How can analyzing financial statements of a company help reveal its commitment toward CSR

Published 13 December, 2021

Over the past 50 years, corporate social responsibility (CSR) programs have become more prominent in the business world. In 2018 Fortune Global 500 firms spent around $20 billion a year on CSR activities1, which amounts to a mere 2% of their combined profit2. This significant spending should surely benefit some stakeholders but is it at the expense of shareholder wealth?

It is believed that a CSR-oriented strategy not only creates a good corporate image but also brings value to a company in the form of financial benefits. Some managers are involved in CSR activities to satisfy the needs of different stakeholders – customers, employees, shareholders. Some managers perceive CSR activities as resources or capabilities that can contribute to a sustainability-driven competitive advantage. A wide variety of mechanisms such as enhanced firm reputation, increased innovation capabilities, customer loyalty and customer satisfaction could help improve financial performance.

On the other hand, CSR can be seen as an expense benefitting some stakeholders at the expense of shareholder wealth by reducing corporate profit and stock price.

This article presents aggregated results from 58 empirical studies examining the mediating effect of brand and corporate reputation in the relationship between CSR activities and financial performance. The goal is to explore whether and why expenditures on CSR activities increase profit.

What is CSR?

The term of CSR refers to certain obligations of firms to pursue or make decisions that are desirable by the interests and values of the society3.  It includes different responsibilities towards community, environment, customers, suppliers as well as social contribution and corporate environmental ethics. 

Is social responsibility any beneficial?

Researchers have examined how firms involved in CSR activities engage the broader group of stakeholders4. They found that customers are willing to pay a premium price if the firm is involved in positive social performance5. Similarly, investors are more inclined to invest in firms that pursue CSR6. Findings also show  that employees demonstrate a stronger commitment to a firm that has a good public image7.

Some scholars found a positive relationship between stock return and the firm’s environmental performance which includes the use of renewable energy. Even though the overall relationship between CSR and financial performance is positive, the authors distinguished several unique findings relevant to the Asian region. One meta-analysis demonstrates that environmental CSR has a more significant impact than social CSR on business performance of Asian firms than of Western firms8.

Why does corporate reputation play such a big role?

Reputation is defined as a perceptual representation of a firm’s past actions and future prospects that describe the firm’s overall appeal to its stakeholders. For the reputation enhancement mechanism to be enacted, CSR activities must target and be visible to a broader audience (society, employees, customers, environmentalists etc). Customers are more attracted to organizsations with values and norms they deem essential.

Firms that develop strong reputations create a high level of trust with their stakeholders where trust is a substitute for a governance mechanism because fewer protective tools are needed. Consequently, the enhanced reputation of the firm achieved through the demonstration of CSR lowers transaction costs, which offers performance-related advantages.

How does CSR affect brand equity?

Based on panel data of 57 global brands, it was found that CSR toward all stakeholders in addition to the firm's reputation positively impacts brand equity. Brand equity is defined as the additional value because of the presence of the brand name that would not accrue to an equivalent unbranded product9. The marketing outcome of CSR initiatives was addressed mainly from a consumer point of view, for example, CSR impacts brand value through enhanced brand loyalty, brand perception, customer satisfaction, brand advocacy, etc.

On the contrary, other researchers claimed that CSR activities could diminish the firm’s brand equity 10. Since CSR practices are perceived as self-interested activities, their effect on brand value may be reduced as customers develop a subjective opinion about the company’s social activities and when the consumers suspect a firm's image-promotional goals.

Previous research suggests that there is a positive relationship between brand equity and stock financial performance11 (measures by Tobin’s Q, sales revenue, ROI and book value of capital). Therefore, in our study, we aim either to confirm or to disprove these findings. 

Does CSR contribute to profitability and stock return?

To synthesise the outcome and generalise the findings of 58 studies published in high-ranked business journals, our study is conducted by using meta-analytic structural equation modelling (MASEM) – in other words, an analysis of an analysis.

The findings revealed that CSR does not directly lead to either short-term profitability financial performance (profitability, sales, ROA, ROI, ROS and total assets) through enhanced corporate reputation and brand equity. Moreover, we found that CSR improves the reputation of a firm contributing to increased stock returns and long-term financial performance. 

What is the value of CSR for management? 

The findings of our study have several managerial implications, which are discussed below from two perspectives: the effect of CSR on accounting-based Financial Performance and stock performance. We received a mixed set of effects that shows how complex the reality of the CSR-Financial performance relationship may be. 

1. Managers should continue practicing social and environmental involvement and introducing CSR initiatives as these activities lead to greater profitability, although indirectly.
2. CSR initiatives must be implemented into a business strategy and communicated to the external stakeholders by changing the brand’s perception and help to reap financial benefits in the short term.
3. Managers should consider CSR initiatives as antecedents to enhanced brand value and corporate reputation as both represent brand-related intangible assets and contribute to a company’s competitive advantage in a market.
   

References

1. Meier, S. & Cassar, L. (2018). Stop Talking About How CSR Helps Your Bottom Line. Harvard Business Review. Retrieved from https://hbr.org/2018/01/stop-talking-about-how-csr-helps-your-bottom-line 

2. Tendolkar, A. (2019). More Companies Spending On CSR But Aren’t Being Generous Enough. Bloomberg Quint. Retrieved from https://www.bloombergquint.com/business/more-companies-spending-on-csr-but-arent-being-generous-enough

3. Bowen, H. (1953). Social Responsibilities of the Businessman (1st ed.). Harper, New York.

4. Freeman, R. E. (1984). Strategic management: A stakeholder approach. Boston: Pitman. 

5. Bhattarcharya, C., & Sen, S. (2003). Consumer-Company Identification: A Framework for Understanding Consumers’ Relationships with Companies. Journal of Marketing, 67, 76-88. 

6. Barnett, M. L., & Salomon, R. M. (2006). Beyond dichotomy: The curvilinear relationship between social responsibility and financial performance. Strategic Management Journal, 27, 1101-1122. 

7. Dutton, J. E., Dukerich, J. M., & Harquail, C. V. (1994). Organizational images and member identification. Administrative Science Quarterly, 39, 239–263.

8. Mingjun, H., Heng, L., Peihua, F. & Zelong, W. (2016). Does CSR practice pay off in East Asian firms? A meta-analytic investigation. Asia Pacific Journal of Management, 33.

9. Keller, K.L., & Lehmann, D.R. (2006). Brands and branding: research findings and future priorities. Marketing Science, 25(6), 740–759. 

10. Prout, J. (2006). Corporate responsibility in the global economy: a business case. Society and Business Review, 1(2), 184–191. 

Yoon, Y., Gurhan Canli, Z., & Schwarz, N. (2006). The Effect of Corporate Social Responsibility (CSR) Activities on Companies With Bad Reputations. Journal of Consumer Psychology, 16, 377–390. 

11. Wang H.-M.D., & Sengupta S. (2016). Stakeholder relationships, brand equity, firm performance: A resource-based perspective. Journal of Business Research, 69(12), 5561–5568. 

Agostini L., Filippini R., & Nosella A. (2015). Brand-building efforts and their association with SME sales performance. Journal of Small Business Management, 53(1), 161–173. 

Verbeeten F.H.M., & Vijn P. (2010). Are brand-equity measures associated with business-unit financial performance? Empirical evidence from the Netherlands. Journal of Accounting, Auditing & Finance, 25(4), 645–671.

Barth, M.E., Clement, M.B., Foster, G., & Kaszink, R. (1998). Brand values and capital market valuation. Review of Accounting Studies, 3, 41–68. 

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