Business-NGO partnerships and triple
bottom line performance:
Does it pay to do good?
Final version Master thesis
15 August 2014
Michiel Jurgens
Student number: 6156630 Supervisor: Dr. A.E. Kourula
MSc. in Business Studies – Strategy Track University of Amsterdam
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Abstract
An increasing number of companies and their stakeholders are concerned with corporate social responsibility (CSR) and are convinced that firms should act socially and environmentally responsible, instead of only focusing on their financial goals. In terms of Elkington (1997), they should strive for a high triple bottom line performance. At the same time, firms engage into different types of partnerships with NGOs. This paper adds new insights to the current state of research on CSR by combining studies on triple bottom line performance and studies on business-NGO partnerships. In this study, the relationship between three different types of business-NGO partnerships and firms’ triple bottom line performance are explored. Furthermore, the mutual relationships between the components of triple bottom line performance are researched. It was expected that a more integrative partnership would lead to higher triple bottom line performance, and that financial performance, social performance, and environmental performance would relate positively to each other. Using a quantitative approach these hypotheses are tested on a sample consisting of the firms of the S&P 100, using data from COMPUSTAT, KLD, CDP S&P 500 Climate Change Report 2013, and all firms’ CSR reports. Unexpectedly, it appears that there is no relationship between the different types of business-NGO partnerships and firms’ triple bottom line performances. An interesting mutual relationship that was found between the components of triple bottom line performance is the positive relation between financial performance and social performance, which might suggest that it ‘pays to do good’.
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Table of Content
1. Introduction……… 4
2. Literature review……… 6
2.1. Corporate Social Responsibility………... 6
2.2. Triple bottom line performance……… 7
2.3. Non-governmental organizations………... 7
2.4. Different forms of CSR and cooperation with NGOs……… 8
3. Theoretical framework……….. 11
3.1. Different types of business-NGO partnerships and TBL performance…………. 11
3.2 Mutual triple bottom line effects……… 13
4. Methods………... 15
4.1. Sample……… 15
4.2. Data collection and variables………..………. 15
4.2.1. Independent variable: Type of business-NGO partnership..………. 16
4.2.2. Dependent variable: Triple bottom line performance……… 17
4.2.2.1. Financial performance………... 17
4.2.2.2. Social performance………. 18
4.2.2.3. Environmental performance……….. 18
4.2.3. Control variable: Firm size………... 19
4.3 Method……… 20
5. Results………. 20
5.1. Descriptive statistics………... 20
5.2. Correlations……….. 22
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5.3.1. Different types of business-NGO partnerships and TBL performance… 25
5.3.2. Mutual relationships between TBL performance components…………. 27
6. Discussion……… 29
6.1. Theoretical contribution………. 30
6.2. Managerial implications……… 34
6.3. Limitations……… 35
6.4. Recommendations for further research………... 36
7. Conclusion………... 37
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1. Introduction
Since the 1980s Non-Governmental Organizations (NGOs) have been growing in number, size, and influence (Doh & Guay, 2006). Teegen, Doh, and Vachani (2004) describe NGOs as broader social movements that have been evolved to a structural entity. These entities try to influence governments and businesses to act in a way that creates value for all stakeholders. A firm should, for example, not only look at maximizing shareholders’ value. NGOs emphasize the responsibilities firms have for more stakeholders than just the shareholders of the company. These stakeholders can be employees, suppliers, customers, and the environment.
Many large corporations engage in relationships with NGOs in order to conduct their Corporate Social Responsibilities (CSR) policies well. According to Carroll (1991) CSR is built on four pillars of social responsibilities. Firms should namely take into account their economic, legal, ethical, and philanthropic responsibilities in order to be social responsible. Elkington (1997) endorses the view that firms have responsibilities that go beyond financial performance. He introduced the term triple bottom line (TBL) to construe that companies should strive to perform well on three aspects of business: the financial, social, and environmental terrain. Firms should no longer focus on just financial gains, but on TBL performance instead. To achieve this, partnerships with NGOs could be helpful.
