Corporate Reputation as a determinant in the relationship between Corporate
Social Performance Disclosure and Corporate Financial Performance
By: Dimitra Mania Student Number: 2700816 E-mail: demmie19@gmail.com
Supervisor: Dr. A.A.J. van Hoorn Co-Assessor: Dr. M.M. Wilhelm June, 2015
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Abstract
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Table of contents 1. Introduction………...…….…...8
2. Theoretical Background………...………...11
2.1. Corporate Social Responsibility (CSR)………...……...11
2.2. Corporate Social Performance (CSP)………...……...12
2.2.1. Corporate Social Performance disclosure………....12
2.2.2. The motivation for CSP disclosure...12
2.2.2.1. Resource-Based Theory...13
2.2.2.2. Legitimacy Theory...15
2.2.2.3. Stakeholder Theory...15
2.2.3. CSP disclosure Standards and Guidelines ………...17
2.3. Literature Review...18
2.3.1. The CSP-CFP relationship………...18
2.3.2. The role of reputation in CSP disclosure-CFP link………...20
2.3.2.1.The relationship between CSP disclosure and Reputation...20
2.3.2.2.The relationship between Reputation and CFP...21
2.4. Hypothesis Development...22
3. Data and method………...24
3.1. Sample and data collection………...…....24
3.2. Variables………...…....24
3.2.1. Dependent variable………...…....24
3.2.2. Key independent variables.………...25
3.2.2.1. CSP disclosure...25
3.2.2.2. Reputation...25
3.2.3. Control variables………...…...25
5 3.2.3.2. Industry...26 3.2.3.3. Risk...26 3.3. Method………...26 4. Results………...…..29 4.1. Baseline results………...30 4.2. Robustness ...………...…..31
4.3. Does Reputation mediate the relationship between CSP disclosure and CFP? ...34
4.4. Extensions...36
5. Discussion and Conclusion………....39
5.1. Discussion...39
5.2. Limitations and Future Research...40
5.3. Conclusion...42
References...43
6 List of figures and tables
Figure1: Social Responsibility Categories (Carroll, 1979, p.499) p.11 Figure 2: The stakeholder model (Donaldson and Preston, 1995, p.69) p.16 Figure 3: Application level requirements of the GRI (GRI, 2014) p.17 Figure 4: Conceptual Model p.23 Figure 5: Main effects p.31 Table 1: Descriptive Statistics p.29 Table 2: Standard Regression Results p.30 Table 3: Robustness checks: The effect of reputation on CSP disclosure p.32 Table 4: Robustness check: the effect of ROA on CSP disclosure p.33 Table 5: Results for Mediation Analysis p.34 Table 6: Results for Sensitivity Analysis p.35 Table 7: Results for regression with Reputation as dependent variable p.37 Table 8: Results for regression with ROA as dependent variable p.38 Appendices
7 List of abbreviations
CSR Corporate Social Responsibility CSP Corporate Social Performance CFP Corporate Financial Performance GRI Global Reporting Initiative
WBCSD World’s Business Council for Sustainable Development RBV Resource Based View
PI Performance indicators ROA Return on Assets
R&D Research and Development MAC Most Admired Companies
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1.
IntroductionOver the last years, the rise of attention in firms’ environmental and social related impact led Corporate Social Responsibility (CSR) to be the center of interest in the international business world. CSR is considered a hot issue and more and more companies see CSR as a business opportunity (KPMG 2013), regardless industry or country of operation (Mermod and Idowu 2014). However, no matter how many CSR initiatives a firm develops, without communication the impact of CSR in stakeholder perception would be null (Du et al., 2010). This stems from the fact that communication with stakeholders is not only the means that makes known a firm’s initiatives and achievements but also the purpose of those initiatives and achievements (Du et al., 2010). In other words, Corporate Social Performance (CSP) disclosure is vital for a company. According to KPMG survey (2013), CSP disclosure is now a business standard that all firms comply with. 50% of the companies include CSR information in their annual financial report while this percentage was only 8% in 2008.All these indicate that CSP disclosure tends to be a universal phenomenon (KPMG 2013).
Nonetheless, all these years a debate prevails about whether firms that engage in CSR practices and CSP disclosure also perform better financially, particularly whether these firms have higher Corporate Financial Performance (CFP). According to practitioners, managers take the decision to engage in CSR practices and CSP disclosure when they see that can gain competitive advantage in the long term (Carroll and Shabana 2010, Berger 2007) and only with the primary stakeholders (shareholders, employees, other resource suppliers, customers, community residents, and the natural environment) (Hilman and Keim 2001).Following the aforementioned argument, many studies have focused to discover the direct effect of CSP on CFP. However the results were mixed and showed that ‘companies can do good and do well, even if companies do not always do well by doing good’ (Margolis et al., 2008, p.23). This means that CFP is not the driving motive behind CSP and that this relationship is more complex than it seems (Margolis et al., 2008). So why firms engage in CSP disclosure and devote money, time and resources if it is voluntary and if the financial gains from it are not clear?
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corporate reputation. Reputation is considered a firm’s most valuable intangible resource, offering benefits that can lead to a competitive advantage for the firm (Branco and Rodrigues 2006) and improve CFP (Lee and Roh 2012, Roberts and Downing 2002, Kotha et al. 2001). Furthermore, a good reputation creates a positive impression among stakeholders and helps build long-term relationships with them (Hillman and Keim 2001). Finally, a good reputation could enhance the strength of corporate branding (Downing 2006), could limit a company’s costs from the perspective that employees may choose to work to a reputable firm with lower remuneration, and could offer to a firm the flexibility to increase products’ price without losing part of the market (Roberts and Downing 2002).
