The effects of Corporate Social Responsibility on the reputation of organizations

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The effects of Corporate Social Responsibility on the reputation

of organizations.

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Statement of Originality

This document is written by Sophie van Soest, 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.

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Abstract

This research investigated the relationship between Corporate Social Responsibility and the Reputation of organizations. Data from the WRDS index is used to examine this relationship from companies of the S&P 500 over the years 2011 till 2013. Previous literature implied that CSR activities can strategically be used by organizations to build reputation for the organization, by aligning the interests of the company with those of society. Data is obtained for the independent variable CSR, the dependent variable Reputation and for the control variables Research and Development, Size, Risk and Financial

Performance. This study finds that Corporate Social Responsibility engagement positively affects the Reputation of the organization. This is in accordance with previous studies.

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1. Introduction

Over the past years there have been numerous scandals surrounding both climate change and pollution. One such example involves the company Royal Dutch Shell. In 2015 a subsidiary of the company Shell called Shell Petroleum Development Company (SPDC) was sued in the Netherlands (RTL nieuws, 2015). Nigerian farmers and environmental protection initiated a lawsuit against Shell on account of oil pollution in three Nigerian villages (RTL nieuws, 2015). The subsidiary of Shell, Shell Petroleum Development Company, is responsible for the activities in this area after Shell discovered the rock oil in this area. Together with other companies, such as State Oil Company of Nigeria, they exploit the area in a joint venture. The exploitation of these areas in Nigeria caused for oil leakages which had a destructive effect on the nature and made the areas uninhabitable for the population (Milieudefensie, 2014). Although Nigeria earned a lot of money because of the oil industry, the inhabitants live in extreme poverty (Amnesty, 2017). This was the first time that a Dutch Multinational was ever sued in the Netherlands on account of environmental damage. After, many more countries sued Shell (RTL nieuws, 2015).

These activities of Shell have damaged their reputation in the field of environmental sustainability (NPO focus, 2016). Shell has been doing oil extraction in Nigeria since 1937 with the State Oil Company of Nigeria, and since the 90’s there have been a lot of protest against their oil extraction activities. There are also accusations of corruption against Shell. Because Shell is one of the biggest producers of gas and oil, it had an important role regarding problems with climate change. Nevertheless, Shell keeps continuing their oil and gas extraction since it is needed in current society (NPO focus, 2016).

Shell took responsibility for their actions and started a new sustainability program. Their annual sustainability report explains the sustainability challenges they face and how they try to respond to these challenges (Reports Shell, 2018). The report starts with a statement of the CEO : “We, at Shell, think long and hard about our role in the transition to a cleaner energy future and the steps needed to create a sustainable world economy. We continue to put respect for people, their safety, communities and the environment at the heart of everything we do” (Reports Shell, 2018). Together with the United Nations they developed 17 sustainable development goals in 2015. Shell prioritizes 6 of the goals which are significant to them. These goals include among other things “ensuring access to affordable, reliable, sustainable and modern energy”, taking climate actions by managing greenhouse gas emissions and moving towards “responsible consumption and production” (Reports Shell, 2018).

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Another organization engaging in Corporate Social Responsibility activities is Lego. According to Forbes (2017) it won first place in the world for being the most Corporately Social Responsible company. This was based on a study by the Reputation Institute (RI) from Boston. According to the RI, Lego was the top CSR company because the company is built on corporate social responsibility, is viewed as a transparent and fair company and engages in environmental and social issues (Forbes, 2017). On Lego’s website they explain how they aim to be innovative for children to inspire them, aim for environmental leadership and aim to be as caring, ethical and transparent with their business practices (Lego, 2015).

Regarding the emerging importance of Corporate Social Responsibility over the past years, companies invest a lot in environmental sustainability and have a detailed program on how to achieve these goals. The activities of Shell in Nigeria seem to have done damage to their reputation, but their current Corporate Social Responsibility activities seem to improve this. As for Lego, their attitude towards CSR activities seem to have created an outstanding reputation. The emerging question regarding these cases is whether their Corporate Social Responsibility activities have had any effects on their reputation. Another question is why organizations engage in Corporate Social Responsibility activities and how this affects the reputation of the organizations. Do these companies really care about the

environment, or does this have something to do with the reputation a company is trying to (re-)build? For companies like Shell it is important to know if the engagement in CSR activities has some kind of effect on the reputation of their company and if it is possible to rebuild their reputation by doing this. This would not only be important for Shell, but for many more companies. Another important question is whether Corporate social responsibility and profitability might be related to one another.

