Corporate Social Responsibility and Financial Performance:
The moderating role of Value Chain CSR in the agro-food
industry
Master Thesis – Final Version
Study Qualification: MSc. in Business Administration – Strategy Track
University of Amsterdam, Amsterdam Business School
Date of Submission: June 22
nd, 2017
Student:
Olivier Francescangeli (11371188)
Change Value Chain for Value Chain (except for the Shared value paragraph)
Change non-Value Chain for non-Value Chain
Statement of originality
This document is written by Student Olivier Francescangeli 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
Table of Contents
1. Abstract ... 4
2. Introduction ... 5
3. Literature Review ... 8
3.1 The relationship between CSR and CFP ... 8
3.2 The Agri-Food industry ...10
3.3 Shared Value Creation ...11
3.4 Sustainable Value Chains ...14
4. Data and Methods ...18
4.1 Sample ...18
4.2 Variables ...19
4.2.1 Corporate social performance and financial performance ...19
4.2.2 Value Chain and non-Value Chain CSR activities ...20
4.3 Data collection methodology ...20
4.4 Data Processing and Statistical Analysis ...22
5. Results ...23
5.1 Descriptives and Correlations ...23
5.2 Regressions and moderations ...26
6. Discussion and further research ...30
7. Limitations ...35
8. Conclusions ...36
9. References ...37
Table of Figures
Table 1. Descriptive statistics of the variables analyzed. ...24
Table 2. Correlation matrix between the variables analyzed. ...26
Table 3. Hierarchichal Multiple regression of ESG on different financial
performance dependent variables. Control variables are report type, leverage ratio
and net sales. ...27
Table 4. Moderation analysis results. Data is presented on the overall model and
the interaction term of the independent variable × moderator for different financial
performance dependent variables. Control variables are report type, leverage ratio
1. Abstract
The relationship between Corporate Social Performance (CSP) and Corporate Financial
Performance (CFP) has been the topic of much research and debate. By integrating the strategic potential of CSR activities focused in the Value Chain for firms in the agri-food industry, the aim of this research was to evaluate whether Value Chain CSR could have a moderating role in the CSP-CFP dynamics. Using Porter’s Value Chain framework, the reported CSR activities of 85 public firms in the agri-food industry in 2015 were classified into Value Chain CSR and non-Value Chain CSR. Data for CSP and CFP was extracted from existing databases. ESG scores were used as a measure of CSP whereas 3 market-based and 3 accounting-based measures were used for CFP. The results showed no moderating effects of Value Chain CSR into the CSP-CFP relationship for none of the CFP measures. Value Chain CSR was then disentangled into its Value Chain components, primary and secondary activities, for further analysis. Similarly to Value Chain CSR, the results showed no moderating effects of neither primary nor secondary activities into the CSP-CFP relationship for all of the CFP measures.
2. Introduction
The current global challenges are putting unprecedented pressure on businesses to behave in a responsible manner. The unequivocal manifestation of climate change, increasing inequality differences, and the negative impact that some large multinationals have had around the world has created an increasing necessity for firms to redefine their meaning of business success. The exclusive focus on short term profits is no longer acceptable and, as we live in a highly
digitalized information era, the positive or negative actions of a firm towards the society and the environment can have more impact than ever in their day to day business (Perrini et al., 2011). As a result, the concept of Corporate Social Responsibility (CSR) has become an important topic in the strategic management field.
The debate on CSR has reached multiple levels of analysis. At its most fundamental level, the debate revolves around whether the sole purpose of a firm is to maximize profits for its
shareholders (shareholder theory) or whether the role of a firm is to maximize the well-being of all stakeholders and hence, of society (stakeholder theory) (Carroll and Shabana, 2010). This is important because it aims at disentangling CSR at its key drivers such as morality and values. This research acknowledges the importance of those issues for the development of the field but will not deal with CSR at that level of analysis. Rather, in this research I will explore a different level of the debate of CSR, the business case debate. More specifically I will focus on
In that sense, the real impact of CSR on firm performance is still under scrutiny. The so called “business case” of CSR has revolved around finding the ties between corporate financial performance (CFP) and CSP, which has led to much debate among scholars because of
contrasting results (Perrini et al., 2011). Nevertheless, most of the meta-analysis in the topic have proven this relationship to be positive (Beurden and Gössling, 2008; Orlitzky et al., 2003; Wang et al., 2016). Yet, regardless of the generally positive attitude towards CSR and its link with financial performance, the debate is far from over, as it is highly dependent on the specific context of the analysis and the large amount of variables that can influence this analysis (Barnett, 2007). In fact, the complexity of the relationship can largely be attributed to the multiple factors that are known to moderate or mediate the relationship such as firm reputation, R&D spending (Luo and Bhattacharya, 2006; McWilliams and Siegel, 2000; Schreck, 2011). In that light, Grewatsch and Kleindienst (2015) called for the integration of other fields of research and literature to further untangle this complex relationship.
It has also been suggested that the industry type plays an important role in determining CSR strategy, effectiveness and disclosure (Cuganesan et al., 2010). One of the industries where CSR plays a predominant role is the agri-food industry because this industry is dominated by a relatively small amount of very large companies that have an important global social and environmental impact (Bansal and Roth, 2000; Maloni and Brown, 2006). In fact, due to the seasonal nature of agricultural production, agri-food processers and retailers source from a large number of producers which are small, in most cases, and tend to come from different countries and regions. Furthermore, the agro-food industry is one of the industries with the highest environmental impact, as agriculture accounts for the largest use of water, land and is the most important source of greenhouse gas emissions in many countries (Rueda et al., 2017). This
important negative environmental impact, together with the large amount of interaction of the with their stakeholders, provides companies in this industry the opportunity to make a real impact through their CSR activities. This makes the industry a very interesting case for exploring the CSR-CFP relationship further.