Reputation is of vital importance for a firm now more than ever. Nowadays, firms are becoming more and more complex due to the fact that they are consisted of long value chains which are widespread in several countries-phenomenon known as fragmentation (Gereffi et al. 2005). This led stakeholders to increase the pressure for transparency and sustainability. However, over the last years several scandals related to firms’ suppliers occurred which not only caused bad publicity but also unsettled the reliability that stakeholders had to firms. The oil rig disaster in the Gulf of Mexico in April 2010 and the collapse of a garment factory in Bangladesh in April 2013 are only some of the scandals that occurred over the last years. These scandals led to companies’ negative public attention for a long period in the worldwide media, and increased stakeholders’ demand to actions that would prevent such situations for never happening again. So, communication through CSP disclosure provide assistance in the reduction of stakeholders’ unawareness of a company’s attributions in CSR. From their part, stakeholders contribute to firm’s reputation so it is important for a firm to keep their stakeholders informed (Du et al., 2010). What is more, due to the increased competition firms in order to survive need resources that could lead to sustainable competitive advantage. CSP disclosure could be this means that lead to sources that can gain sustainable competitive advantage so that can compete in the globalized world (Branco and Rodrigues 2006). When Nike in the 1990s became a target of boycotts, Reebok due to its strict CSR policy program did not experience anything of these and also benefited financially for being less targeted (Yu 2008).
10 Does corporate reputation mediates the relationship between Corporate Social Performance
disclosure and Corporate Financial Performance?
This is of interest because insider organizational actors are these people that take the decision to engage in CSP disclosure. These people need first to see the instrumental value of these initiatives (Aguilera et al. 2007), since the ultimate purpose of firms is to maximize their financial returns. Although the largest firms report, CSP disclosure in many countries is still in its infancy (KPMG 2013) and more efforts have to be done. For instance there is a limited number of firms that encompass supply chain initiatives in their CSP disclosure (KPMG 2013). So insider organizational actors need to be persuaded to try for more with improving the quality of their reports. In order to do that it would be of great importance to discover the factors that indirect influence CFP so that to plan where and how to target.
11 2. Theoretical Background
2.1. Corporate Social Responsibility (CSR)
World’s Business Council for Sustainable Development (WBCSD) defines CSR as "Corporate
Social Responsibility is the continuing commitment by business to contribute to economic development while improving the quality of life of the workforce and their families as well as of the community and society at large"(p.3), also European Commission’s definition of CSR is ‘Corporate social responsibility(CSR) is essentially a concept whereby companies decide voluntarily to contribute to a better society and a cleaner environment’’ (2001:8). However, as
many practitioners have already contended explicit definition of CSR does not exist (Matten and Moon 1997, William et al.2006, Gossling and Vocht 2007, Campell 2007, Shum and Yam 2010). Carroll (1979), made a summary of all the views referring to CSR and resulted in the assumption that firms have four responsibilities:
Economic responsibilities: to produce goods and services that society wants,
Legal responsibilities: the laws and regulations under which business is expected to
operate,
Ethical responsibilities:behaviors and activities that are not necessarily codified into law but nevertheless are expected of business by society's members,
Discretionary responsibilities: voluntary behaviors and activities that a firm engage,
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with the economic responsibilities to be the base for the others. According to practitioners (Wood 2010,Saeidi et al. 2015), this conceptualization is the best to define CSR.
The aforementioned definitions target to the CSR activities that a firm should engage. However, these activities have as purpose to reach a goal which is the corporate social performance (CSP).
2.2. Corporate Social Performance (CSP)
A conceptualization of CSP made by Wood (1991, 2010) who sees CSP as the outcome of CSR focusing on the impacts of performance.According to Orlitzky et al. (2003, p.408), CSP can be measured by four broad strategies: (a) CSP disclosures, (b) CSP reputation ratings, (c) social audits, CSP processes, and observable outcomes, and (d) managerial CSP principles and values. In this paper, the strategy that will be discussed is CSP disclosure.
2.2.1. Corporate Social Performance disclosure
When talking for CSP disclosure it becomes apparent that there are several synonyms such as CSR reporting (Sutantoputra 2009) and sustainability reporting (GRI 2014). However, in this research the term CSP disclosure is used. Global Reporting Initiative (GRI) call it sustainability reporting and define it as ‘the practice of measuring, disclosing, and being accountable to internal and external stakeholders for organizational performance towards the goal of sustainable development’ (GRI 2013, p.3). We adopted this definition because GRI framework is used in this research.
2.2.2. The motivation for CSP disclosure
There are two cases that prevail about why firms engage in CSP disclosure, the normative and the business case (Branco and Rodrigues 2006). The normative case cope with the notion that firms engage in CSP disclosure because they want to help society without having ulterior purposes (Branco and Rodrigues 2006). On the other hand, the business case idea support that firms in order to have long term benefits must improve their environment (Carroll and Shabana 2010).
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targets, easier implementation of the environmental strategy, greater awareness of broad environmental issues throughout the organization, ability to convey the corporate message internally and externally, license to operate, reputational benefits, enhanced business development opportunities and enhanced staff morale, improved credibility from greater transparency and ability to communicate efforts and standards. Deegan (2002 p.290) also have listed several potential reasons for CSP disclosure such as the desire to comply with legal requirements, to believe in an accountability to report, to comply with community expectations, to protect firm’s legitimacy, to manage particular stakeholder groups, to attract investment funds, to comply with industry requirements and to win reporting awards that have implications to their reputation.
It can be implied from the aforementioned that the majority of the motives are related to the business case argument and more specifically to reputation. Three theories, Resource-based theory, Legitimacy theory and Stakeholder theory can best explain the business case and make one understand better the reasons that a firm could engage in CSP disclosure according to the business case argument.
