Company motivations to engage in CSR activities across industries : a multiple case study

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COMPANY MOTIVATIONS TO ENGAGE IN CSR ACTIVITIES

ACROSS INDUSTRIES – A MULTIPLE CASE STUDY

Master thesis

Rolea Ilinca Alexandra - 10377980

MSc. Business Studies – International Management University of Amsterdam

First supervisor: Arno Kourula

Second supervisor: Daniel van den Buuse Date: 13th August 2014

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Acknowledgements

As the intensive and thought-provoking process of writing this thesis has come to an end, I would like to express my sincere gratitude to my supervisor, Arno Kourula, whose patience and understanding, together with inspiring comments and suggestions, have been crucial throughout the research. Furthermore, I would like to thank my family and friends for their continuous moral support and encouragements.

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Abstract

The main purpose of this thesis is to contribute to a better understanding of the reasons that lead companies to engage in corporate social responsibility (CSR) activities and to explore how these drivers vary across industries. The resource-based view and the institution-based view of the firm are employed to build a conceptual model of company CSR drivers. In order to discover industry-level differences that might exert influence on CSR engagement motivations, the paper uses criteria such as potential for environmental damage, brand importance and employee dependence. To answer the research question, a multiple case study research of 12 multinationals from 6 different industries is conducted through combining structured interviews with documentary analysis of CSR reports and media newspaper articles. The findings show that the most important motivating factors vary by different industrial sectors. For highly environmental damaging industries these are represented by laws and regulations, cost reduction and non-governmental organization pressure. Moreover, CSR activities of high brand importance industries are driven by image enhancement and customer pressure, while highly employee dependent industries are more likely to pursue employee development and satisfaction.

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Figure 3 – Motivations for the oil and gas industry Figure 4 – Motivations for the retail industry Figure 5 – Motivations for the financial industry Figure 6 – Motivations for the pharmaceutical industry Figure 7 – Motivations for the automotive industry Figure 8 – Motivations for the airline industry

Figure 9 – Potential for environmental damage findings Figure 10 – Brand importance findings

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1. Introduction

The number of organizations integrating CSR initiatives into their everyday business has grown tremendously in the last years, proving that companies are no longer able to afford turning a blind eye to the social impacts that their business generates. As KPMG‘s 2011 International Survey of Corporate Responsibility Reporting shows, CSR has become a must-have in the 21st century, with more than 95% of the 250 largest companies in the world reporting on their CSR activities.

In the last four decades, the field of CSR has evolved from the view of Milton Friedman (1970) that the only ‗social responsibility of business is to increase its profits‘ to being considered just a fad and then to gaining importance and becoming mainstream. One way of looking at this evolution is by analysing the factors that nowadays drive the efforts of companies to act in socially responsible ways. The debate in the CSR literature regarding the determinants of CSR revolves around two theoretical perspectives: the resource-based view of the firm and the institutional theory. On the one hand, CSR activities are said to be driven by internal considerations of increasing resources and capabilities in order to gain competitive advantage, while on the other hand they can also be explained as a response to the pressures from the external environment.

When trying to establish which of these perspectives is the most appropriate to explain CSR determinants, the mediating role of specific industries should not be disregarded, as different combinations of industry attributes can lead to different needs and motivations. However, so far, few of the existent studies have tried to analyse the differences in CSR drivers generated by different industries. This lack of studies on the topic represents the gap that the current research tries to address.

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8 Although there has been a great deal of research regarding companies‘ reasons to engage in CSR activities, mainly through the lens of RBV and IBV, the predominance of one over the other has not been proved. For example, the study of Husted and Allen (2006) finds that, in the case of emerging countries, CSR decision making is driven by institutional pressures, rather than strategic considerations, while the paper of Darnall, Henriques and Sadorsky (2008) argues that more companies adopt environmental management systems as part of their CSR activities in light of gaining complementary resources and capabilities which lead to increased business performance.

Furthermore, there is a scarcity of comparative CSR studies, the majority being focused on a specific firm or industry from a certain country or geographical area. As a result, the research question chosen would combine these two gaps in the literature and deal with establishing organizations‘ reasons of engaging in CSR (according to RBV and IBV), depending on the industry. In other words, the goal would be to examine to what extent engagement in CSR activities is institutionally embedded, representing a response to external pressures rather than reflecting strategic considerations on the basis of the resources and capabilities accumulated by the firm, when also taking into consideration different industries. As the study will analyse whether the industry a firm competes in has an impact on CSR engagement motivations, it can be said that its purpose is twofold: a better understanding of CSR drivers, together with the way these drivers differ among industries.

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2. Literature review

2.1. Overview of corporate social responsibility

Nowadays the world is in a constant change and as a result the business environment has become significantly more complex and rewarding on the one hand but more demanding and risky on the other. Companies have to face increasing uncertainty in all aspects of their operations and thus, deal with a wide variety of challenges. One of the areas that present such challenges is the one of CSR, topic that has received considerable attention worldwide in recent years, mostly due to three interrelated factors (Habisch et al 2005; Preus et al 2009). The first one is a decrease in national governments‘ power due to political changes which hinders their ability to control multinational enterprises (MNEs). The second one is represented by changes in the civil society which has become increasingly more aware of the existing environmental and social problems and the last one stems from technological advances and increased mobility of corporations, enabling them to gain a salient economic role.