The Value Chain is a key component of the business models of most large firms in the agri-food industry (Maloni and Brown, 2006). The Value Chain refers to all the activities and actors involved in the creation of a product, from conception to market (Cruz and Boehe, 2008).The Value Chain comprises therefore all the Value Chain processes in which a firm is able to create value (D’heur, 2015). In the last few years, there has been an increased interest among scholars to show how holistic business models that take into account the wellbeing of all the actors and aspects of the Value Chain can have a positive effect in terms of economic, social and ecological value (Boons et al., 2013). As the prices of natural resources increase, information is more easily available and consumers are more aware and educated, there is real value in sustainability not only as brand value but also as a production efficiency factor (D’heur, 2015). The importance of sustainable Value Chains in the agri-food industry has been highlighted by Crowder and
Reganold (2015), as sustainability is increasingly being viewed as a quality factor, allowing firms to differentiate from their competitors and charge premium prices for their products. In that sense, this research intends to highlight why creating value across the Value Chain can be
strategically valuable for firms in the agri-food industry.
The literature on the relationship between CSP and CFP is extensive and has incorporated theories from different fields for its development. Yet, it fails to integrate the insights and knowledge developed by the sustainable Value Chains scholars. This research aims at bridging these two research streams by exploring the moderating role of CSR practices specific to the
Value Chain to the CSP-CFP relationship, in a relevant industry. In doing so, I unravel new variables that contribute to the further understanding of the CSP-CFP dynamics. From a managerial perspective, the findings of this paper could help managers make better strategic decisions and allocate their CSR resources in a more effective way. Finally, I hope the content of this research will help inspire future founders to explore new business models and increase the importance that CSR is given in new ventures.
The remainder of the article comprises six additional sections. The “literature review” section reviews literature on the CSP-CFP relationship, the importance of Value Chains for creating value and highlights why CSR in the Value Chain is so strategically important. The “Data and Methods” section describes the methodological approach used to tackle the research and the variables analysed. The “Results” section presents the empirical results of this research and the “Discussion” section makes a link between the results and existing literature, highlights the study’s contributions and suggests topics for further research. The “limitations” section discusses the drawbacks of this research and the “Conclusion” section highlights the takeaways of this research.
3. Literature Review
3.1 The relationship between CSR and CFP
The concept of CSR started to gain popularity during the 1950-60’s on the early years of the cold war as a way to leverage the free market capitalism against what was thought to be the danger of soviet communism (Spector, 2008). Although it has been a topic of interest since then, the
academic interest on it has increased drastically over the last years because of the increasing societal and environmental problems seen as a result of business decisions (Aguinis and Glavas, 2012).
CSR can be defined as “the practices and policies of corporations that reflect business responsibility for some of the wider societal good” (Matten and Moon, 2008). Though, an activity can only be considered as CSR when it goes beyond the requirements of the law
(McWilliams and Siegel, 2001; Waddock, 2004). The boundaries of CSR have been very much debated, to the point that it has even become a topic of research (Dahlsrud, 2008). This is because CSR is considered an umbrella under which other competing, complementary and overlapping concepts are embraced (Carroll and Shabana, 2010; Gond and Crane, 2010). Examples of such include corporate social performance, corporate social responsiveness, corporate citizenship, corporate governance, corporate accountability, sustainability and corporate social entrepreneurship (Parmar et al., 2010).
Much of the existing literature on CSR has focused on establishing its relationship with corporate financial performance (CFP)(Belu and Manescu, 2013; Cochran and Wood, 1984; Erhemjamts et al., 2013; McGuire et al., 1988; Neal and Cochran, 2008; Nollet et al., 2016; Saeidi et al., 2015; Tang et al., 2012). The reasoning behind this is that companies might be persuaded to act more responsibly if doing good could be connected to doing well (Margolis et al., 2007).Yet, there seems to be no overall consensus to whether this relationship is positive, negative or has no effect as individual studies have contrasting results (Aguinis and Glavas, 2012). In an attempt to clarify this, several meta-analysis have been performed: Orlitzky, Schmidt, and Rynes (2003) showed a positive relationship between CFP and social responsibility and to a lower degree, environmental responsibility; In a review of 52 studies Wang et al. (2016) showed a positive
relationship between CSR and CFP; Beurden and Gössling (2008) reviewed 34 previous studies on CSR and showed that 68% of them supported the positive links between CSR and CFP. One of the reasons for the contrasting results in literature is that the relationship is particularly influenced by the context and the specific conditions of the study (Stoian and Gilman, 2017; Wang and Bansal, 2012). In that sense, the dynamics of the relationship are likely vary from one industry to another (Baird et al., 2012). This, added to the fact that certain industries are more susceptible to CSR strategy and disclosure (Cuganesan et al., 2010), explains the need for industry specific studies. The next section will explore why the industry chosen for this study is relevant.
3.2 The Agri-Food industry
The agri-food industry is a multi-trillion dollar industry in the US and is still the largest
manufacturing sector in many developing and developed countries (Maloni and Brown, 2006). Although the industry is becoming more efficient in many ways, it still consumes large
percentages of the world’s natural resources, and is facing more pressure than ever from aware consumers to become responsible in several aspects such as climate change, oil dependency, localism and fair pricing to suppliers. At the same time, the industry is still battling with its old challenges such as food security, waste, public health and farming practices (Li et al., 2014). The agri-food industry is the second largest producer of greenhouse gases (Vermeulen et al., 2012), and utilizes around 40% of the world’s land and 70% the extracted water (Foley et al., 2011). Agriculture has degraded up to one quarter of the world’soils and agricultural run-off has polluted a large part of the world’s rivers (Grunwald et al., 2011; Liu et al., 2012). Furthermore, food packaging accounts for more than sixty percent of the total packaging waste (Del Borghi et
al., 2014). Among others, deforestation, transport and food waste are areas in which the industry still has a lot of progress to be made (Kim, 2017).