2.2.2.1. Resource-Based Theory
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policies over some period of time, reputation for quality may be built rather than bought(Dierickx and Cool 1989, p.1506)
So, in order firms to acquire sustained competitive advantage, resources must meet four conditions. They must be:
valuable-improve a firm’s efficiency and effectiveness,
rare- possessed by a small number of competing firms,
imperfectly imitable- causal ambiguous ,social complex or based on unique historical
conditions,
without substitutes (Barney 1991).
If the resources own these characteristics then a firm could obtain a sustained competitive advantage vis-à-vis other companies.
15 2.2.2.2. Legitimacy theory
The legitimacy theory explains why the management may take decision of environmental and social disclosure that favors society (Deegan 2002). According to Deegan (2002), organizations are part of a broader social system and exist to the extent that society believes that are legitimate. Organization and society have a ‘social contract’ and if society perceives that the organization will not operate in a legitimate manner then there will be consequences. Dowling and Pfeffer (1975, p.127) contend that three actions could be done by an organization to obtain legitimacy:
“The organization can adapt its output, goals and methods of operation to conform to prevailing definitions of legitimacy.”
“The organization can attempt, through communication, to alter the definition of social legitimacy so that it conforms to the organization’s present practices, output, and values.”
“The organization can attempt, again through communication, to become identified with symbols, values, or institutions which have a strong base of social legitimacy.”
CSP disclosure can be an important factor to assist a firm in order to gain legitimacy as it can encompass the three aforementioned actions. Lightstone and Driscoll (2008), tested Canadian companies’ disclosure as a tool to gain legitimacy and they found that when bad news was communicated also positive information was provided which had as a purpose to mislead the stakeholders’ perception about the bad news. So, disclosure achieve legitimacy as it works as an offset between good and bad news. Cho and Patten (2007) also found evidence that environmental disclosures are used as a tool for legitimacy and that companies with bad environmental performance are disclosing more environmental information
2.2.2.3. Stakeholder theory
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and there is no group that have priority over the others, that is why the arrows run in both directions (Donalson and Preston 1995).
There are two views for stakeholder theory, the instrumental and the normative view. The instrumental view for the stakeholder theory explains that if firms fulfil all stakeholders’ desires they will have better performance (Donaldson and Preston 1995).This is one of the reasons that many practitioners tried to investigate the CSP-CFP link (Carroll and Shabana 2010) that we are going to discuss in 2.3.1.. This view indicates that stakeholders should be taken into account as means to the goal of profit maximization (Branco and Rodrigues 2007).
There are many researches that present the importance of the stakeholders as a means to a better performance. Hillman and Keim (2001) see stakeholders as a source of a competitive advantage which can be created by long- term relationship with primary stakeholders. What they claim is that if a firm’s relationship with their primary stakeholders is relational rather than transactional then there is the possibility to convert this relationship to an intangible resource that could lead to competitive advantage.Waddock and Graves (1997, p.306-307) indicate that improved relationships with key stakeholder groups result in better performance. Dentchev (2004) proved that CSP can lead to the improvement in the relationship with the stakeholders which in turn can lead to increased financial returns. However, he also found that CSP may harm a firm’s core business which may be a result of poor implementation of CSP and lead to bad reputation if CSR practices are not the one expected from the stakeholders. So we can understand from the aforementioned that a firm’s relationship with their stakeholders is vital. Finally, Huang and Kung (2010) examined the power of stakeholder pressure to firms’
Figure 2: The stakeholder model (Donaldson and Preston, 1995, p.69) Governments Trade Associations Employees Political Groups Investors Communities
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environmental disclosure and found that stakeholders play a vital role to the level of environmental disclosure.
2.2.3. CSP Disclosure Standards and Guidelines
As CSP disclosure is a voluntary action, a plenty of frameworks have made their appearance over time including United Nations Global Compact, AA1000 series, OECD for multinational enterprises and GRI. Among them, GRI is considered the most generally recognized standard (Wilburn 2013, Sutantoputra 2009, Isaksson and Steimle 2009) and it is going to be explained below.
Global Reporting Initiative
The GRI Reporting Framework was founded in 1997 and is intended to serve as a generally accepted framework for reporting on an organization’s economic, environmental, and social performance (GRI 2014) due to the increased stakeholder demand for globally accountability and comparability (Sutantoputra 2009). GRI is considered as the most useful framework for sustainability reporting (Wilburn 2013) and it enables greater transparency and accountability which in turn increase trust that stakeholders have in an organization (GRI 2014). The organization publishes sustainability reporting guidelines that can be used by organizations to
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report and assess their progress toward achieving CSR goals each year. A standard disclosure should provide different information types (strategy and profile, management approach and performance indicators (PIs)) (Bouten et.al. 2011).
The GRI allows companies that follow these guidelines to publish them on the GRI website where reports are classified as application level A, B, C and a + when external assurance was sought for the report. When an organization submits report for the first time a C is used which declares that a firm has report a set of the Profile disclosures and 10 PIs. For B, firm must fulfil C level requirements and report on at least 20 PIs and address the management approach disclosures. Level A is for advanced reporting organizations and in this level reports include all disclosures for Profile Disclosure, Management approach and PIs.
2.3. Literature Review
2.3.1. The CSP-CFP relationship
The business case made practitioners investigate the relationship between CSP and CFP which is of the utmost importance as it shows to managers whether they should be cautious or pursue CSR activities (Cochran and Wood 1984). So, many practitioners tried to establish a business case so that to persuade managers why it is good for a firm to behave in a responsible manner (Wood 2010).
