University of Business and Economics Faculty of Business Corporate Social Responsibility from a Strategic Intent: is it an Industry Matter? Master Thesis - Mei 2009

University of Business and Economics Faculty of Business

Corporate Social Responsibility from a Strategic Intent: is it an Industry Matter?

Master Thesis - Mei 2009

Author: Ms. C.C. DISCH1

Address: Moreelsestraat 1, 1071 BJ Amsterdam Student #: 1381865

Telephone #: +31 6 28908539 Email address: christinedisch@hotmail.com

Supervisors:

Prof. Dr. L. Kartsen (l.karsten@rug.nl)

Dr. J.C.E. Becker Ritterspach (J.C.E.Becker.Ritterspach@rug.nl)

1

Corporate Social Responsibility from a Strategic Intent: is it an Industry Matter? 2 ABSTRACT

This paper heeds to numerous research implications that called for CSR research on industry level. I build my hypotheses on current literature that treat CSR as a strategic business choice; the latter suggests that firms engage in CSR because they expect that in the long term some kind of benefit will accrue to them that outweighs the initial CSR costs. The Resource-Based View (RBV) is introduced in this thesis to provide a theoretical background for this strategic intent. Furthermore, the RBV puts forward the importance of information disclosure when engaging in CSR. The Structure-Conduct-Performance comes in to investigate the relationship between the industry‟s concentration ratio (structure), the level of CSR (conduct) and financial performance (performance) for four industries. I perform a multiple regression analysis to test the sample, which originates from a database provided by Fortune Magazine for the years 2005-2008. The analysis shows insignificant results and I am unable to detect an industry effect. However, this paper does contribute to existing CSR literature by performing research from a new strategic angle.

TABLE OF CONTENTS

1. INTRODUCTION………. 5

1.1 Research Objective 5

1.2 Contributions 7

1.3 Structure of the paper 8

2. THEORETICAL FRAMEWORK………. 9

2.1 Research Territory 9

2.2 CSR history: the shareholder versus stakeholder debate 10

2.3 CSR history: the factors that facilitated CSR 11

2.4 The relationship between Corporate Social Responsibility (CSR)

And Corporate Financial Performance (CFP) 13

2.5 CSR as a business strategy: the Structure-Conduct-Performance (SCP) model

and the Resource-Based View (RBV) 14

3. LITERATURE REVIEW AND HYPOTHESES……….. 21

3.1 Industry research 21

3.2 Inter Industry differences in the level of CSR 22

3.3 Industry structure and the level of CSR 23

3.4 Industry structure and the CSR-CFP relationship 25

3.5 Organizational visibility 26

3.6 The Conceptual Model 27

4. METHODOLOGY………..………….. 29

4.1 Methods 29

4.2 Sample and data collection 29

4.3 Variables 31

4.4 Economic model 33

5. RESULTS……….. 35

5.1 Variance analysis 35

5.2 Diagnostic tests 35

5.3 Normality and Homoskedasticity of the Residuals and Outliers 37

Corporate Social Responsibility from a Strategic Intent: is it an Industry Matter? 4 5.5 Regression results 38 6. FINAL REMARKS………... 41 6.1 Conclusions 41 6.2 Contributions 42 6.3 Limitations 42

6.4 Further research expansions 43

REFERENCES……….. 44 APPENDIX A………50

CHAPTER 1. INTRODUCTION 1.1 Research Objective

The debate concerning Corporate Social Responsibility (CSR) has been a focus of business attention since the early seventies. This debate has been characterized by inconsistencies, lack of consensus concerning the (financial) effects of CSR, and disagreement regarding methodological and terminological issues. Recently, researchers have indicated that selecting groups of firms on the basis of certain factors could pinpoint the CSR-effects, and more empirically sound results (van Beurden and Gössling, 2008). So far, research mainly concentrated on the firm level variance in CSR (Beliveau, Cottrill, & O‟Neill, 1994). Various researchers have shown however, that the level of CSR is influenced by industry and factors that are highly influenced by industry (Waddock & Graves, 1997). The idea that a firm‟s industry is a defining characteristic for its behavior was acknowledged by research a long time ago (Hillman, 2003; Porter, 1980). Although numerous studies stressed industry‟s determinative role in firm behavior; the relationship between the level of CSR and industry related characteristics has not been an explicit topic of research (Griffin & Koerber, 2006). My paper responds to these implications; I investigate CSR on an industry level.

Corporate Social Responsibility from a Strategic Intent: is it an Industry Matter? 6 three manners, (1) the industry component is addressed by structure, (2) CSR can be considered the conduct; the behavior that reacts to the industry structure, and (3) the performance, is presented as the CFP; being the outcome of the combination of the structure and conduct. By implementing this model onto my thesis, CSR can be approached from an industrial, as well as, a strategic intent. The RBV is applied to this research since it complements the SCP model. It explains the conduct of firms in more detail and it builds a thorough connection between the firm conduct and performance, while taking into account a firm‟s capabilities. Furthermore, this model addresses the notion of information disclosure. In order for CSR to affect a firm‟s performance in any manner the transfer of a firm‟s information regarding its CSR activities onto the stakeholders is crucial. Therefore, I took into account the level of information disclosure measured as the level of “firm visibility”. The research question discussed in this paper is stated as follows:

To what degree can CSR be considered an “industry matter”?

