MSc. THESIS
Profiting from an Integrated Understanding of Corporate Social and Political Activities
Supervisor: Dr. Pushpika Vishwanathan
Name: Laura Spronk
Student Number: 11150416
MSc.: Business Administration: Strategy
Date of submission: 23/06/2017
Statement of originality
This document is written by Student Laura Spronk who declares to take full responsibility for the contents of this document.
I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.
The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.
ABSTRACT
Scholars find that corporate social responsibility and corporate political activity both augment firm performance. However, these findings have only been established in separate streams of literature that ignore combined effects. Recent literature asserts that a joint approach to corporate social and political activity provides opportunities to add additional value to the firm. The theories underlying this proposition are resource based theory and strategic alignment. The theoretical framework, furthermore, expects these effects to be amplified in case firms reside in government dependent or regulated industries. This study develops an explanatory variable that measures the extent to which firms’ CSR and CPA scores overlap on the extent to which they address specific policy issues. I test these propositions by running hierarchal multiple linear regressions on 436 U.S. for-profit public Fortune 500 companies. Findings support the hypotheses that firms overlap in terms of the issues they address and that firms with higher CSR-CPA overlap, have higher firm performance. However, the results also show that for some issues the effects are the opposite, and therefore leave several interesting areas for future research.
TABLE OF CONTENTS
1. INTRODUCTION ... 5
2. THEORY AND HYPOTHESES ... 9
2.1 Separate CSR and CPA literature ... 9
2.1.1. The conceptions of CSR and CPA ... 9
2.1.2 The economics of CSR and CPA ... 10
2.2 Integrating CSR and CPA literature ... 13
2.2.1 Overlap between CSR and CPA ... 13
2.2.2 Complementarity between CSR and CPA ... 15
2.2.3 Alignment ... 18
2.3 Government Dependency ... 20
2.4 Regulated Industries ... 22
2.5 Research model ... 23
3. DATA AND METHODS ... 24
3.1 Sample... 24
3.2 Data sources ... 25
3.3 Measurement ... 27
3.3.1. Dependent Variables: CFP ... 27
3.3.2. Independent Variables: Overlap CSR-CPA. ... 28
3.3.3. Moderating Variables: government dependence and regulated industries ... 32
3.3.4. Control Variables ... 34
4. ANALYSES AND RESULTS ... 35
4.1 Correlation analysis ... 35
4.2 Regression analyses ... 41
4.2.1 Tobin’s q ... 42
4.2.2. Return on assets ... 45
5. DISCUSSION ... 48
5.1 Discussion and implications... 48
5.2 Limitations and future research... 50
5.2.1 Limitations ... 50
5.2.2. Direction for future research ... 53
6. CONCLUSION ... 54
7. REFERENCES ... 55
7.1 Literature ... 55
7.2 Sources ... 67
8.1 Appendix A ... 69 8.2 Appendix B ... 77 8.3. Appendix C ... 90
LIST OF FIGURES AND TABLES
Tables
Table 1 CSR-CPA overlap categories Table 2 Descriptive statistics
Table 3 Correlation matrix Table 4 Correlations CSR-CPA
Table 5 Regression results on Tobin’s q Table 6 Regression results on ROA
Figures
Figure 1 Conceptual model Figure 2 Industry distribution
Figure 3 Government dependence distribution
Appendices
Appendix A: Additional tables and figures Appendix B: Coding manual
1. INTRODUCTION
This study attempts to integrate the instrumental literature concerning corporate social responsibility and political activity. Where corporate social responsibility (CSR) addresses the firm’s commitments to voluntarily contribute to social welfare, corporate political activity (CPA) captures the firm’s efforts to influence political decision making. Separate streams of literature have devoted considerable attention to CSR and CPA and find that both strategies are in general positively related to firm performance (Orlitzky, Schmidt & Rynes, 2003; Margolis & Walsh, 2003; Hillman, Keim & Schuler, 2004).
Strategic management scholars have long emphasised the importance of the non-market environment to firm performance (Baron, 1995). Non-market strategies, such as CSR and CPA, evidently take up a lot of firm resources and are of influence on firm success. In the U.S. political economy, business firms stand high among the most important political institutions and are inevitable participants in the political process (Preston, 1986; Keim & Baysinger, 1988). Despite substantial variation in scope, almost the entire top 200 firms of the Fortune 500 engage in CPA in some way. In the US nationally, more than half (56.4%) of the Fortune 500 engage in lobbying (Hansen & Mitchell, 2000). Top managers and executives view political strategy and skills as a vital strategic resource to the firm (Mahon, 1989; Shaffer, 1995). Simultaneously, firms are increasingly urged to engage in social and environmental responsibility. A growing number of scholars and top managers allocate considerable amounts of time and resources to support social and environmental initiatives (Cheng, Ioannou & Serafeim, 2014). In the 2010 UN Global Compact Accenture CEO study, most (93% out of 766) CEOs participating worldwide assert that CSR is an ‘important or very important’ factor for their organisations’ future success (UN Global Compact Accenture, 2010).
Scholars assert that the integration of business activities with the non-market environment of the firm is important and that coordination is always a necessary thing (Baron, 1995). So far however, firms
have often not even considered the interplay between CSR and CPA in addressing policy issues. Despite promising strategic overlap, literature and practice tend to consider the two strategic activities and their effects on firm performance separately. Little research has been attributed towards their interplay, to whether and how firms may jointly manage their political and socially responsible activities, as well as the consequences thereof. For this reason, both scholars and practitioners have been missing potential benefits that firms can derive from a more integrated understanding of CSR and CPA. CSR studies have usually only been directed towards the integration of CSR activities with other business functions or with their market environments (Googins et al., 2007). Empirical work on CPA, too, has barely considered the analysis of multiple political tactics aimed at a single policy issue. The few studies that did consider different kinds of CPA, have mostly treated them as independent activities rather than as complements (Masters & Keim, 1985; Wilson, 1980).
A few scholars did address the interplay between corporate non-market strategies. Several studies have for instance established that multiple CPA tactics can act as complements (Coates & John, 2012; Schuler, Rehbein & Cramer, 2002). Recently, scholars have also started to impel a link between corporate social and political strategy (Scherer & Pallazo, 2011; Hond et. Al., 2014; Hillman, Keim & Schüler, 2004). The advance of the ‘political CSR’ literature provides an indication of the narrow boundaries between the issues that firms address through their CSR and CPA. It asserts that CSR can broadly speaking be seen as a political act as it focuses on firms’ assumptions of government roles and responsibilities (Matten & Crane, 2005). As weakening governance occurs in the context of globalisation and technological development, CSR firms increasingly take up social and environmental responsibilities that were otherwise the task of governments (Scherer & Palazzo, 2011). Yet, besides the political assumptions behind CSR, firms also operate politically in a more traditional sense by addressing policy issues through corporate political activity. Although they remain distinctly different activities, this stipulates common ground between CSR and CPA. The policy issues addressed through CPA often coincide with the issues seen in social and environmental commitments (Delmas et al., 2016). Liedong et al. (2015) furthermore find that CSR and CPA may complement to create trust between firms and policy makers. Hond et al. (2014) conceptually examined what different configurations of CSR and CPA can mean for a firm’s reputation. The latter
research is however merely confined to an exploratory conceptual analysis. Moreover, reputation and trust are only a single aspect of several of the causal chains that connect CSR and CPA with firm performance. Thus, previous studies have only focused on separate levels of analysis and have mostly ignored the aspect of integration. So far, opportunities regarding the coordination of CSR and CPA have therefore not been adequately and empirically researched, while they reserve huge value creation opportunities for the firm (Hond et al., 2014).