Current literature tries to explain this with research towards CSR activities and their effect on the organization. The article of McWilliams and Siegel (2000) tries to explain the relationship between financial performance and CSR. In their research they find that CSR has a neutral effect on financial profitability. The study of the Royal Dutch Shell corporation by Ekatah, Samy, Bampton and Halabi (2011) also showed that CSR activities are positively related with financial performance of the organization. Another article by Pérez (2015) explains how the reporting of Corporate Social

Responsibility activities “is especially useful to generate corporate reputation”. The variables contributing to this idea are transparency of the corporation, information quantity and information quality. According to OECD (2011), an organization can use CSR to build reputation or even to promote an organization's

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brand. Though, there is still no proof that CSR activities have a certain effect on an organization’s reputation.

This paper will try to explain the effect of Corporate Social Responsibility activities on the reputation of an organization. This is important, to explain whether some organizations might have a better reputation relative to other organizations. This is also important because with this information organizations could use Corporate Social Responsibility activities to their advantage by picking the right activities that align with the company’s strategic path. Secondary data of 96 organizations will be used from the years 2011-2013. The Secondary data is gathered from Wharton research data services (WRDS) through the KLD statistics and Compustat statistics. The effect of Corporate Social Responsibility on reputation will be measured through a linear regression.

The intended contributions of this study will generally be, that organizations could use this knowledge to their advantage and be environmentally responsible, whilst working on their reputation. According to the research of OECD (2011), companies already use their CSR practices for their own benefit, but if these activities show real effect on the organization’s reputation is important knowledge before engaging in this. Practically, managers could use this information to choose their CSR activities strategically in accordance with the strategic directions of the reputation of the organization. For

example, if an organization wants to engage more with the customers, it can target CSR activities that are closely related or of great importance to their customer target group. Secondly, managers can use this information if the organization needs to improve their reputation or the profitability of the organization. Like the article of Ekatah, Samy, Bampton and Halabi (2011), if CSR activities are positively related to profitability, this can help organization that need to be more profitable. If it is know how CSR activities can improve (bad) reputations, this knowledge is of great importance for organizations and managers.

In the literature review the previous and current research regarding this topic will be discussed. Next, the methodology will be discussed, explaining the variables and their relationship. Then the results and conclusion will be discussed.

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2. Literature review

Corporate social responsibility has been and still is an important subject to organizations all around the globe. Many relationships between CSR and other variables have been examined and analyzed. Many authors have researched if the use CSR engagement can provide benefits for organizations or companies. This literature review will analyze the different definitions of CSR and reputation. Subsequently, the relationship between CSR and other variables is established, including reputation.

2.1 Definition CSR

CSR can be defined in different ways. Smith (2003) defines CSR as “the obligations of the firm to society or, more specifically, the firm’s stakeholders- those affected by corporate policies and practices. Another explanation of McGuire (1963) describes CSR as “The idea of social responsibilities supposes that the corporation has not only economic and legal obligations, but also certain responsibilities to society which extend beyond these obligations”.

Although Corporate Social Responsibility can have varying meanings to different sectors, there is a general understanding of CSR. CSR is about creating more than just jobs and wealth, it is also about the contribution of businesses to sustainability. Companies should respond and contribute to environmental and societal issues (OECD, 2001). Companies put a lot of thought, effort and planning into their CSR activities to make sure to reach the most effective impact through a strategic approach. Companies try to take a more strategic objective towards CSR in order to deal with social problems of communities (OECD, 2001). According to OECD (2001), corporations choose these problems “in order to protect its interests and to enhance its reputation, but at the same time these corporations are investing in response to the needs and appeals of charitable and community organisations”. CSR can be used to maintain

relationships with customers, create a morale for the employees of the corporation and even to build reputation or promote the company (OECD, 2001).