By using the term “industry matter”, I investigate whether the level of CSR ánd its relationship with CFP is determined in any sense by the firm‟s industry and/or factors that are highly correlated to industry. The question is subdivided into four questions that are addressed in hypotheses stated further on in this paper.

a) To what degree are there inter industry differences in the level of CSR? b) To what degree does the Industry Structure affect the level of CSR?

c) To what degree does the Industry Structure affect the CSR-CFP relationship?

d) To what degree does Organizational Visibility affect the relationship in Hypothesis 2c)? The industry structure is measured by the industry concentration ratio. The sample is drawn from the Fortune Magazine, representing the „top 100 most Accountable big companies‟ rankings for the years 2006-2008.2 In order to investigate whether industry structure is responsible for the firm level of CSR and CFP, four industries are investigated and compared: automotive, telecommunications, utilities and, computer and electronic equipment manufacturing. These

industries are selected on the basis of their concentration ratio and visibility level. Each industry is marked by either a high (low) value in either concentration ratio or visibility level. Subsequently, the four industries are subjected to a multiple regression analysis in order to provide an answer to the research question.

1.2 Contributions

Corporate Social Responsibility from a Strategic Intent: is it an Industry Matter? 8 1.3 Structure of the paper

2. THEORETICAL FRAMEWORK 2.1 Research Territory

Corporate Social Responsibility from a Strategic Intent: is it an Industry Matter? 10 2.2 CSR history: the shareholder versus stakeholder debate

Throughout the last century there have been ongoing critics on the social responsible activities of corporations. The first signs of social responsibility and the corresponding debate became apparent in the 50‟s. Levitt (1958) initiated the debate about the social responsibility of business in his Harvard Business Review article „The Dangers of Social Responsibility‟, in which he cautions that „government‟s job is not business, and business‟s job is not government‟ (p.47). However, it was only in the 70‟s that the debate really commenced; Friedman (1970) addressed CSR as a signal of an agency problem within a firm. Managers would use CSR for their personal benefits. Furthermore, he claimed „„the one responsibility of business towards society is the maximization of profits to the shareholders within the legal framework and the ethical custom of the country” (p. unknown, 1970). In the existing literature Friedman is often addressed as the patron of the shareholder theory; advocating the profit maximization principle in perfect competitive markets. Friedman, however, argued from a societal point of view; social responsible behavior would detain firms from optimal profit maximization; and subsequently the society would be punished for this inefficient outcome in the form of, for example, higher prices and less employment. Friedman did not perceive any benefits from CSR; solely costs that would be translated to the society. In 1984 Freeman interfered in the debate and introduced the stakeholder theory, stating that managers should take the interests of the stakeholders into account considering the effect that they can influence firm outcomes. According to McWilliams, Siegel and Wright “stakeholder theory implies that it can be beneficial for the firm to engage in certain CSR activities that non-financial stakeholders perceive to be important, because, absent this, these groups might withdraw their support for the firm” (2006:3). If managers would fail taking these interests into account, the entire firm might suffer from negative effects. So, contrary to Friedman, Freeman expected that firms would profit from engaging in stakeholder relationships, and that an optimal, efficient outcome for firms could be achieved by engaging in stakeholder relationships.

order to answer these questions I believe that it is necessary to fully understand the concept of CSR and its origin.

2.3 CSR history: the factors that facilitated CSR

In 2006 Fortune reported that an estimated $2.3 trillion out of $24 trillion was invested in companies that rate highly on some measure of social responsibility, this means that about one out of every ten dollars of assets under management in the U.S goes to a CSR favorable company. Fortune Magazine claimed this as a $2.3 trillion wager that socially responsible companies will outperform companies that don‟t engage a wide array of stakeholders (Demos, 2006). The last decades the pressure from employees, suppliers, community groups, NGOs, and government to increase a firm‟s involvement in CSR has become intense and constant (McWilliams et al., 2006). “In the past several decades there has been a revolution in the way people view the relationship between business and society” (Lantos, 2001:595). This section focuses on the changes, internal and external to the firm, that made CSR an increasingly popular issue among corporations and society worldwide.

Communication. One of the external changes that facilitated the birth of CSR is the increasing transparency in the communication process between corporations and society. We live in a “smaller world” due to globalization and development in technology national borders seemed to have faded away. The communication process between these firms and stakeholders simplified significantly during the last few decades. Consequently, the level of business transparency and business actions‟ visibility increased. This caused a rise in the expectations and interference of stakeholders.

Corporate Social Responsibility from a Strategic Intent: is it an Industry Matter? 12 Firm Size. Another external change that contributed to the rise of CSR is the fact the average size of firms increased, this was the cause and the consequence of increased transparency and visibility. Prasad (2005) discussed how the activities of business converged with the functions of the state, since some MNE‟s budget has reached to size of countries GDP. Companies grew across their boundaries; national boarders faded away and firms‟ opportunity to serve other parts of world increased. The external pressure grew on the corporations to interfere in governmental (social) issues. Furthermore, DeGeus (1950) discussed that when companies grow beyond familiar geographic boundaries they seem to lose control over their operating environment. Firms needed recognition from their environment in order to survive.

The combination of increased transparency and visibility, the average size increase of firms, and the media hype around accountability rankings led to greater expectations and pressure from society on organizations. Firms‟ responsibility and vulnerability grew parallel. Firms were appointed a certain reputation and this was for the world to know. “CSR is a solution to the societal uncertainties that businesses have to cope with in the present dynamic, global and technological social contexts” (van Beurden & Gössling, 2008:407). Customer demands have risen, with the increased transparency in the markets, they are asking for sustainable products (Gaulthier, 2005). Government restrictions have become stricter with respect to social conduct. Investors value firms not only on financial results but also on their engagement in social activity (Barnett and Salomon, 2006). It found it hard to say what change caused another change, I think that that the numerous changes worldwide have contributed together to business becoming more socially responsible.