This paper focuses on the central role that resource-based theory represents in explaining the potential performance attributes that firms may derive from jointly coordinating and managing their social and political activities. The resources and capabilities that firms accumulate through CSR and CPA commitments may create ‘complementary firm-level resources that enable a firm to maximize simultaneously the effectiveness of both CSR and CPA’ (Hond et al., 2014, p.797). Moreover, alignment and coordination of non-market activities stimulates internal efficiency and consistency towards external stakeholders (Russo & Fouts, 1997).
This paper analyses if the positive effect that CSR-CPA overlap may have on firm performance is moderated by industry regulation and government dependency. Resource dependency theory represents the firm as an open system that is contingent upon many environmental externalities (Pfeffer & Salancik, 1978). In case of dependency, the government holds many firm opportunities, by for instance being responsible for a large share of a firm’s sales contracts. This study proposes that government dependent firms are likely to gain more from CSR-CPA overlap. Additionally, industry regulation is introduced as a moderating factor. Prior research finds that the firm’s institutional environmental is a huge contributor to variation and effectiveness of CSR and CPA (Spence et al., 2004; Aguilera et al., 2007; Hillman & Hitt, 1999; Ioannou & Serafeim, 2010). This paper therefore argues that the resource complementarity between corporate social and environmental activities has more potential in regulated industries.
In sum, the purpose of this paper is to address this fascinating research gap by analysing the following research question: Does coordination of corporate social and political activities contribute to firm performance? Do government dependence and industry regulation moderate this relation?
This study examines the research question by empirically analysing information about 436 publicly listed and for-profit firms from Fortune 500 in the U.S., averaged over the years 2012-2015. It develops an independent variable that integrates how firms balance their CSR and CPA on specific policy issues. The findings contribute to theory and practice in several ways. They challenge existing classifications in CSR and CPA literature, that ignore combined effects. Furthermore, the findings reinforce the idea that there is significant common ground between corporate social and political activities. This paper contributes to resource based theory, by complementing current ideas of resource complementarity. Resource complementarity may work beyond and across firm divisions. The findings support the idea that the resources from corporate political activity and corporate social responsibility might mutually support each other. Furthermore, the type of policy issue on the table, may influence the combined effects of CSR and CPA on firm performance. Managers should therefore become more aware of the thematic of their business activities. Moreover, the results provide incentives for managers to gain a more integrated understanding of their corporate social and political activity.
The structure of this paper is as follows. The theoretical framework provides justification and theoretical grounding for the research question. It first shortly defines and clarifies both conceptions CSR and CPA. Subsequently, it explains the focus on firm performance outcomes and it explains scholarly work on the economics of CSR and CPA. Thereafter, it constitutes several areas of overlap between corporate social responsibility and political activity. Then, it introduces recent streams of literature that start to connect the two firm strategies and it explains the potential complementarity between CSR and CPA from a resource-based perspective. Furthermore, it explains the predicted complementarity between CSR and CPA in terms of internal and external strategic alignment. This theoretical background leads to the first two hypotheses. Moreover, the existence of government
dependency and industry regulation are discussed and introduced as moderating factors, leading to the third and final hypotheses. The literature study is concluded with a recap of the hypotheses and a visualisation of the conceptual model. Next, the method section specifies the data collection process and research setting of the study. Furthermore, the empirical analyses and results are discussed. At last, I provide a critical discussion of the results and associated limitations. The final section brings concluding remarks and several paths for future research.
2. THEORY AND HYPOTHESES
2.1 Separate CSR and CPA literature
2.1.1. The conceptions of CSR and CPA
Corporate social responsibility (CSR) is a well-known concept that has been under scrutiny of academic scholars for a long time (Wood & Jones, 1995; McWilliams & Siegel, 2001; Orlitzky, Schmidt & Rynes, 2003). CSR is commonly defined as ‘the firm’s considerations of and responses to issues beyond the narrow economic, technical, and legal requirements of the firm to accomplish social and environmental benefits along with traditional economic gains that the firm seeks’ (Aguilera et al., 2007, p.836). While the definition of CSR is not always clear, scholars agree that CSR is ‘voluntary and designed to improve social or environmental conditions’ (Mackey, Mackey & Barney, 2007, p. 818) and going ‘beyond the interest of the firm and that which is required by law’ (McWilliams & Siegel, 2001, p. 117). When the literature refers to how well a firm performs on certain CSR characteristics or activities, it employs the denotation of corporate social performance (CSP) (Mackey, Mackey & Barney, 2007).
The other non-market strategy this research addresses is corporate political activity (CPA). In the literature, scholars define political activity of the firm as ‘corporate attempts to shape government policy in ways favourable to the firm’s continued economic survival and success’ (Hillman, Keim & Schuler, 2004, p. 838; Baysinger, 1984; Baron, 1995). CPA is an umbrella concept that captures the firm’s ‘policies, processes and practices that are intended to influence government policy or
processes’ (Hond et al., 2014, p. 794). The three different goods of exchange in the market of corporate political influence are information, financial incentive, and constituency building strategies. CPA is conducted individually by an organisation or collectively with a group of firms that share a vested interest (Hillman & Hitt, 1999). Moreover, firms employ corporate political activity through either relational or transactional approaches.
2.1.2 The economics of CSR and CPA
Strategic management scholars have long sought ways to explain why some firms perform better than others and to understand the sources of sustained competitive advantage (Barney, 1991). Surviving by means of achieving and maintaining a competitive advantage in the marketplace is a primary concern for the firm (Jensen, 2002; Margolis & Walsh, 2003). While CSR research and practice grew over time and increasingly resources were dedicated to social responsibility, questions arose if the activity pays for itself and whether it produces a positive return on investment (McWilliams & Siegel, 2001; Carroll & Shabana, 2010; Waddock & Graves, 1997). Firms engage in CSR mainly for instrumental, relational, and moral reasons (Aguilera et al, 2007). Correspondingly in the CSR literature, the quest for an instrumental argument has been predominant for several decades. Indeed, the growing literature on the business case for CSR has already uncovered some vigorous debates regarding the potential shift from a solely moral and normative CSR perspectives, towards a more strategic CSR approach (Aguilera et al. 2007; Mackey, Mackey & Barney, 2007; McElhaney, 2007; Porter & Kramer, 2006). Friedman’s arguments against CSR only reinforced the pursuit for a justification and rationale to CSR (Friedman, 1970; Jensen, 2002). To satisfy the tension between traditional economic theory and CSR and in order to take hold of the premise that firm attentiveness to social issues could be consistent with maximising wealth, scholars agree it is important to increase our understanding of the effects of CSR on firm performance. Therefore, a great extent of the CSR literature is focused on finding instrumental arguments to CSR and how it relates to the firm’s financial and economic returns (Jones, 1995; Margolis & Walsh, 2003).
