human capital; financial performance; organizational performance.
Introduction
Within the realm of corporations, the idea that a firm's single purpose is to make profits has dictated the way businesses are conducted by most organizations, leading to a mindset focused on short term results, with less attention given to most business stakeholders. Nevertheless, large corporations play important roles within local and global economies that include generating jobs, paying taxes and creating value for consumers and society (Jenkins, 2007), and a narrow-minded focus on profit maximization at the expenses of stakeholders can hurt company performance and future returns (Aguinis, 2011).
Besides discussing how and when companies are socially responsible, scholars have also explored the impacts that social responsibility initiatives have on businesses themselves (Aguinis & Glavas, 2012; Campbell, 2007). Some have suggested that CSR can positively affect firms financially, by promoting improved relations with their stakeholders, thereby reducing transaction costs, production costs and certain associated risks (Barnett, 2007). However, findings from empirical research thus far conducted on that matter are ambivalent: while some report that CSR has a positive influence on the financial performance of firms (e.g.: Orlitzky, Schmidt, & Rynes, 2003; Peloza & Shang, 2011), others have observed non-significant or even negative effects (e.g.: Brammer, Brooks, & Pavelin, 2006; Margolis & Elfenbein, 2008).
After reviewing research on the subject, Aguinis and Glavas (2012) concluded that yet very little is known about the processes through which such investments can lead to improved performance at the organizational level of analysis. Quite clearly, outlays on different areas of social responsibility (e.g., internal, environmental or philanthropic initiatives) can produce distinct outcomes in terms of costs and returns (Van der Laan, Ees, & Witteloostuijn, 2008). Therefore, in the present study we single out internal CSR investments (I-CSR), a dimension of social responsibility that focuses on employees (Carroll, 2008; Turker, 2009). Would investments in I-CSR lead to increments in company performance in the short and long run?
Although evidence obtained over the last decades has suggested that investments on employees, such as sponsoring development and training, can promote more efficient and effective company operations and processes (e.g.: Chen & Huang, 2009), we still lack consistent research on the outcomes from outlays on specific dimensions of internal social responsibility on company performance (Aguinis & Glavas, 2012; Weber, 2008). The objective of this research is to analyze if company expenditures on internal dimensions of social responsibility can affect present and future revenue.
In this article, we begin by presenting a theoretical framework regarding how I-CSR outlays would promote revenue growth, and by highlighting specific facets of internal social investments that are likely to drive such outcomes. Since most studies on CSR and company performance use panel and level regression analysis, without accounting for the biases associated with endogeneity and reverse causality (see: Ree & Carretta, 2006), in the methods section we describe how we applied 2SLS in our study--a technique that corrects for such problems, frequently employed in Economics (Wooldridge, 2002). We present the results of the analyses in the following section, based on longitudinal data from companies traded in the Brazilian stock exchange during the last decade. In the conclusion, we discuss our findings vis-a-vis extant research, highlighting implications for practice and presenting an agenda for future research in the field.
Literature Review
Because of the socioeconomic transformations that many firms have undergone in recent years, corporate social responsibility (CSR) has attracted increasing interest in the business and academic spheres (Aguinis & Glavas, 2012; Waddock, 2004). Several broad-ranging conceptualizations of CSR have been put forward, aimed at defining the set of elements that characterize a socially responsible company - expressions such as contribution to society and commitment to sustainable development are invariably included among these elements. For instance, the World Bank's view is that corporate social responsibility refers to
companies' commitment to contributing to sustainable economic development in their relations with their employees, with the communities in places where they operate, and with society as a whole, so that their actions have a positive effect on business and on development (World Bank, 2003, p. 01). The accumulated literature on the subject suggests that the relationship between companies and society is complex, and involves communities, employees, governments and even other companies, and therefore objectively defining the concept becomes troublesome. Although recognizing that the notion of CSR is still evolving, we have adopted in this study Aguinis' (2011) concise and encompassing definition, which views CSR as a set of "context-specific initiatives and policies, which take into account the expectations of stakeholders and the triple bottom line of economic, social and environmental performance" (p. 855).
Managerial attitudes towards CSR and level of company engagement in CSR activities vary by country. Waldman et al. (2006) have observed that managers in countries with high institutional collectivism and with low power distance traits, that is cultural values that focus on addressing long-term concerns and lessening inequity respectively, are more likely to show behaviors positively associated with CSR. Since Brazil is a country where institutional collectivism is average to low, and power distance is high (House, Hanges, Javidan, Dorfman, & Gupta, 2004), it should come as no surprise that CSR issues in the Brazilian business environment are still not as widespread as compared to other countries. Nevertheless, pressures from interest groups and attention to such issues by the business media have increased concerns regarding corporate social performance in the country (Puppim, 2008). Therefore, since the early 2000s, some Brazilian companies began to voluntarily demonstrate their social performance through the adoption of social balance sheets or social reports, thereby disclosing economic and social information related to their initiatives in this area (Tinoco, 2008).
CSR and business financial performance
Many authors have pinpointed that companies which neglect their social responsibilities are likely to experience several negative consequences that can affect the economic value of the firm directly, when fines and pay damages or subsidies are due, and indirectly, through impact on the firm's reputation, which can ultimately weaken the brand (Brammer & Pavelin, 2006). On the other hand, conflicting views have emerged in the literature regarding company outcomes of direct investments in CSR. Some authors argue that CSR investments represent additional costs for the business and ultimately have a negative impact on financial performance (e.g.: Margolis & Elfenbein, 2008). Others, however, believe that CSR initiatives can positively affect a business, by improving the company's image, strengthening the loyalty of clients or favoring a positive assessment of the company's products (Aguilera, Rupp, Williams, & Ganapathi, 2007), and therefore reap benefits in the long run.
A number of studies have investigated the relationship between corporate social responsibility and financial outcomes in both the short term and the long term (e.g. Peloza & Shang, 2011). Systematic reviews of literature (e.g.: Orlitzky et al., 2003) have suggested that the relationship is significant and positive. However, scrutiny of many studies conducted revealed inconsistencies and raised methodological concerns, due to the great diversity of extant social and environmental performance measures, sampling limitations, lack of control over interactions between the variables under study, and obscurity in regards to direction of causality (i.e., whether CSR determines financial performance or the other way around) (Ionescu-Somers, Salzmann, & Steger, 2005; Peloza, 2009).
The majority of quantitative studies on the topic found in the literature used data collected in the U.S. and EU, therefore little is known about companies that operate in other regions of the world, and despite the results so far generated in the field, the bulk of the literature on CSR consists of studies that employed level and panel analysis, which does not adequately account for the problems of endogeneity or reverse causality (Ree & Carretta, 2006). Moreover, research has indicated that different foci of CSR initiatives (e.g...
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