2.4 The relationship between Corporate Social Responsibility (CSR) and Corporate Financial Performance (CFP)

A positive relationship between the CSR and CFP rests on the stakeholder theory. The stakeholder theory contends that the success of an organization depends on the extent to which the organization is capable of managing its relationships with key stakeholders, such as financers and shareholders, but also customers, employees, and even communities or societies. This view is born from the argument that costs related to CSR will be outweighed by the benefits since it is a source of legitimacy and competitive advantage, implicating improved financial performance. By fulfilling the key stakeholders need, the company builds a reputation which gives them a competitive advantage.

Corporate Social Responsibility from a Strategic Intent: is it an Industry Matter? 14 Some designated the CSR-CFP relationship as one that has been the most researched, and least understood, relationships in business and society (Griffin & Mahon, 1997; Rowley & Berman, 2000; Wood & Jones, 1995), but the central premise of the performed studies is leaning towards an overall positive relationship (i.e. Berman et al. 1999, Waddock & Graves 1997, Bowman, 1978; Fry & Hock, 1976; Preston, 1978; Anderson & Frankle, 1980; Belkaoui, 1976). Meta analyses performed by Orlitzky, Schmidt and Rynes. (2003) and Griffin and Mahon (1997), examining 52 and 51 studies on this subject respectively, support such a positive relationship. According to Waddock and Graves these meta analyses led to a 'wide acceptance of the notion that being socially responsible would result in competitive advantage, improved financial performance, and a higher value of the firm's objective function' (1997:371). Although researchers so far have not agreed on the CSR-CFP relationship, a large school of researchers is convinced of the positive relationship. The next section provides some theory that builds a profound argumentation advocating a positive relationship between CSR and CFP.

2.5 CSR as a business strategy: the Structure-Conduct-Performance (SCP) model and the Reosurce-Based View (RBV)

Firms undertake strategic plans to safeguard long term profitability. The SCP model focuses on the economic performance of an industry, derived from the strategic management field (McWilliams & Smart, 1993). A steady movement has occurred towards an increasingly strategic practice of CSR (Saiia et al., 2003; Buchholtz, Amason & Rutherford, 1999; Corcoran, 1987; Logsdon, Reiner & Burke, 1990; Marx, 1994; Smith, 1994; Werbel & Wortman, 2000). Marx (1999) speaks of a trend among managers that acknowledge the strategic implications of CSR, and he describes CSR as a business deal with direct and measurable financial returns to shareholders.

structure determines market conduct, which is comprised of the “behavioral rules followed by buyers, sellers, and potential entrants to choose the variables under their control”. The market performance is determined “by comparing the results of the market to the conduct to first-best ideals, such as perfect competition” (Schmalensee, 1987:5). The SCP model fits into this research since it functions as model connecting three main research topics into one; it focuses on industry structure as a static theme, then it investigates what conduct results from this (introducing CSR) and lastly, it explores the performance as a result of the underlying structure and conduct (introducing financial performance). McWilliams and Smart claim that “the SCP model implies that the structural characteristics of an industry, particularly the level of concentration of fir ms (…), have a significant influence on the ability of firms within an industry to price above the competitive price” (1993:65). McWilliams and Smart (1993) describe the basic tenet of the SCP model in the following manner: “the economic performance of an industry is a function of the conduct of buyers and sellers which, in turn, is a function of the industry‟s structure” (p.64). Porter states that “in the long run, the rate of return available from competing in an industry is a function of its underlying structure‟ (1987:46).

Resource-Based View. The Resource-Based View (RBV) grew out of the frustration with the SCP model (Bain, 1959; Porter, 1980). The SCP model did not specify thoroughly on the conduct aspect, the RBV theory, complements the SCP model in this manner. RBV can be explained in the following manner: “firms generate sustainable competitive advantages by effectively controlling and manipulating internal and external actors‟ resources and capabilities that are valuable, rare, cannot be imitated and for which no perfect substitute is available” (McWilliams et al., 2006:3). The SCP model does not thoroughly explain why the conduct should lead to increased performance. The RBV fills this gap, as it provides explanations for CSR to lead to increased financial performance.

Corporate Social Responsibility from a Strategic Intent: is it an Industry Matter? 16 advantage. A firm‟s ability to adopt its strategy to the external environment is considered a competitive advantage and this ability lies in its internal resources (Branco and Rodrigues, 2006; McWilliams et al., 2006). These internal resources are tagged as a firm‟s capabilities in my paper. I contend that the resource based view (RBV) can be useful in clarifying the relationship between the conduct and performance. It does not focus on whether a firm should engage in CSR at all, or what particular level of CSR a firm should adopt, it explains the effects of CSR of a firm‟s reputation and its (financial) performance. Numerous authors that attempted to develop an empirically testable stakeholder theory claimed that the RBV may be the suitable necessary theoretical base (Frooman, 1997; Mitchell, Agle & Wood, 1997; Rowley, 1997). Others addressed the RBV as an appropriate way examining a firm‟s engagement in CSR with a strategic intent (e.g. McWilliams et al., 2006). Branco and Rodrigues (2006) performed a literature study on the Resource-Based perspectives and they address the RBV as a concept that provides arguments in understanding the means through which CSR is translated into increased financial performance. Furthermore, they suggest that the RBV theory unites a firm‟s internal capabilities and its performance. Russo and Fouts (1997) provide two reasons as for why the RBV is the appropriate tool in analyzing CSR and its effect on company performance; (1) the key outcome variable is performance, and (2) the RBV recognizes the importance of intangible resources.