In general, the relation between CSP and CFP is positive over a broad area of contexts and industries (Margolis & Walsh, 2003). In short, several meta-analyses on the CSP-CFP relation
uncover the following mechanisms through which CSP may translate into CFP (Orlitzky, Schmidt & Rynes, 2003). Firstly, investments in CSR contribute to knowledge about the firm’s social, political, ecological, and technological markets. It helps the firm to increase managerial competencies, resources and capabilities, and encourages innovation (Porter & Linde, 1995; Porter & Kramer, 2006; Russo & Fouts, 1997). Secondly, CSP helps to create strategic resources such as building positive reputation, enhancing stakeholder relations, and developing moral capital and goodwill with employees, consumers, investors and suppliers (Turban & Greening, 1997; Fombrun & Shanley, 1990; Bansal & Roth, 2000; Mackey, Mackey & Barney, 2005). Thirdly, along with moral capital, CSP may insure the firm against corporate risks (Godfrey, Merill & Hansen, 2009; Jo & Na, 2012). Despite most research corroborates an overall positive CSP-CFP relation, ‘scholars have not figured out every link in the complex causal chain connecting social responsibility with firm performance’ (Vishwanathan, 2016, p. 54). For example, scholars have not found consensus on how CSP affects firm performance in combination with other strategy variables of the firm (Orlitzky, Schmidt & Rynes, 2003; Wood & Jones, 1995; McWilliams & Siegel, 2001). Besides the prevailing advantages CSR may generate, research also finds negative effects associated with CSR. It may undermine economic returns by adding costs, distracting management or creating agency problems (Wang & Bansal, 2012).
As firms are constantly looking for sources of competitive advantage, another source is government policy. The government provides firms with ‘the rules of commerce, the structure of markets, the offerings of goods and services that are permissible and the size of markets based on government subsidies and purchases’ (Schuler, Rehbein & Cramer, 2002, p. 659). Firms engage in political activity in the attempt to shape public policy outcomes and to complement private profit seeking objectives (Hillman & Hitt, 1999; Mitnick, 1993). Outcomes are the second most studied area of CPA research (Hillman, Keim & Schuler, 2004). At one level, managers have an interest to find out if they are using the right tools and whether their CPA is able to achieve desired policy outcomes (Hillman & Keim, 2001; Dean, Vryza & Fryxell, 1998). If CPA has the ability to influence policy decisions in a way favourable to the firm is, in turn, closely intertwined with its ability to improve firm performance
(Hillman, Keim & Schuler, 2004). Executives view CPA as a means to gain a competitive advantage or to protect against regulatory scrutiny (Stieglitz, 1985). To date, a few scholars analysed and established direct empirical linkages between CPA, competitive advantage and shareholder wealth (Marsh, 1998; Hillman, Zardkoohi & Bierman 1999; Shaffer, Quasney & Grimm, 2000). Many studies corroborate that CPA has the ability to influence government policy (Carroll & Shabana, 2010; Ramirez & Eigen-Zucchi, 2001; Ramirez & de Long, 2001) and several scholars support the importance of government policy to firm profitability (Keim & Baysinger, 1988; Schuler, 1996; Baron, 1995; Hillman & Hitt, 1999).
According to Stigler (1971), government policy has the power to provide benefits and constraints that are conducive to firm performance. Sometimes firms choose to get involved in the political process for defensive reasons, in case regulatory changes appear to hinder the business’ competitiveness in the future (Getz, 1997). Other times, firms may spot opportunities to shape their political environment in order to safeguard or increase firm performance (Baysinger, 1984). Effective CPA may generate efficiency and legitimacy as well as good relationships with key stakeholders such as the government and public interest groups (Oliver & Holzinger, 2008). CPA may provide political access, which in turn gives the firm timely information about the contours and dynamics of the policy landscapes (Schuler, Rehbein & Cramer, 2002). The main policy mechanisms that are likely to generate direct benefits to increase firm performance are subsidies, controlling entry by new rivals, using the power of the state towards substitutes or complements and price-setting (Stigler, 1971; Belkaoui, 1976). Additionally, findings suggest that firms exchange money and information for political benefits such as trade barriers, reduced or easier regulatory inspections, and lower tax rates (Coates & John, 2012). In conjunction with these positive effects, corporate political activity is prone to distract managers and result in investments that lack focus and poorly fit the firm’s business strategy.
2.2 Integrating CSR and CPA literature
2.2.1 Overlap between CSR and CPA
As outlined above, most large firms dedicate significant amounts of resources to CSR as well as to CPA. Prior findings independently perceive the activities as important to firm performance. Now, as most firms conduct both CSR and CPA, it is interesting to see whether and how these firm strategies interact. Recently, scholars have started to connect research on several non-market strategies of the firm and have identified considerable areas of strategic overlap between CSR and CPA (Beloe, Harrison & Greenfield, 2007; Hond et al., 2014; Scherer & Palazzo, 2011; Matten & Crane, 2005). The potential interplay between CSR and CPA is manifold.
First and utmost, CSR and CPA are marked by their presence in the non-market environment of the firm and their political characteristics. Despite growing literature on the business case for CSR, the essence of CSR is to take responsibility beyond the narrow economic objectives of the firm and to contribute to or mitigate their social and environmental impact. Therefore, CSR has a significant presence in the non-market environment of the firm with a broad stakeholder’s perspective, just as is the case for corporate political activity (Baron, 1995). From the outset, the discussion on CSR is marked by its strong political involvement that assumes a certain role for the firm as a political actor (Friedman, 1970). A recent stream of political CSR literature formally connects corporate social and political theory (Scherer & Palazzo, 2011). Whereas globalisation is blurring national boundaries and thereby diminishing the grip of national decision-makers on certain political objectives, even more (political) social and environmental responsibility is being adopted by multinational corporations. Firms collaborate with international institutions and set standards that influence global expectations and perceptions, along and beyond government efforts (Kamieniecki, 2006; Scherer, Palazzo, & Baumann, 2006; Pache & Santos, 2010). On the other hand, firms also perform actual political activity in the more traditional sense through corporate political activity (Hond et al., 2014). For instance, they make lobbying expenditures and contributions to political parties to increase firm’s chances of receiving particular subsidies or of being invited to trade missions (Hillman, Keim &
Schuler, 2004). In sum, the high involvement of both strategies in the non-market and political field presents evident common ground between CSR and CPA.