The nature of the relationships and characteristics on the agri-food industry makes it one of the industries in which the CSR actions of large companies can have the biggest effect on its operations and stakeholders (Maloni and Brown, 2006). First, because a large majority of the inputs come from agricultural production, which is seasonal and vulnerable to external conditions, causing agri-food companies to source from a large number of producers from different regions and conditions (Rueda et al., 2017). This makes it very difficult to monitor and standardize labour conditions, environmental behaviour and working practices but creates an opportunity for companies to have an impact in a large amount of stakeholders. Second, because sourcing practices and production processes can have a large influence on the quality and safety of the product, which creates an opportunity for product differentiation and premium pricing through sustainability (Crowder and Reganold, 2015; Rueda et al., 2017).
Being one of the industries with the largest environmental footprint, companies in the agri-food industry have room for their CSR activities to make a big impact (Del Borghi et al., 2014). This, in combination with the large amount of stakeholders that are affected by the decisions made by large firms in the industry, makes it very relevant from the CSR standpoint (Kim, 2017). The next sections will look further into the ways in which CSR can be better integrated in a companies’ business to create value.
3.3 Shared Value Creation
For a long time, CSR and sustainability were seen in management literature as a predominantly defensive strategy and were therefore seen practically as a cost dependent decision (D’heur,
2015). However, in the last years there has been an increase of interest in sustainability as a driver for increased economic performance due to a change in 3 main factors: (1) the increase long term challenges such as climate change, water scarcity and ageing population; (2) A change in the way companies compete, as differentiation and cost leadership strategies have been
neutralised by the rise of firms in the emerging economies; (3) The impact of economic meltdowns, such as the financial crisis of 2008, which have triggered the thinking that most companies operate on business models that are not sustainable (Boons et al., 2013).
One of the ways in which scholars have suggested integrating “doing good” into the
conceptualization of new business models, is through the “shared value creation” concept, which is a practice being increasingly used by several companies (Dembek et al., 2016). Shared value creation (SVC) was first introduced by Porter and Kramer (2011) and defined as “policies and operating practices that enhance the competitiveness of a company while simultaneously advancing the economic and social conditions in the communities in which it operates”. The authors argue that value is calculated as benefits relative to costs, which includes both social and economic considerations, as opposed to the traditional measure of value (revenues minus costs), which includes only economic considerations. The aim of SVC is to address the gap in trust people have in global corporations and to improve the relationships between businesses and society by aligning social benefits with corporate profits (Dembek et al., 2016).
Since the definition is broad and the concept of SVC has created debate among scholars
(Corazza et al., 2017; Crane et al., 2014; Dembek et al., 2016), it is important for the purpose of this research to clarify two misconceptions about it that help understand why this concept is theoretically valuable for this research. First, SVC is not about sharing or redistributing the value already created by a firm to advance the economic and social conditions of stakeholders. Rather,
it is about using this value to improve the conditions, knowledge and well-being of stakeholders in order to expand the total pool of economic and social value that the firm can create in the future. Second, SVC is also not about philanthropy or doing good in the world with extra business activities, but rather it is about creating social and economic value through business model innovation and the improvement of business relationships, thus creating value around a companies’ Value Chain business activities (Porter and Kramer, 2011).
Previous research on social entrepreneurship has shown that market-based drive, based on
profitability and growth, and community-based drive, which deals with social issues, can interact and coexist in organizations (Greenwood et al., 2011). The process in which organizations can achieve this is called organizational hybridization (Battilana and Dorado, 2010). The authors argue that in order to be successful, hybrid organizations need to create a common organizational identity that supports and embeds the balance between market-based drive and community-based drive.
Porter and Kramer (2011) underline that companies can operationalize this organizational hybridization and create shared value opportunities in three principal ways: First, by
reconceiving markets and products, companies can address some of the society’s unmet global challenges such as health, better housing, help for the aging and less environmental damage. Examples of this are food companies that are changing their ingredients to increase the
healthiness of their products. Second, by enabling local cluster development, companies are able to promote greater logistical efficiency and collaboration. Developing clusters allows companies to train and support suppliers and employees in a more efficient way and to provide them with a better infrastructure. Finally, by redefining productivity in the Value Chain firms can
argue that improving the logistics, energy use, resource use, procurement, distribution and employee productivity of a firm can have big effects in shared value creation.
The following section will focus on this third aspect, as it will explore further how Value Chains can create shared value and how this can be strategically valuable for firms in the agri-food industry.
3.4 Sustainable Value Chains
The term Value Chain, which was first coined by Porter (1985), describes all the value adding activities that a firm performs in order to produce and commercialize a product or service in the market. The Value Chain consists of primary activities, related to production, sales and
distribution, and secondary activities which support primary activities, such as technology development, human resources, procurement and finance. Even though the Value Chain is based on the main components of the supply chain, the thinking behind both terms differs. The supply chain thinking is based on cost reductions, distribution efficiency, protecting information and leveraging scales and market power to secure favourable terms of trade. The Value Chain thinking, on the other hand, is based on product differentiation, distribution quality and service, sharing information along the chain and focuses on collaborative relationships and shared resource allocation and benefits (Fearne et al., 2012).