Corporate Social Responsibility from a Strategic Intent: is it an Industry Matter? 18 Figure 1. The steps of the Resource-Based View

These five steps explain the operation of the RBV. I used boldface for a few of the terms in the figure, in order to stress their importance within the RBV.

Some researchers stress that one should be aware, when combining the stakeholder theory with the RBV, that there are two fundamental differences. Ever since Freeman introduced the stakeholder theory it has showed resemblance with the RBV (Pfeffer & Salancik, 1978). The similarity lies in the fact that both theories are focused on actors external to the firm. However, Berman, Phillips and Wicks (year unknown) claim that areas of disagreement should be stressed. In the case of the stakeholder theory the organization is recommended to work in a cooperative way with the external actors, this leading to increased performance. The RBV, however, argues from a self-interested perspective, and considers the external actors as a source of uncertainty. This paper, however, approaches CSR from a rather RBV perspective; I expect that resources provided by internal and external actors are a source of uncertainty.

1.

2.

• Firm builds external and internal stakeholder relationships (by engaging in CSR) making use of its capabilities

• These stakeholder relationships are in-imitatable and unsubstitutable

3.

4.

• Because of the firm's respected reputation it is able to: • control its critical resources

• gains a competitive advantage

• differentiate from its market competitors

Information asymmetry. Teece, Pisano and Shuen (1997) claim that fluctuations in a firm‟s reputation trigger external stakeholders‟ responses. However, they stress that these responses are based on what they know, rather than what is knowable about a firm. Therefore, they emphasize, reputations are more important than the true state of business. There exists an asymmetry in the information that is provided by the firms, and the information received by the stakeholders (Branco & Rodrigues, 2006). The disclosure of information in the case of CSR is particularly important, since the stakeholders base their opinion and actions upon a firm‟s reputation. When implementing a new CSR action this should be communicated to the stakeholders. If this communication process, however, does not function properly, the stakeholders receive different or less information than firm was intended to transfer. How can CSR practices be beneficial if the stakeholders are not aware of the activities the firm has undertaken? CSR only pays off if a company's stakeholders know that their company is involved in these practices; only in this manner stakeholders will alter their behavior. In order to maximize the functionality of CSR, as well as the research performed on CSR, the possible asymmetry of information needs to be taken into account. The existing literature discussed two concepts concerning this research area: social responsibility disclosure and organizational visibility. The disclosure of CSR is claimed as a communication instrument that firms use to transfer the effects of CSR in corporate reputation (Hooghiemstra, 2000). The concept was first applied to the RBV in 2002 by Toms. He reported that the disclosure of environmental policies contributed significantly to the creation of corporate reputation. Both Hasseldine, Salama and Toms (2005) and Toms (2002) state that it is difficult for firms to engage in CSR, create a good reputation and subsequently realize the value of that reputation, without the use of making disclosures.

Corporate Social Responsibility from a Strategic Intent: is it an Industry Matter? 20 Although information disclosure and organizational visibility show some dissimilarity, they both focus on information (a)symmetry between managers and stakeholders (Burke & Logsdon, 1996). Visibility focuses mainly on the convenience that information is transmitted due to the characteristics of the firm, product or service. The disclosure concept, however, focuses on the information transmitting process, regardless of the firm‟s product or service. I regard these concepts relevant in the communication process between the firm and the stakeholder. One should take into account that communication is a very important tool when engaging in CSR.

CHAPTER 3. LITERATURE REVIEW AND HYPOTHESES 3.1 Industry Research

Corporate Social Responsibility from a Strategic Intent: is it an Industry Matter? 22 manufacturing industries but found no significant differences with regard to the strategic philanthropy classification.

3.2 Inter industry differences in the level of CSR – A behavioral explanation

develops, selection processes favor some firms over others. Both views state that due to a process a certain industry standard evolves, in the case of this research; it would be a CSR-standard. Based on these arguments I state the following hypothesis:

Hypothesis 1: There exist significant differences in the level of CSR between industries This hypothesis explains the differences in CSR from such a point of view, that all firms in an industry will exhibit similar behavior, and that every industry exhibits a certain kind of behavior (and a certain level of CSR) that is adopted by all. The RBV treats CSR as a potential source of safeguarding a firm‟s resources through differentiation, and not from mimicking. RBV therefore, claims in some way the opposite compared to the behavioral explanation. I expect that the mimicking behavior still holds for an industry, but at the same time I expect that one or another firm will breach the industry set level of CSR and differentiate by engaging in a higher level of CSR (and safeguard its resources in this manner). The next few hypotheses address the relationship CSR from a micro economic and financial point of view.

3.3 Industry structure and the level of CSR

The relationship between industry structure and CSR consists of numerous facets. In order to pose a hypothesis, all facets of the relationship need to be addressed carefully. Firstly, the relationship between profitability (in the form of slack resources) and the level of CSR is addressed. Subsequently, I examine the relationship between the industry concentration ratio and the slack resources. Lastly; the industry concentration is combined with the CSR.

Corporate Social Responsibility from a Strategic Intent: is it an Industry Matter? 24 level of financial performance or profitability is a predictor of the level of CSR (Waddock & Graves, 1997). Beliveau et al. (1994) argue: “a firm‟s ability to provide CSR is relative to the firm‟s economic health” (p.733). McElroy and Siegfried's (1985) research concludes that the elasticity of philanthropy to net income is approximately equal to one. Buchholtz (1999) also detected a positive relationship between resource availability and corporate philanthropy (which falls under CSP), testing for 43 firms in 2 industries. A large group of researchers, particularly those of McGuire and colleagues (1988, 1990) provide support for the slack resources theory. Other researchers in favor of this theory are: Cochran and Wood (1984), Ulmann (1985) Aupperle, Carroll and Hatfield (1985), Navarro (1988), McGuire, Schneeweis and Branch (1988 and 1990), Roberts (1992), and Adams and Hardwick (1998). McGuire et al. (1988) reported that financial performance in one period is positively related to CSR in a later period: “firms with high performance may be better able to act in a socially responsible manner” (1988: 869).