Secondly, CSR and CPA are to a large extent relational activities. The strategies are directed towards the active steering of stakeholders, the building of relationships of many kinds and essentially pivot upon human engagements (Oliver & Holzinger, 2008; Aguilera, et al., 2007). For this reason, CSR and CPA both generate and rely on intangible and relational resources, which indicates another promising venue of common ground between the two non-market activities (Hond et al., 2014; Liedong et al., 2015).
Thirdly, the agendas of CSR and CPA may coincide in terms of the type of issues they address (Delmas et al., 2016). Therefore, issues potentially play an important role in the interplay between CSR and CPA. Issue salience, ‘the net impact of a policy issue on the firm’s competitive strategy and performance’ (Schuler & Rehbein, 1997, p.121) is seen as a primary determinant for social and political activity (Bonardi, Hillman & Keim, 2005; Hillman et al., 2004; Clark & Crawford, 2012; Hillman & Hitt, 1999). The salience of CSR issues to the firm depends on industry specific stakeholder pressures and how close an issue is associated with a firm’s particular business activity (Brammer, 2006). Also, scholars find that the higher issue salience, the higher the likelihood a firm will become politically active or will increase the intensity of existing political activities (Schuler & Rehbein, 1997; Vogel, 1996; Getz, 1997). Prior CPA research looking for evidence of policy influence via lobbying has focused on specific issues (Coates & John, 2012). Moreover, scholars have discussed how firms face issue-based competition in their market and non-market environments (Hillman, Keim & Schuler, 2004; Wilson, 1980). The prevalent stance on issues for CSR and CPA proposes a negative correlation (Hillman & Hitt, 1999). It states that the poorer firms score on certain CSR issues, the more likely they would be to engage in (more) political activity (Cho, Patten & Roberts, 2006; Fremeth & Richter, 2011; Bonardi, Hillman & Keim, 2005). This reasoning suggests that industries see issue salience as a threat and implies that firms performing well on certain CSR issues would have less interest in influencing policy outcomes. This argument proposes that in case, for instance, a highly polluting firm faces costly regulations, it is likely to engage in CPA in order to mitigate it, potentially leading to policy outcomes that are not necessarily in line with public interest
(OECD, 2014; Barley, 2007). However, there is also a less opposing view on the issue-based interplay between social and environmental performance and policy. According to Delmas et al. (2016), the interaction between CSR and CPA has a more complex U-shaped relation wherein both highly polluting and firms that are performing well environmentally, are prone to engage in CPA. Firms with strong performance records in terms of social and environmental issues may leverage ‘new regulations and performance standards to gain competitive advantage over industry rivals’ through CPA (Delmas et al., 2016, p.3), to achieve the ability to set or redefine environmental standards and regulations to create a competitive advantage (Fremeth & Richter, 2011; Reinhardt, 1999; Vogel, 1995; Kamieniecki, 2006; Scherer, Palazzo, & Baumann, 2006).
The literature identifies many areas of overlap between CSR and CPA, while findings on the size and direction of the interaction remain rather inconclusive. Scholars emphasise that decisions about corporate social and political activities are contingent upon the position and salience of certain issues to the firm. With regard to issue overlap, I expect when certain issues are important to the firm, it is likely that firms will attempt to control it and dedicate resources in both the shape of social and political activities. Therefore, I expect a positive correlation between CSR and CPA. Without assuming causality, I predict that CSR and CPA co-vary in the sense that when firms dedicate resources to a certain policy issue through CSR, they are also likely to address that issue through their CPA, and vice versa. The correlation serves as an inspiration for the creation of the independent variable later in this study.
HYPOTHESIS 1: There is a positive correlation between CSR and CPA.
2.2.2 Complementarity between CSR and CPA
Resource-based theory (RBT) of the firm highlights the question what kind of corporate resources may generate a sustained competitive advantage (Wernerfelt, 1984; Rumelt, 1984; Penrose, 1959). RBT is instrumental for my research question by helping to analyse how the resources developed
through specific firm activities in the non-market environment might complement each other. According to RBT, corporate resources may lead to a sustained competitive advantage when they are valuable, rare, inimitable and non-substitutable (Barney, 1991). Alongside resources, firm capabilities include the firm’s capacity to deploy their resources towards a certain end and to combine them by using organisational processes. Firm capabilities can be ‘information-based, tangible or intangible processes that are firm-specific and developed over time through complex interactions among the firm's resources’ (Amit & Schoemaker, 1993, p.35). In this paper, I will use the term resources to refer to both resources and capabilities of the firm. Strategy and economics scholars assert that resources can be strongly synergistic and complementary (Penrose, 1959; Alchian & Demsetz, 1972; Porter, 1996). We find complementarity between resources when ‘the strategic value of an asset’s relative magnitude increases with an increase in the relative magnitude of another asset’, so when doing more of one activity, increases the marginal benefits the other (Amit & Schoemaker, 1993, p.39; Dierickx & Cool, 1990). Many scholars corroborate that interdependencies among corporate activities generally produce positive interactions that enhance firm performance (Carmeli & Tishler, 2004; Ethiraj et al., 2005; Morgan, Vorhies & Mason, 2009; Novak & Stern, 2009; Parmigiani & Mitchell, 2009). Complementary resources can include a wide variety of firm assets, such as strategic contacts, reputational assets, regulatory knowledge, marketing capabilities, or consumer insights (Teece, 1986; Stieglitz & Heine, 2007).
RBT recently ascended into studies of CPA, which increases the focus on firm-strategic factors (Hillman, Keim & Schuler, 2004; McWilliams, Fleet & Cory, 2002). A few prior CPA studies portray how politically active firms may combine tactics. They argue that different kinds of political activities are complements in the sense that if two kinds of political activities are employed, both will be more effective and more frequently used than on their own (Schuler, Rehbein & Cramer, 2002). For instance, with regard to PAC contributions and lobbying, PAC contributions may ‘buy’ access and lobbying may exploit this access to affect government policy (Coates & John, 2012). Although RBT is also largely present in CSR literature, these two streams have not been combined before. In CSR literature, RBT emphasises managerial choice and the theory of the firm, which views CSR as a regular good or investment that contains specific CSR attributes or processes (Russo & Fouts, 1997;
McWilliams & Siegel, 2001). Managers maintain the challenging task to select the direction, focus and specific issues of firms’ social and political strategies.