Despite the recent rise in its resonance, CSR is hardly a new phenomenon, Carroll (1999) tracing the related formal writing back to the 1950s, period considered to represent the beginning of the modern literature on this subject. Since then, a vast body of literature on CSR and related concepts has emerged, though without succeeding to reach a consensus on how to define the construct of CSR. Consequently, definitions are characterized by a high degree of heterogeneity. As Crane, Matten and Spencer (2008, p. 5) put it ‗definitions of CSR abound, and there are as many definitions of CSR as there are disagreements over the appropriate role of the corporation in society‘. In their view it is rather impossible to come up with a straightforward definitive description of what CSR is and, as a result, they provide a list of core characteristics of CSR: voluntary nature, internalization or management of

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10 externalities, multiple stakeholder orientation, alignment of social and economic responsibilities, set of practices and values and going beyond philanthropy. In a similar vein, after analysing 37 CSR definitions, Dahlsrud (2008) suggests five dimensions of CSR: environmental, social, economic, stakeholder and voluntariness. Moreover, he also comes to the conclusion that the most frequently used definition is the one provided in 2001 by the Commission of the European Communities (‗a concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis‘) which was revised in 2011 as ‗the responsibility of enterprises for their impacts on society. To fully meet their social responsibility, enterprises should have in place a process to integrate social, environmental, ethical human rights and consumer concerns into their business operations and core strategy in close collaboration with their stakeholders‘.

Stemming from the above mentioned lack of a clear definition and approach, a point of criticism of the CSR literature is that comparative issues have been rather neglected. The most common explanation points to the difficulties in comparing and contrasting the results of different studies, as they evaluate different CSR dimensions using different operationalizations and measurements (Williams and Aguilera, 2008). The existing comparative studies usually use broad units of analysis, such as countries or continents and focus on one level of analysis or on one CSR dimension. For instance, Hoepner, Yu and Ferguson (2010) analyse whether industrial characteristics influence CSR activities and performance across the ‗Global 100 Most Sustainable Companies in the World‘ and theorize that differences in industries‘ dependency on certain stakeholder groups, their proximity to the end consumer, their potential for social and environmental damage and their level of product / service differentiation moderate CSR‘s value relevance.

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11 Another point of criticism has been the tendency to overemphasize the relationship between engagement in CSR activities and financial performance. The connection between the two has raised researchers‘ interest but the results so far have not been conclusive due to mixed findings: although the majority of studies appears to find a small, but positive relationship, there are still others that indicate a negative one or no relationship at all.

Campbell (2007) argues that more attention needs to be paid not to determining the impacts of CSR on financial results but to understanding the underlying mechanisms that lead companies to act in responsible ways. Although corporations‘ reasons for engaging in CSR vary with factors such as the company size and multinational focus, the corporate governance structure, the type of industry, the country or the societal culture, researchers have tried to come up with frameworks for understanding the mechanisms that play a role in CSR engagement decisions. For instance, in Kuada and Hlnson‘s study (2012) a classification of CSR drivers into legal, economic, ethical and discretionary categories is used, while Bansal and Roth (2000) keep the first three dimensions and replace the forth one with stakeholder pressures. A similar taxonomy appears in both the research of Ingenhoff and Sommer (2011) and Kilian and Hennigs (2014) and consists of dividing the reasons for which companies engage in CSR into the following categories: performance-driven, the aim being to improve competitive position and profitability, stakeholder-driven, where CSR is viewed as a reaction to pressure from stakeholder groups and lastly, value-driven, meaning CSR initiatives stem from the company culture and its core values.

A thorough summary is also provided by Aguinis and Glavas (2012) who critically review the CSR literature at three levels: institutional, organizational and individual. Firstly, the CSR predictors at the institutional level of analysis are represented by legal regulations, standards and certifications that firms need to comply with. Additionally, at this level, emphasis is also put on the institutional pressures coming from stakeholders having different expectations from

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12 the company: shareholders, customers, the media or the local community. Secondly, the organizational level predictors deal with achieving competitiveness and organizational benefits and are influenced by the openness of the corporate governance and the alignment of CSR activities with the company‘s mission and values. Lastly, at the individual level of analysis, it is of utmost importance to consider the degree of commitment shown by supervisors and managers, together with their personal values and CSR knowledge and expertise.

Babiak and Trendafilova (2011) look at the motives to adopt CSR practices from a rather similar perspective. On the one hand, there are legitimacy reasons, stemming from the need to conform to institutional pressures (government, competitors, society as a whole), while on the other hand, there are strategic reasons, such as image enhancement and financial opportunities. Drawing on this line of thought, in order to obtain a more detailed and clear picture of the drivers of socially responsible behaviour, two suitable theoretical approaches can be used and will be described in more detail in the following sections. Firstly, the resource-based view which analyses the internal environment of the firm and focuses on drivers that help achieving competitive advantage and secondly, the institutional theory that takes more of an outside perspective, including those external drivers related to legal obligations, norms, values and expectations.

2.2. The resource-based view of the firm

Starting from the early work of Penrose (1959) who suggested viewing the firm as a pool of resources and continuing with the contributions of researchers such as Wernerfelt (1984), Rumelt (1984) and Barney (1991), the resource-based view (RBV) has come to be one of the most used theories regarding sustainable competitive advantage.

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13 According to RBV, a firm‘s competitive advantage stems from the tangible and intangible resources it accumulates, the theory thus emphasizing the direct link between the internal characteristics of the firm and its performance level. Originating in the strategic management research, the RBV complemented the well-known emphasis in the field on the relationship between firms and the industries they compete in with a focus on internal factors, such as management skills, information and knowledge acquired or organizational processes. Together with these resources, the RBV also takes into account firm capabilities which refer to the ability of managing, using and combining resources in order to achieve specific objectives (Branco and Rodrigues, 2006).

There are two underlying assumptions in RBV: resource heterogeneity and resource immobility, meaning that each firm is characterized by a different amount and mix of resources and that these differences persist over time. In order for these resources to actually lead to sustained competitive advantage, Barney (1991) argues that 4 conditions need to be met: first, resources need to be valuable, meaning they enable strategies that improve firm efficiency and effectiveness; secondly, they also need to be rare, so that not many competitors also possess it; thirdly, the condition of imperfect imitability needs to be fulfilled and lastly, the non-substitutability of resources requires that competitors are not able to implement the same strategy separately with different resources.