Austin (2000) did research on these partnerships and distinguished three types of partnerships between the business sector and NGOs. On a continuum scale, with different levels of engagement and integration, he distinguished the philanthropic partnership, the transactional partnership, and the integrative partnership.
Austin (2000) shows two interesting developments. First, it appears from his paper that an increasing number of companies take their responsibilities on multiple dimensions
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serious by engaging with NGOs. But even more interesting, they do so by very different ways of collaboration. A firm that engages in a philanthropic partnership with a NGO, does not do much more than regular charity, whereas the company and the NGO that are linked in a transactional partnership have already an overlap in mission and values, and transfer their core competencies to each other. When engaged in an integrative type of partnership, both parties even have shared values and create joint value together.
The finding that firms differ in the way they cooperate with NGOs in order to conduct their CSR activities well, together with the increasing belief that companies should focus on their TBL performance, creates a fruitful ground for a study on the relationship between different types of business-NGO partnerships and TBL performance of companies. The combination of these two streams in the CSR literature would add new insights to current research on this topic.
This study therefore aims to find out what the relationship is between different types of
business-NGO partnerships and triple bottom line performance of companies. Furthermore,
this paper also examines the mutual relationships between the components of TBL performance, namely financial performance, social performance, and environmental performance.
In this paper first the current state of research on this topic is reviewed. Afterwards, the hypotheses of this study are introduced. Subsequently, the research methods are clarified. This is followed by the result section and the discussion of these results in relation with the findings of prior research. Finally, the conclusions of this research are drawn.
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2. Literature review
2.1. Corporate Social Responsibility
The research area of CSR is getting more and more attention of scholars and corporations. Carroll (1991) suggests that “four kind of social responsibilities constitute total CSR: economic, legal, ethical, and philanthropic”. He translates this into more managerial terms as “the CSR firm should strive to make a profit, obey the law, be ethical, and be a good corporate citizen” (Carroll, 1991). Aguinis (2011) defines CSR as “context-specific organizational actions and policies that take into account stakeholders’ expectations and the TBL of economic, social, and environmental performance.”
Aguinis and Glavas (2012) reviewed the CSR literature at the institutional, organizational, and individual level of analysis. On the institutional level, they found that the influence and actions of stakeholders are important predictors of CSR engagement of firms. Besides that, institutional forces like regulation tend to affect the extent to which firms engage in CSR activities. Other interesting results of the authors’ review on this level of analysis are that CSR activities are sometimes more symbolic than genuine, just to simply appease stakeholders, and that CSR often leads to increased customer loyalty and an enhanced reputation of the firm.
On the organizational level, Aguinis and Glavas (2012) found that firms mainly engage in CSR because of instrumental reasons such as expected financial performance. Another reason the authors identified for engaging in CSR is that the firm’s values and beliefs implicitly require the company to do so. Besides that, a small, but positive relationship between CSR activities and financial performance was found. Next to increased financial performance, multiple non-financial performances, such as product quality, management practices, and attractiveness to investors, increase as well when firms engage in CSR.
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On their third level of analysis, the individual level, Aguinis and Glavas (2012) conclude that, although there has not been done a lot of research on this level of analysis, CSR engagement is affected by the alignment of the CSR activities with the personal values and concerns of the employee. Also, the authors found that CSR activities positively influence employee attitudes, behaviors, and performance.
Elkington (1997) agrees that there is a need to apply CSR in companies. He introduced the term triple bottom line (TBL) to convince companies that they have to perform well on three aspects of business: on the financial, social, and environmental dimension.
2.2. Triple Bottom Line performance
The term TBL was first used by Elkington (1997), around the time that there was a groundswell of public opinions that companies were responsible for more than just creating economic value (Hubbard, 2009). In resemblance with this tendency, Elkington (1997) stated that firms should act socially and environmentally responsible, instead of only focusing on their financial goals. In other words, firms should focus on their triple bottom line performance. Based on Elkington (1997), in this paper TBL performance encloses the firm’s performance on the financial, social, and environmental terrain.