The case for complementarity across CSR and CPA is as follows. During the development and implementation of corporate nonmarket activities, such as CSR and CPA, firms accrue various strategic resources. These resources include several intangible assets such as specific knowledge and information, experience, contacts, and so on. Recent literature asserts that the resources and capabilities accumulated during socially responsible activities may support in particular the performance of the firm’s political activities, and vice versa (Beloe, Harrison & Greenfield, 2007). Coordination between the two non-market activities is argued to ‘enable firms to maximise simultaneously the effectiveness of both activities’ (Hond et al., 2014, p.797). With the common ground between CSR and CPA outlined earlier, this combines to several fruitful areas of complementarity. Hond et al. (2014) have developed a conceptual framework that explores the various paths through which coordination of CSR and CPA can benefit the firm. As it may be, CPA helps the firm develop resources that are valuable to its CSR, such as ‘information about legislative policy preferences, political contacts, sophisticated government affairs operations, and has the potential to build political coalitions’ (Hond et al., 2014, p.803). A firm’s CSR can benefit from the resources developed from its CPA, whereas through political activity the firm may ‘(i) improve its ability to select CSR priorities, (ii) enhance the viability of CSR activities, and (iii) increase the credibility of CSR commitments’ (Hond et al., 2014, p.797). Conversely, CSR activities help firms create relations with non-traditional stakeholders, learn about their preferences, and develop special expertise, that are conceived helpful in obtaining their political objectives (Yaziji, 2004). The resources generated through CSR activities may, therefore, enhance their CPA, as social activities may support the firm to ‘(a) facilitate political access; (b) enhance CPA efficacy, and (c) reduce the costs of political interactions’ (Hond et al., 2014, p.799). This illustrates complementarity between CSR and CPA that might be conducive to firm performance.
2.2.3 Alignment
Scholars have recently started to analyse firm responses to the various societal and institutional pressures they encounter in their non-market environment (Child & Rodrigues, 2011; Scherer, Palazzo & Seidl, 2013). In many contexts, firms are aware of contradictory institutional demands and devise appropriate strategic responses accordingly. In the specific case of CSR and CPA, one would predict accurately designed activities that are in line with firm strategy and objectives. Learning about the extent to which CSR and CPA overlap and the accompanying opportunities, one would at least expect a certain awareness at a managerial level. However, the evidence seems to suggest that many firms do not even consider the relationship between CSR and CPA. Potential interactions between CSR and CPA have often ‘not been recognized, misunderstood or ignored, leading to huge wasted value creation opportunities for the firm’ (Hond et al., 2014, p.797). One explanation for this is that CSR and CPA are often spontaneously developed in response to or in anticipation of specific, incompatible or conflicting demands in their institutional environments (Pache & Santos, 2010). Therefore, we should assume that the many different shapes and configurations of CSR and CPA are often more emergent rather than deliberate events (Hond et al., 2014). Despite this assumption, research and practice pronounce that coordinating CSR and CPA can add much value to the firm (Peterson & Pfitzer, 2009; Schuler & Rehbein, 2005).
Firstly, scholars generally advocate that business strategies should be consistent with the capabilities of the firm and the characteristics of its environment (Russo & Fouts, 1997). Management scholars have long embraced the concept of strategic alignment as it stimulates that ‘employees work towards a common objective’ (Birkinshaw, 2011, p.42). Corporate strategy is best ‘focused, composed of a small number of elements, easily communicated, understood, and implemented by middle managers and employees’ (Coates & John, 2012, p.13; Porter, 1980). This applies to strategies both in the traditional and in the non-market environment of the firm (Baron, 1995) and is emphasised by CSR as well as CPA scholars. Strategy dilution may cause projects to be less aligned with shareholder interest
than would otherwise be the case (Coates & John, 2012). In the context of this research, alignment is defined as the strategic fit in which firms use their CSR and CPA to achieve similar outcomes in addressing a policy issue. Research points out the value of consistency through and beyond the normative assertion that firms’ attempts to exert influence on their political environment should be in line with their corporate values and CSR positions (Hond et al., 2014).
Secondly, Dowling and Moran (2012) examine alignment in the context of strategic choice and reputation and emphasise that besides internal alignment, external fit is important to firm performance. Despite the positive reputational attributes that CSR can generate, reputational theory also points out frailty in case of inconsistent behaviour or mixed signals. Stakeholder theory puts forth that firms are ought to maintain a consistent approach towards their stakeholders (Freeman, 1984; Margolis & Walsh, 2003). When CSR and CPA are aligned, stakeholders are likely to revise their perception of the firm as more reliable and trustworthy (Love & Kraatz, 2009). The perception of the firm’s CSR can fluctuate from either a risk-reduction or a window-dressing hypothesis, which underlines the importance of fit (Jo & Na, 2012; Brammer & Pavelin, 2006). Likewise, scholars perceive CPA either as part of the emergence of a positive and wider trend of civil regulation (Dahan, Do & Teegen, 2010; Scherer & Palazzo, 2011), or they feel corporate interests are gaining excessive power (Coates & John, 2012; Schuler, 2008). As both CSR and CPA literature emphasise the importance of consistency, it is important for the firm to jointly manage CSR and CPA to assure effective internal coordination and to send consistent external signals (Harrison, Bosse & Phillips, 2010; Jo & Na, 2012). When a firm’s social and political activities are aligned, unfavourable negative reputation effects can be mitigated, and positive reputational effects increased (Hond et al., 2014; Godfrey, Merrill & Hansen, 2009).
As CSR and CPA scholars assume a certain level of managerial choice for firms’ non-market strategies (Hillman, Keim & Schuller, 2004; McWilliams, Fleet & Cory, 2002), an important objective of the manager is to ‘identify, develop, protect, and deploy a set of complementary and specialised resources and capabilities in a way that provides the firm with a sustainable competitive advantage’ (Amit & Schoemaker, 1993, p.33). Any form of corporate strategy, market or non-market,
necessitates a form of integration with the other (Baron, 1995). By identifying and exploiting synergistic opportunities, managers can reap the full potential of corporate resources and capabilities to add the most value to the firm. To safeguard and stimulate the mechanisms through which CSR and CPA may contribute to firm performance, managers need to be aware how the interplay between CSR and CPA fits into these models. Therefore, I propose firms can best take advantage of the interaction between CPA and CSR when they acknowledge areas of overlap and take a coordinated approach to CSR and CPA in pursuing policy goals.
Despite not all CSR-CPA overlap is the result of deliberate alignment, analysing what CSR and CPA can jointly do for firm performance is an important first step. Therefore, the second proposition this research analyses is:
HYPOTHESIS 2: There is a positive relation between CSR-CPA overlap and firm performance.
2.3 Government Dependency
Government dependency is likely to be of influence on the relationship between corporate social and political activities and firm performance that section 2.2 discusses. The theory underlying government dependency of the firm is resource dependency theory (RDT), which originates from an early publication of Pfeffer and Salancik (Hillman, Withers & Collins, 2009; Pfeffer & Salancik, 1978). The resource dependency perspective represents the firm as an open system that depends on contingencies in its external environment. It underlines that in order to understand the behaviour of the firm, scholars should understand the context of that behaviour, the ‘ecology of the organisation’ (Hillman, Withers & Collins, 2009, p.1404; Pfeffer & Salancik, 1978). Despite the risks from external factors in the environment of the firm, RDT recognises that managers can act to reduce contextual uncertainty. Consequently, firms can and do take actions such as CSR and CPA, to manage external
dependency. The concept of power is key to these managerial actions, which in this case refers to ‘the control over vital resources’ (Hillman, Withers & Collins, 2009, p.1404; Ulrich & Barney, 1984).