The demands of final customers and the ever increasing competitive environment have extended the competition between firms to competition between supply chains (Green et al., 2008). The Value Chain thinking is valuable because it allows firms to leverage the skills and resources across the supply chain to increase the efficiency and effectiveness of its processes. As opposed to Porter’s (1985) original suggestion of the supply chain as a system of disaggregated
components of a firms internal function, the Value Chain groups its components as a system of multiple firms collaborating together (Pandelica et al., 2009). This allows for a better response to dynamic changes in the market, reduced sequential role of activities and executing an integrated strategy (Fearne et al., 2012). As a result, suppliers are able to plan their activities better, allocate their resources more efficiently and create certainty through long term partnerships while their customers benefit from higher quality supplies, more efficient systems and a greater influence on their suppliers overall (Pesonen, 2001).
The potential of increased Value Chain management lies in achieving a higher degree of
innovation and competitiveness through increased collaboration (Bonney et al., 2007). Previous research has shown that value creation in the supply chain is maximized when firms have superior capabilities in selecting the right members, are able to locate near them and are capable of building long term relationships with them (Jayaram et al., 2004). In fact, building such relationships through the steps of open market negotiations, cooperation, coordination and collaboration requires time, resources and capabilities that can be a source of sustainable competitive advantage (Barney, 2012). This is because such relationships are normally developed through unique stories and are socially complex and casually ambiguous, which makes them difficult to acquire or imitate for competitors (Gold et al., 2010).
Creating shared value through the Value Chain is especially important in the agro-food industry because, unlike other industries, most firms are unable to achieve vertical integration (Maloni and Brown, 2006). In fact, the Value Chain is fragmented in several steps that involve many intermediate actors which are heavily dependent on each other and might be affected by
incidents that occur in other parts of the chain. This is particularly important for the actors in the initial phases of the Value Chain (i.e farmers, growers) which are the most vulnerable to changes
in the market conditions (such as demand, competition, pricing) and environmental factors (such as weather and pests) (Sari Forsman‐Hugg et al., 2013). Furthermore, this long and fragmented characteristic of the agri-food industry leaves firms exposed to a wide range of risks such as changes in governmental regulation or environmental policy as well as the use of unsafe or illegal practices from second-tier or third-tier suppliers, which is very difficult to monitor (Dauvergne and Lister, 2012).
By focusing their efforts on sustainability through the Value Chain, companies can anticipate and discourage changes in regulations, increase accountability, safety and traceability of their
products and secure a reliable supply of inputs with a consistent quality (Nadvi, 2008). Additionally, sustainability is increasingly becoming a qualitative factor for food products, making sustainability a differentiating factor (Crowder and Reganold, 2015). In fact, as the shared value creation literature argues, consumers are willing to pay more for food products when companies demonstrate proactive CSR attitudes towards its stakeholders and the environment (Kim, 2017).
Given that the Value Chain is a Value Chain component agro-food firm’s business and, that there is strategic value in making the Value Chain more sustainable, we theorize that focusing the CSR efforts on the Value Chain components is strategically valuable for a firm. Potentially, this makes the CSR efforts of a firm more effective and efficient, which in turn have an effect on financial performance. This leads to the following hypothesis:
H1: CSR activities focused on the Value Chain have a moderating effect on the Corporate Social
Performance (CSP) – Corporate Financial Performance (CFP) relationship for companies in the agri-food industry.
In his description of the Value Chain, Porter (1985) disentangles the Value Chain processes and activities of firms into nine generic categories that are then separated into two main categories related to their function: primary and secondary activities. Primary activities involve the physical creation of the product, logistic, commercialization and after sales service. Secondary activities are the rest of the activities that are necessary to support and execute all the primary activities. This includes the procurement of inputs, technology and knowledge development, managing human resources, and the development of the right physical and legal firm
infrastructure.
Porter and Kramer (2006) argue that CSR activities focused on either primary or secondary activities are relevant in creating and sustaining competitive advantage. The authors do not analyse the consequences of firms focusing their CSR activities on either primary or secondary activities. However, it was previously discussed that two of the areas where most improvement is yet to be made for firms in the agri-food industry face are the environmental issues and stakeholder wellbeing (Kim, 2017; Maloni and Brown, 2006; Rueda et al., 2017). Given that most environmental issues are related to operational processes (primary activities), and that stakeholder issues are more related to procurement and human resource management (secondary activities), I argue that analysing where in the Value Chain firms focus their CSR activities is an important factor of whether Value Chain CSR can moderate the CFP – CSP relationship. This leads to the following hypotheses:
Performance (CSP) – Corporate Financial Performance (CFP) relationship for companies in the agri-food industry.
H3: Secondary Value Chain CSR activities have a moderating effect on the Corporate Social
Performance (CSP) – Corporate Financial Performance (CFP) relationship for companies in the agri-food industry.
4. Data and Methods
4.1 Sample
The data sample consisted of 85 publicly listed agro-food companies. The list of companies was taken from the Asset4 database on Datastream, from the sample lists on food and tobacco companies. The total list consisted of 126 firms, from which 16 were tobacco companies and were therefore eliminated. The other 25 companies not taken into account were eliminated due to either a complete lack of CSR information in their websites and reports or due to the fact that their CSR information was available only in a language not understood by the author. The decision to use this list of companies was due to the availability of ESG ratings for those companies in the database. The sample contained companies of different size and from many different countries and most of them were companies with operations all over the world. The chosen year for all the data collection and was 2015, as it was the last year for which ESG ratings were available for all the companies in the sample. Also, all companies had available 2015 annual and sustainability reports online, and this was necessary for the data collection.
4.2 Variables
4.2.1 Corporate social performance and financial performance
Because CSR is an umbrella concept that encompasses many definitions, it poses a problem for studies that want to measure CSR in an empirical way. Hence the concept of Corporate Social Performance (CSP), which embraces both the descriptive and normative aspects of CSR and its observable outcomes, provides a less subjective way of measuring the results of individual firms in the field (Carroll and Shabana, 2010; Gond and Crane, 2010).