From the 1980s many researches tried to find a link to the relationship between CSP-CFP (Carroll and Shabana 2010)with the results to vary from positive (Orlitzky et al. 2003, Margolis et al. 2008, Beurden and Gossling 2008) to negative (Makni et al. 2008, Brammer et al. 2006) and neutral (McWilliams and Siegel 2000, Aupperle et al. 1985). Wood (1991) supported that business and society are interwoven rather than distinct. She stated that this connection is why people have expectations for appropriate outcomes and that financial performance was not the only one but one of the dimensions of CSP and people that tried to link this relationship were misguided. However, studies proved that this was not true. As it was advocated, engagement in CSR is instrumental which means that the business case for CSR exists (Hamill 1999). Some of the studies that try to close the gap between the CSP and CFP relationship are cited below.
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al. (1997), found that investor behavior is negatively correlated with CSR initiatives. As they proved,Defense Industries Initiative (DII) firms compared with non-DII defense firms have a negative impact in their future cash flows as the markets react negative to an ethical initiative.
Aupperle et al. (1985) found no significant CSP-CFP relationship. They used Forced Choice Survey instrument as a measure for CSR, Return on Assets (ROA) as a financial measure and risk as control variable. They supported that there is no difference between firms that engage in CSR and firms that are not. The results are the same with or without control for risk either for the short-term or the long-term. A neutral relationship was also found by McWilliams and Siegel (2000). The results indicate that CSR and R&D are highly correlated. However, when they controlled the intensity of Research and Development (R&D) that previous studies omitted the results indicate that the relationship between CSP and CFP is neutral.
Cochran and Wood (1984) examine the CSP-CFP relationship and found that asset-age is correlated with CSR, leading to a positive relationship with CFP. Considering this, they controlled the asset age variable and the results indicated a positive link between CSP-CFP. McGuire et al. (1988) using both market and accounting performance measures found that prior CFP is more closely correlated to CSP than subsequent. Graves and Waddock (1997) also investigated the connection of CSP-CFP. They used accounting measures for CFP and examined whether CSP can be both dependent and independent variable. They supported that firms that have good CFP would allocate resources to CSR and this would improve more the CFP. They also proved that CSP is positively associated with future CFP so that a virtuous circle exist. Griffin and Mahon (1997) continued an existed research in the chemistry industry with using several sources of data measures for both CSP and CFP and found a positive relationship. Finally, Beurden and Gossling (2008) conducted a literature review on the relationship CSP- CFP and found that overall, CSR pays off the companies.
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from highly to modestly positive relationship, due to contingencies such as reputation. Five years later Margolis et al. (2008) conducted a new meta-analysis with an even bigger coverage of 167 studies over the period 1972-2007, providing a deeper analysis. This analysis also proved a positive but weak relationship between CSP and CFP. However, they also supported that financial reward gained from acting socially responsible is less than the financial impact of being wrong (poor CSP can lead to e.g. damage of reputation and drops in sales). So the motive for engaging in CSR is not direct for improving CFP.
2.3.2. The role of reputation in the relationship between CSP disclosure and CFP
2.3.2.1. The relationship between CSP disclosure and Reputation
According to practitioners, CSP disclosure can work both as a means to improve reputation (Fombrun and Shanley 1990, Toms 2002 Espinosa and Trombetta 2010, Shauki 2010,Michelon 2011, Bayoud and Kavanagh 2012, Perez 2015) and as a reputation insurance (Fombrun et al. 2000, Minor and Morgan 2011, Bebbington et al. 2008)
Reputation enhancement has been observed by various practitioners. Toms (2002) found that annual report might promote the creation and management of environmental reputation. Espinosa and Trombetta (2010) proved that companies with better annual report disclosure are more likely to be rated among top 50 national companies in terms of reputation and that CSP disclosure scores, positively affect reputation scores. Michelon (2011) found that reputation is a determinant of sustainability disclosure and that both commitment to stakeholders and media exposure are positively related to sustainability disclosure. Bayoud and Kavanagh (2012) supported direct and positive relationship between CSR information related to innovation and risk management and reputation. Finally, Shauki (2010) proved that information quantity influences the social and environmental reputations of companies.
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management’. Although normally, CSR practices may reflect a cost for the company, when an incident arises, the firm is insured to the extent that its past CSR activities tip the scale toward bad luck rather than bad management, saving the firm money, avoiding regulatory scrutiny, and preserving the value of its brand. That is, a firm’s history in CSR creates the perception to the stakeholders that a bad incident occurs due to factors out of firm’s control rather than negligence. Finally, Bebbington et al. (2008), contend that there is evidence that firms use CSP disclosure to manage reputational risk and they further investigate Shell’s reports to see if this is the case. They concluded that reputational risk plays a role in making the report although the way that is achieved is highly complex.
2.3.2.2. The relationship between Reputation and CFP
22 2.4. Hypothesis Development
All these years, researches tried to investigate the CSP-CFP link but the results were rather inconclusive. The two meta-analyses which were conducted show that the direct link between CSP-CFP although it is positive it is not so strong to explain firms’ engagement on it. As a result, researchers speculate that there are indirect factors that lead companies to engage in CSP disclosure. As emerges from the literature, we claim that one of this indirect factors is reputation.
According to the RBV reputation is a firm’s most valuable intangible asset. Reputation reflects the stakeholders’ perception of a firm whether is good or bad which in turn could lead to sustained competitive advantage, better financial performance or signal success (Galbreath 2010).Fombrun and Shanley (1990) state that firms have multiple stakeholders each one of whom evaluates corporate performance differently and so, reputation is a combination of different signals that in the end generate a firm’s reputation. So firms have to keep in balance their multiple stakeholders’ needs. A way to succeed it is CSP disclosure. CSP disclosure reflects a means of communication between a firm and its stakeholders (Du et al., 2010). If firms do not disclose their achievements in CSR, then it would be difficult for the stakeholders to know for these achievements. However, even when stakeholders know about this achievements they need to believe that at least these CSR initiatives serve both the needs of the society and a firm’s profits or it is aimlessness for the firms to engage in CSR initiatives (Du et al., 2010). This is due to the fact that if stakeholders realize that the only thing that offer these CSR initiatives is increase in profits then they will not support it (Du et al., 2010). So, accordance with the stakeholder expectations for CSR is of utmost importance and can lead to better reputation (Brammer and Pavelin, 2006) or can damage it (Brammer and Pavelin, 2006, Denchev 2004). The reputational effect vary across sectors and within sectors across the various types of CSP and firms that want to improve their reputation have to fit practices with what stakeholders feel right (Brammer and Pavelin 2006). So we can assume that CSP disclosure can provide benefits to a firm with both improving reputation and protecting from reputation damage. To continue, reputation has an undisputable positive relationship with CFP. So firms dependent on the expectations that their stakeholders have for their initiatives will have an either positive or negative impact on their profits.