This study is limited to the examination of one important element of resource dependency theory, government dependency of the firm. The government has great power over firms as it maintains many of the firm’s risks and opportunities (Pfeffer & Salancik, 2003; Baron, 1995; Stigler, 1971). Firms face government dependence when the government is responsible for a large share of a firm’s revenues, for instance in terms of sales contracts (Hillman, Keim & Schuler, 2004). Government dependency theory argues that the more government dependent firms are, the more motivated they become to manage this dependency through corporate political activity (Hillman, Keim & Schuler, 2004). Moreover, firms with high perceived or actual government dependency are more likely to favour on-going, long-term, relational CPA (Hillman, Keim & Schuler, 2004). The general statement about government dependency as an antecedent to CPA has taken an almost self-evident status in the corporate political literature (Hillman, Withers & Collins, 2009). Clearly, government dependency plays a role in the political behaviour of firms. In general, ‘non-market strategies are more important the more opportunities are controlled by governments’ (Baron, 1995, p.49). Moreover, CPA of government dependent firms is less likely to be influenced by managers’ personal goals instead of firm objectives and is, therefore, less likely to dilute the strategic focus of the firm (Hillman, Keim & Schuler, 2004). Prior findings (section 2.1.2) argue that strategic dilution is one of the mechanisms through which CSR and CPA may undermine firm performance. Thus, the political activities of government dependent firms are, in general, more legitimate and relational. Therefore, the effect of CSR-CPA overlap on firm performance is likely to be stronger when the firm’s industry is marked as government dependent.
HYPOTHESIS 3: There is a positive relation between CSR-CPA overlap and firm performance and this relationship is moderated government dependency, so that this relationship is stronger for government dependent industries.
2.4 Regulated Industries
Firm performance is heavily contingent upon its regulatory environment. CSR, as well as CPA, scholars underline the influence of the institutional environment of the firm on the drivers, types and effects of corporate social and political activities (Aguilera et al., 2007; Hillman, Keim & Schüler, 2004). Therefore, this section introduces regulated industries as a moderating factor.
Prior research has, directly and indirectly, examined how institutional variation explains differences in the adoption of specific corporate social activities. Findings suggest that firms that operate in various institutional settings have significantly different CSP. An important institutional factor is the political environment of the firm in terms of laws and regulations (Ioannou & Serafeim, 2010). Firms that are embedded in different regulatory environments experience ‘divergent degrees of internal and external pressures to engage in CSR initiatives’ (Aguilera et al., 2007, p. 836; Matten & Crane, 2005). Also, research finds that the relation between CSP and firm performance is stronger in heavily regulated industries (Brammer & Pavelin, 2006). Through corporate political activity, firms try to shape their regulatory environment in favour of the firm. Industry regulation is therefore seen as an important antecedent that drives and forms corporate political activity (Hillman, Keim & Schüler, 2004). The more stringent the regulatory scrutiny of the firm, the higher the potential cost burden associated with government regulation in terms of penalties or compliance (King & Lenox, 2002). Therefore, in regulated industries, the need for and efficacy of CPA is higher.
Taking CSR and CPA findings together, the regulatory scrutiny of the firm may potentially amplify the benefits firms generate through jointly managing their CSR and CPA. The resource complementarity between CSR and CPA is likely to have more effect in regulated industries, whereas industry regulation may increase the salience of the several paths through which CSR and CPA resources support each other. For instance, resources developed through CSR can enhance CPA by creating political acumen, which is an important intangible asset that demonstrates firm’s ability to influence public policies in favour of the firm (Russo & Fouts, 1997). Political acumen is more
conducive to firm performance in regulated industries, as firms have more to gain (or lose) from (in)effective political activity. Likewise, through reputation and goodwill, CSR reduces regulatory compliance related costs. CSR may lower the need for regulatory monitoring and may ward off disruptive regulatory reforms (Carroll & Shabana, 2010). Looking at the assumptions of firm heterogeneity, every firm is affected differently by common laws and regulations (McWilliams, Fleet & Cory, 2002). Therefore, innovative CSR firms try to push through new rules to raise rivals’ costs and lobby for tougher standards and regulations that rule out substitutes (Baron, 1995; Delmas et al., 2016; Fremeth & Richter, 2011; Reinhardt, 1999; Vogel, 1995). In regulated industries, the competitive edge of combining social and political activities may thus be higher and more crucial. I, therefore, expect that regulated industry positively moderates the relation between CSR-CPA overlap with firm performance:
HYPOTHESIS 4: There is a positive relation between CSR-CPA overlap and firm performance and this relationship is moderated by regulated industries, so that this relationship is stronger for regulated industries.
2.5 Research model
Chapter 2 introduced the hypotheses of this paper. The conceptual model below illustrates them (Figure 1). The main model refers to the causal relationship between CSR-CPA overlap and firm performance (hypothesis 2). The model furthermore expects moderating effects of government dependency and industry regulation (hypotheses 3 and 4). Subsequently, it shows the predicted correlation between issue specific CSR and CPA (hypothesis 1).
Figure 1. Conceptual model.
3. DATA AND METHODS
3.1 Sample
The overall sample of this research is based on large publicly listed multinational firms in the Unites States over the period 2012-2015. The data is collected from U.S. firms, since the U.S. has the best opportunities for data collection in this field, both in terms of CPA transparency and reporting (Dahan, Hadani & Schüler, 2013), as well as in terms of CSR database quality and quantity (Cheng, Ioannou & Serafeim, 2014). The timeframe (2012-2015) contains the most recent years of which comprehensive data is available and includes two election cycles, both a presidential (2012) and a
Government Dependency
Overlap CSR-CPA Firm Performance
Regulated Industries
congressional (2014) election. Unfortunately, for too many of my variables the databases do not have data for 2016 yet, which makes it unworkable to include the latest presidential elections in the research. Following prior research, I chose to select the sample from the full list of Fortune 500 firms (Aguilera et al., 2007; Hansen & Mitchel, 2000). I have retrieved basic firm information, like CEO name, HQ location, and official website from the Fortune 500 website1. This information was useful to increase my knowledge of the firms in my sample, but I have not directly used it in the analyses. The firms on the Fortune 500 list make an important part of the economy, where in total they represent ‘two-thirds of the U.S. GDP with $12 trillion in revenues, $840 billion in profits, $17 trillion in market value, and employ 27.9 million people worldwide’ (Fortune 500, 2016). CSR and CPA are highly contingent upon firm size and resources (Coates & John, 2012; Schuler, Rehbein & Cramer, 2002). Choosing Fortune 500 firms as a reference, therefore, provides a coherent sample of large firms that match the activities of interest for my analyses. More than half of the firms in Fortune 500 produce CSR reports annually (Economist, 2005). Moreover, publicly listed firms are obliged to publish financial results, which gives the opportunity to investigate their financial performance (Turban & Greening, 1997; Wang & Bansal, 2012). Unfortunately, I had to exclude some firms as they turned out to have been acquired by other firms in the sample in the years of measurement, or were not for profit and publicly listed firms (Appendix D). Furthermore, I had to eliminate some firms from the sample, because the databases did not provide any CSR and CPA data about them. It should be clear that the excluded firms with incomplete data do not show any perceptible differences from the firms that are included.