CSR can be explained through several models or frameworks. Carroll (1979) explains CSR by dividing CSR into a framework with four different categories. The first category of Carroll’s CSR pyramid is economic responsibility. This category explains that first of all the organization has to be profitable. The second category refers to the legal responsibilities of the organization. This category explains that the organization has to be law abiding, because the law explains the interpretation of what is

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right and what is wrong. The third category is the ethical responsibility of the organization. This refers to avoiding harm and being fair as an organization. The last category is philanthropic responsibilities of an organization. This explains that the organization has to behave as “a good corporate citizen” (Carroll, 1979).

Another framework regarding CSR is developed by Dahlsrud (2006). According to Dahlsrud (2006), CSR can be divided in five dimensions. The first dimension is environmental. This refers to the natural environment. The second dimension is social, this refers to the relationship of the society and business. The third is economic or the financial dimension. The fourth is the stakeholder dimension, this refers to how business interact with their stakeholders. The fifth one is the voluntariness dimension, this has to do with the ethical standards of the organization (Dahlsrud, 2006).

2.2 Definition Reputation

Corporate or organizational reputation is defined in different ways. Fombrun (1996) explains reputation as “a perceptual representation of a company’s past actions and future prospects that describe the firm’s overall appeal to all its key constituents when compared to other leading rivals”. Another definition of Roberts and Dowling (2002) explains reputation as how the company is viewed by its stakeholders. In other words, the extend by which the company is viewed as a good or a bad company.

When a company grows over time it can become “well known, can accrue a generalized understanding in the minds of observers as to what it is known for, and can be judged favorably or unfavorably by its observers.”(Lange, Lee & Dai, 2011). Reputation is what the organization is known for, and it can take many years to build a good reputation. Though, reputation can be ruined in a very short time if the organization did not keep their promises. When there is bad news about an organization it can ruin the relationship with their stakeholders and consumers (Lange, Lee & Dai, 2011). In their article Lange, Lee and Dai (2011) describe the three dimensions of Organizational reputation. The three

dimensions are part of a multidimensional construct. The model is viewed in Appendix 1. The dimensions are “Being known”, “Being known for something”, and “Generalized favorability” (Lange, Lee & Dai, 2011).

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2.3 Current Literature on Corporate Social Responsibility

According to OECD (2011), organizations nowadays “ are taking a more strategic approach in their CSR efforts and significant research and preparation goes into the planning of CSR strategies, determining where a company can make the most effective impact”. OECD (2011) explains that organizations choose the social issues to respond to the community whilst at the same time using these to their own advantage. CSR can be used by managers to enhance their firm value, provide a transparent view to their customers and to support their strategies (Jensen 2002). By picking the CSR activities that concern the customer relations of the company, it can create the image of “hero” in the mind of their customers. Not only are these activities important for their customers, but also for their employees. More challenging for these organizations is to actually follow these CSR strategies and at the same time function as a normal company (OECD, 2011). For example, the article by Cai, Jo and Pan (2012) examines the use of CSR in controversial industry sectors. The main question they ask in this article is, “Can a firm in controversial industries be socially responsible while producing products harmful to human beings, society, or the environment?” (Cai, Jo & Pan, 2012). Specifically, they studied the relationship between CSR and firm value in sinful industries, for example in the tobacco industry. They examined controversial US industries from 1995 till 2009. They find a positive relationship between CSR engagement and firm value of firms in controversial industries. The explanation they give is, that controversial industries often cross paths with society because of social values. This is why firms in these industries use their CSR activities to target their customers in order to enhance their firm value (Cai, Jo & Pan, 2012). CSR can be viewed as a strategic investment, because CSR activities can be used as a firms differentiation strategy. The CSR strategy does not have to be connected to the products or services a company offers, but this strategy can be used as a tool to build reputation or to maintain a good reputation (McWilliams, Siegel & Wright, 2006).