23 CSP Disclosure Reputation Corporate Financial Performance
Figure 4: Conceptual Model
As it can be seen by the conceptual model, CSP disclosure has an effect in CFP but this effect is both direct and indirect. To elaborate, we assume that CSP disclosure has a positive direct effect on corporate financial performance. Also we assume that CSP disclosure has an indirect positive effect to corporate financial performance through reputation. So we further support that CSP disclosure has a positive effect on reputation and reputation has a positive effect on Corporate Financial Performance. As a result, we claim that this relationship is mediated by corporate reputation due to both theoretical and empirical evidence mentioned. So our hypothesis is:
24 3. Data and method
3.1. Sample and data collection
The sample is based in the Fortune Global 500 list. We started with 500 observations which were reduced in 141 due to lack of data available in reputation and GRI reports. These companies are in the frontline of business due to their revenues and have a lot of publicly available data. The GRI framework will be used for the measurement of CSP disclosure, as it has been already mentioned that researchers consider GRI as the most useful framework for sustainability reporting (Wilburn 2013). Second, as its measure of the reputation this research will use the scores of the Most Admired Companies (MAC) taken from the reputation index of the Fortune 500. These data have been used in several studies to measure reputation including the works of Griffin and Mahon (1997), and Fombrun and Shanley (1990) and despite the criticisms against the financial bias of the data published in Fortune, this survey is still the most widely used in the empirical research arena (Sabate and Puente 2003). As such, this dataset is an excellent measure of business people’s reputational view of the firm. Research is conducted by the Hay Group since 1997. Finally for the CFP, Orbis database is used. This research uses cross-sectional data and the year investigated is 2012 due to lack of data for the most recent years.
3.2. Variables
3.2.1. Dependent variable
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earnings by its total assets, and gives an idea of how efficient management is at using a company’s assets to generate earnings.
3.2.2. Key independent variables
3.2.2.1. CSP disclosure
To categorize CSP disclosure the application level of the GRI 3 and GRI 3.1 frameworks are used because these frameworks are the one used in the year researched. The reports are classified as application level A, B, C and a + when external assurance was sought for the report. Also reports that apply the GRI framework but have undeclared application level are included. Undeclared application level means that the firm follow the GRI guidelines but they do not include in their report which application level they follow. In order to measure the application level a point system score is created which has been also used in previous researches (Giannarakis and Theotokas 2011). This point system score will classify the companies dependent on their GRI application level from 1 to 7. For the classification of the application level see Appendix II.
3.2.2.2. Reputation
To measure reputation the scores from the Most Admired Companies are used. These scores are based on a survey of business executives, directors, and analysts who rate eight categories of corporate performance (i.e., innovation, people management, financial soundness, quality of management, use of corporate assets, social responsibility, long-term investment, and quality of products/services); ratings from each category are then averaged to provide a single stakeholder assessment.
3.2.3. Control variables
In order to prevent our model from searching for a useless correlation three control variables were added to the model: firm size, industry and company risk. These three variables were chosen as they are the most used (Margolis et al. 2008) for controlling CSP-CFP relationship as they affect both CSP and CFP (Ullmann 1985).
3.2.3.1. Firm Size
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for CSP disclosure than smaller firms. This happens due to the fact that larger firms are more likely to have the necessary financial, managerial and technical know-how to practice CSR activities (Waddock and Graves 1997, Ulmann 1985). To control for the impact of firm size on CSP disclosure and the CFP of the listed companies in this study firm size will be measured by using ln of total assets
3.2.3.2. Industry
Waddock and Graves (1997) emphasized the necessity of including industry as a control variable as firm performance differ per industry and is considered an essential component that not only has an effect on the company’s financial performance but also on the ability and likelihood to engage in CSR (Ullman 1985). Industries like heavy manufacturing, chemicals and oil, are considered as more ‘dirty’ than other industries and stakeholders may be more demanding in some industries than in others (Griffin and Mahon, 1997).To control for these industry differences dummy variables are used. The industries are grouped into the following nine categories that are identified by the North American Industry Classification System (NAICS): (1)agriculture, forestry and fishing (2)mining; (3) construction; (4) manufacturing; (5) transportation, communications, electric, gas, and sanitary services; (6) wholesale trade; (7)retail trade; (8)finance, insurance, and real estate; and (9) services. In line with prior research a SIC (Standard Industrial Classification) code is used to control for industry effects (Cochran and Wood 1984, McWilliams and Siegel 2000). For the classification of the different industries, see appendix I.
3.2.3.3. Risk
Risk is added because in prior researches, risk is one of the most used control variables because of the strong relationship between the firm’s risk and its financial performance (Waddock and Graves 1997). In this research it is used the debt ratio to proxy the management’s risk acceptance level which reflects the level of debt held by the company and indicates the proportion (in percent) of the company’s assets that has been financed through debt (Waddock and Graves 1997).
