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Corporate Social Responsibility and Performance

The influence of exploitation efforts on the CSR-FP relationship.

By

Caroline Boerema

University of Groningen

Faculty of Economics and Business

MSc Business Administration: Organizational & Management Control

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Abstract

In the face of such issues as corporate scandals, increased legislation and growing stakeholder awareness concerning ethical and environmental issues, organizations are stimulated more and more to conduct their business in a socially responsible manner. This subsequently resulted in research increasingly examining the concept of corporate social responsibility (CSR) and its implications for firms and society. In that, many researchers have attempted to determine the relationship between the ambiguous concept of CSR and the financial performance (FP) of organizations. A conclusive finding on the relationship between CSR and financial performance has not emerged however, with some researchers finding either a positive or negative relationship, while other studies could not find any significant relationship at all. Numerous issues have been suggested in prior research explaining the discrepancy in findings on the CSR-FP relationship, yet in reviewing these issues this paper finds that research only sporadically examined the role of the organization herein. This is considered a shortcoming in current research as this paper contends that organizations have the ability to exploit CSR practices by exercising activities termed exploitation efforts. In that, exploitation efforts are expected to have a positive, though primarily intervening effect on the CSR-FP relationship, by allowing organizations to take full advantage of the financial possibilities that CSR could offer.

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Index

1. Introduction ...4 2. Research design...6 2.1 Research methodology ...6 2.2 Data...7

3. Corporate Social Responsibility ...8

4. CSR and financial performance ...13

4.1 The relationship between CSR and a firm’s financial performance ...13

4.1.1 Negative relationship between CSR and financial performance ...13

4.1.2 Positive relationship between CSR and financial performance ...14

4.1.3 Non-significant relationship between CSR and financial performance ...17

4.2 Discussing the discrepancy in findings on the CSR-FP relationship ...19

4.2.1 The measurement of corporate social responsibility and financial performance...19

4.2.2 Explanations for the dispersion of results on the CSR-FP relationship ...21

5. Alternative perspective on the CSR-FP relationship ...24

5.1 The role of the organization’s exploitation efforts in influencing the CSR-FP relationship ...24

5.2 Conceptualization of organizational exploitation efforts ...25

5.3 Exploitation efforts as intervening factors on the CSR-FP relationship ...26

6. Discussion ...28

6.1 Legitimacy...28

6.1.1 Obtaining organizational legitimacy through CSR practices...28

6.1.2 Legitimacy: externally stimulated opportunity recognition ...29

6.1.3 Legitimacy: internally stimulated opportunity recognition...31

6.2 Resource availability...32

6.3 Organizational form ...34

6.4 The influence of exploitation efforts on the CSR-FP relationship...37

6.4.1 The exploitation of corporate social responsibility initiatives ...37

6.4.2 Research implications ...38

7. Conclusion ...40

7.1 Research limitations and suggestions for further research ...42

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1. Introduction

Over the last decade, corporate social responsibility (CSR) has significantly gained in importance in both theory and practice. This, amongst others, due to the increasing involvement of the government and the subsequent development of codes of corporate governance, and growing stakeholder awareness concerning ethical and environmental issues. As such, the concept of corporate social responsibility is expected to become more widely embedded within the culture and organizational profile of firms, possibly extending towards developing countries and SME’s (Hopkins, 2006). Subsequently, many researchers have examined the concept of corporate social responsibility, for example assessing the effectiveness of CSR within a corporate strategy and exploring the possible consequences CSR could have on a company’s (financial) performance. Such studies might be of relevance to organizations in practice, especially as embedding CSR within a corporation occasionally involves considerable investments or may influence how firms conduct their business, which are consequences that some firms are only willing to face when improvements in performance are to be expected (van Marrewijk, 2003). In that, research on the relationship between corporate social responsibility and the financial performance (FP) of organizations in particular has been frequently conducted. In general however, these papers are inconclusive, at times finding that corporate social responsibility has either a positive or negative influence on the firm’s financial performance, while in other research examinations no correlation between financial performance and CSR was discovered at all (Griffin and Mahon, 1997; Margolis and Walsh, 2003).

These research papers are bounded by their focus and positioning though, as well as the research methodology and data-set used, where the issue of operationalizing and measuring the constructs of corporate social responsibility and financial performance in particular has been identified as significant in explaining the different findins on the CSR-FP relationship (Orlitzky et al., 2003). This paper maintains however, that the issues predominantly distinguished in research to influence the relationship between CSR and a firm’s financial performance are not sufficient for understanding this relationship. As such, this paper will focus specifically on an organization’s exploitation efforts, an issue only sporadically mentioned in CSR research, yet expected to influence the financial performance of those companies committed to socially responsible behaviour. In that, exploitation efforts refer to those actions taken by an organization that allow that firm to take full advantage of the financial possibilities of the CSR concept (Morris et al., 2001). As such, the purpose of this paper will be to explore whether and how exploitation efforts may enable organizations to actively influence the CSR-FP relationship, aiming to contribute to a better understanding of the CSR-FP relationship. In examining this subject, this paper will attempt to answer the following research question:

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In order to answer this research question and obtain a good understanding of the subject matter, a number of sub-questions will be examined, including (1) What is corporate social responsibility?; (2) What effect does corporate social responsibility have on a firm’s financial performance?; (3) How does prior research explain the divers results on the CSR-FP relationship; (4) What are exploitation efforts?; and (5) How do an organization’s exploitation efforts influence the CSR-FP relationship? Ultimately, these research questions should result into propositions on the influence of exploitation efforts on the relationship between a company’s financial performance and corporate social responsibility initiatives.

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2. Research design

This research design constitutes the blueprint for the collection and analysis of data. In that, the type of research methodology applied in this study will be discussed as well as the data sources used.