Data for CSP was taken from the Environmental, Social and Governance (ESG) Asset4 database. CSP was calculated as an average of the individual scores on each of the three domains. The database also provides an overall score for CSP to each company. However, this overall score also takes into account an economic score given to each company. I therefore used the average of the three individual ESG scores as the measure for CSP.
Data for CFP was taken from the Datastream database. Tests on the CSP-CFP were performed in both accounting based measures and market based measures. Earnings Per Share (EPS), Return on Assets (RoA) and Return on Capital (RoC) were used as accounting measures of CFP. Price Earnings Ratio (PER), Share Price (SP) and Tobin’s Q Ratio (TBQ) were used as market based measures. Tobin’s Q Ratio was calculated from Datastream as the sum of Equity Market Value and Liabilities Book Value divided by the sum of Equity Book Value and Liabilities Book Value.
The control variables were the Leverage Ratio (LR), Net Sales (NS) and the type of report (R) from which Value Chain and non-Value Chain CSR data was extracted from. The leverage ratio is the total debt percentage over the total common equity. The choice of control variables was
based on a recent study that found firm size (sales) and risk (leverage ratio) to be important control variables when assessing the effects of CSP on CFP (Nollet et al., 2016).
4.2.2 Value Chain and non-Value Chain CSR activities
In order to distinguish Value Chain and non-Value Chain activities, Porter and Kramer’s (2006) Value Chain framework was used as a basis. The original framework describes what the authors consider as the five dimensions of primary activities and the four dimensions of secondary or support activities. CSR activities can also be categorized in this framework, given that they fall within one of the five primary dimensions or one of the four secondary dimensions (References
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5. Appendix
Annex 1). The authors argued that primary activities are the necessary activities for firms to sell their products and acquire new clients and that secondary activities are necessary to support these primary activities occur and develop. Porter and Kramer (2006) consider therefore that together, primary and secondary activities constitute the Value Chain business of a firm. Following that logic, in this research, CSR activities that felt under one dimension of either primary or
secondary activities were considered as Value Chain activities. All activities which did not fall under any of the primary or secondary activities were considered as tertiary activities and tertiary activities were considered non-Value Chain CSR activities. The overview I used for classifying activities into primary, secondary and tertiary activities can be found in Annex 2.
5.1 Data collection methodology
Identifying CSR activities from reports required developing a methodology, especially because of the differences between CSR reports and the diverse ways of reporting specific CSR activities and programmes. I analysed 15 companies from the sample in a first run, and developed a coding protocol partly intuitively and partly based on Porter’s Value Chain.
Data was collected from either a company’s 2015 annual report, its 2015 sustainability report, or its website depending whether the company had a CSR section on their annual report. If it did, the annual report was used; otherwise the sustainability report was used. In other few cases, the company had only CSR information in their website. This was used a last resort. The type of report used was reported following the coding protocol (Annex 3). Both of these report types
1 where downloaded directly from their websites or searched through a web browser. The method consisted of reading either the entire CSR section of the annual report or the entire sustainability report, in search for CSR activities. The steps described below were the same for both types of report.
In order to standardize and facilitate the reading, I used a heading and subheading system to determine what to read. Headings refer to major subjects within CSR, such as people, environment and community. Within those headings, reports had also subheadings, which referred to more detailed subjects within that subject (for example work safety and health plans within the subject people). The content in between subheadings provided the boundaries for searching for activities. The content under a subheading was therefore used as the unit of
analysis and the three step procedure described below was performed for every subheading. The rest of the content, which includes the introductory paragraphs of the CSR section and the introductory paragraphs of a heading were skipped and not searched for activities.
As mentioned previously, in order to search for activities within every subheading, a three step approach was taken: (1) I started by looking for one of the following set of keywords:
“Programme, campaign, scheme, activity, initiative, development, project, pilot, system, reduction, efficiency, charity or fund”. If at least one of these keywords was mentioned in the section, then I proceeded to step 2. Otherwise I skipped to the next subheading. (2) I read the entire subheading content in order to identify and classify the described activities into one of the primary, secondary or tertiary categories, following the overview and explanation in Annex 2. (3) Once the category of the activity was identified, it was reported following the coding protocol (Annex 2 and 3). This three step approach was repeated for all the subheadings in each report. Additionally, in some cases more than one activity was reported from one subheading. The
2 reasoning for it can be found in Annex 4.
For each company, after all activities had been coded under the different categories, the percentage of primary, secondary and tertiary activities over the total number of activities was calculated. The addition of the primary and secondary activities percentages represented the % of Value Chain CSR and the tertiary activities percentage represented the non-Value Chain CSR. These percentages were then used for the statistical analysis as moderators for the CSP and CFP relationship. By calculating percentages over the total of activities, the way in which companies report their CSR activities and the amount of activities they report has a lower influence on the result. Also, by collecting data this way, the analysis could be extended further by using the primary or secondary activities percentages by themselves as mediators of CSP and CFP.
5.2 Data Processing and Statistical Analysis
The statistical analysis was performed using IBM SPSS version 22. Moderation analysis was performed using the PROCESS version 2.16 add-on tool for SPSS (Hayes, 2012). Correlations were calculated using the Pearson correlation test. As most all of the CSP and CFP data was taken from a database, the data was checked for inconsistent values and these were eliminated before running any analysis. An example of this was for Price Earnings Ratio, were negative values were found. For moderation testing, model 1 for PROCESS was used as the standard model procedure. Before running the moderation analysis, the independent variables and moderators were standardized using SPSS. Heteroscedasticity consistency was checked and accounted for in the moderation analysis. For all moderation and regression tests the control variables LR, SR and R were used as covariates.