During time, RBV has not only raised the interest of strategic management researchers, but also that of international business ones, since it is useful to explain the nature of the resources needed for achieving firm-specific advantages that help MNEs overcome their liability of foreignness when expanding to other countries. Furthermore, RBV also extends the perspectives of the required resources in international diversification, both in terms of geography and products. Another stream of research in international business is represented by strategic alliances, where RBV contributes through the idea that competitive advantage can

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14 also result from the capacity to learn from partners and develop tacit resources (Peng, 2001). It can be argued that RBV is present in mostly all themes in international business research, the following section discussing specifically the case of the factors that drive organizations to engage in CSR activities.

2.2.1. CSR drivers according to RBV

When applying RBV to the CSR field, the main question that stands out is whether competitive advantage can be gained through engaging in CSR activities (Zink and Steimle, 2008). This requires looking at CSR from a strategic perspective, more specifically by examining the intangible dynamic resources that stem from a firm‘s CSR involvement.

Several authors have used the resource-based perspective to understand why firms engage in CSR. For instance, Branco and Rodrigues (2006) argue that CSR activities and disclosure bring firms both internal and external benefits. The first category includes the development of resources and capabilities related to know-how and corporate culture, with a strong focus on human resource management. CSR activities raise employees‘ motivation, morale and commitment to the firm which translates into lower staff turnover and recruitment costs, as well as higher productivity and financial performance. Other internal benefits are connected to the environmental side of CSR, mostly dealing with the reorganization of production processes to increase efficiency, productivity and ultimately revenues. Hart (1995) was the pioneer of theoretically applying RBV to corporate environmental strategies and his findings were empirically validated by Russo and Fouts (1997), thus proving that resource efficient technologies lead to cost savings or in other words ‗it pays to be green‘. Other internal benefits result from pre-emptive CSR approaches that lead to more effective change management as they ‗help management develop better scanning skills, processes, and

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15 information systems, which increase the organization‘s preparedness for external changes, turbulence and crises‘ (Orlitzky et al, 2003, p.5).

The second category, the external benefits, refer to the effect of CSR on corporate reputation and as opposed to the first category, here it is highly relevant whether the external stakeholders are aware of the firm‘s CSR practices (Zink and Steimle, 2008). A firm regarded as acting in socially responsible ways will build a positive image, being perceived as trustworthy and legitimate, attributes which will signal the firm‘s attractiveness to stakeholders, thus being useful when it comes to influencing customer buying decisions, attracting better employees or getting access to capital more easily. A good reputation is considered one of the most important intangible resources leading to competitive advantage, especially on markets where brand image is the primary determinant of consumer buying choices (Branco and Rodrigues, 2006).

Surroca, Tribo and Waddock (2010) also apply RBV to firms‘ CSR activities, their research focusing on the importance of intangible resources as mediators between corporate social performance and corporate financial performance. Similar to the benefits described above, the intangibles analysed in this study refer to product and process innovation, human resources, reputation and culture.

2.3. Institution based view of the firm

In contrast to the previously described RBV, which argues that firms‘ strategic choices and competitive advantage are driven by the internal resources and capabilities, the institution based view (IBV) moves the focus to the external environment, suggesting that organizations cannot craft a strategy without incorporating outside influences, coming for instance from the state and the society. These pressures actually refer to the presence of institutions, which according to North (1990) represent ‗the rules or the game‘ or ‗the humanly devised

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16 constraints that structure human interaction‘, thus having the role of indicating the appropriate choices and rendering others unacceptable (DiMaggio and Powell, 1991). Consequently, firms‘ strategic choices are basically the outcome of the interaction between organizations and institutions (Peng, 2002).

The notion of legitimacy becomes salient in IBV, as firms respond to the pressures from their institutional frameworks in similar ways, meaning they try to earn social legitimacy by conforming to the established rules and adapting certain organizational practices and forms, which is actually how the isomorphism process takes place.

Scott (1995, 2007) has identified three domains of the institutional environment: regulatory, normative and cognitive pillar. Firstly, the regulative pillar incorporates North‘s (1990) formal rules and regulations and deals with the legally enforced aspects of institutions. Secondly, the normative pillar dictates what is appropriate in certain situations for society members by using social values and norms and lastly, the cognitive pillar takes into account the culturally constituted perceptions of what is usually taken for granted in a society. As none of the pillars can exist by itself, only the interaction between the three of them will determine the appropriate, desirable behaviour of an organization.

2.3.1. CSR drivers according to IBV

As firms, and implicitly the CSR activities they engage in, are influenced by different institutional factors, the IBV can be used to examine in more depth the relationship between the firm‘s CSR drivers and its institutional framework. According to Kunapatarawong and Martínez-Ros (2013), analysing CSR from an institutional perspective means focusing both on the interactions and interdependencies between firms and stakeholders and on the homogenization of CSR practices, as they are to a certain extent, regulated and standardized by forces in the institutional environment.

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17 Apart from the internal pressures coming from employees and management, the CSR strategy of an organization also needs to respond to various external institutional pressures from competitors, customers, suppliers, the government, nongovernmental organizations (NGOs), etc. These pressures actually mean that, through their actions, the stakeholders can potentially hurt the resources, revenues and reputation of the company (Aguinis and Glavas, 2012). In order to avoid these negative outcomes and to gain stakeholder support, companies may decide to be responsive to their stakeholders‘ expectations.

The most common way to look at the homogenization of CSR practices appears to be the use of DiMaggio and Powell‘s (1983) classification of institutional isomorphism into three categories, which although similar to the above described pillars developed by Scott (1995) are not necessarily correspondent. In short, the three types of isomorphism are coercive, mostly stemming from political regulations, laws and standards imposed by industrial organizations; mimetic, referring to companies‘ willingness to imitate the behaviour and practices of other organizations and normative, resulting from professionalization, meaning

professionals striving to define their own roles and to comply with standards (Ali and Rizwan, 2013).