Industry Concentration ratio and Slack Resources. Porter (1980) claims from the field of industrial economics that industry structure creates slack. Highly concentrated industries enjoy slack resources because of its presumed inverse relationship between competition and industry concentration. The slack can be redistributed in the form of CSR (Porter, 1980). In the case of a highly concentrated market, only a few large players are present in the market, it is hard to enter the market and the profits are above zero, which indicates the presence of slack resources. In the case of a fragmented industry the marginal costs equal price, the profits just about cover the costs and the firms are not in the possession of slack resources. This argument is based on general micro economics.

clarifications. Beliveau et al. (1994) investigate whether the concentration ratio of a firm‟s industry is positively related to the firm‟s CSR levels, but they fail to find support for this proposition. However, they suggest that it is premature to reject industry structure as a potential determinant of CSR. Cottrill (1990) claims that the industry level of concentration may determine CSR potential, he stresses that a high competition cannot go together with the engagement in CSR.

Concluding. Fragmented industries stand for high competitiveness, which leaves no room for CSR since their lack of slack resources. Furthermore, research argues that firms in concentrated industries are aiming for visibility and acquaintanceship with the stakeholder. Theoretically, a higher industry concentration should lead to less competition, in turn leading to more slack and more CSR (Beliveau et al., 2004). Combining the slack resources theory, a theory supported by many researchers, and the positive relationship between the concentration ratio and the level of profitability (based on micro economics) results in following hypothesis:

Hypothesis 2a: the industry concentration is positively related to the level of CSR

This hypothesis affects the relationship between the structure and conduct of the CSP model. The next hypothesis includes the third component of the SCP model: performance.

3.4 Industry structure and the CSR-CFP relationship

Corporate Social Responsibility from a Strategic Intent: is it an Industry Matter? 26 a single firm to differentiate itself from its competitors through the engagement of CSR. I regard the concentration ratio as the cause of the inter industry differences in benefits from differentiation. However, although it is harder in a fragmented industry, I expect the benefits to be larger. A firm in a fragmented industry does not expect its competitors to get involved in issues such as CSR because of the genuine lack of slack in that industry. However, if one firm decides to break through this expectation by engaging in CSR, the conceived differentiation effect will be relatively larger compared to that of a concentrated industry. The need to differentiate is higher in fragmented industries than in concentrated industries because the increase in profit in the fragmented industry is relatively larger compared to the incremental profits in a concentrated industry. If it is financially difficult to engage in CSR but if a firm decides to do so anyway, it can expect that it will not be followed by its competitors soon because of the financial constraints apparent in the industry. Arriving at the next hypothesis, linking structure, conduct and performance:

Hypothesis 2b: The industry concentration is positively related to the level of relationship between CSR and CFP

3.5 Adding organizational visibility to the relationship CSR-CFP

allow possible investments in CSR. However, in the case of high visibility and high concentration ratio I expect the competition to be high. Although the actors in the market adopt a price greater than marginal costs (P>MC), the competition is still high. I expect that a high level of visibility will lead to greater competitiveness within the industry due to external pressures that are involved with highly observable products, causing media-attention, and „implicit regulation‟. This is because of the high organizational visibility present in the industry. In the automotive industry this is certainly the case, consumers are highly aware of a firm‟s products, services, actions and reputation and there is a low level of asymmetric information between the firm and the stakeholders. As I stated earlier on in this paper, a firm‟s control of its reputation and the degree of firm‟s differentiation through the use of CSR is influenced by organizational visibility. Although the SCP model claims that the underlying industry structure determines the conduct and performance, the literature concerning the RBV stresses that this effect can be disturbed by the level of visibility. This reasoning results in the last hypothesis.

Hypothesis 2c: Hypothesis 2b is violated in the case an industry is marked by high concentration combined and high organizational visibility

Only three out of the four industries from the sample are used in investigating this research question. The utilities industry is marked by a low level of concentration, and therefore is not appropriate for researching this hypothesis. The other three industries: automotive, computer and electronics product manufacturing and telecommunications are marked by a relatively high level of concentration ratio.

3.6 The Conceptual Model

Corporate Social Responsibility from a Strategic Intent: is it an Industry Matter? 28 between concentration and the CSR-CFP, or the conduct-performance relationship (Hypothesis 2c). condus

Figure 2. The Conceptual Model: the Structure-Conduct-Performance Model combined with the Resource-Based View

Hypothesis 2a investigates the relationship between structure and conduct. Hypothesis 2b researches the relationship between structure and the relationship between conduct and performance. Lastly, hypothesis 2c investigates the effect combining organizational visibility to the relationship between conduct and performance.

CHAPTER 4. METHODOLOGY 4.1 Methods

The hypotheses are tested by performing multiple regressions in the SPSS 15.0 for Windows program. I perform some tests to check whether the sample meets the presuppositions that apply to a multiple regression. Furthermore, I provide an overview of the descriptive statistics and perform a variance analysis (ANOVA).