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6. Results
6.1 Descriptives and Correlations
The descriptive statistics for all the variables are reported in Table 1. It can be seen that from these that, although the sample size was not very high (85 companies in total), the companies in the sample were heterogeneous in terms of size (measured as net sales). The company with the highest NS in the sample has revenues 500 times higher than the company with the lowest NS in the sample and the standard deviation is higher than the average (Mean = 8.54 Billion $; SD = 14.05), which means that there several companies that are very large and very small in
comparison to the mean. Similarly, the sample includes firms with both very high and very low ESG scores (Min = 10.78; Max = 93.79), although the standard deviation is considerable lower in comparison to the average (Mean = 66.08; SD = 19.64). In terms of the type of CSR activities, companies tend to perform in average more Value Chain CSR (Mean = 74.8; SD = 14.44) than non-Value Chain CSR activities (Mean = 25.2) as the differences among the companies is relatively small in comparison to the average (SD = 14.44).
Table 1. Descriptive statistics of the variables analyzed.
Variable Obs Minimum Maximum Mean Std. Deviation
Primary activities 85 10.00 100.00 36.13 13.77
Secondary activities 85 0.00 70.00 38.71 13.02
Value Chain activities
4 Non-Value Chain Activities (Tertiary activities) 85 0.00 75.00 25.17 14.44 ESG 84 10.78 93.79 66.08 19.64 PER 76 2.00 72.80 25.46 12.47 SP 80 0.30 109.33 23.45 28.29 TBQ 85 0.61 6.02 1.99 1.04 EPS 82 0.00 5.61 1.03 1.36 ROE 82 -13.88 38.93 7.35 8.90 ROA 83 -0.19 15.21 3.88 3.91 LR 85 0.00 571.04 54.54 86.16 NS (billions $) 85 0.16 86.81 8.54 14.05 Report type 85 0.00 2.00 0.71 0.67
Note: ESG = Environmental, Social and Governance Scoress, PER = Price Earnings Ratio, SP = Share Price, TBQ = Tobin’s Q Ratio, EPS = Earnings Per Share, ROE = Return on Equity, ROA = Return on Assets, LR = Leverage Ratio, NS = Net Sales.
Table 2 shows the correlations between all the variables analysed. The percentage of Value Chain CSR activities is moderately correlated with the ESG scores (r = 0.312; p<0.01). However, this positive relationship is due to a positive correlation of secondary activities with ESG scores (r = 0.283; p<0.01) as ESG scores have no correlation with primary activities (r = 0.060; p>0.05).
Neither primary nor secondary activities have a significant correlation with any of the market based or accounting based measures of financial performance (Table 2). Value Chain CSR is moderately correlated with Earnings per Share (EPS) (r = 0.229; p<0.05) and Return on Assets (ROA) (r = 0.292; p<0.01), both of which are accounting based measures. ESG score follows a similar trend as it is negatively correlated to one market based measure, Price Earnings Ratio (PER) (r = - 0.253; p<0.05), but positively correlated to all three accounting based measures, EPS (r = 0.347; p<0.01), Return on Equity (ROE) (r = 0.283; p<0.01) and ROA (r = 0.233; p<0.05). Among the three market based measures, none of them are significantly correlated to
5 each other. This is not the case among accounting based measures, where the three variables are positively correlated with each other (Table 2).
From the 85 agro-food companies for which data was collected, 40 (47%) integrated their CSR report in their annual reports, 35 (41%) had a sustainability report and 10 (12%) reported their CSR activities only on their websites. From these 10 website reports, 6 were actual sustainability reports integrated in an interactive website based platform and 4 were just detailed websites. Although the type of report was used as a control variable in the regression, it has a significant negative correlation with the ESG scores (r= - 0.374; p<0.01) (Table 2). Since the reports were coded from more CSR information (sustainability reports = 0) to less CSR information (website reports = 2), this negative correlation suggests that companies that have a sustainability report tend to have higher ESG scores.
Table 2. Correlation matrix between the variables analyzed.
Prim Sec Value
Chain¥
ESG PER SP TBQ EPS ROE ROA LR NS
Prim Sec -.420** Value Chain .575 ** .501** ESG .060 .283** .312** PER .107 -.110 -.003 -.253*
6 SP .188 .025 .203 .077 .154 TBQ -.012 .111 .088 .139 .075 .081 EPS .063 .194 .229* .347** -.081 .736 ** .142 ROE .008 .192 .181 .283** .006 .207 .252* .434** ROA .121 .196 .292** .233* .096 .138 .158 .352** .863** LR .126 .059 .173 .356** -.177 .043 -.033 .114 .258 * .191 NS -.012 .054 .038 .251* -.108 .177 -.121 .379 ** .118 .116 .087 Rep -.0560 -.1670 -.204 -.374** -.164 -.237* -.219* -.2020 -.295** -.267** -.141 -.16
* Correlation is significant at the 0.05 level (2-tailed). ** Correlation is significant at the 0.01 level (2-tailed).
¥
Correlations for Non-Value Chain are the inverse of Value Chain.
Note: Prim = Primary activites, Sec = Secondary activities, Value Chain = Value Chain activities, ESG = Environmental, Social and Governance Scoress, PER = Price Earnings Ratio, SP = Share Price, TBQ = Tobin’s Q Ratio, EPS = Earnings Per Share, ROE = Return on Equity, ROA = Return on Assets, LR = Leverage Ratio, NS = Net Sales, R = Report type.
6.2 Regressions and moderations
Although this study did not hypothesise about the direct relationship between CSP and CFP for the agri-food industry, it is interesting for the overall research scope to understand the direct effect of ESG scores on several CFP measures. The results of the regressions can be seen in Table 3.