Not only is CSR used to create a positive brand image, several studies hold that CSR and financial performance are also related variables (Baron, Harjoto & Jo, 2011; Waddock & Graves, 1997; McWilliams & Siegel, 2000; Ekatah, Samy, Bampton and Halabi, 2011) McWilliams and Siegel (2000) found that if they include Research and Development (R&D), financial performance and CSR are highly correlated. Thereafter, if they test the effect of CSR on reputation of organizations and R&D is an

included variable, CSR is found to have a neutral effect on financial profitability. McWilliams and Siegel (2000) explain that this is normal. They explain that most firms who are involved in CSR activities are also likely to use a differentiation strategy, which then again is closely related with R&D. The article by

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Ekatah et al. (2011) is in accordance with McWilliams and Siegel’s (2000) study. In their study they analyze the sustainability reports of Royal Dutch Shell. Results show a significant positive relationship between CSR and financial performance.

According to this previous literature CSR is proving to have a positive effect on certain aspects of the organization. If the CSR has a positive effect on, for example, firm value and financial performance of an organization, it is likely to have positive effects on the reputation of an organization as a whole. The paper of Pérez (2015) continues to explain effects of CSR by investigating the relationship between corporate reputation and CSR reporting to stakeholders. The article explains that companies are forced to show their ethical standards through CSR reporting. The conclusion is that CSR reporting can be used as a useful tool regarding the corporate reputation (Pérez, 2015), claiming that CSR reporting has a positive effect on the reputation of the organization. Three variables contribute to this idea. Firstly, the

transparency of the corporation. Explaining that being honest and transparent towards stakeholders creates mutual trust and ensures good behavior. Secondly, the information quality and quantity. This explains that the stakeholders view on how the company is doing is very important. It is important for the stakeholders to know what kind of CSR activities are developed by the company and if the stakeholder perceptions and ideas connect with the perceptions of the company (Pérez, 2015). The market nowadays is highly

competitive, which explains why companies use Corporate social responsibility to improve the stakeholders perception of the company (Jones, 2005). They respond to their customers, other

organizations and many more by using CSR as strategy, which can create a positive brand image for the company.

Organizations often assume that CSR has an positive impact on the organization, which is why they engage in CSR investments and activities (Stuebs & Sun, 2011). Results suggest that companies that are socially responsible also hold the best corporate reputations (Stuebs & Sun, 2011). A model created by Vilanova, Lozano & Arenas (2009) tries to explain exactly how CSR is related to financial

performance and competitiveness. In this study she hypothesized that CSR and corporate reputation have a positive relationship. She created a model that links CSR and competitiveness, through organizational reputation. Her model claims that CSR has a significant impact on reputation, which in turn has an impact on competitiveness. This paper concludes that reputation is the link between CSR and financial

performance or the organization (Vilanova et al., 2009). Thus, pleading for an effect of CSR activities on the reputation of the organization. So reputation and legitimacy arguments can be held responsible for the engagement of companies in CSR activities (Carroll & Shabana, 2010). The engagement of firms in

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socially responsible activities can be seen as a way to attract customers and build reputation (Smith, 2003). Smith (2003) also states that for consumers, an important factor for purchase decisions is the engagement of firms in socially responsible activities. The socially responsible activities are not only important to the consumers, according to Smith (2003) employees also prefer to work for more socially responsible companies. Socially responsible activities can help to build reputation for the company. One way of achieving this, would be through ‘Cause Marketing’. Through cause marketing the company can meet their own goals and at the same time meet the goals of the stakeholders (Carroll & Shabana, 2010).

Not only can CSR activities be used to help build reputation, according to Minor and Morgan (2011) CSR activities can be used to “insure a firm against lost reputation in the face of adverse events”. In their study they investigate the S&P 500 companies and their engagement in CSR activities and their stock price response as a result of those activities. Based on their results they claim that CSR can be used as a powerful tool in protecting the reputation of a firm, CSR can be used to protect companies from reputation risk. This is in accordance with the article of Cai, Jo and Pan (2012), who claim that CSR activities are a key source for sinful industries to ensure their own firm value, thus reputation. If companies can use Reputation as a direct tool to avoid reputation damage or to ensure their good reputation, CSR engagement is assumed to have a positive effect on the reputation of the organization. The study of Hur, Kim and Woo (2014) investigated the effects and relationships between CSR, corporate brand equity, corporate brand credibility and reputation. They used a sample of South-Korean consumers and came to the conclusion that CSR has a significant positive effect on corporate reputation (and on corporate brand equity). Another study by Hsu (2012) investigates the advertising of life insurance companies in Taiwan. Specifically, they investigate the advertising effects of CSR engagement of those companies on the reputation and brand equity of the company. This study identifies the effect of

advertising of CSR activities on the reputation of the company. Specifically, they find that the perception of the policymakers about the CSR activity advertising has a positive effect on the reputation of the company. Thus, Hsu (2012) shows that CSR activities lead to improved company reputation.