2.1 Research methodology

The purpose of this paper is to examine the rather ambiguous relationship between corporate social responsibility and a firm’s financial performance from an perspective found to be only sporadically applied in prior CSR research. Maintaining that previously distinguished factors said to explain the divers findings on the CSR-FP relationship are not sufficient in explaining this discrepancy, this paper considers the influence that the organization might have on this relationship. Three factors are identified, being legitimacy, resource availability and organizational form, arguably affecting the financial success of CSR practices, though the impact of these factors are expected to be strongly dependent on the efforts a firm takes to exploit their CSR initiatives. In that, corporate social responsibility is considered a possible profit opportunity which organizations can attempt to exploit, thereby striving towards taking full advantage of the financial possibilities that CSR could offer (Morris et al., 2001). These ‘exploitation efforts’ include such activities as resource development and allocation, legitimizing strategies etc. In examining the relationship between corporate social responsibility and the firm’s financial performance by considering the notion of exploitation efforts, this paper assumes a perspective not commonly present in current research. In that, this assessment represents an exploratory study, intended to more clearly define an issue that has not been explored well, resulting in propositions and questions for further research (Cooper and Schindler, 2006). As such, this paper conducts qualitative research, representing interpretive techniques that seek to describe, decode, translate, and otherwise come to terms with the meaning of certain phenomena, thereby constituting a fundamental approach to exploration and thus considered the more appropriate form of research for this paper (Cooper and Schindler, 2006).

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As such, a literature study provides the opportunity to find a theoretical foundation for the expectation that exploitation efforts affect the CSR-FP relationship, possibly resulting in a stronger incentive for further research on this topic. There are a number of advantages of using a literature study as a research method. Firstly, literature studies represents a relatively inexpensive and convenient research method, providing limitless opportunities for the replication, re-analysis and re-interpretation of existing research (Procter, 1993). Literature studies also allow for longitudinal analyses, to research and understand past events and to engage in exploratory work to test new ideas, theories and models of research design (Smith, 2008). Furthermore, this research method enables researchers to access a wide array of high quality data, and allows researchers to gain a second perspective on the data, thereby possibly challenging or reinforcing the findings of previous research (Thorne, 1994; Smith, 2008).

2.2 Data

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3. Corporate Social Responsibility

In examining the concept of corporate social responsibility, it has to be acknowledged that this is certainly not a new issue (Hopkins, 2006). Discussions on this topic can be found as early as the 1930’s when Berle and Dodd debated on the role of corporate managers and on the view of corporations as economic institutions with both a social-service and a profit-making function (Okoye, 2009). The more popular beginnings and formalizations of the concept of CSR are said to date back to the 1950’s though, with the work of Abrams (1951) and Bowen (1953). In subsequent years the concern for the social responsibility of business has increased, particularly over the past decade due to corporate scandals, international development and governmental legislation (Hopkins, 2006). Social responsibility has become an important issue not only for business but also in the theory and practice of law, politics and economics, resulting in a wide range of supportive analysts and writers who have broadened the acceptability and popularity of the concept, ultimately making CSR a widely accepted field (Okoye, 2009).

Although the concept of CSR has significantly gained in importance, the actual definition of corporate social responsibility is still a matter of debate (Wan-Jan, 2006). The ambiguity of the CSR concept is apparent from the multitude of theories existing in academic debates and business environments, proposing varying definitions of corporate social responsibility by referring to a more humane, more ethical or more transparent way of doing business (van Marrewijk, 2003). In that, the concept of corporate social responsibility can convey any number of ideas, where CSR has for instance been regarded as a legal responsibility or liability, as socially responsible behavior in the sense of being ethical, proper or valid, or simply synonymous to charitable contributions (Okoye, 2009). Corporate social responsibility thereby increasingly covers a wide range of issues such as employee relations, human rights, corporate ethics, community relations and the environment (Moir, 2001).

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theories and related approaches into four groups. They differentiate between instrumental theories advancing economic objectives through social activities; integrative theories expressing the necessity for corporations to integrate social demands; political theories advocating corporate power and its responsible use; and ethical theories examining the morality and rightness of corporate social action (Garriga and Mele, 2004).

Instrumental theories constitute more conventional theories concerning corporate social responsibility, revolving around the concept of ‘enlightened self-interest’, where companies are said to introduce CSR within their firm due to a belief that benefits are to be obtained accordingly. In that, corporate social responsibility is seen only as a strategic tool in order to achieve economic objectives and wealth creation (Garriga and Mele, 2004). Traditional instrumental theories like the agency theory or shareholder approach propose that companies are merely responsible, both morally and legally, to maximize the value of the shares of those who have invested in the organization. CSR is then seen as a business strategy, where stakeholders are treated ethically as managers believe that doing so will result in their businesses to prosper. These theories suggest that it might even be erroneous for organizations to do anything without the intention of reaping benefits from their actions, as managers are agents of the stockholders and therefore should prioritize serving them by maximizing financial gains (Wan-Jan, 2006). And as the shareholders in their pursuit of profit maximization should be the focal point of companies, CSR practices are said to be merely concerned with contributing to the aim of creating long-term value for the business-owners, where CSR initiatives should only be accepted when consistent with wealth creation (van Marrewijk, 2003).

Instrumental theories have suggested that CSR can become a competitive edge or core competence for the companies who can exploit it properly (Wan-Jan, 2006). Economic benefits are subsequently gained as CSR focuses on how to allocate available resources in order to achieve long-term social objectives, using consumer concern for business responsibility as a means for securing competitive advantage. Company revenues and sales, or customer relationships, could then be enhanced by creating socially responsible attributes that allow companies to differentiate themselves and improve company reputation (Garriga and Mele, 2004). Otherwise, economic benefits can be obtained through cost-minimalization. As organizations behave in a socially responsible manner, the extent of externalized costs can be reduced by avoiding distributional conflicts or by anticipating and minimizing conflicts between organizations and society, thereby aligning private and social costs if differences are the source of the conflict (Heal, 2005).

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though, an aspect of instrumental theories usually deemed insufficient by stakeholder theories. These theories argue that CSR should imply companies actively responding to all the needs of both shareholders as well as other stakeholders that can affect or are affected by the achievement of an organization’s objectives (Moir, 2001). Theories like stakeholder management consequently plea for a more comprehensive consideration of all stakeholder needs when contemplating the introduction and design of CSR initiatives (van Marrewijk, 2003). Hopkins (2006) accordingly defined corporate social responsibility as the treatment of the stakeholders of the firm in an ethical or responsible manner. Smith (2003) similarly states that CSR specifically encompasses the obligations of companies towards the firm’s stakeholders, being those that are affected by corporate policies and practices, arguing that the motivations for organizations to incorporate CSR might be a combination between self-interest and the desire to do good (Smith, 2003). Furthermore, corporate social responsibility has been defined as the economic, legal, moral and philanthropic actions of companies that influence the quality of life of relevant stakeholders (Hill et al., 2007).