Although not explicitly, Campbell (2007) uses this taxonomy in order to develop several propositions regarding the conditions under which firms are more likely to engage in CSR activities. Corporations will act in socially responsible ways whenever strong government regulations are in place and they have been involved in the process of developing these regulations through negotiation. One example of coercive isomorphism which is not represented by a hard law, but by a standard developed by a voluntary association is the International Organization for Standardization (ISO). ISO9000, ISO4000 and ISO26000 are guidelines regarding companies‘ business practices in terms of the quality management system, the environmental management system and CSR implementation and management,

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18 respectively. Moreover, peer pressure encourages companies to adopt CSR best practices and engage in developing industry standards and norms. Due to uncertainty, companies pick up information about the activities of other organizations and act mimetically by also adopting the same practices. However, choosing role models and following their behaviour may be detrimental, especially where an alignment doesn‘t exist between the copied practices and the firm‘s core activities. Lastly, another reason for CSR engagement is represented by the existence of an ‗environment where normative calls for such behaviour are institutionalized in, for example, important business publications, business school curricula, and other educational venues in which corporate managers participate‘ (Campbell, 2007, p. 15). If managers from various companies have undergone similar educational processes, it is reasonable to expect them to have rather similar skills, ways of handling problems and taking decisions.

In order to sum up and draw a clear picture of the RBV and IBV related CSR drivers that have been presented so far, a summary for each of the two perspectives will be provided next:

 RBV – competitive advantage

 Corporate image enhancement (improved stakeholder relations)

 Cost savings through resource efficient processes

 Financial performance

 Higher employee motivation and satisfaction

 Improved management skills

 IBV - legitimacy

 Stakeholder pressure and expectations (shareholders, customers, suppliers, NGOs, media, local community)

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19  Legal regulations, standards and certifications

 Social values and norms regarding CSR

 Peer pressure (mimetic forces) 2.4. Industry effects

Although the literature has been mostly focused on examining differences between countries when it comes to CSR motives, the industry definitely also plays a role, as ‗individuals are likely to have distinct expectations and attitudes towards CSR contingent on the industry‘ (Williams and Aguilera, 2008, p. 453). This idea goes back more than three decades ago when Sturdivant and Ginter (1977) emphasized the fact that, when conducting CSR studies, the need to take a firm‘s industry into account appears. Furthermore, the idea is also present in Sweeney and Coughlan (2008) where omitting industry factors from any CSR research is said to result in fatally deficient studies.

One of the studies that did incorporate industry effects belongs to Nunez (2008) who finds that corporate image improvement is the main CSR motivation in the manufacturing and commercial trade sectors, while for communications/transport and energy sectors community commitment was the most important. Interestingly, gaining competitive advantage was not a top motivator for any of the sectors, as opposed to employee satisfaction, which was essential for all the six industries studied.

Although not as specific as the study above, the research of Fishman, Heal and Nair (2005) outlines that the desirability of CSR activities depends on the level of competition in the industry, the level of consumer orientation of the industry measured by advertising intensity and also on the number of other firms engaging in CSR. The results show that in industries where few other firms pursue CSR activities, a company‘s main motivation is to differentiate

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20 itself and gain competitive advantage, while in consumer-oriented industries profitability will be the main driver.

Building on these ideas, it can be argued that each industry will dictate which are its main reasons to engage in CSR, since for different industries there will exist differences in nature, stakeholder pressures or regulations. For instance, Bansal and Roth (2000) show that for industries such as oil, mining or forestry, considered to have potentially harmful environmental impacts and a high degree of institutional pressure from industry peers, the main driver will be legitimacy and not competitiveness or ecological responsibility. Similarly, for companies in industries where there is a high dependence on the staff, such as consulting, accounting or services in general, the main reason will no longer be legitimacy, but increasing satisfaction of current employees as well as attracting new, skilled ones.

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3. Theoretical framework

3.1. Conceptual model

This section will present the theoretical foundations of the conceptual model used in this research to study the differences in CSR engagement motives across industries. Building on the resource-based view of the firm and the institutional theory, three hypotheses are developed, by taking into account different industrial characteristics. ‗Comparing the social performance of an oil company, where environmental and employee safety issues are likely to be paramount, with a high street retailer in effect makes no sense‘ (Moore 2001, p. 304) perfectly illustrates the above mentioned idea of having to separate industrial sectors when analysing their CSR activities, in light of their specific particularities.

Due to the existing high degree of heterogeneity, industries can be classified according to multiple factors, such as capital intensity, human capital level, research and technological intensity, growth potential, product / service differentiation, competition level etc. Judging from a CSR perspective, different factors present varying degrees of relevance for the topic so consequently some of them have attracted more research interest. The industrial characteristics that will be analyzed in this research are based on the work of Hoepner, Yu and Ferguson (2010). Although their model is more complex and serves a different research goal, representing a contingence perspective on the relationship between CSR and corporate financial performance, the industry characteristics involved are nevertheless helpful for the purpose of this research.

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22 Figure 1 - Industrial characteristics (Hoepner, Yu and Ferguson, 2010, p. 9)

As it can be seen in Figure 1, the four industrial characteristics used are the potential for social or environmental damage, the proximity to end consumers, the dependence on certain stakeholder groups and the level of product / service differentiation. The model will not be used in its initial form, as some alterations need to be made in order to increase its suitability for the current research question. Firstly, the emphasis will be put on environmentally sensitive industries, which can be linked to the damaging impacts resulting from toxic emissions (pollution, climate change) and excessive resource use (depletion of natural resources). Although the potential for social damage will not be individually analysed (the concept is difficult to operationalize and measure, due to its general and comprehensive nature), the way surrounding communities are affected by companies‘ activities will still be taken into account through the potential for environmental damage. Secondly, the proximity to end consumers will be taken one step further, moving to the notions of customer orientation, brand awareness and brand importance, so that it doesn‘t only matter if companies serve end consumers or other businesses, but rather how much effort they put in understanding and satisfying customer needs and how well they position themselves in the minds of consumers and establish relationships with them. Thirdly, when it comes to the dependence on certain stakeholder groups, the one that will be analysed is represented by employees, as they are the ones that set in motion the activity of a company, some even saying that they are a company‘s most important asset. The importance of the human

Potential for social or environmental damage Proximity to end consumers Dependence on stakeholder groups Product / service differentiation INDUSTRIAL CHARACTERISTICS

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23 resources in the overall context of a business is emphasized by the fact that what the employees say about the company, how they act in the workplace or how satisfied they are with their roles all have a great impact on the brand, the company‘s image, the levels of service and ultimately the customers‘ satisfaction. Lastly, the level of product/service differentiation will not be included here as a characteristic of the industry, but rather it will be regarded as a strategy, as CSR activities can be used to differentiate products and services from competitors. Thus, this factor will appear as one of the motivations of companies to engage in CSR activities.