Concerning marketbased CFP measures, ESG scores had no significant effect on PER (c = -0.208; p = 0.130) and TBQ (c = 0.138; p = 0.275) but was significant for SP (c = 0.266; p = 0.03). This means that for every point increase in ESG scores SP will increase in approximately 0.27. The overall model including the control variables (report type, leverage ratio and net sales) and ESG scores is able to explain 19% of the variance in SP (R2 = 0.191) and in comparison to the initial model with only the control variables, the addition ESG scores to the model increases the variance explanation in 5% (R2 change = 0.052).
7 Similarly to market-based CFP measures, ESG scores had only a significant effect in one of the three accounting-based CFP measures as ESG scores had no significant effect on ROE (c = 0.117; p = 0.357) and ROA (c = 0.097; p = 0.447) but was significant for EPS (c = 0.259; p = 0.034). Thus, for every point increase in ESG scores EPS will increase in approximately 0.26. The overall model including the control variables and ESG scores is able to explain 20% of the variance in ESP (R2 = 0.200). In comparison to the initial model with only the control variables, the addition ESG scores to the model increases the variance explanation in 4.9% (R2 change = 0.049).
Table 3. Hierarchichal Multiple regression of ESG on different financial performance dependent variables. Control variables are report type, leverage ratio and net sales.
Overall Model Unstandardized Standardized
Independent Variable Dependent variable R2 R2 change¥ Coefficient (B) SE Coefficient (β) t P Value ESG PER 0.124 0.029 -0.136 0.089 -0.208 -1.533 0.130 SP 0.191 0.052 0.385 0.177 0.266 2.171 0.030 TBQ 0.085 0.014 0.007 0.007 0.138 1.099 0.275 EPS 0.200 0.049 0.018 0.008 0.259 2.161 0.034 ROE 0.117 0.010 0.053 0.058 0.117 0.926 0.357 ROA 0.104 0.007 0.019 0.025 0.097 0.764 0.447 ¥
R2 change refers to the change in R in comparison to the analysis with only the control variables.
Note: ESG = Environmental, Social and Governance Scoress, PER = Price Earnings Ratio, SP = Share Price, TBQ = Tobin’s Q Ratio, EPS = Earnings Per Share, ROE = Return on Equity, ROA = Return on Assets.
Results of the moderation analysis can be seen in Table 4. Regarding the effect of Value Chain CSR in moderating the relationship between ESG Value Chains and market-based CFP
measures, it can be seen that there are no effects as the interaction term between the ESG scores and Value Chain CSR are is significant for either PER (c = -1.007; p = 0.659), SP (c =3.628; p =
8 0.330) or TBQ (c = 0.062; p = 0.737). Similarly, Value Chain CSR does not moderate the
relationship between ESG scores and accounting-based CFP as the interaction term is not
significant for either EPS (c = 0.114; p = 0.488), ROE (c = 1.039; p = 0.406) or ROA (c = 0.719; p = 0.209).
Concerning the moderating role of primary activities and secondary activities on the relationship between ESG scores and market-based CFP measures, similar results as for value-chain CSR were found. The moderating role of primary activities is not significant for none of the three market-based CFP measures PER (c = -0.091; p = 0.973), SP (c = -1.168; p = 0.795), and TBQ (c = -0.230; p = 0.203) nor the accounting-based CFP measures EPS (c = -0.196; p = 0.357), ROE (c = 1.193; p = 0.307), and ROA (c = 0.684; p = 0.191). Likewise, secondary activities do not moderate the relationship between ESG scores and any of the market-based CFP measures measures PER (c = -846; p = 0.639), SP (c = 3.393; p = 0.468), and TBQ (c = 0.237; p = 0.135) nor the accounting-based CFP measures EPS (c = 0.230; p = 0.196), ROE (c = 127; p = 0.931), and ROA (c = 0.551; p = 0.931).
The overall model, which includes the independent variable, the moderators, the interaction between both and the control variables, is significant in explaining the variation for SP and the three accounting based measures of CFP regardless of the moderator (Table 4). As none of the moderation effects are significant and ESG scores are only significant in explaining differences in SP and EPS (Table 3), the overall results suggest that the control variables play a more important role than the independent variable and the moderator in predicting the differences in variance on SP, EPS, ROE and ROA.
Table 4. Moderation analysis results. Data is presented on the overall model and the interaction term of the independent variable × moderator for different financial
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performance dependent variables. Control variables are report type, leverage ratio and net sales.
Overall Model Interaction Term
Independent
Variable Moderator
Dependent
variable R2 P Value Coefficient SE t P value
ESG Value Chain Activities PER 0.150 0.179 -1.007 2.274 -0.443 0.659 SP 0.207 <0.001 3.628 3.699 0.981 0.330 TBQ 0.088 0.350 0.062 0.185 0.337 0.737 EPS 0.224 <0.001 0.114 0.164 0.697 0.488 ROE 0.136 0.004 1.039 1.243 0.836 0.406 ROA 0.171 0.003 0.719 0.568 1.267 0.209 ESG Primary Activities PER 0.131 0.265 -0.091 2.654 -0.034 0.973 SP 0.194 0.005 1.168 4.481 0.261 0.795 TBQ 0.109 0.249 -0.230 0.179 -1.285 0.203 EPS 0.213 <0.001 -0.196 0.212 -0.928 0.357 ROE .0125 0.018 1.193 1.160 1.029 0.307 ROA 0.126 0.015 0.684 0.518 1.320 0.191 ESG Secondary Activities PER 0.142 0.219 -0.846 1.794 -0.471 0.639 SP 0.223 <0.001 3.393 4.648 0.730 0.468 TBQ 0.124 0.152 0.237 0.157 1.510 0.135 EPS 0.230 <0.001 0.230 0.176 1.307 0.196 ROE 0.125 0.050 0.127 1.468 0.087 0.931 ROA 0.120 0.053 0.551 0.629 0.088 0.931
Note: SE = Standard Error, t = t-test factor, p = probability; ESG = Environmental, Social and Governance Scoress, PER = Price Earnings Ratio, SP = Share Price, TBQ = Tobin’s Q Ratio, EPS = Earnings Per Share, ROE = Return on Equity, ROA = Return on Assets, LR = Leverage Ratio, NS = Net Sales.