One of the ways in which firms conduct their activities in order to score well on their TBL performance, is by setting up a relationship with secondary stakeholders, such as non-governmental organizations (NGOs).
2.3. Non-governmental organizations (NGOs)
According to Arenas, Lozano and Albareda (2009) NGOs are key players in CSR. The role of NGOs has grown a lot since the 1990s (Arenas et al., 2009). In those days NGOs were mainly involved in activism against child labor, sweatshops, and environmental pollution (Arenas et al., 2009). Laasonen, Fougère and Kourula (2012) call this adversarial relationship between
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NGOs and business the pressure-response problem-setting. These authors argue that in this setting, the motive for a business reaction is the pressure of a NGO.
A few years later, NGOs and firms engaged more often in collaboration relationships, or dyadic partnerships (Arenas et al., 2009; Laasonen et al., 2012). In these collaboration relationships, NGOs help corporations with developing CSR standards, provide them with technical assistance, and they monitor and audit CSR (Arenas et al., 2009). In doing so, NGOs have got more influence on CSR practices of large corporations, while these corporations profit from an enhanced reputation. According to Laasonen et al. (2012), the rise of these partnerships suggest that the value of adversarial partnerships might not be that high anymore.
But next to the above mentioned adversarial relationship and the dyadic partnership, which are according to Kourula and Laasonen (2010) examples of relationships of the category Business-NGO interface, these authors distinguish two other categories of NGO relationships. The first category, the business-NGO-government interface, also discusses the role of the government in CSR, while the last category sees the NGO as just one of the many stakeholders of firms. But firms do not only differ in their relationship with NGOs, they also engage in different CSR strategies and actions.
2.4. Different forms of Corporate Social Responsibility and cooperation with NGOs
In their paper, Kourula and Halme (2008) classify three types of CSR actions, each with a different form of engagement between corporations and NGOs. The first type of CSR action these authors distinguish, is philanthropy. In this type, companies try to satisfy stakeholders with charitable actions that are not part of the firm’s core activities. Examples are sponsorships and donations (Kourula & Halme, 2008).
When firms try to combine CSR actions with their core activities, they engage in
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(2008), companies do so by taking responsibility for their customers, employees, suppliers, and the political and natural environment.
The last type of CSR Kourula and Halme (2008) found, is Corporate Responsibility
Innovation (CR Innovation). Companies that engage in this type see CSR as a source of
business innovations. In contrast to CR Integration, this form involves creating new businesses or lucrative opportunities to solve problems of disadvantaged groups within the society, instead of conducting existing businesses more responsibly (Kourula & Halme, 2008).
Kourula and Halme (2008) identified several forms of NGO engagement for the different types of CSR actions. Sponsorships and employee volunteering are examples of philanthropy, while consultation, systematic dialogue, certification, and research cooperation characterize CR integration. CR innovation involves a deep relationship between the NGO and the firm, and exists of a common program and partnership (Kourula & Halme, 2008).
Austin (2000) also distinguishes different forms of cooperation between the business sector and the nonprofit sector. He defines three types or stages of collaborations between NGOs and businesses, to what he refers to as interorganizational relationships (IORs). These types reconcile with the three types of CSR actions as described by Kourula and Halme (2008) on some aspects. The types of IORs, or business-NGO partnerships, Austin (2000) distinguishes are the philanthropic, transactional, and integrative types. The philanthropic stage is largely viewed as a one-way value flow, since in this type of business-NGO partnership, the company from the business sector gives economic resources to the NGO, and does not get anything in return, apart from some psychological benefits (Austin, 2000). According to Elkington (1998), this was common practice at the time that NGOs and businesses were starting to develop the first business-NGO partnerships. In this stage, firms
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simply donated money to NGOs, hoping to enhance their reputation somewhat (Elkington, 1998).