To sum up, the conceptual model will include as industry characteristics the potential for environmental damage, brand importance and employee dependence, as it can be seen in Figure 2. Due to these differences across industries, the motivations to engage in CSR activities are also expected to vary. As a result, by using the resource-based view of the firm and the institutional theory, three hypotheses are developed in order to analyze which motivations are more relevant to different industries.

Figure 2 – Conceptual model RBV – competitive advantage  Image enhancement  Cost reduction  Employee satisfaction IBV- legitimacy  Stakeholder pressure

 Laws and regulations

 Peer pressure (mimetic forces)

Industry

WP1: Potential for environmental damage WP2: Brand importance

WP3: Employee dependence

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24 3.2. Potential for environmental damage

Although it can be argued that generally all industries have a damaging effect on the environment (directly or indirectly, higher or lower), there are some that can definitely be characterized by a considerable potential for environmental damage. This category refers to those industrial sectors whose operations require or result in emissions of greenhouse gases, eutrophying and toxic substances, extraction of biotic and abiotic resources and use of land and fresh water (UNEP, 2010). Some examples would include forestry, mining and crude oil production, petroleum and metal refining, gas and energy supply, transport, chemical and paper mills (O‘Conner and Shumate, 2010; Branco and Rodrigues, 2008). At the other end of the spectrum, there are those industries with low and mostly indirect environmental impacts so that they are rarely associated with visible environmental issues. This is usually the case of banking, consulting, advertising, hospitality, or in other words, of services in general. A similar distinction appears also in Lyon (2007) who analyses two broad categories: the production and the services industry, arguing that the former has a greater impact on the environment and a wider public exposure, so firms usually try to control the increased attention they attract and seek legitimacy through CSR.

This distinction between the high and low potential for environmental damage of an industry helps to emphasize different drivers of CSR activities. More specifically, industries highly risky in terms of environmental issues are mostly driven by legitimacy concerns, dealing with a considerable higher need of regulatory compliance and adequate response to stakeholder pressures. Companies activating in these industries attract the attention of various external stakeholders, especially NGOs and activists, the government and the media, as well as the local and international communities, so that they need to proactively comply with their expectations and increase transparency.

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25 Firstly, due to their environmental and social impact, these firms are inevitably subject to governmental scrutiny and to the coercive regulations imposed by the authorities. Due to their political visibility, organizations use the engagement in and disclosure of CSR related information as a means of proactive prevention of politicians‘ criticism (Killian and Hennigs, 2014). Furthermore, complying with legislation offers them the benefit of avoiding the high legal costs of penalties and fines (Bansal and Roth, 2000). Companies in these sectors are even willing to go beyond legal requirements due to ‗reasons related to risk management and the perceived need to protect their social license‘ (Gunningham, Thornton and Kagan 2005, p. 313).

Apart from the national governmental regulations, MNEs also have to comply with additional laws and standards, such as the ones imposed by the European Union (EU), aimed at sustainable development through the implementation of environmental management systems (e.g. UNI EN ISO 14001 and European Regulation 761/01 EMAS). A representative example of regulatory pressure can be found in the automotive industry, where the EU sets emission standards, meaning the acceptable levels of exhaust emissions (for instance, from 2012 onwards, the new CO2 emission limit for new cars registered in the EU was set at 120 g CO2 / km). Since noncompliant vehicles are not allowed to be commercialized in the EU market, vehicle producers are bound to respect the standards.

In other words, these coercive forces can be thought of as the ways through which policy makers can threat to or practically obstruct MNEs‘ operations on the basis of environmental criteria. Governments can exert influence on companies to improve their environmental performance by making their acceptance and support for certain practices and standards very clear, for instance, by enhancing the reputation of complying companies. They can also guide and provide assistance to interested organizations in order to make the process less cumbersome through diminishing information and search costs (Delmas and Toffel, 2004).

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26 Secondly, receiving the license to operate is not only dependent on respecting legal requirements, but also on adequately responding to normative pressures coming for instance from consumer groups and NGOs. It is recognized that lately NGOs have gained more power and influence and that they are able to mediate but also alter the relationship between businesses and the government, sometimes even partially replacing the role of authorities.

The relationship between MNEs and NGOs can either be one of interactive communication and mutual partnership where efforts are joined to facilitate change or a more conflictual one, characterized by the NGOs‘ attempts to force MNEs into amending their damaging behaviour. On the one hand, organizations can enhance legitimacy and gain the public‘s approval through engaging in open and constructive dialogues and committing to collaborative partnerships with the NGOs, usually resulting in the development of corporate codes of conduct. These act as voluntary certification and accreditation systems that guarantee sound social and environmental conduct, the NGOs acting as independent auditors who verify companies‘ compliance. For example, the Forest Stewardship Council (FSC) represents such a system based on institutionalized cooperation between businesses and NGOs, so that retailers such as Ikea or Home Depot decided to sell FSC-certified products which meant increased responsible behaviour from the part of forestry companies in the form of not compromising conservation when harvesting wood products (Doh and Guay, 2004).