3.3. Method
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the mediator variable (reputation) and the dependent variable (CFP) is determined using regression analysis. Finally, the relationship between the independent variable (CSP disclosure) and the dependent variable (CFP) must be predicted to confirm that the independent variable (CSP disclosure) is a significant predictor of the dependent variable (CFP). However, in recent years a new method has been studied called causal mediation analysis which highlighted limitations of previous methods used including and the traditional method (Tingley et al., 2014). According to Hicks and Tingley (2011) the traditional approach does not permit sensitivity analysis and also is difficult to be extended to non- linear models. Causal mediation analysis can surpass these two limitations. The main difference with the traditional mediation is that instead of controlling for the mediator allows to the mediator to vary so that any changes on the dependent variable not to be attributed only to the independent variable (Imai et al., 2011). To use this approach we make the assumption that there is no unmeasured confounder for 1. the independent - mediator, 2. mediator - dependent, 3. independent - dependent (Imai et al., 2011). In order to test the hypothesis this research follows the causal mediation analysis and the package used is STATA.
So, to test the hypothesis, I estimate the following two basic models:
REPi= α1+ β1CSPDi+ ξ1SIZEi+ξ2INDi+ξ3RISKi+ε1
CFPi = α2 + β2CSPDi +γREPi +ξ4SIZEi +ξ5INDi+ξ6RISKi+ ε2
CFPi = ROAᵢ of company i, (Net Profit / Total Assets) α1 = intercept, the estimated value of REPᵢ
α2 = intercept, the estimated value of CFPᵢ ξi , γ= structural parameters
CSPDᵢ = GRI application level of company i
28 INDᵢ= industry of company i, (2 digit US SIC Code)
29 4. Results
Means, standard deviations, minimum and maximum for the dependent, independent, mediator and control variables are presented on table 1. In order to see if our variables are correlated we
conducted Spearman’s test with a significance level of 0.05.Based on the Spearman correlation
analysis of the sample firms, there is some evidence available that a relationship between CSP disclosure and ROA exists. However this relationship is negative, which indicates that engagement in CSP disclosure reduce the profits of the company although the evidence is not very strong. On the other hand, CSP disclosure and reputation have a positive correlation although again the evidence is not very strong, indicating that Corporate Social Performance affects positive the reputation but not in a significant degree. Finally, reputation and ROA have a positive strong correlation which means that reputation increase company’s profits. Correlation results are presented in Appendix V. Moreover, tests for normality were conducted the results of which are in Appendix VI. Also tests for multicollinearity were conducted and we did not find highly correlated variables something that can be also derived from the correlation analysis.
Table 1 Descriptive Statistics
Variable Observation Mean Std.Dev. Minimum Maximum
30 4.1. Baseline results
Models 1 and 2 in Table 2 are the most basic models including the basic variables CSP disclosure, Reputation and CFP. First we examined the influence of CSP disclosure to the mediator-reputation (Model 1). Then, a second regression analysis was conducted indicating the influence of CSP disclosure to ROA with also including reputation (Model 2). As it can be seen there is a very weak adjustment of the first model. CSP disclosure (β=-.011, p>0.1) seems not to be a significant variable for reputation and also the result indicate that when CSP disclosure increase, reputation decrease which is surprising. In the second regression (Model 2) the adjustment of the model is better. Reputation (β=.025, p<0.001) is a significant variable for CFP and implies that when reputation increases profits increase too. On the other hand CSP disclosure (β=-.002, p>0.1) seems to have an insignificant effect on profits and also a negative one. This indicates that when CSP disclosure increases the profits decrease.
Table 2 : Standard Regression Results
Standard errors in parentheses.
31 Corporate Social Pperformance Disclosure Reputation Corporate Financial Performance 0.025*** -0.002 -0.011
Figure 5: Main effects
4.2. Robustness
In order to check if our results are biased, robustness test is conducted. One method to check for robustness is with adding control variables( Plumper and Neumayer 2012). When baseline results differ significantly when one adds control variables then one could assume that the results are not robust( Plumper and Neumayer 2012). So here size, risk and industry are added as control variables to complement Models 1 and 2.
In table 3 we can see how the relationship of CSP to reputation changes when adding size, risk and industry control variables. Compared with Model 1 the CSP disclosure becomes significant variable for reputation when controlling for firm’s size (β=-.070, p<0.1) and then again when controlling for all variables together (risk, industry and size) (β=-.104, p<0.05). Moreover, firm’s size (β=-.139, p<0.001) also influence reputation. We can assume that the bigger the size of the firm the more the expectations of the stakeholders and if these expectation are not meet this may harm their reputation. Risk and industry factors does not seem to influence CSP disclosure practices and reputation.
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Table 3 : Robustness checks: The effect of reputation on CSP disclosure
Model 3 Model4 Model 5 Model 6 Intercept 8.927196*** (.7301185) 6.224771*** (.2344652) 6.512845*** (.8995376) 8.309141*** (1.089662) REPi CSPDi -.070539 † (.0397612) -.0039064 (.0395527) -.0528446 (.0399201) -.1046041* (.0437694) RISKi -.3729287 (.3317255) -.392738 (.3291176) SIZEi -.1390480*** (.0343027) -1250398*** (.0371226) CONSTRU C -.6571554 (1.271512) -1.625437 (1.220222) FININS -2.52* (1.270885) .2295322 (.8863955) MANUF -.8828341 (.9159764) .799689 (.8777717) MINING -.2689442 (.9125983) .8695414 (.9095342) RETAIL -.1538571 (.9404384) .679507 (.9065121) SERVICE -.0503355 (.9490151) 1.089325 (.943115) TRANSP .3522582 (.988333) 1.094076 (.8938564) WHOLES .0401807 (.9330008) .7396505 (1.219023) F 0.0004 0.5104 0.0059 0.0001 R-squared .1070 0.0097 .1583 .1770
Standard errors in parentheses.