Later on, when two circumstances changed, the business-NGO partnerships changed as well. On the one hand side, businesses wanted to receive more specific benefits in return for their donations, insisting on a bigger PR bang for their sponsorship buck (Elkington, 1998). On the other hand side, NGOs became aware of the need for more employees with financial and project management skills, in order to handle the increasingly bigger projects they engaged in (Elkington, 1998). These needs were satisfied by transferring core competences and employees between both parties. While satisfying both these needs, the business-NGO partnerships intensified. When the company and the NGO interact in such a mutual beneficial relationship, in which there are two-way benefit flows that are identified, these organizations find themselves in a transactional type of business-NGO partnerships (Austin, 2000). According to Austin (2000), overlapping missions and comparable values between the NGO and the corporation are the main drivers for developing a transactional relationship.
The last type of business-NGO partnership that Austin (2000) describes, is the integrative type of business-NGO partnerships. In this stage, the NGO and the business integrate their missions, values, activities, and organizations much more intensive than in the transactional stage. The relationship can be seen as an equity-based relationship in a joint venture, in which both firms engage in a broader scope of activities of strategic importance together. Another characteristic of this stage is that the culture of both organizations is influenced by the partner (Austin, 2000).
Building on prior research as reviewed in this section, the hypotheses are developed in the next chapter.
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3. Theoretical framework
From the literature review it becomes clear that CSR is getting more and more important in the business sector. To structure their CSR activities, companies engage with NGOs. There appear to be different types of business-NGO engagements (Austin, 2000). In this research, the philanthropic, transactional, and integrative types of partnerships are distinguished.
At the same time, there is a movement in the evaluation of business performance. On an increasing scale, companies are not held responsible anymore for their financial performances only, but also for their social and environmental impact. In terms of Elkington (1998), firms are expected to score well on their TBL performance.
The combination of the rise in business-NGO partnerships and the increasing emphasis on firms’ TBL performances lead to the question what the relationship is between different types of business-NGO partnerships and TBL performance of companies. Furthermore, it is interesting to find out what the mutual relationships are between the components of TBL performance. These research questions are underpinned by seven hypotheses, which are discussed in this section.
3.1. Different types of business-NGO partnerships and triple bottom line performance
According to Austin (2000) there are different types of business-NGO collaborations on a continuum, with distinct characteristics and functions. The philanthropic type of collaboration comprises mainly a relation as charity donor and a recipient, with few other involvements between both organizations. When the collaboration shows more involvements between the business and the NGO, such as overlap of mission and values, transfers of each organization’s core competences, and more frequent communication between both partners, Austin (2000) categorizes the partnership as a transactional type of collaboration. When the partners of the business-NGO relationship share the same values, engage in a broader scope of activities of
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strategic significance, and there is nonstop attention of top management for the collaboration, this is typified as an integrative collaboration (Austin, 2000).
As was mentioned in the literature review, many large corporations engage in partnerships with NGOs to conduct their corporate social responsibilities, or their TBL performance, well. Because all three different types of business-NGO partnerships Austin (2000) distinguishes, are used by companies to improve their TBL performance, the following relationships are expected:
Hypothesis 1: The philanthropic type of collaboration is positively related with triple
bottom line performance.
Hypothesis 2: The transactional type of collaboration is positively related with triple
bottom line performance.
Hypothesis 3: The integrative type of collaboration is positively related with triple
bottom line performance.
The article of Austin (2000) also leads to the fourth hypothesis. Since Austin (2000) describes the three types of business-NGO collaborations as steps of increasing involvement on the same continuum, and a rational assumption would be that an increasing engagement with a NGO would mean more involvement of the company with the social and/or environmental concerns for which the NGO stands, the following hypothesis emerges:
Hypothesis 4: The positive relation between the integrative type of collaboration and
TBL performance is stronger than the positive relation between the transactional type of collaboration and TBL performance, which is stronger than the positive relation between the philanthropic type of collaboration and TBL performance.
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3.2. Mutual triple bottom line performance effects
Besides the expected relation between different types of business-NGO collaborations and TBL performance, earlier research also suggests that correlations between TBL performance components may exist.