On the other hand, NGOs can use methods aimed at normatively delegitimizing companies, meaning distorting the perception that the organizational behaviour is appropriate and desirable and that certain socially constructed norms and values are respected (Suchman, 1995). Yaziji and Doh (2009) describe two types of campaigns falling into this category. Firstly, ‗watchdog campaigns‘, take place when NGOs demand a change of processes and threaten with starting a campaign otherwise. If the target organization doesn‘t comply, a highly visible campaign will take place until the change of behaviour is implemented. As the

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27 goal of these campaigns is to reach a snowball effect, the NGO then targets another company from the industry which usually prefers to meet the demands in order to prevent another campaign, since it had already witnessed the negative publicity caused by the first one. This was exactly the case with Friends of the Earth campaign against Lufthansa in 2011 which was accused of using agro fuels which lead to deforestation in Southeast Asia. The negative reactions of consumers and the media raised the awareness of the other airline companies who made sure their fuels were indeed sustainable. Secondly, ‗proxy wars‘, are broader in scope and involve more confrontational tactics which immediately attract media attention, such as blockades, protests or image events, being designed towards achieving both structural and institutional change. McDonald‘s witnessed such a proxy war, when Greenpeace protested against the practice of chicken being fed with soy grown from the Amazonian rainforest by wearing chicken suits in front of their restaurants.

Apart from these direct actions, NGOs can exert pressure on companies also through indirect means by using other parties that have leverage on the company thanks to their direct influence, such as consumers, suppliers, regulators or shareholders. These stakeholders become aware of the issues and respond to the expressed criticism towards the organization which translates into possible economic losses and behavioural restrictions (Perko, 2011).

As it has been previously emphasized, the concerns for legitimacy, explained through the lens of IBV, represent the main drivers for highly environmental damaging industries when it comes to CSR activities. Nevertheless, for these industries, RBV can also shed some light on the motivations involved, namely through pursuing operational effectiveness by means of cost reductions and increased productivity.

Judging from an economic perspective, organizations can kill two birds with one stone when intensifying their production processes: reduce the environmental impact, as well as diminish

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28 input and waste disposal costs (Bansal and Roth, 2000). Although it can be argued that the above logic can be virtually applicable to all industries, the more environmental sensitive an industry is through its pollution levels or use of natural resources, the more opportunities there are for improvement through socially responsible practices.

For those industries that mostly damage the environment through their production activities, such as crude oil production, petroleum and metal refining or chemicals, the cost reduction argument will inevitably deal with production costs so that the non-product output is reduced: less raw materials, water or energy used during the production process (Sino-German Corporate Social Responsibility Project, 2012). For instance, Dow Chemical, specialty chemical corporation, reduced its ‘consumption of fresh water at its largest production site by one billion gallons—enough water to supply nearly 40,000 people in the U.S. for a year— resulting in savings of $4 million‘ (Porter and Kramer, 2011, p. 9).

Due to energy and resource price hikes in the past years, MNEs have become more aware of the benefits stemming from re-examining their processes and adopting better technologies, recycling, reusing, cogenerating and so on (Porter and Kramer, 2011). Moreover, when trying to prevent and reduce environmental harm, these organizations are encouraged to become more innovative with their use of resources and technologies which leads to new and improved practices. This is even more so the case for industries that not only pollute through production activities, but also through actual product use. For instance, in the automotive industry, BMW has introduced a fully recyclable car with a very low carbon footprint and a fully sustainable production cycle, representing both a source of competitive advantage and of cost reduction through auto recycling and material recovery.

By becoming involved in CSR and switching to green practices which reduce industrial pollution and encourage material substitution, organizations enjoy increased transparency and

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29 a more accessible monitorization of their production process and resources. As a result, it becomes easier to identify bottlenecks, prevent accidents and correct inefficient operations, thus contributing to higher overall organizational flexibility and productivity levels.

To conclude, all the above mentioned arguments, including both RBV and IBV considerations, lead to the first hypothesis regarding highly environmental damaging industries:

H1: Industries characterized by a high potential for environmental damage are more likely to engage in CSR activities on the one hand due to laws, regulations and NGO pressure and on the other hand due to operational effectiveness (cost savings, productivity enhancements).

3.3. Brand importance for consumers

The second industry characteristic, brand importance for consumers, is a very encompassing notion that deals with the extent to which consumers are aware of and take into account brands when making purchase decisions. In order to be more specific about its meaning and to be able to make a reliable industry distinction between high and low brand importance, firstly the underlying concepts of consumer proximity and brand awareness will be briefly referred to.

As the name implies, consumer proximity, represents the closeness between a company and the individual consumers. O‘Connor and Shumate (2010) divide industries according to the value chain position, meaning how close or far they are to consumers in the value chain. Among the industries that have more direct contact with customers the following are mentioned: commercial banking, general merchandisers, hotels, casinos, resorts, specialty retailers and telecommunications. Another consumer proximity based classification appears in

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30 Branco and Rodrigues (2008) who use a slightly different segmentation criterion, more specifically, how well companies in an industry are known to the final consumers and how likely it is that their brand names are familiar to the majority of the general public or, in other words, how high their brand awareness is. Some of the sectors with high profile companies are thus considered to be household goods and textiles, beverages, food and clothes retailers, telecommunication services, utilities distribution and banks. The significance of firms‘ identity to consumers and the likelihood that the organizations are affected by customers‘ perceptions are treated by Fishman, Heal and Nair (2005) as customer-orientation and they proxy this importance of consumers and brand image through advertising intensity (advertising to sales ratio). Similarly, Haddock-Fraserand and Tourelle (2010) refer to the brand status of a company to indicate whether there is an identifiable presence of an organization in the minds of consumers, usually the brand name companies being the ones that have the same product and company name.

As there exist different industrial degrees of consumer proximity, as well as of brand awareness and brand salience in buying situations, it can be argued that the motivations to get involved in CSR will not be homogenous across all industrial sectors. For industries where organizations interact directly with end consumers and highly depend on their brand name, corporate reputation and trustworthiness in order to be successful, the main driver for socially responsible behaviour is the RBV derived competitive advantage obtained through image enhancement. Building and maintaining a strong brand image will send positive signals about the company to both potential and current customers, thus obtaining their support and increasing loyalty.