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Table 4 : Robustness check: the effect of ROA on CSP disclosure
Model 7 Model 8 Model 9 Model 10
Intercept -.0071998 (.0648816) -0.065122† (.0330738) -.12641 (.0656382) -.0088465 (.0823359) REPi .0226154*** (.0052409) .0240915*** (.0048588) .0259281*** (.0053878) .0215056*** (.0055234) CSPDi -.004608 † (.0024757) -.0017483 (.0022577) -.0026218 (.0024781) -.0034205 (.0028059) RISKi -.0595824** (.0190209) -.0506326* (.0207604) SIZEi -.0038238† (.0022341) -.0038046 (.0024291) CONSTRUC -.0029838 (.0784895) -.0646163 (.0770736) FININS .0510202 (.0795383) .0319965 (.0556213) MANUF .0189338 (.0562953) .035667 (.0552427) MINING .0185697 (.0562953) .0445139 (.0572602) RETAIL .0373799 (.0579994) .0236991 (.0569925) SERVICE .0129485 (.058523) .0762001 (.0594702) TRANSP .0674429 (.0609765) .0137752 (.0563995) WHOLES -.0073672 (.0575352) .0182113 (.0765828) F 0.0000 0.0000 0.0001 0.0000 R-squared .1871 .2252 .2315 .2166
Standard errors in parentheses.
34 4.3. Does Reputation mediate the relationship between CSP disclosure and CFP ?
Coming in the argument that CSP disclosure affects a firm’s financial performance through reputation requires us to test the mediating effect of reputation. In this analysis, CSP disclosure, especially GRI application level is the independent variable and ROA is the dependent variable. We consider a direct effect of CSP disclosure in CFP but also an indirect, mediated effect through reputation. Table 5 presents the results. This table provides information for the mediation analysis with encompassing the average causal mediation effect (ACME), direct and total effects. ACME is the product of the coefficients of CSP disclosure(Model1) *Reputation(Model2). In other words, shows the indirect effect of CSP disclosure to CFP through reputation. Here, the average effect of the treatment variable on the outcome that operates through the mediator for our basic models 1, 2 (model 11) is insignificant. Although the coefficients of Reputation (β=.025, p<0.001) (Model 2) are significant, the coefficients of CSP disclosure (β=-.011, p>0.1) (Model 1) are not. The estimates of the direct effect of CSP disclosure to CFP are negative which means that there must be some other mechanism which is more important than reputation and that makes the impact of CSP disclosure on CFP negative. The total effect is the sum of ACME and direct effect and is also not significant. All in all, the results show that the relationship between CSP and CFP is not mediated by reputation as the models are not statistically significant which lead us to the rejection of our hypothesis that reputation mediates the relationship between CSP disclosure and CFP.
Table 5: Results for Mediation Analysis
Model 11 (1,2) Model 12 (3,7) Model 13 (4.8) Model 14 (5.9) Model 15 (6,10) ACME .0002937 -.0017207 -.0002093 -.0014157 -.0023031 Direct Effect -.0031553 -.0043382 -.0015023 -.0025386 -.0030116 Total Effect -.003449 -.0060589 -.0017115 -.0039543 -.0053146 %of Tot Eff
mediated
35
In order to see if our mediation-model is valid, we conducted sensitivity analyses for each mediation model. Sensitivity analysis is based on the correlation between the error terms of the mediator and of the outcome and investigate how robust the results are to the assumption of unmeasured confounders (Hicks and Tingley 2011). There are two ways to check the robustness of the mediation. The first is to answer the question how large Rho have to be for the mediation effect to disappear and is counted by the correlation between the errors εi1 and εi2. The alternative approach is to check R-squared which shows to what extent there is an omitted confounder that could explain a remaining variance in the mediator and a remaining variance in the outcome, for the ACME to be zero. The results of the sensitivity analyses are presented in table 6. As we can see in Model 16 which is based in our basic model, there is an unobserved confounder that could explain 16% of the variance in mediator and 13% in the outcome. As we add control variables we see the results to vary. In Model 20 where all control variables are added, we can see that still is not explained 10% of the variance in reputation and 5% in the outcome. Also it can be implied that only size is a significant control variable for reputation and there are still other confounders that missing. So our results are not robust.
Table 6: Results for Sensitivity Analysis
95% confidence interval
To summarize, our models indicate results that lead us to reject our hypothesis that reputation mediates the relationship between CSP disclosure and CFP.
Sensitivity Results Model16 (1,2) Model 17 (3, 7) Model 18 (4,8) Model 19 (5,9) Model 20 (6,10) Rho at which ACME=0 .3995 .3459 .3901 .3889 .3254
36 4.4. Extensions
To have a more complete view of our model we included 60 firms that do not disclose their CSP and 40 that do disclose but they do not use the GRI guidelines. In table 7 and 8 we can see the results for the regressions with dependent variable the corporate reputation and CFP respectively.
As it can be seen in table 7, it is obvious that a firm’s size plays a significant role for the reputation. CSP disclosure with GRI affects positively reputation (β=0699858, p>0.1) (Model 21) whereas no disclosure of CSP has a negative effect on a firm’s reputation (β=-.1293333, p>0.1).This comes in contrast with the results above as we found that CSP disclosure affects negatively reputation. Conversely, in table 8 we can see that both CSP disclosure with GRI (β=-.0060227, p>0.1) and no CSP disclosure (β=-.0160814, p>0.1) have a negative impact on a firm’s profits. Nevertheless, firms that do not disclose any guidelines face bigger loss in their performance than firms that do disclose GRI guidelines.
37
Table 7: Results for regression with Reputation as dependent variable
Standard errors in parentheses.
† P<0.1, *p< 0.05, ** p< 0.01,***p<0.001
38
Table 8: Results for regression with CFP as dependent variable
Standard errors in parentheses.