In congruence with that, Stanwick and Stanwick (1998) found a positive relationship between corporate social performance and firms’ sales and profitability. Also McWilliams and Siegel (2000) reported a positive relation between financial performance and corporate social performance in their sample, and so did Posnikoff (1997). However, the results are mixed, since other authors found negative relationships between corporate social performance and financial performance (Wright and Ferris, 1997), while Teoh, Welch, and Wazzan (1999) found no relationship between both variables. Pava and Krausz (1996) looked at the relation between financial performance and social responsibility the other way around, and found that firms which have been perceived as having met social-responsibility criteria, have been performing at least on a par, if not better, than other firms on the financial dimension. So earlier research does not offer unequivocal evidence if, and/or in what direction, financial performance relates to social performance. But combining all these views from different authors, the following relationship is expected:
Hypothesis 5: Financial performance is positively related to social performance.
Next to the potential relationship between financial performance and social performance, another mutual relationship that may exist between the TBL performance components is the relation between financial performance and environmental performance. Although Barnett and Salomon (2006) found a negative relation between the use of environmental criteria for investments and financial performance, a majority of prior research shows signs of the possible existence of a positive relationship between financial and environmental performance.
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Dowell, Hart, and Yeung (2000), for instance, found that companies that apply strict global environment standards on their investments have a higher stock market performance than firms that do not apply strict environmental standards. Russo and Fouts (1997) also found a positive link between economic performance and environmental performance, suggesting that ‘it pays to be green’. Besides that, Porter and Van der Linde (1995) argue in their paper that environmentalism is not necessarily costly, and that environmental performance and financial performance can peacefully coexist. So, the vast part of literature on this relationship between financial and environmental performance directs us to the following hypothesis:
Hypothesis 6: Financial performance is positively related to environmental
performance.
A last interesting mutual relationship between the components of TBL performance that is reported in the literature is the relationship between social performance and environmental performance. For instance, Stanwick and Stanwick (1998) found a positive link between corporate social performance and environmental performance, what they measured using the amount of pollution emissions released by the firm. Also Poduska, Forber, and Bober (1992) found a positive relationship between social and environmental performance, as did Reilly (1992). Based on these papers, the last hypothesis arises:
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4. Methods
4.1. Sample
To investigate whether there is a relationship between different types of business-NGO partnerships and TBL performance of firms, data was gathered about the financial, social, and environmental performances of firms and about their main type of engagement with NGOs. The sample of this study includes firms from the S&P 100 index. The S&P 100 index represents the 100 U.S. companies with the largest market capitalization (Rhoads, 2014, p.11). This sample is suitable for this research because data about the financial, social, and environmental performance of these companies, and about their CSR activities, is available. Besides that, observing the CSR behavior of the 100 largest U.S. firms is interesting since these companies, from which the market capitalization of their stocks covers approximately half the market capitalization of the 500 stocks in the S&P 500, have a big impact on the global environment and the lives of millions of people on the planet.
The sample consists of 85 companies that are listed on the S&P 100 index and meet practical criteria, such as the availability of data to assess TBL performance and the existence of a company’s report on its CSR activities. One company was excluded from the sample since no information on the firm’s CSR activities could be found. Two firms were excluded because of the absence of data on social performances, and twelve companies were removed from the sample because there were no data available on their environmental performance.
4.2. Data collection and variables
In this section, the independent variable, the dependent variable, and the control variables are introduced. For each of the variables is explained how the data about the variable was collected.
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4.2.1. Independent variable: Type of business-NGO partnership
To determine which type of business-NGO partnership, as distinguished by Austin (2000), best describes the way in which the company collaborates with NGOs, the CSR reports of all companies of the sample were studied. In most of the cases the firm discusses its CSR activities in a specific CSR report, though some firms mention their CSR activities in a CSR section in the annual report. Since not all companies from the sample provide information on their CSR activities annually, studying the latest CSR report was most suited for this research. For most of the companies, the latest CSR report was released in 2013, whereas some firms published their most recent one in 2012, and a few others in 2014.