Within the classification of Garriga and Mele (2004), stakeholder oriented theories like stakeholder management pertain to the category of integrative theories. This constitutes a group of theories that considers how businesses integrate social demands by means of CSR practices, necessitated by the assumption that businesses depend on society for its existence, continuity and growth (Garriga and Mele, 2004). In that, social demands are considered a manner for society to interact with businesses and convey their expectations. And as society is said to provide organizations with legitimacy and prestige (Moir, 2001), integrative theories suggest that companies should take these social demands into account and integrate them in such a way that the organizations operate in accordance with social values (Garriga and Mele, 2004). According to integrative theories, there are no specific corporate social responsibility initiatives for which an organization is responsible. Instead, these theories are focused on the detection and scanning of, and response to, the social demands that achieve social legitimacy, greater social acceptance and prestige (Garriga and Mele, 2004).

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organizations towards society, describing company involvement as part of societal expectation (Donaldson and Dunfee, 1994). Companies have also been viewed as citizens belonging to a community that needs to be taken into account when operating, resulting in the concept of corporate citizenship. Corporate citizenship describes a strong sense of business responsibility and consideration towards the local community, the environment and partnerships as a way of formalizing the willingness to improve the community (Matten et al., 2003).

The final group of CSR theories described by Garriga and Mele (2004) are ethical theories which maintain that the relationship between business and society is embedded with ethical values. These ethical theories constitute a vision of CSR from a perspective where social responsibilities are accepted by organizations as an ethical obligation above any other consideration (Garriga and Mele, 2004). When seen as an ethical stance, companies should incorporate CSR within their business practices due to the belief that socially responsible behavior is the proper way to behave (Wan-Jan, 2006). Mintzberg (1983) refers to this perspective as the purest form in which CSR can be practiced, as firms become socially responsible because that is the noble way to behave without expecting anything back from these activities, serving society beyond selfishness and greed. Goyder (2003) described his concern about companies taking CSR simply as compliance with expectations, as this ‘compliance’ CSR will likely lead to companies only providing stakeholders with the information they want to hear so the firms seem to fit into society’s template. However, in the case of true or ‘convicting CSR’ firms honestly believe in a set of purposes and values and have convictions to act on them (Goyder, 2003). Argandoña and Hoivik (2009) too maintained that CSR is mainly an ethical concept, a responsibility that emerges in society where even in the presence of other managerial dimensions a firm’s responsible behavior is a matter of morality.

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business ethics (Wan-Jan, 2006). CSR might also be adapted to meet specific requirements for exposition within management studies, marketing, accounting, sociology, political science and law, or to meet the divergent aims and interests of the exponents of CSR, such as academia, researchers, managers etc. (Okoye, 2009). In that, definitions and theories pertaining to corporate social responsibility are often biased towards specific interests, where views on CSR are aligned with the particular situations and challenges faced by an organization or market (van Marrewijk, 2003). Finally, the inconsistency or ambiguity of CSR can also be traced back to the different origins of this concept, where historical, cultural, linguistic, and socio-economic factors are playing a decisive role (Argandoña and Hoivik, 2009).

The above discussion thus demonstrates that a single and precise definition of corporate social responsibility is currently lacking. It is deemed unlikely though, that one global standard of the CSR concept could be established, as the content and application of CSR will vary between organizations and countries and will change over time (Argandoña and Hoivik, 2009). Also, an all-embracing standard of CSR will presumably be too broad and vague to be useful in academic debate or in corporate implementation, devoid of richness, variation and flexibility (van Marrewijk, 2003). Yet, as corporate social responsibility covers a wide range of issues (Moir, 2001), a more specific and narrow definition of CSR may not be sufficiently comprehensive, failing to consider important aspects of CSR. In that, van Marrewijk (2003) maintains that there is no set of universal best practices in CSR but instead that corporate social responsibility is a custom-made process and each organization should choose its own specific approach regarding socially responsible behavior. The author subsequently argues that ‘one solution fits all’ definitions of CSR should be abandoned, accepting various and more specific definitions matching the development, awareness and ambition levels of organizations (van Marrewijk, 2003). In considering CSR to be a context dependent concept, van Marrewijk (2003) thereby proposes a set of differentiated approaches, matching the various contexts in which companies operate, allowing organizations to respond to outside challenges in accordance to its own awareness and abilities (van Marrewijk, 2003).

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4. CSR and financial performance

Due to the increasing importance of the concept of corporate social responsibility, much research has been conducted examining the influence of these CSR practices on the financial performance of organizations. The findings of these studies vary though, where researchers have found both positive and negative relationships between corporate social responsibility and financial performance, or no relationship at all (Orlitzky, 2003; Margolis et al, 2003). This section of the paper will provide a brief overview of the different results found on the CSR-FP relationship in prior research. Furthermore, possible explanations as to why such various outcomes have been found will be addressed.

4.1 The relationship between CSR and a firm’s financial performance

When considering how corporate social responsibility practices influence the financial performance of organizations, researchers have found both negative and positive associations, as well as no relationship at all. A number of these research findings will be highlighted here in order to obtain an understanding of the ambiguous relationship between CSR and financial performance.

4.1.1 Negative relationship between CSR and financial performance

Conventional wisdom has dictated that the relationship between corporate social responsibility and a firm’s financial performance would be a negative one (Kedia and Kuntz, 1981; Freedman and Jaggi, 1982; Lerner and Fryxell, 1988). Researchers have argued that socially responsible behavior detracts from an organization’s financial performance, contending that CSR results in significant additional costs and foregone profit opportunities which depress financial performance. It is deemed costly and administratively burdensome for a firm to engage in socially responsible activities such as corporate philanthropy, providing employee day care, granting paid parental leave, reducing environmental impact etc. As these expenditures on corporate social responsibility are expected to unnecessarily raise the costs that firms incur, socially responsible firms should be at a economic disadvantage in a competitive market relative to rivals who do not engage in such practices (Vance, 1975; Jensen, 2002).