According to the current literature, CSR activities can be strategically chosen in order to align with the interests of the organization (Jensen, 2002; OECD, 2011). For example, to create a favorable image of the organization or to align the interests of the organization with those of society (Cai, Jo & Pan, 2012; McWilliams, Siegel & Wright, 2006; Minor & Morgan, 2011). The engagement of the organization in CSR activities creates a favorable image in the mind of customers and employees (Smith, 2003). CSR reporting of the organization can have a positive impact on the organizations reputation (Hsu, 2012;

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Pérez, 2015). Organizations believe that CSR activities have a positive effect on the organization as a whole, which is why they engage in those activities (OECD, 2011). The previously discussed studies also show a significant (positive) effect of the engagement in CSR activities on the reputation of the

organization (Minor & Morgan, 2011; Cai, Jo and Pan, 2012; Hsu, 2012; Stuebs & Sun, 2011; Vilanova et al., 2009). Based on the literature review, the following hypothesis is assumed:

H1: Corporate Social Responsibility has a positive effect on the reputation of the organization.

For the analysis, there are also certain variables that need to be accounted for. As described in the

literature review, certain variables might have effect on the reputation of the organization. These variables include: _{Research & Development, Size, Risk & Financial Performance}

. These variables will be

controlled for in the analysis for the effect of CSR on Reputation to make sure they do not have effect on the relationship this study wants to investigate. The use of these control variables is in accordance with prior work (Stuebs & Sun, 2011; Baron, Harjoto & Jo, 2011; Jo & Harjoto 2011).

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3. Methodology

3.1 Research design

In this part the methods used for the research will be described. This will be an objective study, meaning that it will be based on observable reality. The scientific method will be used, meaning that this will be a deductive study. This means that this study will build upon current knowledge by testing theory. This will be done through standardized methods. The study will be based on secondary data obtained through the online database Wharton Research data Services. Subsequently the data will be analyzed using a linear regression analysis.

3.2 Sample

The focus of the sample will based on organizations or companies represented in the S&P 500. The S&P 500 is an index which will give a trustworthy representation of the American stock market. This index is built upon the 500 biggest American companies. This index is created by Standard & Poor’s (Standard & Poor’s, 2018).

Firstly, the financial data for the control variables from the Compustat database are obtained. Secondly, the data from the KLD index is obtained to calculate the CSR variable. Lastly, the data from fortune’s “Most Admired Companies” is added. The data is matched and this leaves the study with the data of 96 S&P 500 companies, for the years 2011, 2012 and 2013.

3.3 Variables

3.3.1 Independent variable : Corporate Social Responsibility

The Corporate Social Responsibility engagement of the organizations will be based upon the measure of the KLD index from Wharton Research data Services from the years 2011, 2012 and 2013. This is a database containing information about different levels of Corporate Social Responsibility. This database is used as a measure of CSR engagement in various studies (Cai, Jo & Pan, 2012; Stuebs & Sun, 2011; Jo & Harjoto, 2011; Baron, Harjoto & Jo, 2011) and therefore a trustworthy measurement method.

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The data of the KLD index is based on strengths and concerns in five different categories. The categories used in this study are Environment, Community, Diversity, Employee relations and Corporate governance. The dimensions of the KLD database are included in Appendix 2.

Within these qualitative categories, companies get a score for their concerns or strengths. Companies get a 0 if they do not meet the criteria of the category and a 1 if they do meet the needed criteria. Thereafter a formula is used to create the total variable of CSR engagement. The following formula is used:

CSR engagement / KLD = (Total strengths of Community – Total concerns of Community) + (Total strengths of Corporate Governance – Total concerns of Corporate Governance) + (Total strengths of Diversity – Total concerns of Diversity) + (Total strengths of Employee Relations – Total concerns of Employee Relations) + (Total strengths of Environment – Total concerns of Environment)

The KLD index has gathered a lot of information about the Corporate Social Responsibility categories, therefore this provides a broad perspective of the organizations CSR engagement.