When studying the first few CSR reports, it was noticed that counting coded terms as, amongst other things, ‘philanthropic’, ‘transactional’, ‘integrative’, and ‘NGO’ was not a right method to determine what type of business-NGO partnership is most applicable to a company. The reason for this is the enormous variety in terms that are used in the different CSR reports to define a certain partnership, as well as the diversity in meanings for the same coded term. Since the coded search through the CSR reports was not usable, interpreting the reports and determining the relevant partnership was found to be the best suited collection method. Using this method, the S&P 100 companies were divided in the three categories of business-NGO partnerships as mentioned by Austin (2000), namely philanthropic, transactional, and
integrative partnerships. Consenting with Austin (2000), who stated that these partnership
types are on a continuum scale, firms that are part of an transactional partnership, are classified as a partner in a philanthropic and a transactional collaboration, whereas firms that are engaged in an integrative partnership are classified as engaged in all three types.
It should however be noted that most of the companies representing the S&P 100 engage in many partnerships with multiple NGOs, with different approaches in terms of the
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type of partnership. In these cases, the most dominantly appearing type of partnership was used to divide the company in a partnership category.
4.2.2. Dependent variable: triple bottom line performance
After dividing the companies from the sample into the three categories of business-NGO partnerships, the TBL performance of the companies in the sample was measured. The TBL performance score was constructed as an addition of the separate financial, social, and environmental scores. These three dimensions are equally weighted in this research, based on the dimensional weights in the Dow Jones Substantially Index (2014). The sections below explicate how these scores are determined and how the data to assess those scores were collected.
4.2.2.1. Financial performance
The financial performance of the companies in the sample was measured using the item NI-
Net Income (Loss) from the WRDS COMPUSTAT database. For each company, the average
net income was determined using the net income of the fiscal years 2012 and 2013. By taking the average net income over two years, the financial performance of the companies are more equable and representative for their current financial position, especially since the net income per year may show substantial outliers. Using the average net income, the companies were ranked according to their relative average net income, placing the firm with the highest average net income on 1 in the ranking, and the company with the lowest average net income on 100 in the ranking. After the ranking was completed, points were assigned to all firms using the formula Financial Performance Points = (101-rank). The amount of points assigned
to a firm represents its financial score, which will partly determine the TBL score with a weighting of 33.3%.
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4.2.2.2. Social performance
To measure the social performance of the firms included in the sample, data from the WRDS KLD database was used. The KLD database provides binary scores per item. The chosen items are based on Norman and MacDonald’s (2004) list with commonly used social performance indicators. Taking into account whether the outcome of an item was positive or negative, the binary scores of the items Negative economic impact, Number of community
concerns, Community engagement, Number of community strengths, Health and safety strengths, Supply chain policies & programs & initiatives, Product safety, Human right violations, Child Labor, Customer relations, and Business ethics were added up to determine
the total social score for each company. All items were based on the companies’ social performances in the year 2012. As with the ranking of the financial performance, the firm with the highest added score on the social items was placed first in the ranking, while the lowest added score led to the last place in the ranking. After that, all firms were assigned points according to the formula Social Performance Points = (101-rank), representing the
social performance of each firm.
4.2.2.3. Environmental performance
To be able to assess the environmental performance of each firm from the sample, the CDP S&P 500 Climate Change Report 2013 (CDP, 2013) was used. In this report a list with the environmental performance of almost all S&P 500 companies is published. In this report, each company is scored against two scoring schemes: disclosure and performance. The disclosure score assesses the quality and completeness of the company’s response to the CDP questionnaire, rated on a scale from 1 to 100. The performance score assesses the level of action, as reported by the company, on climate change mitigation, adaption, and transparency. Performance is rated on a scale from A to E, with A representing the highest performance. A
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high performance score signals that a firm is measuring, verifying, and managing its carbon footprint (CDP, 2013).