7. Discussion and further research
The aim of this study was to evaluate whether performing CSR activities related to the Value Chain for firms in the agri-food industry has an effect in explaining why higher a CSP are not always translated into higher CFP. The results of our empirical study suggest that, contrary to the hypothesis (H1), Value Chain CSR does not moderate the relationship between CSP and CFP.
10 As Porter’s framework of Value Chain activities was used to classify CSR activities, I
hypothesized that disentangling Value Chain CSR into primary and secondary CSR would further explain the non-moderating role of Value Chain CSR in the CSP-CFP relationship. Nevertheless, the results show that neither primary nor secondary CSR activities play a moderating role in the relationship, which leads to the rejection of both H2 and H3.
As the role of the Value Chain in creating shared value was highlighted in the literature review, this research theorized that focusing CSR activities in the Value Chain could be of strategic importance to firms in the agri-food industry. However, several authors have highlighted the importance of shared vision and institutional change, rather than collective action only, as the key factors in achieving meaningful shared value creation (Battilana and Dorado, 2010; Matinheikki et al., 2015; Thompson et al., 2015). Actually, when organizations are not able to embed within their culture both economic and social returns as an overarching goals, they run into the risk of members polarizing into different groups that focus on either economic or social returns, thus creating tensions between these logics (Battilana and Dorado, 2010; Battilana and Lee, 2014).
Furthermore, efficient execution and integration of shared value in a firm’s systems might require specific knowledge and experience that commercial businesses do not tend to have (Corner and Pavlovich, 2016). In that sense, the tension between the creation of economic and social value in organizations is similar to the exploration-exploitation tension that most
established organizations face (O’Reilly and Tushman, 2011). As executives face the pressure of shareholders for improved profits through efficiencies and the creation of new products,
engaging in transformational Value Chain CSR might require exploration resources that
11 to invest in CSR initiatives as merely “greenwashing” (Roome and Louche, 2016). This is
exemplified by Crane et al. (2014), who argue that Coca-Cola and Nestle, two of the largest agri-food companies that have invested in exploratory shared value creation for healthy products, are still releasing products containing high amounts of sugar, salt and caffeine that create addiction among its consumers. Therefore, in spite of the strategic potential of Value Chain CSR for creating both social and economic value, merely focusing CSR activities in the Value Chain might not be sufficient to create higher profits. Rather, a transformational change in the culture and the way exploration is carried in large organizations might be necessary. Further research linking Value Chain CSR investment to actual organizational changes and product offerings is necessary to understand whether Value Chain CSR is actually a strategic component.
Data of CSR activities was collected mostly from annual and sustainability reports. The
correlation analysis showed a significant correlation between the type of report and ESG scores. Overall, companies with a separate sustainability report tended to have higher ESG scores. Whether this is a causal effect is a topic for further research. However, as the results of this research were highly dependent on what and how companies report their CSR activities, differences in CSR disclosure might have had an influence. In fact, as large organizations worldwide are giving CSR and shared value creation disclosure an increasing importance, scholars are increasingly questioning the legitimacy and accuracy of CSR reporting (Corazza et al., 2017). These authors argue that many organizations disclose shared value activities in their communications but fail to give enough insights to prove what they are actually doing. In fact, in their study, Wang and basal (2012) controlled for CSR disclosure against actual CSR activities. They found that, CSR activities, but not CSR disclosure, had an effect on financial performance, thus highlighting the differences between actual CSR and disclosure.
12 Additionally, the industry in which a company operates affects CSR disclosure (Halme and Huse, 1997) as companies in industries with a higher social and environmental impact tend to disclose more information related to CSR (de Villiers and van Staden, 2006). In the case of the agri-food industry, Cuganesan et al. (2010) reported that companies with a higher CSR profile (companies with products that have mainly negative connotations), engage in more symbolic disclosures aimed at changing public perception and deflecting attention. Furthermore, the authors concluded that the way in which an activity is reported and focused upon depends on the extent in which the CSR issue is related to the Value Chain business of the company.
The arguments presented above raise the question of how on the influence of CSR disclosure on the results of this study. In fact, albeit not reported, it was noted during data collection that most of the companies focused a large extent of their report on reducing environmental footprint and the wellbeing of their suppliers (i.e. farmers), two of the issues agri-food companies are more scrutinized for (Rueda et al., 2017). It is therefore recommended for future research evaluating CSR activities to look for external sources of information rather than relying on firms’ self-reporting. Additionally, evaluating whether CSR disclosure moderates the CSP-CFP relationship in the agri-food industry could be the topic of further research.
Regarding the direct effect of CSP on the different CFP variables measured, the results showed an effect of ESG scores on one of the three market-based variables (Share Price) and one of the three accounting-based variables (Earnings Per Share). The ambiguity of these results is not uncommon in the CSP-CFP literature as different CFP variables tend to respond differently to CSP and each variable can be influenced by several mediators or moderators (Aguinis and
Glavas, 2012; Grewatsch and Kleindienst, 2015; Luo and Bhattacharya, 2006; Saeidi et al., 2015; Surroca et al., 2010). The positive influence of ESG scores on Share Price is not surprising as