† P<0.1, *p< 0.05, ** p< 0.01, ***p<0.001
39 5. Discussion and Conclusion
5.1. Discussion
In this research it was found that Reputation is not a mediator for CSP disclosure and CFP. This was beyond our expectations. More specifically, a negative albeit insignificant relationship was found between CSP disclosure and CFP and between CSP disclosure and reputation. The results indicate that there must be some other mechanism which is more important than reputation and that makes the impact of CSP disclosure on CFP negative.So the question that arises is why firms follow guidelines and devote resources for CSP disclosure if it is not for reputation and the effect on CFP is insignificant?
One explanation for these results is that stakeholders may see these CSR initiatives as an instrumental gesture that has as a purpose the marketing and the increase of firms’ bottom line. So these initiatives have no real imlications on the environment or in society (Du et al. 2010). According to Du et al. (2010, p.10) ‘a key challenge for CSR communication is how to minimize stakeholder scepticism and to convey intrinsic motives in a company’s CSR activities. In other words, how to persuade the stakeholders that at least there is a benefit for both firms and society from these initiatives.This stems from the fact that stakeholders react negatively if they have the impression that they are being deceived and that the CSR activities are used only as a marketing tool (Du et al. 2010). ). Dentchev (2004) claimed that while CSP can improve a firm’s profits, a poor implementation of CSP could lead to bad reputation if CSR practices are not the one expected from the stakeholders. In his work Perez (2015) also supports that the volume of disclosure is not enough to lead to better corporate reputation but also quality is important. So the results that we found strengthen the perspective that firms may do it for a marketing purpose and not focus on it as much as they should. It should be also taken into account that the firms used in the sample are the largest in the world. As we found that when the size of a company increase the reputation decreases, this may mean that stakeholders expect more from these companies in CSP disclosure, and so these firms do not fulfill their expectations. This can also be supported from the results as when controlling for firm’s size CSP disclosure becomes significant variable for reputation. This finding support researches that claim that stakeholders have more demands from large companies than from the medium and small sized companies (Ullman 1985, Waddock and Graves 1997)
40
than in developing countries (Marimon et al. 2012). As a result CSP disclosure may be taken for granted. So CSP disclosure cannot be considered as a source that could create competitive advantage as something inimitable and hard to obtain. So it can be considered that has no effect on profits. What is more, as these companies are renowned as the most of them have been existed for several years before CSP disclosure become a trend, CSP disclosure may not influence their reputation since these firms have already build their image. So this may lead us to the assumption that for these firms CSP disclosure is not an effective communication tool. As the results showed that CSP disclosure has a negative effect on reputation, this may indicate that stakeholders do not care neither for the quantity nor for the quality of CSP disclosures. This may happen because as I have already mentioned these firms are well established in the corporate world and have earned their stakeholders’ trust and loyalty.
Nonetheless, companies may be affected in a negative way if they do not follow CSR guidelines. As practitioners have supported (Bebbington et al. 2007, Fombrum et al. 2000), the cost of not complying may be larger than complying, as if a misfortune happen stakeholders would not consider it as negligence but as bad luck (Minor and Morgan 2011). This can be supported from the results on Tables 7 and 8 where it can be seen that compared with the firms that disclose GRI guidelines, firms that do not disclose at all have bigger losses both in their reputation and in their financial performance.
Striking is also the result that industry effects have no impact on CSP disclosure and CFP. This go against prior researches that have supported heterogeneity across industries (Ullman 1985, Griffin and Mahon 1997, Waddock and Graves 1997). Hoepner et al. (2010) advocated that some industries pay more attention in CSR practices and CSP disclosure than others and that the relationship CSP-CFP is not homogeneous across industries. However if we take into consideration the above potential explanations that justify why we did not take the expected results, we can understand that these implications are valid for all industries with no exemption.
Finally, as the results for our initial model do not indicate big returns from disclosing CSP performance one may wonder if indeed companies that engage in CSR practices and CSP disclosure they do so because they follow the normative case for CSR.
5.2. Limitations and Future Research
41
research did not find any significant results. This small size is due to the small number of companies that already set up a GRI report in the year of 2012. So in future research bigger samples should be used when investigating this relationship. Also, in this research a single year was investigated. Future researches should include longitudinal data to investigate if there is a difference in this relationship between firms that engage constantly and firms that are not. Furthermore, it would be interesting to observe how the results may change over the years. As we saw in tables 7 and 8, compared with the firms that disclose GRI guidelines, firms that do not disclose at all have bigger losses both in their reputation and in their financial performance. However the research is cross sectional and we cannot predict if this is the fact in the long term because it is possible that more years needed in order to obtain stakeholders’ trust. Kolk (2010) has distinguished the firms as consistent reporters, consistent non-reporters and inconsistent reporters. So it would be a good idea to investigate whether there is a difference in the results if compare these three groups in the long-term. Also, a research over the years is interesting due to the fact that we can observe how the results may change as stakeholders get more and more familiar with the concepts of CSR and CSP disclosure.
Another limitation is that only the GRI reporting framework is tested. Firms use also other frameworks to disclose CSR information like United Nations Global Compact and AA1000 series. We included only GRI framework which means that the results could differ if we included also other CSR reporting frameworks. However it is difficult to compare different frameworks as they have different ways of measurement. This means that the results are difficult to be generalized. So in future research, content analysis of CSR reports should be used as a measure to gather information from CSR reports which encompass different frameworks and test our model
42
Finally, the data of the reputation is based on the reputation index that is provided by the Fortune 500. This reputation index is compiled by business people of international companies, which is not an accurate representation of total society and all stakeholder sentiment. It is difficult to find a database that represents companies’ reputation that is representative of the impression of total society. So future research should encompass a proxy for reputation that include both the perception of the business people and the consumers.
5.3. Conclusion
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