4.2 Sample and data collection

The population was drawn from the Fortune Magazine „most accountable firm top 100‟ rankings for the years 2006, 2007 and 2008. Fortune Magazine ranked the 100 world largest companies by the quality of their commitment to social and environmental goals.3 For the year 2006 the „Accountable Firm Top 100‟ consists of only 65 firms instead of 100. The magazine, however, does not provide a reason for this irregularity. This results in a population of 265 observations. The composition of firms listed does not change much over the 3 observable years. I selected four industries for my research. I chose these industries on basis of their concentration and visibility score. The population consists of numerous industries of which some are represented by only a few firms. When selected industries I had to take into account a number of considerations; (1) the industry had to present an either high a low level of visibility or concentration ratio and (2) the industry had to exist of at least 10 observations. Setting the minimum limit at 10 observations per industry is in line with Cottrill (1990); he examined 180 firms over 18 industries, which comes down to 10 firms per industry.

Computer and electronic product manufacturing, and utilities represented the highest and lowest scores in visibility and automotive and telecommunications represent the highest and lowest levels of concentration, respectively. Daellenbach and Rouse (1999) used a similar investigation approach; they selected two industries at the end of the continuum. However, they

3

Corporate Social Responsibility from a Strategic Intent: is it an Industry Matter? 30 selected the firms on the basis of the level of innovation. The sample size for this study consists of 86 observations for 33 firms, from 8 different countries (China, France, Great Britain, Germany, Japan, Russia, South Korea, Spain and the U.S.). This makes the sample geographically quite wide-spread. However, the firms in the sample are among the largest of the world and operate worldwide; therefore the differences in firm nationality might be considered not that important.

These industries reported by Fortune Magazine did not correspond to the industry description giving by the NAICS. I searched for the industries listed on the basis of the NAICS that most closely matched the industries reported by Fortune Magazine. The U.S. Census Bureau reports the NAICS codes and corresponding industries.

The concentration ratio is reported by the U.S. Census Bureau. They present the concentration ratios based on the NAICS4 industry rating for 2002. This report present the most recent concentration ratios made available by the U.S. Census Bureau. However, the bureau reports that the NAICS 2007 is exactly the same as NAICS 2002 for thirteen of the twenty sectors. I consulted a correspondence table provided by the bureau to look up what codes changed over the years 2002-2007.5

The level of visibility was collected at the LexisNexis search base. I performed a search on the company name and reported the number of hits the search resulted in. I selected the largest newspaper on the basis of language (English), frequency (daily) and region of coverage (international, the United States, The United Kingdom), this resulted in the following newspapers: USA Today, Wall Street Journal, International Herald Tribune, the Times and Daily News. For a number of firms I was unable to retrieve visibility data. The hits that the search base LexisNexis6 provide did not specify solely on firms, but on all articles that contained the word I searched for. In this manner I received biased searching results for firms as, for example, ING Group (all articles that involved words ending with “–ing” were listed), Target, Total, etc., these are often mentioned words and I was unable to filter out the articles that actually

4 _{NAICS stands for North American Industry Code Standard} 5 _{http://www.census.gov/epcd/naics07/}

mentioned the actual firms that I was looking for due to time constraints. Due to this problem some cases had to be excluded from the sample.

The levels of assets, equity and net income were collected from various sources; Amadeus, DataStream, www.yahoo.finance.com and Fortune Magazine. Once I collected these values I calculated the levels of ROA and ROE by dividing Net Income by total Assets and total Equity, respectively. The same sources were consulted when collecting the level of long term Debt, which was used to calculated a firm‟s risk (long term Debt / total Equity).

4.3 Variables

CSR. Numerous techniques have been used to measure CSR. Researcher judgment (Moskovitz, 1972), content analysis of annual reports (Bowman & Haire, 1975), but far most used the Socrates database provided by Kinder, Lydenberg and Domini (KLD). This database was claimed to be well suited to CSR research, since the data is calculated by independent researchers using all information available in the field of CSR (Waddock & Graves, 1997; Hull & Rothenberg, 2008). This database, however, provides CSR scores of companies over the period 1995 to 2002. I was constraint to use the KLD database, since I would run in to problems collecting concentration and visibility data for that period. The focus on organizational visibility is a relatively recent development in the CSR School of research. In my research CSR is defined as an accountability score. Fortune Magazine performs the accountability rating by measuring the extent to which companies have built responsible practices into the way they do business. Furthermore, it looks at how well the firms account for the impact of their actions on their stakeholders. Companies earn score in six categories, for a maximum of 100. The categories are: stakeholder engagement, governance, strategy, performance management, public disclosure and assurance.7 Numerous researchers consulted Fortune Magazine for CSR rating; Beliveau et al. (1994), for example, base their measure of CSR on Fortune‟s annual survey of corporate reputations. This survey was conducted annually since 1982. The particular Accountability score is only available for the years 2006-2008.

Corporate Social Responsibility from a Strategic Intent: is it an Industry Matter? 32 CFP. There exist numerous ways to measure CFP. Commonly researchers differentiate between market- and accounting based methods. A market-based measure can capture the intangibles of a company, where as accounting based measures solely focus on the book value. Schwert (1981), for example, argues in favor of market based measures (such as a firm's securities), since the market value of a firm's securities reflect all available information about its future profitability. A widely used measure is Tobin‟s Q; which measures the stock market‟s estimation of net present value (Tobin & Brainard, 1968).8 Advocates of the accounting measures argue that changes in a firm‟s reputation are automatically transferred to the book value of the company, in the form of increased sales. DataStream did not provide the market/book value for all the companies in the sample. Therefore, I decided to use Return on Assets (ROA) and Return on Equity (ROE) as measurement tools for financial performance, since these proxies are available on the internet. The regression analysis is run with either ROA or ROE, depending on the statistical soundness of the variables.