3.3.2 Dependent variable : Reputation

The Reputation of the organizations will be measured based on the reputation score of Fortune’s “Most admired companies” list from the years 2011, 2012 and 2013. For this list, Fortune questioned

businesspeople to vote for the companies they admired most, regardless the industry type of the company. They gave companies scores on the basis of nine different categories. These categories include:

Innovation, People management, Use of Corporate Assets, Social Responsibility, Quality of Management, Financial Soundness, Long-Term Investment value, Quality of Products and/or Services and Global Competitiveness (Fortune, 2018). Based on these categories, companies get a score between 1 and 10. The higher the score of the company, the better the reputation of the concerned company. The use of Fortune’s “Most Admired Companies”list is consistent with prior work (Stuebs & Sun, 2011; Melo & Garrido-Morgado, 2011).

3.3.3 Control variables : Research & Development, Size, Risk & Financial Performance

To measure the effect of Corporate Social Responsibility on Reputation, there are certain variables that need to be controlled for. This is necessary because these variables might also have an effect on the

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Reputation of the company, which can affect the results of the effect this study wants to measure. According to the existing literature, these are : R&D, Size, Risk and Financial performance (Stuebs & Sun, 2011; Baron, Harjoto & Jo, 2011; Jo & Harjoto 2011).

The first variable that will be controlled for is Research & Development. The variable “R&D” is obtained from the Compustat Database from Wharton data research statistics for the years 2011, 2012 and 2013. This Compustat item contains the yearly investment in Research and Development.

The second variable that will be controlled for is the size of the company. The variable size will be measured on the basis of the total assets of the company. For this variable the Compustat item ‘Total Assets” is used for the years 2011, 2012 and 2013, which represents the total assets of the concerned company in the concerned year.

The third variable that will be controlled for is the risk of the company. This variable is measured by using the debt to assets ratio. The following formula is used:

Risk = (Long term debt + short term debt) Total assets÷

The variables “Total debt + short term debt” and “Total assets”are obtained from the Compustat database WRDS for the years 2011, 2012 and 2013.

The last variable that will be controlled for is the financial performance of the company. The variable is measured by the Return on Assets ratio. The following formula is used:

ROA = Net Income Total assets÷

To measure the financial performance, the Compustat items “Net Income” and “Total Assets” are obtained for the years 2011, 2012 and 2013.

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3.4 Analysis protocol

Firstly, the data from the KLD index is obtained for the companies of the S&P 500. This is obtained through WRDS. The following categories are obtained from the KLD index: Community, Corporate governance, Diversity, Employee relations and Environment. The formula described above is used to create 1 variable: CSR engagement/ KLD.

Secondly, the Compustat items necessary will be obtained through the WRDS database for the S&P 500. The following Compustat items will be obtained: R&D, Total Assets, Total debt, Short term debt, Net income. As described in the previous paragraph, these items will be used in the formulas to create the variables needed: R&D, Size, Risk and Financial Performance.

Because not all of the data for every company in the S&P 500 will be complete, the companies with data missing will be deleted. After matching the data together with al variables complete for every company, the data will be checked for errors. Thereafter, multiple tests will be run to see if the data meets the criteria needed for a regression analysis. If so, the regression analysis will be run to see if the results will be significant.

3.5 Conceptual model

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4. Results

In this part the results of the regression will be discussed and explained. Based on the current literature and assumptions, we test for the effect of Corporate Social Responsibility on Reputation of the

organization using Linear regression. Firstly, the data is checked for missing values and errors. All N=297 are valid and there appear to be no errors in the data.

4.1 Conditions

There are certain criteria the data and variables need to meet in order to proceed with a regression analysis. The first condition involves the measurement level of the dependent and independent variable. As explained in the methodology, both the CSR and Reputation measurement are interval data. Thus, this condition is met. The second condition is that the relation between the independent variable and the dependent variable has to be linear. To check this, a scatterplot is made. This condition is also met. The third condition is that the residuals are normally distributed and homoscedastic. To check this, a histogram is made regarding regression standardized residual. This condition is also met.