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contractors who didn’t sign the DII. However, the results showed that the market reacted negatively to the DII, as the market prices of the firms who signed the DII were negatively affected due to their affiliation with this ethical initiative. According to the authors, these findings indicate that the market interpreted the DII as either a form of regulation or as a penalty for social irresponsibility by socially conscious investors. On the one hand, the market could have perceived the establishment of the DII as a precursor to increased industry-wide governmental regulation and future sanctions, reducing the industry’s ability to accrue abnormal returns from (unethical) business practices (Patten, 1990). On the other hand, the possibility was opted that the market viewed the DII as a form of punishment by socially motivated investors, as these investors could perceive the formation of the DII initiative as an acknowledgement of prior unethical practices by the companies who signed the initiative and as such might refrain from investing in these organizations. (Boyle et al., 1997).

When examining the relation between corporate social performance (CSP) and financial performance by analyzing stock returns, Brammer et al. (2006) found that organizations with higher CSP scores achieved lower returns as opposed to firms with lower CSP scores, suggesting that certain corporate social activities are largely destructive of shareholder value. Due to the implementation of ethical screens, CSR activities within organizations will be taken into consideration by equity analysts and fund managers, where such firms are then considered as relatively poor investments. The share prices of organizations engaging in CSR activities are then punished by the financial markets. Alternatively, behavioral explanations could also be considered when assessing these results, in that required returns on stocks of socially responsible firms might be lower because their shareholders are willing to forgo returns for altruistic reasons (Brammer et al., 2006).

4.1.2 Positive relationship between CSR and financial performance

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mutual funds. Their results suggest that the screening for social responsibility in investments would initially have a negative impact on financial performance. However, eventually these effects turn positive as socially responsible firms are ultimately deemed more stable and possibly better-managed, and screening for corporate social responsibility consequently encourages investments in those organizations (Barnett and Salomon, 2006).

In discussing the notion of improving stakeholder relations through corporate social responsibility, researchers have also suggested numerous non-financial benefits to be obtained. According to multi-dimensional performance measurement systems like the Balanced Scorecard (Kaplan and Norton, 1996), non-financial factors too influence the financial performance of organizations, though often indirectly. Referring to a portfolio of performance measures which include both financial and non-financial, as well as external and internal performance measures, multi-dimensional performance measurement systems aim to provide a more balanced indication of performance. In that, assessing both financial and non-financial information provides a more concise and complete story about the achievements and performance of the organization. This additionally calls for a broad focus on both the internal and external environment of an organization (Bourne et al., 2000). In adopting a more comprehensive perspective on financial performance, the perceived link between performing well in social arenas and good managerial practice has also been argued to result in better employee relations, resulting in non-financial benefits like enhancing employee morale, productivity and satisfaction, indirectly influencing the financial performance of organizations (Waddock and Graves, 1997).

For example, Turban and Greening (1996) found that organizations higher in corporate social performance have better reputations and are more attractive employers than firms lower in CSP, allowing companies to attract and retain valuable employees. Having a reputation for socially responsible behavior signals the value system the organization maintains, thereby influencing applicants’ perspectives of working conditions and subsequent attraction to the firm. An organization invested in corporate social responsibility is expected to be attractive for employees as working there could for instance result in more positive self-concepts. And, as distinctiveness has been identified as a factor significant for increasing individuals’ tendency to identify with social groups, it is furthermore argued that employees working for organizations with distinctive and positive reputations for CSP will have a stronger identification with these firms (Turban and Greening, 1996).

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relations are increasingly becoming bases of competition, where such positive perceptions of a firm may lead to increased sales or reduced stakeholder management costs (Waddock and Graves). Klassen and McLaughlin (1996) contended that customers are showing preferences for environmentally oriented organizations. Responding to environmental issues can affect financial performance by leading to new market opportunities, competitive differentiation or stakeholder management. The firms who demonstrate efforts towards minimizing the negative environmental impacts of their products and processes, recycle post-consumer waste, or establish environmental management systems will likely have the opportunity to expand their markets or displace competitors that fail to promote strong environmental performance (Klassen and McLaughlin, 1996).

Having a reputation for CSR has also been found to be of value during a crisis. Schnietz and Epstein (2005) analyzed the financial value of a reputation for corporate social responsibility during a crisis to assess whether this CSR reputation provided insurance against some unforeseen crisis or an exogenous shock that is likely to harm an organization. Their results suggested that a reputation for social responsibility yields financial benefits, as reputation allows organizations to inform stakeholders about the firm’s ability to deliver valued outcomes, and improves the possibility of attracting and retaining important stakeholders like investors, employees, customers and suppliers. CSR reputation may thus facilitate complex, long-term stakeholder management, which in turn should enhance an organization’s ability to outperform its competitors by either increasing revenues or reducing costs (Schnietz and Epstein, 2005). And as reputation is hard to imitate by competitors, CSR reputation is considered an intangible economic asset contributing to a firm’s sustainable competitive advantage (Russo and Fouts, 1997). Additionally, the study conducted by Schnietz and Epstein (2005) showed that having a reputation for CSR could protect organizations from financial losses during a crisis, as a reputation for social responsibility could result in goodwill which can serve as an insulation from negative financial performance (Schnietz and Epstein, 2005).

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in boycotts (Klassen and McLaughlin, 1996). The adverse consequences of careless or illegal behavior, both in terms of costs for the company as well as managers’ personal liabilities, could furthermore provide strong incentives for organizations to continuously keep investing in social responsibility (Herremans et al., 1993).

Aside from reducing the possibility of incurring unforeseen and perhaps unnecessary costs, corporate social responsibility might also decrease an organization’s operating costs. Through environmental management for example, the costs resulting from material waste and inefficient processes can be minimized (Klassen and McLaughlin, 1996). In examining the effects of environmental management, Hart and Ahuja (1996) specifically looked at the impact of pollution prevention on a firm’s bottom line, suggesting that the prevention of pollution had a number of economic benefits. For instance, preventing pollution appeared to be cheaper than cleaning it up afterwards. Furthermore, the prevention of pollution might increase productivity and efficiency because less waste implies that inputs are better utilized, which in turn results in lower raw material and waste disposal costs. Also, when the prevention of pollution allows for emissions to be cut below the levels that are required by law, firm’s might be able to reduce their compliance and liability costs. Subsequently, due to the cost reductions possibly achieved by committing to a socially responsible activity like pollution prevention, it was argued that corporate social responsibility is positively associated with a firm’s financial performance (Hart and Ahuja, 1996).