3.2 Data sources
Following prior research, I draw CSR data from the MSCI ESG KLD STATS Database 2 (former KLD: Kinder, Lydenberg, Domini & Co. Company Profiles). The use of MSCI ESG KLD STATS database for measuring CSR comes with several advantages and has been used by a great deal of
1
http://beta.fortune.com/fortune500/list/
2
scholars interested in CSR (Graves & Waddock, 1994; Griffin & Mahon, 1997; Jo & Na, 2012; Brammer & Pavelin, 2006; Godfrey, Merril & Hansen, 2009). The MSCI ESG database is the largest multidimensional CSR database that is available to the public and contains a great variety of CSR characteristics from over 3,000 companies (Turban & Greening, 1997; Jo & Na, 2012). MSCI rates firms on various dimensions and characteristics of corporate social performance and uses an objective set of criteria (Brammer & Pavelin, 2006; Turban & Greening, 1997).
To obtain data on the corporate political activity of the firms in my sample, I use the website of the Center for Responsive Politics: Open Secrets3. The use of this data source follows the approach taken in prior research to estimate values of CPA (Coates & John, 2012). Open Secrets provides summaries of data based on the Federal Election Commission and U.S. Senate website. Regarding my timeframe, information associated with election cycles is available for the years in 2012 and 2014 and represent contributions to re-elect the president or senator from a year prior to the elections up until the election date. Other variables, such as lobbying data, are available annually and are thus collected for all years 2012-2015 (Coates & John, 2012; Pittman, 1977).
I use the Compustat North American Database for firm financial performance data. I access the Compustat database by registering a free account on Wharton Research Data Services4 (WRDS). Compustat provides fundamental and market information on publicly listed companies and is used by many scholars in both CSR and CPA research (Jo & Na, 2012; Schuler; Rehbein & Cramer, 2002; Coates & John, 2012; King & Lenox, 2002; Konar & Cohen, 2001; Fombrun & Shanley, 1990; Godfrey et al., 2009).
Merging these databases together results in the complete dataset that contains U.S. publicly listed firms that appear in the list of Fortune 500 and are included in the MSCI ESG Stats as well as the Compustat databases. The final sample includes 436 publicly listed firms, representing all industries groups from the Fama and French five industry portfolios5 (Coates & John, 2012).
3 www.opensecrets.org 4 https://wrds-web.wharton.upenn.edu/wrds/ 5 http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/Data_Library/det_5_ind_port.html
3.3 Measurement
3.3.1. Dependent Variables: CFP
Based on prior research, I collect four relevant measures of firm performance. Scholars have operationalised firm performance in three broad subdivisions, which consist of market-based (investor returns), accounting-based (accounting returns), and perception-based (survey) measures (Orlitzky, Schmidt & Rynes, 2003).
I omit the use of perceptual indicators, whereas its subjectivity is only desirable in case market or accounting-based indicators are not available (Wang & Bansal, 2012). Accounting-based measures, such as return on assets (ROA), capture the firm’s internal efficiency in some way (Cochran & Wood, 1984). They are contingent upon managerial policy choices and their discretionary allocations of funds to different projects. Accounting-based measures thus reflect internal decision-making capabilities and managerial performance rather than just external market responses to organizational (non-market) actions (Orlitzky, Schmidt & Rynes, 2003). Accounting-based indicators look at the profitability of firms on the short term in the past years (Al-Matari, Al-Swidi & Fadzil, 2014). I follow prior research by collecting return on asset (ROA), return on equity (ROE) and return on investment (ROI) data as accounting-based measures of CFP (King & Lenox, 2002; Matari, Al-Swidi & Fadzil, 2014). Higher ROA reflects the firm’s effective use of its assets in serving the economic interest of its shareholders (Ibrahim & Samad, 2011). Furthermore, I have collected data on a market-based performance indicator, Tobin’s q6 (Chung & Pruit, 1995; Bebchuk et al., 2012; Konar & Cohen, 2001; Jacobsen, 1987). Market-based indicators are categorised by their long-term and forward-looking aspects and their reflection of shareholders’ expectations with regard to the firms’ future performance, which they in turn base on previous and current performance (Wahla, ShahSyed & Hussain, 2012; Shan & McIver Ron, 2011; Ganguli & Agrawal, 2009). Tobin’s q has been used
6 Coates & John (2012): Tobin’s q is calculated following Kaplan and Zingales (1997). Tobin’s idea was to
relate an asset’s market value to its replacement value (Tobin & Brainard, 1977), but market values of firm assets are not readily observable, and may diverge from book value (as when a firm’s assets include significant intellectual property or other intangibles).When comparing firms in the same industry in the same period, these divergences are unlikely to bias the results, and it has become customary to refer to the ratio described in note 24 as Tobin’s Q and to use it as an indicator of firm value (e.g., Demsetz & Lehn 1985; Himmelberg et al. 1999; Core et al. 2006; Bebchuk et al. 2009, 2010).
before in the context of corporate political research, studying the relationship between firm value and political expenditures (Hersch et al., 2008). Scholars adopt Tobin’s q as a primary proxy for shareholder value (Coates & John, 2012). It adheres to the theoretical standard for measuring intangible assets (Godfrey, Merrill & Hansen, 2009) and as it incorporates expected future gains it is a very suitable measure to reflect the inherent value of the firm (King & Lenox, 2001).
3.3.2. Independent Variables: Overlap CSR-CPA.
The independent variable of my analysis, called ‘overlap CSR-CPA’, is very new and innovative. Due to its explorative character, some of its aspects face a certain subjectivity, which will be further discussed in limitations. The variable is constructed by integrating two concepts that are often used by prior research, CSR and CPA. I will therefore first explain the choices I have made regarding the variables selected to measure CSR and CPA. Subsequently, I will provide a detailed description of the process of creating the overlap variable and how it should be interpreted.