As far as customer proximity is concerned, Haddock-Fraserand and Tourelle (2010) find that for what they call C2C (close to consumers) companies, the particular motivation of reputational benefits surpasses cost reduction, these organizations being more likely to engage

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31 in non-cost reduction type activities, as compared to B2B (business to business) companies. Moreover, Branco and Rodrigues (2008) also use the concept of consumer proximity as a proxy for the social visibility of a company and show that the higher this visibility, the more companies will get involved in community involvement disclosure.

Due to the high visibility and direct contact with final consumers that characterize companies in high brand importance industries, there appears the need for them to carefully manage customer relationships with an emphasis being put on building a sense of trust. The reason behind this is that trust has been shown to contribute to satisfaction, commitment, loyalty and long-term orientation in a relationship (Poolthong and Mandhachitara, 2009). In the literature (Doney and Canon 1997; Hess 1995; Sirdeshmukh, Singh and Sabol 2002), trust has been mostly conceptualized as a multidimensional construct, usually encompassing a company‘s reliability, integrity and benevolence. Companies can signal this corporate trustworthiness to the public through strong corporate culture, in such a way that the corporate values and guiding principles are proven by the activities pursued. Therefore, through their CSR efforts, companies convey the message that they are honest and reliable, which also solves problems of quality evaluation, as consumers associate these features with higher level quality products and services (Branco and Rodrigues, 2006). Moreover, Poolthong and Mandhachitara (2009) argue that trust is also positively related to brand effect, as it enables the resolution of customers‘ outcome uncertainty, resulting in positive affective responses, correlated with brand commitment.

The conclusion of the arguments mentioned above is that CSR activities of companies in high brand importance industries are developed for a strategic purpose, being part of a signalling process aimed at offering customers and stakeholders in general visible signals of firm positive traits, which boost confidence and overall firm reputation (Galbreath, 2009).

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32 Apart from their desire to strengthen their brand and reputation, the second relevant aspect for high brand importance companies is represented by dealing with consumer pressure. As these companies rely on their image and the way the public perceives and rates them, they are more prone to be under closer consumer scrutiny and to receive more incentives from their customers to act responsibly. Consumers increasingly pay more attention to companies‘ impact on society and they no longer expect only a high quality product or service from their preferred brands, but also responsible practices. Thanks to the improved availability and accessibility of information, consumers gain a better knowledge of companies‘ activities and practices which stimulates their preference towards responsible behaviour. These socially conscious consumers judge companies on the basis of social and ethical criteria, the result being either to support and purchase from the company (positive ethical consumerism) or express their disapproval by stopping their acquisitions from a particular brand, also known as consumer boycotting (negative ethical consumerism). In other words, ‗Customers are increasingly pressuring companies to accept and manage their responsibilities through their purchasing power‘ (Waddock, Bodwell and Graves 2002, p. 135). For example, the 2012 Ethical Consumerism Report (U.K. survey conducted by the Co-operative Group) shows that 50% of the surveyed consumers avoided products or services on the basis of the company‘s responsible behaviour, acknowledging that their position as consumers enables them to make a difference in how responsibly a company behaves. The punishment for companies failing to behave responsibly can go even further when consumers exert pressure through the above mentioned consumer boycotts. When a product boycott is announced, there will be negative stock market consequences due to the expected harm on both company sales and reputation (Smith, 2007).

On the positive side, companies can capitalize on consumers‘ demand for sustainable behaviour in order to drive growth by improving their products to correspond to their clients‘

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33 requirements. Listening to what consumers want and expect and positioning offerings accordingly, helps companies to take advantage of sustainable market opportunities and improve customer satisfaction. The fact that consumers shape their purchasing behaviour not only on quality and price criteria, but also on companies‘ social attitude, incentivizes organizations to expand their portfolios in a responsible way, as to meet the rising level of expectations and strengthen their customer relationships. For instance, the increasing consumers‘ sophistication regarding natural and organic cosmetic products and their expectations of chemical safety, encouraged Avon Cosmetics to eliminate in 2014 all toxic chemicals from their products, thus managing to maintain consumer trust and also make their offerings more attractive to the public.

In conclusion, in high brand importance industries, next to the RBV brand enhancement driver, an IBV motivation of customer pressure can also be found, which results in the second hypothesis:

H2: Industries characterized by high brand importance are more likely to engage in CSR activities to take advantage of brand strengthening opportunities and to adequately respond to pressures stemming from consumers.

3.4. Employee dependence

The generally accepted view in the literature that employees are a company‘s most valuable asset (Amabile and Kramer 2011; Branham 2001; Civi 2000) emphasizes the importance of human resources in the overall context of a business, on the basis that what employees say about the company, how they act in the workplace or how satisfied they are with their roles, all have a great impact on the brand, the company‘s image, the levels of service and ultimately the customers‘ satisfaction. While it is true that no company could successfully

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34 perform its activities and pursue its strategy and objectives without its employees, it can be argued that there are some industries where the level of employee dependence reaches a higher value, as it will be emphasized in the following examples.

Firstly, the distinctive features of service industries (intangibility, perishability, heterogeneity and interactive consumption) place even more responsibility on employees‘ shoulders, as they are usually directly involved in the process delivery of the service. Inevitably, this process is highly related to the image that customers conjure up about the company, which means that employees‘ actions create powerful and long lasting impressions on customers. Service organizations count on their brand name to act as an insurance of quality and reliability for consumers and one of the critical steps towards achieving this is making sure their workforce is highly skilled and trained, as well as satisfied and loyal.

Secondly, research intensive industries, such as software development, chemicals, pharmaceuticals or medicine depend on their highly educated and qualified staff to use their strong body of specific knowledge and their know-how to successfully engage in intellectual work with innovative outcomes. It can be argued that employees‘ capabilities and knowledge represent the most significant input. This actually represents the main characteristic of a wider group of industries, the knowledge-intensive ones, described by Blackler (1995, p. 1022) as being ‗staffed by a high proportion of highly qualified staff who trade in knowledge itself‘. As the proportion of highly qualified workers and the capability to retain or replace them differ considerably across industrial sectors (Gotsch et al, 2011), it can be argued that companies in some industries will be more prone to engage in activities that contribute to the development and satisfaction of employees and to the creation of a top employer image. The beneficial effects for the workforce brought about by socially responsible behaviour and

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35 practices (pay and benefits, safety and health, training and developing opportunities, ethical treatment, etc.) will be discussed next.