Numerous researchers have thus argued for a positive relationship between CSR and a firm’s financial performance. One the one hand, both direct and indirect benefits can be obtained from CSR as these practices allow firms to improve their relations with key stakeholders like investors, employees and customers. Otherwise, firms that commit to socially responsible behavior can potentially avoid certain costs and financial losses or reduce the operational costs incurred by the organization.

4.1.3 Non-significant relationship between CSR and financial performance

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seem to increase investor’s total rate of return, nor did it appear that being socially involved is detrimental for the investor (Abbott and Monsen, 1979).

Aupperle et al. (1985) contended that prior studies which found either a positive or negative relationship between CSR and financial performance often reflect limited methodological procedures. In desiring to minimize the degree of response bias, Aupperle et al. (1985) attempted to avoid the problems of relying on what they conceived to be methodologically weak mechanisms by using an elaborate forced-choice instrument to examine the relationship between an orientation toward CSR and profitability. The force-choice instrument constituted a survey instrument capable of clearly assessing, on a relative basis, a corporate respondent’s social responsibility orientation, enabling the observation on how much relative importance an organization placed on both the economic and non-economic components of CSR. Here, the non-non-economic factors referred to legal, ethical and discretionary concerns as defined by Carroll (1979). Ultimately, this study was unable to support the notion that a relationship exists between CSR and a firm’s profitability. Specifically, varying levels of social orientation were not found to correlate with performance differences (Aupperle et al., 1985).

Currently however, the methodological problems in research on the CSR-FP relationship are still not resolved. McWilliams and Siegel (2000) for example found CSR to be highly correlated with R&D investment, implying that any equation that incorporates CSR as a determinant of firm performance but which excludes R&D intensity, like the equation estimated by Waddock and Graves (1997), will result in an upwardly biased estimate of the CSR variable. McWilliams and Siegel (2000) therefore included a measure of firm-level investment in R&D and found the relationship between CSR and the financial performance of organizations to be non-significant. Their findings on the influence of R&D intensity on the relationship between CSR and financial performance subsequently led these authors to suggest that the inconsistency in previous findings on the CSR-FP relationship is due to flaws in empirical analysis (McWilliams and Siegel, 2000).

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corporate giving, there may be offsetting strategic benefits from philanthropy to counterbalance these agency costs (Seifert et al., 2003). The neutral CSR-FP relationship found could otherwise be explained by the notion that so many other and more important influences on stock valuation might exist, that corporate giving is regarded as a secondary influence. Another possibility is that corporate philanthropy is a primary influence but its impact is merely felt when the firm first institutes a major giving program. In other words, corporate giving could merely have a one-time effect, influencing a firm’s financial performance the first time such a philanthropic gesture occurs, while subsequent donations will no longer have an effect on financial performance (Seifert et al., 2003).

4.2 Discussing the discrepancy in findings on the CSR-FP relationship

Although the majority of studies indicated a positive association between corporate social responsibility and financial performance (Margolis and Walsh, 2003) the current evidence is often considered too fractured or too variable to draw any generalizable conclusions on the CSR-FP relationship (Orlitzky, 2003). When examining the financial consequences of corporate social responsibility, numerous researchers thereby argue that differences in the measurement of CSR and FP need to be considered, as these measures can influence the research outcomes (Brown, 1998; Orlitzky et al., 2003; Wu, 2006). Because both corporate social responsibility and a corporation’s financial performance are such broad meta-constructs, the operationalization of these constructs could vary significantly within different studies, which is often found to be problematic for analyzing the CSR-FP relationship (Orlitzky et al., 2003). As such, an understanding of this measurement issue is often considered to be of importance for comprehending the relationship between corporate social responsibility and financial performance. This section will therefore begin by assessing the different measurement strategies predominantly employed in research.

4.2.1 The measurement of corporate social responsibility and financial performance

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as corporate philanthropy, social and environmental programs and community service. Corporate action thereby refers to concrete observable CSR processes and outcomes (Orlitzky et al., 2003). The pollution control performance is an example of such a single-issue indicator (Freedman and Jaggi, 1982). Corporate crime is another indicator of socially responsible behaviour (Davidson and Worrell, 1990). The uni-dimensionality of this CSR measure is found to be a significant limitation, leading some researchers to prefer to use a combination of these indicators (Turker, 2008). In measuring corporate social responsibility, researchers have also frequently considered the extent of social disclosure about matters of social concern (Wu, 2006). CSR disclosure measurement consists of the content analysis of corporate publications like annual reports, letters to shareholders, 10Ks, and a number of other corporate disclosures to the public. Content analysis entails the comparison of units of text against particular corporate social responsibility themes in order to draw inferences about the firm’s underlying social responsibility (Orlitzky et al., 2003). The final measure of corporate social responsibility discussed in this section pertains to the use of scales that measure CSR perception at the individual and organizational level (Turker, 2008). These measures are intended to assess the CSR values and principles inherent within individuals and organizational culture (Orlitzky et al., 2003), an example of which is the forced-choice survey of corporate social orientations developed by Aupperle et al. (1985), described in paragraph 4.1.3.

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include such measures as price per share or share price appreciation. The bidding and asking processes of stock-market participants, who rely on their perceptions of past, current, and future stock returns and risk, determine a firm’s stock price and thus market value (Cochran and Wood, 1984). Market returns have several advantages over accounting-based measures, being that they are less susceptible to differential accounting procedures and managerial manipulation and represent investors´ evaluations of a firm’s ability to generate future economic earnings rather than past performance (McGuire et al., 1988). However, problems also exist with the use of market-based measures of financial performance. For example, market measures imply that investors’ valuation of firm performance is a proper performance measure, yet since firms face multiple constituencies, sole concentration on investor evaluations may not be sufficient (McGuire et al., 1988). Finally, perceptual measures qualitatively assess organizational performance using either internal or external sources, like Fortune magazine rankings or management surveys. The use of perceptual measures also has its limitations; e.g. in case of surveys it remains uncertain whether respondents will be truthful in their answers and whether they will interpret the questions in a similar, consistent and comparable manner (Peloza, 2009).