I use data on issue-specific lobbying behaviour as a measure of the corporate political activity of the firms in my sample. Scholars have examined a wide variety of corporate political activities (Baysinger et al., 1985; Keim & Baysinger, 1988; Pittman, 1977; Zardkoohi, 1985), of which lobbying and political contributions belong to the primary political tactics (Schuler, Rehbein & Cramer, 2002). In most research, CPA is analysed in terms of financial contributions to political candidates or parties through political action committees (PACs). Less systemic attention has been paid to other dimensions such as lobbying (Hansen & Mitchell, 2000), while firms devote more resources to lobbying than other political tactic and usually spend five times more on lobbying than on PAC contributions (Baron, 1995). When firms lobby, they convey information (political, technical, economic analyses) to policy makers that supports their preferred policy outcome (Hillman & Hitt, 1999). Issue specific lobbying data is retrievable from the Open Secrets website7 and distinguishes
7
https://www.opensecrets.org/lobby/alphalist_issue.php.
between 76 different lobbying issues8. After filtering out issues that are more industry specific issues rather than ‘general policy issues’ and issues that are not suitable for my research for other reasons, I am left with 19 specific lobbying issues. Subsequently, many of the 19 CPA issues are somehow related to each other and considering this research share more generic content. I have therefore aggregated them into five broader categories. Each CSR issue variable is later on designated to one of these categories as well, in the process of creating the overlap variable. The data collection process for the lobbying data and the list of selected issues is described in the CPA coding manual (Appendix B, section 2). Lobbying reports can be displayed when searching per firm and per specific issue. In order to clarify what the different lobbying issues comprise, I have provided a number of randomly selected headers of these lobbying reports per policy issue (Appendix A, table II). Furthermore, Open Secret discloses issue specific lobbying data in terms of numbers of ‘reports’ and ‘specific issues’. Despite thorough examination to my best efforts, this division remains rather ambiguous. It is possible to open the lobbying reports on the website to further investigate them, but the number of ‘specific issues’ receive no further explanation. Therefore, I find number of ‘reports’ a slightly more reliable measures and prefer it over number of ‘specific issues’ for my analyses.
Prior research has assessed CSR through broadly four measurement strategies: ‘(a) CSP disclosures; (b) CSP reputation ratings; (c) social audits, CSP processes, and observable outcomes; and (d) managerial CSP principles and values’ (Orlitzky, Schmidt & Rynes, 2003, p.408). Social audits, CSP processes, and observable outcomes are systemic third-party efforts to objectively assess firms’ CSP behaviour, and such variables, such as KLD, are previously used by many scholars (Brown & Perry, 1995; Graves & Waddock, 1994; Griffin & Mahon, 1997;). Therefore, I retrieve an ‘annual dataset of positive and negative environmental, social, and governance performance indicators applied to a universe of publicly traded companies’ from the MSCI ESG KLD STATS9
(MSCI, 2015, p.10). The data consists of both positive and negative performance indicators. Positive performance
8 : GENERAL ISSUE AREA: the general issue area is a code found on lobbying registrations and reports. It
refers to one of 76 codes devised by the Secretary of the Senate or the Clerk of the House to identify a broad issue on which a lobbyist is working.
9 MSCI.com: MSCI ESG KLD STATS: 1991-2014 DATA SETS. Methodology MSCI Research, June 2015.
For more information, open the data methodology research paper: https://msci.com/www/research-paper/esg-ratings-methodology/0175943017.
indicators, ‘strengths’, capture management best practices concerning ESG risks and opportunities. The negative performance indicators, ‘weaknesses’, are based on MSCI ESG Research’s proprietary Impact Monitor controversies analysis. Both strengths and weakness indicators are scored by a simple binary scoring model, which implies ‘if a company meets the assessment criteria established for an indicator, this is signified with a 1, if a company does not meet the assessment criteria established for an indicator, this is signified with a 0, and companies that have not been researched are signified with a R’ (MSCI, 2015, p.14). See Table I in Appendix A for short descriptions of all the CSR strengths and weaknesses that I have collected for this research.
Table 1. Final CSR-CPA overlap categories.
Issue Category CPA Issues CSR Weakness Issues
A: Civil Rights Civil Rights & Liberties Human Rights
Indian/ Native American Controversial regimes*
Freedom of expression & censorship Violations
Other concerns
Community
Negative economic impact
B: Climate Environmental/ Superfund Environment
Animals Regulatory problems*
Clean Air & Water Substantial emissions
Natural Resources Climate change
Waste Land use & biodiversity
Supply Chain Management
C: Consumer Protection Advertising Social Opp./ Products/ Advert.
Consumer Product Safety Marketing-contracting concern Food Industry Product safety & quality*
D: Well-Being Labor/ Antitrust/ Workplace Employee relations/ Social Opp.
Retirement Union relations b
Health issues Health and safety concern
Alcohol & Drugs Supply Chain controversies Child Labour
E: Administrative Copyright/ Patents Governance
Accounting Gov structure controversies
Taxation Controversial investments
Business Ethics
Note. * Too much missing data, exluded.
The aim of this research is to analyse the performance effects of the interplay between corporate social and political activities. I, therefore, construct an independent variable that attempts to express the extent to which a firm balances its CSR and CPA activities around particular policy issues. As delineated in section 2.2.1 of this paper, CSR and CPA activities often evolve around analogous issues. By delving into and taking the time to study each separate issue, I have devoted my best efforts
to make a sound personal judgement that identifies shared ledgers for the CSR and CPA issues. Subsequently, I have fitted the collected CSR and CPA variables into one of the five shared categories (Appendix A, table III ). The five resulting categories depict typical social and political issues that firms address through their CSR and CPA: (A) Civil rights, (B) Climate, (C) Consumer safety and protection, (D) Health and well-being, (E) Governance and administration (Table 1). In most cases, it was evident in which category each indicator needed to be distributed. I was indecisive about a few variables and therefore shortly explain these decisions. At first instance, I was inclined to assign the CPA indicator ‘alcohol & drugs’ to consumer protection, whereas what comes to mind are issues as labelling and restrictive marketing. However, when looking into the details of the issue reports, health and addiction propositions prevail. Therefore, I have chosen to assign it to the category of health and well-being. Similarly, I was not sure where to fit in the CPA indicator ‘advertising’. A further look into the issue reports reveals most topics are centred on privacy and data security and therefore it fits the consumer protection category very well. I have furthermore decided to leave out the CPA issue federal budget and appropriations, whereas it is not relevant to my research. Next, I make an average score over the four years by computing the mean scores over 2012-2015 and over the several variables per issue category. As table III (Appendix A) indicates, the research was initially set up to create an overlap variable for both CPA with CSR ‘weakness’ scores and for CPA with CSR ‘strength’ scores. Unfortunately, although the CSR ‘strength’ indicators exist and are described in detail in the MSCI ESG methodology guide, there was hardly any data available on the CSR strengths for my sample firms (see M and ** in column CSR strength in (Appendix A, table III ). The research is therefore limited to empirically analysing the overlap between CPA and CSR ‘weakness’ scores. Now, I have a unique CPA and CSR score for each firm, per issue category, over the years 2012-2015. Subsequently, I took one more step before computing the overlap variable. I standardise the variable into a differential by computing z-scores per issue per firm for both CSR and CPA:
z = xi – x̄/ s.
The z-scores enable me to make a relative and objective assessment of the extent to which firm’s CSR and CPA are scoring more or less than average on particular issues, whereas z-scores display the