4.2 Variable Descriptives

In table 1 the descriptive statistics are given. In the table the variable’s mean and standard deviation of the data is shown. The table shows that Reputation and CSR scores of the companies from the S&P 500 from the years 2011-2013 are quite good on average. Though, for CSR the standard deviation has a high variation which implies that the CSR scores divert. The same goes for Size and R&D. The standard variation of these variables are also quite high, implying diverting scores for these variables.

Table 1 : Variable Descriptives (N=297)

Variable

Mean

Standard Deviation

1. Reputation

2. CSR

3. Size

4. RenD

5. ROA

6. Risk

6.5461

5.1852

52159.2692

1340.7017

0.0755

0.2404

0.75481

4.10126

86731.59004

2111.00293

0.05196

0.18437

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4.3 Initial correlations

In the table Model Summary (Appendix 3) the R Square shows how well the independent variable can be explained. The R Square is the percentage explained variance of the dependent variable explained by the independent variable. As viewed in Appendix 3, R square has a value of 0.143. This means that 14.3% of the reputation of the organization can be explained by Corporate Social Responsibility engagement of the organization. This relationship is a positive relationship which implies that CSR positively affects the reputation of the organization (R= 0.379).

In Table 2 the hypothesis can be tested. To check this, the significance needs to be measured. Judging by the Anova table, it can be assumed that there is a relationship between Corporate Social Responsibility and Reputation. This is because the significance level is F(5, 291) = 9734, p<0.001 which means that the results of this test are significant. This also means that the regression model is useful to predict the effect of CSR engagement on reputation, although the strength of the prediction is mediocre (R square = 0.143).

Table 2 Initial Correlations

Model

Sum of

Squares

df

Mean square

F

Significance

Regression

Residual

Total

24.164

144.479

168.642

5

291

296

4.833

0.496

9.734 0.000*

Note: Dependent Variable: Reputation

Note: Predictors: (Constant), Risk, Size, ROA, CSR, RenD

* Significant at the 0.01 level

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4.4 Linear Regression Results

In table 3 the coefficients of the variables are given. As explained in the last paragraph, the overall effect of CSR on the reputation of the organization is shown to be significant in this analysis (F(5, 291) = 9734, p<0.001). The significance of this relationship is in accordance with previous literature and with the hypothesis (H1) made (Minor & Morgan, 2011; Cai, Jo and Pan, 2012; Hsu, 2012; Stuebs & Sun, 2011;

Vilanova et al., 2009).

As for the other variables, Size (p<0.05) and Return on Assets (p<0.001) also show to have a significant effect. The variables Research & Development and Risk do not show to have a significant impact.

Table 3 Regression analysis

Variable

Standard Error

Beta

Significance

1. (Constant)

2. CSR

3. Size

4. RenD

5. ROA

6. Risk

0.112

0.011

0.000

0.812

0.213

0.159

0.200 -0.101

0.290

0.003 0.000*

0.009*

0.001*

0.127 0.000*

0.955 Note: Dependent Variable: Reputation

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5. Discussion and conclusion

In this part I will discuss and conclude my findings. This includes the implications of this study, findings of this study for theoretical and practical purposes, the limitations of this study and the suggestions for future research.

This research investigated the relationship between Corporate Social Responsibility and the Reputation of organizations. Data from the WRDS index is used to examine this relationship from companies of the S&P 500 over the years 2011 till 2013. Previous literature implied that CSR activities can strategically be used by organizations to build reputation for the organization, by aligning the interests of the company with those of society. Data is obtained for the independent variable CSR, the dependent variable Reputation and for the control variables Research and Development, Size, Risk and Financial Performance. This study finds that Corporate Social Responsibility engagement positively affects the Reputation of the organization. This is in accordance with previous studies.