4.2.2 Explanations for the dispersion of results on the CSR-FP relationship

The types of measures that studies have used in examining the relationship between corporate social responsibility and financial performance could influence results because these measures focus on different aspects of both CSR and financial performance, and are often subject to particular biases. In that, Wood and Jones (1995) for example attributed the wide range of research results to a mismatch between measures of CSR and financial performance, resulting in cross-study variation in correlations between CSR and FP. Wood and Jones (1995) argued that effects would vary depending on expectations and evaluations of corporate social responsibility, which differ from one stakeholder group to another. No positive correlation would be expected between measures that cannot be linked theoretically, such as CSR disclosures and accounting-based efficiency measures of financial performance. For example, Wood and Jones’s (1995) review suggested that the match between market measures and market-oriented stakeholders like customers would produce significant positive results, while correlation between market measures and charitable contributions, for instance, would not.

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the study conducted. And even though this results in diverse approaches used to measure both corporate social responsibility and financial performance, research has argues that the different results on the CSR-FP relationship can be compared if the comparison takes measurement differences into account (Griffin and Mahon, 1997). Yet in doing so this paper finds that, though relevant, the aforementioned measurement issue alone is not sufficient in explaining the discrepancy in findings on the relationship between corporate social responsibility and financial performance. This is exemplified by table 1, which shows that using the same measures of CSR (each of these studies applied reputation ratings as a CSR measure) and financial performance does not always result in the same findings on the CSR-FP relationship.

Table 1: Research findings on CSR-FP relationship in case of similar CSR and FP measures.

Table 1 thereby indicates that other issues additionally influence the CSR-FP relationship. Though not consisting of a comprehensive discussion of factors that could explain the different results found in research on the relationship between CSR and financial performance, a few often mentioned factors not related to the measurement issue that might be of influence will be described. Differences in correlations across variable measures may be a function of statistical artefacts. For example, if one measurement subgroup were found to contain many studies with very small sample sizes, this subgroup would show a relatively large random sampling error. Thus, differences in sampling error across measurement subgroups may explain CSR-FP correlational differences in research (Orlitzky et al., 2003). In addition, measurement error of financial performance and corporate social responsibility might act as another source of cross-study variability. If, for example, CSR disclosure measures were plagued by comparatively low psychometric quality, observed associations between CSR disclosures and financial performance would be systematically lower than associations between FP and other, more reliable measures of CSR (Orlitzky et al., 2003).

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behaviors as do larger firms, possibly because larger firms attract more attention from external constituents and need to respond more openly to stakeholder demands (Waddock and Graves, 1997). Industry has also been repeatedly described as a confounding variable in the relationship between CSR and FP, in that industries differ in the way that they cope with their environment and as they operate in different contexts they have to deal with distinct social, environmental, and financial concerns. Research that covers many industries therefore tends to mask effects of specific industries, where broad studies trivialize the wide differences in stakeholders that exist across industries. It is subsequently argued that research on the link between CSR and FP should focus on a single industry, as this should increase validity and accuracy (Griffin and Mahon, 1997). The reason for the inclusion of investments in resource and development is that R&D improves long-run economic performance because it for example enhances firm knowledge. CSR and R&D are found to be highly correlated, and not including R&D would thereby result in upwardly biased estimates of the CSR-FP relationship (McWilliams and Siegel, 2000). Finally, management’s risk tolerance influences its attitude toward activities that have the potential to elicit savings, incur future or present costs or build or destroy markets (Waddock and Graves, 1997)

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5. Alternative perspective on the CSR-FP relationship

The previous description of the relationship between the ambiguous concept of corporate social responsibility and a firm’s financial performance serves as a prelude to this paper’s discussion on a specific set of factors which are expected to impact the CSR-FP relationship, yet are found to be only sporadically identified in prior research. In doing so, this paper adopts what can be described as an entrepreneurial perspective, assuming that the financial consequences of socially responsible behavior are affected by the extent to which organizations are concerned with the exploitation of their CSR activities. In that, this section presents an initial exploration on the notion of exploiting corporate social responsibility practices and the active role that organizations could play in this respect.

5.1 The role of the organization’s exploitation efforts in influencing the CSR-FP relationship

Based on the literature examining the CSR-FP relationship as included within this paper, the conclusion is drawn that research only sporadically includes the role of what is termed exploitation efforts as a source of influence on the financial consequences of a firm’s CSR practices. In other words, this paper argues that many researchers do not consider the active role that organizations might play in influencing the relationship between CSR and the firm’s financial performance through exploitation efforts which, while more thoroughly discussed in the subsequent paragraph, includes such actions like promotional activities, continuous CSR development etc. Examples from practice that exemplify the notion that a failure to perform such exploitation efforts will result in a lower financial performance is difficult to find as organizations are often unwilling to disclose such negative information. However, examples can be found that illustrate how exploitation efforts might result in an additional positive boost of the financial performance. A few companies such as Ben & Jerry’s and The Body Shop have excelled in positioning themselves on the CSR platform, suggesting that an organization’s marketing strategy and the position of corporate social responsibility within the firm is likely to affect the extent to which CSR activities translate into positive outcomes (Bhattacharya and Sen, 2004). Ben & Jerry’s for example, design their CSR practices in a way that allows the firm to differentiate themselves from their competitors, enabling them to create new demand or to command a premium price for products (McWilliams and Siegel, 2001).

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can primarily be obtained when the organization takes the interests of multiple stakeholders into consideration; a contention which for example is further amplified by the agency theory in suggesting that executives which are merely concerned with their own self-interest will likely be dragging down financial performance (Seifert et al., 2003).

5.2 Conceptualization of organizational exploitation efforts

In examining the exploitation of business practices, three factors are often identified in entrepreneurial research which are suggested to influence the financial success of profit opportunities. These factors include legitimacy, the availability of resources, and the organizational form, which collectively impact the extent to which stakeholders value and are informed about an organization’s business practices and influences the firm’s ability to qualitatively and continuously perform these business activities (Aldrich and Fiol, 1994; Morris et al., 2001; Powell, 1990). However, in obtaining these advantages an active role by the organization is expected to be paramount, involving actions taken by the firm, i.e. exploitation efforts, which pertain to the three factors of legitimacy, resource availability and organizational form and that allow the firm to take full advantage of its business practices. The remainder of the paper will discuss how the three factors identified will likely influence the CSR-FP relationship, thereby specifically assessing the influence of an organization’s exploitation efforts therein. The contention is thereby that firms who focus more on this exploitation process will most likely be better able to reap the financial benefits from socially responsible behavior. .