The performance scores were used to rank the environmental performances of the companies in the sample, while the disclosure scores accounted for the differences in ranking between firms with the same performance score. Based on this ranking, points were assigned to the companies using the formula Environmental Performance Points = (101-rank), representing the environmental performance of each firm from the sample.
4.2.3. Control variables: Firm size and industry
To control for influences of firm size on TBL performance, this study controls for the average number of employees and the average total revenues of the firm. To gather these data for all firms in the sample, WRDS COMPUSTAT was used. For each firm the data about the number of employees in 2012 and 2013, and the total revenues for the years 2012 and 2013 were collected. Afterwards, these data were transformed for each company in the average number of employees and the average total revenue. The average score was chosen to use to control for strong fluctuations, especially in the total revenues of some companies. This is suitable for this study, since CSR activities are also more a long term project than a one year activity.
Besides controlling for firm size, this study also controls for the industry type a company belongs to. The Standard Industrial Classification (SIC) was used to divide all firms into six different categories. The distinguished categories in this paper are the agriculture & mining industry, the manufacturing industry, the transportation & public utilities industry, the wholesale & retail trade industry, the finance, insurance & real estate industry, and the services industry.
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4.3 Method
A hierarchical regression analysis was conducted three times to test relationships between different types of NGO-business partnerships and TBL performance and to demonstrate mutual relationships of TBL performance components. In all three analyses, control variables were included in step 1, while the independent variables were added in step 2. In the first analysis, TBL performance was the dependent variable, whereas social performance was the dependent variable in the second analysis and environmental performances in the last one.
5. Results
In this section, the descriptive statistics and correlations are presented, as are the regression analyses. Based on the outcomes of these statistics, the hypotheses are tested.
5.1. Descriptive statistics
Table 1 shows the descriptive statistics of all variables taken into account. As reported earlier, all firms were divided into six industry categories. 11 percent of the firms from the sample are active in the agriculture & mining industry, 40 percent can be subdivided in the manufacturing industry, whereas the transportation & public utilities industry accounts for 12 percent, the wholesale & retail trade industry for 11 percent, the finance, insurance & real estate industry for 20 percent, and the services industry for 7 percent.
The number of employees per company as showed in table 1, represents the average number of employees for the years 2012 and 2013. In this sample, the number of employees varies per company between 5,400 and 2,200,000, with an average of 145,258 employees per firm. The reported total revenue is also the average for the years 2012 and 2013. The total revenue in this sample varies between $5.197 billion and $470.745 billion, with an average total revenue of $59.748 billion.
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As described in the methods section, the firms’ CSR policies were classified into three business-NGO partnership types. Table 2 shows the distribution per partnership type. 56.5 Percent of the companies in the sample are mainly active in philanthropic partnerships with
NGOs, while the CSR policy of 37.6 percent of the firms was classified as transactional type of partnership, and 5.9 percent of the firms’ CSR policies were classified as an integrative partnership type. Next to the frequencies of table 2, table 1 shows the descriptive statistics for the binary codes of the partnership types. As can be seen in this table, all 85 firms in the sample are active in at least philanthropic partnership activities, so the minimum, maximum, and mean score of the binary variable of philanthropic partnership is 1. For both transactional type of partnership and integrative type of partnership the minimum value is 0 and the maximum value is 1. Both variables differ on the mean score. The mean value of the former is 0.44, whereas the mean score of the latter is 0.06.
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Table 1 also shows the descriptive statistics of the dependent variable of this research, triple bottom line performance, and its components, financial performance, social performance, and environmental performance. As mentioned in the methods section, these variables are based on a ranking. Since 15 firms have been taken out of the sample because of missing values, the minimum, maximum, and mean values deviate from the expected 1, 100, and 50.5.
5.2 Correlations
A correlation analysis was conducted to identify relationship patterns between variables. The negative correlations between different industry types and different partnership types are disregarded in this analysis, since they are mutually exclusive variables. The remaining significant correlations are analyzed in this section.