5.1 Implications & findings for theory and practice

There are several implications for this study. Firstly, since CSR is shown to have a positive effect on the reputation of the organization, CSR practices can be used by organizations to improve their reputation. When an organization has a mediocre reputation and they want to improve this, they can do this by engaging in new CSR activities. They can strategically choose their engagement in certain CSR activities, as implied and discussed in the articles of Jensen (2002) and OECD (2011). Secondly, companies or organizations who operate in harmful industries can use this theory to pretend to be socially responsible and enhance their reputation while actually being harmful to society, like discussed and investigated in the article of Cai, Jo and Pan (2012). Lastly, companies or organizations can use CSR engagement in order to fix their damaged reputation, like discussed in the article of Minor and Morgan (2011). When a company or organizations suffers from a fallen reputation or damaged reputation, CSR activities can be used to restore or enhance their original reputation.

With this knowledge, managers should engage in CSR activities not solely to be socially

responsible, but also from a strategic point of view. The results of this study and previous literature show that there is a positive effect of Corporate social responsibility on reputation and that managers should keep this in mind when making CSR related decisions. Managers can choose their activities strategically, in order to enhance their own reputation, but also to better their relationship with consumers, employees

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and the rest of the society. These results try to support the decisions of managers to ensure they strategically choose the CSR activities they want to participate in.

These findings have theoretical and practical contributions. For theory this means a confirmation that CSR does in fact have an positive effect on the reputation of the organization. This theory can be used in further research. For practice this means that managers, companies and organizations can use this theory to their advantage and use CSR engagement as a tool to enhance their reputation. But also, like discussed in last paragraph, managers can use this to fix damaged reputation or to portray their company as more socially responsible than they really are.

5.2 Limitations & suggestions for future research

Limitations of this study should be considered. Firstly, the sample of this study contains companies from the S&P 500. This limits this study because these companies are the most successful companies, which is why the results of this study are not generalizable over all companies or

organizations. Private or small companies might have different operations or strategies. The same holds up for the Reputation score obtained for these companies from the Fortune “Most admired companies” list. This list contains the companies with the best score, leaving the companies or organizations with bad scores out of this study. Another limitation of this study has to do with the chosen control variables. The control variables Risk and Research & Development seem to have had no significant effect in the regression analysis. Previous studies have shown them to be significant, so this result is contradictory with previous work (Stuebs & Sun, 2011; Baron, Harjoto & Jo, 2011; Jo & Harjoto 2011). These results might have become insignificant because the variables chosen for R&D and Risk were not good enough indicators.

Suggestions for future research include those that make the results of this field more

generalizable. Data for these studies should be more varied, they should take into account private and non-private companies, and smaller companies and bigger ones. They should also include CSR scores of lower ranks to make their results more generalizable. Another interesting field for future research is the extent to which organizations or companies actually use CSR activities for reputation building purposes. It might be interesting to investigate if companies or organizations abuse their engagement in CSR activities in order to make society believe that they act socially responsible.

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Appendix

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2. KLD Strengths and Concerns (The Kinder, Lydenberg, and Domini’s (KLD) Socrates database)

A: KLD Strengths (S) B: KLD Concerns (C)

Community (S) Community (C)

Generous giving Investment controversies Non-US charitable giving Negative economic impact Innovative giving Indigenous peoples relations Support for housing Other concerns

Support for education Indigenous peoples relations Beneficial products

Pollution prevention Alternative fuels

Property, plant, and equipment Other strength

Environment (S) Environment_(C)

Beneficial products Regulatory problems Pollution prevention Ozone depleting chemicals Alternative fuels Substantial emissions Property, plant, and equipment Climate change

Recycling Hazardous waste Communications Agricultural chemicals

Other strength Other concern

Diversity (S) Diversity (C)

Promotion Controversies

Family benefits Non-representation

CEO Other concern

Board of directors

Women/minority contracting Employment of the disabled Progressive gay & lesbian policies Other strengths

Employee relations (S) Employee relations (C) Cash profit sharing Poor union relations Strong retirement benefits Health safety concern Health and safety strength Workplace reductions

Other strength Pension/benefits

No layoff policy Other concerns

Corporate governance (S) Corporate governance (C) Limited compensation Tax disputes

Ownership strength High compensation

Ownership concerns Other concerns

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3. Model Summary (R square)

The effects of Corporate Social Responsibility on the reputation of organizations