Legitimacy. Legitimacy is defined as a generalized perception or assumption that the actions of an

entity are desirable, proper, or appropriate within some socially constructed system of norms, values, beliefs, and definitions (Suchman, 1995). If organizations want stakeholders to respond positively to firm practices like CSR initiatives, they need to reassure that key stakeholder, the general public, key opinion leaders or government officials accept an activity as appropriate and right (Aldrich and Fiol, 1994). In that, gaining legitimacy allows an organization to attract customers and other stakeholders and their resources (Rao, 1994; Higgins and Gulati, 2003), as well as governmental approval or protection, e.g. by legislation or subsidies (Aldrich and Fiol, 1994). Exploitation efforts thereby pertain to the actions taken by organizations through which legitimacy is gained, as will be more thoroughly discussed in the subsequent chapter. Here, the firm can choose to determine and subsequently focus specifically on the CSR practices valued by stakeholders, or they can use legitimizing strategies to convince stakeholders of the value of certain CSR initiatives

Resource availability. A firm’s resources include all assets, capabilities, organizational processes, firm

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physical substance and can be touched, like buildings, materials, machinery, human resources, currencies etc. Intangible resources lack a physical substance, are usually hard to evaluate and include such assets as skills, knowledge, brand names, goodwill and patent rights. Finally, personnel-based assets include culture, the training and expertise of employees, and their commitment and loyalty (Grant, 1991). In attempting to enhance the financial benefits to be obtained from conducting certain CSR practices, the availability of resources is found to be of significance. For example, when resources allow an organization to implement a value creating strategy not simultaneously being implemented by any current or potential competitors, firm’s are able to obtain a competitive advantage (Barney, 1991). An organization’s exploitation efforts thereby concerns the process of creating value by putting together a unique package of resources to exploit an opportunity, involving the development and allocation of resources (Morris et al., 2001).

Organizational form. Following the work by Powell (1990), three modes of organization can be

distinguished that represent different ways of organizing transactions. The market form constitutes a flexible structure of non-coercive organization, coordinating without integrating. Markets are characterized by simple communication, independent actors and central prices. On the other hand, the hierarchy form is based on routines, and features little flexibility, high dependence and a formal climate. The final mode of organization is the network or hybrid from, which is typified by reciprocal patterns of communication and exchange. The network structure is based on relations, interdependence and open-ended, mutual benefits. Important aspects of networks are know-how, the demand for speed and the importance of trust (Powell, 1990). The organizational form that a firm adopts is deemed relevant as this for example determines an organization’s possibilities to discover business opportunities, to exchange resources, to reduce risks etc. This paper specifically discusses the influence of the organizational form on the firm’s ability to continuously perform CSR practices in a manner desired by stakeholders. And though the organizational form is not easily changed, the organization here too is expected to be of influence in terms of the measures firms can take in order to reassure that CSR practices are qualitatively and continuously performed.

5.3 Exploitation efforts as intervening factors on the CSR-FP relationship

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turn, enable the most efficient and competitive use of an organization’s assets and help it to acquire a competitive advantage over its rivals (e.g. Sharma and Vredenburg, 1998; Orlitzky et al., 2003). Therefore, in accordance with Surroca et al. (2010), this paper maintains that these intangibles mediate the connection between corporate social responsibility and a firm’s financial performance. In that, the discrepancy in findings on the CSR-FP relationship would be the result of variations in intangibles and when intangible resources are not developed or destroyed, negative or non-significant associations may emerge. Surroca et al. (2010) therefore emphasizes the importance of including intangibles in research on the relationship between CSR and financial performance, as a failure to control for these intangibles may explain some of the mixed findings in previous studies.

Figure 1: The intervening effect of exploitation efforts on the CSR-FP relationship.

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6. Discussion

The previous chapter identified three factors expected to influence the financial success of CSR initiatives, where success refers to an improvement of the financial performance of organizations. The positive effect the factors of legitimacy, resource availability and organizational form can have on a firm’s financial performance, are thereby expected to be dependent on the efforts by the organization towards exploiting their CSR practices. In this section of the paper, the possible influence of an organization’s efforts to exploit their CSR initiatives on financial performance will be discussed, as well as possible implications of these findings on CSR research.

6.1 Legitimacy

As described in the section on CSR definitions and theories, the integrative theories are concerned with the detection and scanning of, and response to, the social demands that achieve social legitimacy, greater social acceptance and prestige (Garriga and Mele, 2004). This paper too maintains that in order for business practices to translate into an improvement of a firm’s financial performance, the business practices need to be valued and desired by relevant stakeholders. In attempting to understand the mechanisms through which possible rewards for corporate social responsibility materialize, research only sporadically focused on the construct of legitimacy though. These studies have primarily examined the notion that organizations could legitimize their business in society through corporate social responsibility, as stakeholders grant legitimacy to organization’s which it expects to act responsible (Doh et al., 2009). This section however, will additionally discuss how legitimacy is likely to be gained from socially responsible behavior, in the expectation that legitimacy is not automatically to be had when committing to CSR. The premise of this paper is thereby that firms desiring to optimally benefit financially from their CSR policy, will need to work towards establishing a policy that includes those CSR practices valued by stakeholders, as only valued practices represent profit opportunities for the organization. In that, a distinction can be made between externally and internally stimulated opportunity recognition (Bhave, 1994), where the former refers to a firm’s efforts of examining the market to determine which CSR aspects are valued, signifying the profit opportunities the organization should thus pursuit. The latter refers to the situation where an often undiscovered profit opportunity in the field of CSR presents itself within the organization, and for which legitimizing strategies will usually need to be applied in order to convince stakeholder of the value of these CSR practices and thus gain legitimacy.