Organizational visibility. Brammer and Millington (2006) use data concerning the incidence of news media stories involving companies as evidence of their visibility. Brammer and Millington (2006) rely on the approach adopted by Meznar and Nigh (1995); they measure visibility as the number of stories published in five US national daily newspapers over a 15-month period. This study adopts a similar approach. The variable visibility is presented by HITS in the model. The term „hits‟ refers to the number of hits a LexisNexis-search resulted in.

Industry structure. Many authors use the concentration ratio as a measure of market structure because of their availability (they are available in government-supplied data) and because studies have found alternative concentration measures to be highly correlated. The concentration ratio is measured as the combined market share of the top four firms within industries (Porter, 1980). Market share is measured as the firm‟s sales divided by total industry sales. An alternative way to measure the industry concentration is by using the Herfindahl-index, which is a more complicated way of calculating the level of concentration. However, the Herfindahl-index is more appropriate when measuring relative versus absolute levels of concentration. Furthermore, this index, although used by the U.S. Justice Department, is not

available on the web. Therefore, I decided to use the concentration ratio (CONCENTRATION) as a proxy for industry structure.

Control Variable. In this analysis I only control for the effects of risk. Even though, Van Beurden and Gössling (2008) addressed organizational size as the most important control variable in the research for CSR and a considerable number of researchers have concluded that firm size affects the level of CSR of a company (Stanwick & Stanwick, 1998; Pava & Krausz, 1996; Seifert, Morris & Bartkus, 2003; Moore, 2001; Arlow & Ackelsberg, 1991). A positive relationship between the level of CSR and firm size can be advocated if increasing economies of scale and scope decrease the costs of social efforts (Sotorrío & Sánchez, 2008). However, I decided not to control for size since the companies in the sample belong to the largest in the world, and are comparable in size. Organizational risk tolerance is expected to increase the flexibility of a firm and therefore, a firm‟s ability to improve its stakeholder relations increases (Griffin, 2006). Risk is controlled for by taking the long-term debt to total assets. Firms facing a high long term Debt/Equity ratio will have fewer resources to spare for pursuing CSR (Zyglidopoulos, 1999).

4.4 Economic Model

Corporate Social Responsibility from a Strategic Intent: is it an Industry Matter? 34 Model 1: CSR = ά + ß1 CONCENTRATION+ ß2 RISK + ε

Model 2: CFP = ά + ß1 CSR + ß2 CONCENTRATION + ß3 RISK + ε

Model 3: CFP = ά + ß1 CSR + ß2 CONCENTRATION + ß3 HITS + ß4 RISK + ε

Table 1. An overview of the research variables

Variables Measurement Source

DEPENDENT

CSR Accountability score Fortune Magazine

CFP

Return on Assets

Return on Equity

DataStream, Amadeus, Fortune

Magazine and www.yahoo.finance.com

INDEPENDENT

Industry structure Concentration ratio U.S. Census Bureau Organizational visibility Number of hits LexisNexis

CONTROL

Risk Long term Debt / total Equity

DataStream, Amadeus, Fortune

CHAPTER 5. RESULTS

Hypothesis 1 was addressed by performing a variance analysis, which compares the means of the four industries. Hypotheses 2 a, b and c were tested by running a regression analysis. Before running the multiple regression analyses the sample was controlled for normality, linearity, multicollinearity, normality and homoskedasticity of residuals and outliers. These diagnostic tests test the dynamic structure of the relationships. Once all the assumptions were met, the sample was suitable for variance multiple regression tests. Since model 1 and models 2 and 3 run the regression analysis with a different dependent variable, it was necessary to perform the assumptions tests for both two different independent variables.

5.1 Variance analysis

The variance analysis shows an F-value smaller than 1 and insignificant (F=.498, Sig.=.691). An F-value smaller than 1 implicates that the CSR means do not differ significantly per industry. However, since the result is insignificant I am unable to draw a conclusion. Table A1 in the Appendix provides the ANOVA table results.

5.2 Diagnostic tests

Corporate Social Responsibility from a Strategic Intent: is it an Industry Matter? 36 2008). Thirdly, the model was checked for linearity. The scatterplots, combining any combination of two independent variables, were checked whether all residues were more or less in a horizontal band around the zeroline of the graph. Lastly, I performed the kurtosis and skewness tests in order to assess whether the data met the normality of distribution assumption. The kurtosis values must range within the -3 and +3 range and the skewness values should lie between -1 and +1. The variables ROA, ROE and RISK surpassed these values, indicating that a large part of the variance for these variables is determined by the a few extreme cases. By logarithmic transform these variables they met the linearity of distribution assumption. After transforming the variable RISK, it still displays a kurtosis value of larger than 3.

5.3 Normality and Homoskedasticity of the Residuals and Outliers

The residues sketch the quality of the regression model; they need to exhibit normality and homoskedasticity. When checking for homoskedasticity of the residuals, I investigate whether the variances of the residuals are the same across the observations. The normal P-P plots of the residuals represented the relationship between the predicted and observed probability of residuals. Previous researchers considered values between -2 and +2 as acceptable, in this case the distribution of the residuals approximately normal (Norusis, 2006: 498). I was able to track down outliers using Cook‟s distance test. The latter measures the change in a regression analysis if a certain case is eliminated from the sample. All cases that exhibited a standardized residual of larger than 2, were eliminated from the sample (this means that these cases lie more than 2 standard deviations under or above the regression line). In total, 11 cases exceeded the value of 2 standard deviations and were excluded from the sample, leading to a total of 74 cases. After controlling for all assumptions and logarithmically transforming the variables ROA, ROE and RISK the sample could be run in the regression analyses.