Galbreath (2009) emphasizes that one of the ways in which firms benefit from CSR is through the reduction of employee turnover. Using a justice-based theory, the arguments put forward explain that employees develop perceptions about their employer on the basis of the degree of fairness proven by the company. By proving concern for stakeholders and crafting a fair work environment, companies are more likely to see improvements in their employees‘ well-being, thus resulting in lower stress and absenteeism rates and increased commitment and satisfaction levels. Furthermore, employees judge firm behaviour against their justice perceptions and ethical frameworks and when a mismatch caused by inappropriate or inconsistent conduct arises, the chances of higher turnover augment. It is only normal for employees to expect an overlap between individual and organizational values and goals and to include into their workplace decisions criteria regarding the way companies accept their responsibilities (Waddock, Bodwell and Graves, 2002). A 2009 survey on more than 13,000 Australian employees found that 70% of respondents considered the company‘s ethical reputation as very important when choosing an organization to work for. Also, 86% of respondents acknowledged they were more likely to wish to work for a company recognized as being ethically and socially responsible. In a similar vein, Branco and Rodrigues (2006), remark that a strong social responsibility reputation enables companies to attract better job applicants, as well as retain them and preserve high morale, which diminishes turnover, recruitment and training costs.

One of the studies that analyse more deeply the connection between CSR and employees‘ commitment was conducted by Kim et al (2010), the results suggesting that CSR initiatives represent a useful tool towards building positive relationships with employees and increasing organizational commitment. More specifically, although employees‘ CSR associations (the

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36 way they perceive the company‘s social identity) do not directly impact employee-company identification, they do have an indirect effect on it through the perceived external prestige or how employees think outsiders perceive their employer. There is also a direct influence on the employee-company identification exercised by the employees‘ CSR participation, as this satisfies individual psychological needs and helps build a link between employees and the company. Bhattacharya, Sen and Korschun (2008) also emphasize that one of the ways of using CSR to win the war for talent is to involve employees in the co-creation of CSR value by enabling them to participate rather than witness so that more meaning and purpose are driven from the activities.

Apart from aiming to create a relationship with the employees and keep this valuable intangible asset in-house, highly employee dependent companies also seek to develop their human capital as much as possible. Thus, they seek to advance their employees‘ skills and align these skills with the ones needed from a strategically point of view (Branco and Rodrigues, 2006). A company can encounter barriers to progress and to sustain its competitive advantage in the long term if there don‘t exist enough opportunities for employee education and training or, in other words, if the organizational learning culture is missing.

To sum up, the RBV driven arguments regarding the competitive advantage companies can gain through the development and retention of the workforce form the basis of the third and last hypothesis:

H3: Industries characterized by high dependence on employees are more likely to engage in CSR activities due to the need of building a top employer image, as well as developing and satisfying their workforce.

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37

4. Methodology

4.1. Research methodology

As far as the research methodology is concerned, this study will try to fill the identified gap in the literature through a qualitative research which is most often stated as being the most appropriate and useful approach when trying to investigate the motivations or perceptions of a certain phenomenon (Van der Velde, Jansen and Anderson, 2004). That is exactly the case of the current study as the research question that will be analysed deals with understanding which are the reasons of organizations for engaging in CSR activities and how they differ across industries, thus making the qualitative type of research the most suitable option. This choice is also consistent with the view of Aguinis and Glavas (2012, p. 23) that ‗more qualitative studies are needed to improve our understanding of the underlying mechanisms of CSR‘.

The emphasis is put here on establishing which motivations are depicted as being the most important for each industry, thus calling for a thorough analysis of contextual details and deeper roots of a social phenomenon. There would be limited possibilities to gain the necessary insights and draw conclusions by using mathematical and statistical techniques on numerical information, taking into account that these quantitative research tools imply giving up context in favour of generalization. As Myers (2013, p. 9) puts it ‗Qualitative research is best if you want to study a particular subject in depth (e.g. in one or a few organizations).‘ However, this also emphasizes a limitation as opposed to quantitative research, namely the difficulty to generalize the results to a larger population, as the small sample size doesn‘t attain the required statistical significance. As a result, the derived knowledge and findings are usually considered unique to the participants of the research study, satisfying the goal of ‗depth‘ rather than ‗breadth‘.

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38 4.2. Research design

Similar to the case of the research methodology, the decision upon the research design has to take into consideration the fact that the choice must enable answering the specific research questions and meeting the research objectives. The most used research designs are represented by experiments, surveys, action research, case studies and archival research (Saunders and Lewis, 2012).

Given that the current research question is ‗How do motivations to engage in CSR activities differ across industries?‘ and the most appropriate strategy to answer ‗why‘ and ‗how‘ questions is considered to be case studies (Saunders and Lewis, 2012), using this method seems sensible. A more comprehensive model for determining when to use a certain method was developed by Yin (2009) and it consists of three conditions. Apart from the form of the research question being ‗how‘ or ‗why‘, case studies are suitable when the investigator doesn‘t have direct and systematic control over the behavioural events. This is indeed the case, since there doesn‘t exist the possibility to manipulate companies‘ relevant motives and decision making processes. The last condition that points to having a high degree of focus on contemporary as opposed to history events is also fulfilled, as the study focuses on companies‘ most recent CSR engagements.

Yin (2003, p. 4) argues that ‗The case study is the method of choice when the phenomenon under study is not readily distinguishable from its context.‘ This is clearly applicable to this study, since it is hard to distinguish the engagement in CSR activities and the reasons for doing that from the industries and companies in question.

As the main goal of the research drives the decision between single and multiple case studies, here the later are preferred, based on the need to study several industries and to examine the relationship between industry characteristics and CSR drivers through hypothesis testing

Company motivations to engage in CSR activities across industries : a multiple case study