6.1.1 Obtaining organizational legitimacy through CSR practices

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fitting and good (Aldrich and Fiol, 1994). Legitimacy thereby enhances both the stability and comprehensibility of organizational activities, while additionally increasing a firm’s perseverance (Suchman, 1995). This should increase a firm’s ability to secure governmental approval or protection through, for example, legislation or subsidies (Aldrich and Fiol, 1994), as well as attracting stakeholders and their resources, which they are most likely to supply to organizations deemed desirable, proper or appropriate (Roa, 1994; Higgins and Gulati, 2003). As such, the financial performance of organizations should be positively influenced when gaining legitimacy. At the same time, legitimacy affects not only how people act toward organizations, but also how they understand them. Audiences perceive the legitimate organization not only as more worthy, but also as more meaningful, more predictable, and more trustworthy (Suchman, 1995). Legitimacy is therefore closely intertwined with reputation, having similar antecedents, social construction processes, and consequences. However, legitimacy emphasizes the social acceptance resulting from adherence to social norms and expectations, whereas reputation emphasizes comparisons among organizations (Deephouse and Carter, 2005). Thus, legitimacy captures an organization’s conformity with a general set of expected standards, whereas reputation reflects a view that an organization has achieved a special, distinctive status among its peers. In that, legitimacy is a necessary, but not always sufficient condition for the attainment of a positive reputation, and as such may be viewed as a precursor or antecedent to reputation. This implies that reputation might not be an automatic, but is considered a potential consequence of legitimacy (Doh et al., 2009).

Research has considered legitimacy as a key reason for undertaking corporate social responsibility. When a firm’s professional communities have a normative call for organizations to behave in socially responsible ways, this constitutes a critical stimulus for companies to commit to corporate social responsibility, thereby garnering the favorable benefits that results from that adoption (Campbell, 2007). This under the contention that stakeholders grant legitimacy to those businesses which it expects to act responsibly (Wood, 1991). On the other hand, when in the long run organizations do not act in a manner which stakeholders consider responsible, they will tend to lose their legitimacy. Here, stakeholder theory in particular provides insight about how stakeholders grant and takes away corporate legitimacy. If central stakeholders lose confidence in the organization’s CSR performance, legitimacy may be withdrawn, where possible consequences include customers detaining from buying products, shareholders selling their stock, employees withholding loyalty and best efforts, the government stopping subsidies or imposing fines or regulates, and environmental advocates possible deciding to sue (Wood, 1991).

6.1.2 Legitimacy: externally stimulated opportunity recognition

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legitimacy subsequently has several positive effects on the financial performance of organizations. Where legitimacy implies that stakeholders value and desire a firm’s business practices, the premise of this paper is that those organizations focusing on the aspects of CSR most valued by stakeholders should best be able to take full advantage of the financial possibilities that socially responsible behavior could offer. This paper thereby contends that organizations can influence the extent of legitimacy gained from their CSR practices by either tailoring their CSR practices to fit stakeholder needs, or by influencing stakeholder needs to fit a firm’s CSR practices. In case of the former, the exploitation of the CSR concept entails efforts by the organization towards identifying CSR activities that meet stakeholder demands and thereby represent a profit opportunity for the organization. This is referred to as externally stimulated opportunity recognition, where organizations look into the market to find explicit profit opportunities in the field of CSR to pursuit (Bhave, 1994).

Externally stimulated opportunity recognition is considered to be of significance in gaining legitimacy as behaving socially responsible will not automatically result in legitimacy; corporate social responsibility covers a wide range of issues which different stakeholders will not value equally. To demonstrate this point, the following example on individualistic versus collectivistic stakeholders indicates how different stakeholders have different expectations of corporate social conduct. Stakeholders that are more individualistic in nature are often more concerned with broad social welfare issues, whereas low levels of individualism reflects an emphasis on more immediate social referents, such as families and local community members. High levels of individualism could also result in greater economic development, suggesting that the conservation of the environment would be assigned lesser social importance (Katz et al., 2001). In highly individualistic countries employees also value personal time and are sensitive to how their involvement with a company can detract from their quality of life, whereas countries with high levels of collectivism would likely appreciate more solidarity and involvement with organizational life (Katz et al., 2001).

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receive from their socially responsible behavior could be one of the reasons why divers results on the relationship between corporate social responsibility and financial performance are found in research.

6.1.3 Legitimacy: internally stimulated opportunity recognition

As previously described, some CSR practices will already be known and desired by society, thereby providing legitimacy to those organizations which perform such practices. However, other than looking into the market for possible profit opportunities in the field of CSR, valuable CSR initiatives could also present itself within the organization, thereby referred to as internally stimulated opportunity recognition (Bhave, 1994). This often concerns CSR activities not yet valued or expected by society, possibly because societies are unfamiliar with these activities or because they represent entirely new products or processes. In that case, organizations can choose to gain legitimacy by convincing stakeholders of the value of their CSR practices. This implies that stakeholders will need to be knowledgeable about CSR activities and that key stakeholders, the general public, key opinion leaders, or government officials accept these activities as appropriate and right, given existing norms and laws (Aldrich and Fiol, 1994). Pava and Krausz (1997), for example, discussed several criteria for evaluating the legitimacy of corporate projects for institutionalizing social responsibility. They argued that legitimate social responsibility programs are informed by a high degree of local knowledge. Furthermore, legitimate corporate social responsibility programs are designed to improve problems for which the organization is responsible, while stakeholders should be informed and agree about means and ends (Pava and Krausz, 1997).

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processes with CSR features (Zucker et al., 1998). These scientists and academics could also provide access to outside knowledge the firm does not possess and cannot develop on its own and allows for some assurance that the firm has the ability to absorb and leverage new knowledge concerning corporate social responsibility acquired from outside entities (Cohen and Levinthal, 1990).

Though mere examples, these legitimizing strategies indicate some initiatives that organizations could take in order to build a knowledge base that outsiders might accept as valid and which could aid in the establishment of a reputation as reliable and trustworthy. Here, stakeholder trust is a critical determinant in creating legitimacy, as by definition there is an absence of information and evidence regarding the firm’s new activity (Aldrich and Fiol, 1994). When applying the aforementioned legitimizing strategies on the CSR issue, it could be argued that hiring or empowering employees with experience in the field of CSR might represent a signal to stakeholders that the firm possesses the knowledge and skills to conduct itself in a socially responsible manner. Such legitimacy strategies could indicate that the organization will be able to determine stakeholder needs and subsequently can develop its CSR practices in such a way as to meet these demands. This paper expects that those firms best able to obtain legitimacy for their CSR practices will enjoy larger financial benefits.

6.2 Resource availability

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