5.4 Descriptive statistics

Table 2 in Appendix A shows the descriptive statistics before and after the transformation of the variables. The table provides the values for the means, medians, minima, maxima, standard deviations, skewness and kurtosis statistics. The means of all variables are also calculated per industry. Table 2 provides the means per industry; in this manner one can get an impression of the variable values per industry.

Table 2. The means of all research variables per industry

Industry N CSR CONC. HITS ROA ROE RISK Automotive 13 45,626 42,1 1510,567 0,048 0,297 -0,116 Telecommunications 18 37,723 45,6 231,700 0,040 0,155 1,059 Comp. and electr. product

manufacturing

31

41,361 44,2 498,188 1,168 2,377 0,892 Utilities 12 53,975 13,4 129,625 0,048 0,222 0,723

Corporate Social Responsibility from a Strategic Intent: is it an Industry Matter? 38 Although the regression analysis presents the exact nature of the relationships further on in this section, this table provides a preview with some descriptive statistics per industry. The automotive and telecommunications industries are selected for their relatively high and low organizational visibility (HITS). The computer and electronic product manufacturing industry and the utilities industry represent relatively high and low concentration ratio, respectively. When only glancing at this table, one could develop the supposition that concentration is not positively related to the level of CSR, as I stated in my hypothesis 2a. The utilities industry is marked by the lowest level of concentration ratio but exhibits the highest CSR mean. Furthermore, the telecommunications industry shows the highest score on concentration ratio but displays the lowest CSR value. Another remarkable point is that this table does not show any sign of a positive relationship between the level of CSR and CFP. The industry with the highest performance values –the computer and electronics product manufacturing industry- exhibits an under average CSR mean. In the regression I adopt ROA as a proxy for CFP, since this variable exhibits slightly better results when controlling for the regression assumptions. However, the difference between ROA and ROE is very small and both variables be considered as an appropriate proxy for CFP.

5.5 Regression results

visibility has an effect on the relationship between CSR and CFP. The utilities industry is excluded to the sample only consists of industries with a high concentration ratio. The coefficients of model 3 only slightly differ compared to model 2. Neither this model is significant, and has a low R-square.

Table 3. The regression results

Model 1 Model 2 Model 3

Variables Coefficients T-statistic Coefficients T-statistic Coefficients T-statistic

CSR dependent -0.160 -0.745 -0.022 -0.845

ROA dependent dependent

CONSTANT 62.584 13.813*** -2.216 -1.424 -1.801 -0.897 CONC. RATIO -0.462 -4.162*** -0.002 -0.008 0.003 0.110 DEBT/EQUITY 0.892 7.320 -0.071 -0.306 -0.116 -0.455 HITS 0.000 -1.169 R-square 0.223 0.015 0.051 F-statistic 8.733*** 0.240 0.547

*** indicates significance at the 1% level, ** at 5% level and * at 10% level. The results are reported per model. For model 1 the dependent variables is CSR. Model 2 and 3, however, acknowledge ROA as the dependent variable. ROA is a proxy for CFP. RISK is calculated by dividing long term Debt by Equity.

The hypotheses 2a, 2b and 2c are not supported as the result of regression analysis showed insignificant relationships. Unfortunately, this study does not land support on earlier research performed by Cottrill (1990) or Beliveau et al. (2004). The fact that the analysis is insignificant can be ascribed to numerous factors. There simply might not be a relationship between the variables. Or, there is a relationship but I am unable to detect it because of statistical flaws. A possible explanation can lie within the short research period, the CSR effects might be lagged for example. Furthermore, the presence of incorrect data might be a cause of indefinable results. I found numerous contradictions in data when consulting different sources.

CHAPTER 6. FINAL REMARKS 6.1 Conclusions

The aim of this research was to examine to what extent CSR was an “industry matter”. This implicates that I investigated whether the level of CSR, and its relationship, is related to the nature of a firm‟s industry. This research was performed by building a structural model including both the SCP model as well as the RBV. I performed an empirical analysis on four industries consulting the Fortune Magazine accountability top 100 for the years 2006-2008. Unfortunately, the statistical analysis led to little meaningful results. The descriptive statistics show that the average level of CSR is quite different between industries. The ANOVA analysis, however, could not confirm this.

Corporate Social Responsibility from a Strategic Intent: is it an Industry Matter? 42 CSR or CFP. Furthermore, I deal with behavioral issues in this research, and even though numerous theories have mapped human behavior, the behavior of firms in an industry is not always rational, and therefore hard to investigate.

6.2 Contributions

Although the results are marked by insignificancy, this paper contributed to strategic investigation. Never before were three research components –the SCP model, the RBV and organizational visibility- combined as done in this paper. I indicated that the RBV fills the research gap formed by the SCP model and stressed the importance of organizational visibility in the process conduct leading to performance. Previous research has repeatedly used the SCP model in order to perform industry investigations. I still consider this model to be useful in industry research, once the author take the model‟s flaws into consideration. The model is static and doesn‟t specify much on the conduct part. Furthermore, I am convinced that the RBV model can be provided as a useful guideline when explaining the relationship between CSR and CFP. Lastly, I stressed the importance of including organizational visibility in CSR research, since it potentially affects the CSR-CFP relationship.

6.3 Limitations

perform research with a larger database the results might show a higher level of significance; (3) the sample sizes were uneven for each separate industry; (4) the sample size shows a bias towards large organizations; (5) the firms originate from different countries.

6.4 Further Research Expansions

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