What can be derived from table 3 is that there are no significant correlations between the different types of business-NGO partnerships and firms’ TBL performance, although there seems to be a tendency that firms engage in more integrating partnership types with NGOs when they perform better financially (r=.176, p>.05). Next to that, no significant correlations exist between the different types of NGO-Business partnerships and the control variables, but it seems to be that firms in the services industry tend to engage in more integrating partnership types with NGOs than firms from other industries do (r=.154, p>.05).
An interesting significant correlation that can be found in the table is the relation between financial performance and social performance (r=.370, p<.01). From this research it comes forward that firms that perform financially well, also perform socially well. Financial
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performance also correlates significantly with the control variables total revenue (r=.473, p<.01) and number of employees (r=.234, p<.05). Social performance does only correlate significantly with total revenue (r=.322, p<.01), and TBL performance correlates with both
total revenue (r=.467, p<.01) and number of employees (r=.237, p<.05).
Environmental performance does not correlate with these two control variables, but the table does show a significant relationship between environmental performance of firms and their subdivision in the agriculture & mining industry category (r=-.287, p<.01). So firms that are active in this industry seem to perform less well on the environmental terrain than firms that are active in other industries do. The same sort of correlation can be found between the TBL performance of firms and their subdivision in the agriculture & mining industry (r=-.229, p<.05).
Some other interesting observations from the correlations table are the relationship between the control variables number of employees and total revenue (r=.689, p<.01), and the correlations between number of employees and the retail category (r=.476, p<.01), and between the retail category and total revenue (r=.258, p<.05). The last two correlations suggest that firms that are active in the retail industry have more employees and higher total revenues than firms in other industries have. The correlation matrix can be found on the next page.
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5.3. Regression analysis
In order to study the relationships between the dependent and independent variables, three hierarchical regression analyses were conducted. The first analysis was performed to test hypotheses 1 to 4, whereas hypotheses 5 to 7 were tested using the other regression analyses.
5.3.1. Different types of business-NGO partnerships and triple bottom line performance
The first four hypotheses deal with the relationships between different types of business-NGO partnerships and TBL performance. To test these relationships, the first regression analysis was conducted (table 4). In the first step of the analysis, only the control variables were added in the analysis (model 1), afterwards the independent variables were added as well (model 2). As can be observed from table 4, the control variables number of employees, total revenue, and the industry categories, explain 33.1 percent of the variances of the dependent variable
TBL performance (R²=.331). The industry type manufacturing was excluded from the
regression analysis because of high multicollinearity. Model 2 also includes the independent variables transactional partnership and integrative partnership. The independent variable
philanthropic partnership was removed from the analysis because of a constant value for all
firms included in the sample on this variable, since all included firms engage in at least philanthropic activities. Model 2 explains 34.3 percent of the variances of the dependent variable TBL performance (R²=.343).
With the outcomes of the regression analysis the hypotheses can be evaluated. Hypothesis 1, which predicts that a philanthropic type of business-NGO partnership is positively related with TBL performance, cannot be tested with this dataset because all firms in the sample engage in at least philanthropic activities, resulting in a constant value for all firms on this variable.
Hypothesis 2, concerning the presumed positive relationship between engaging in transactional type of business-NGO partnerships and TBL performance, is not supported by
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the outcomes of the regression analysis. Unexpectedly, there seems to be a slightly negative non-significant relationship between transactional type of business-NGO partnerships and TBL performance (β=-.036, p>.05).
The results of the regression analysis show a positive relationship between engaging in an integrative type of business-NGO partnerships and TBL performance, but the relationship is not significant (β=.117, p>.05). Therefore, hypothesis 3 is rejected.
Hypothesis 4 presupposed that the positive relation between the integrative type of business-NGO partnership and TBL performance is stronger than the relation between the transactional type of business-NGO collaboration and TBL performance, which is stronger than the relation between the philanthropic type of collaboration and TBL performance. The regression analysis shows a trend that is somewhat less constant. First of all, the relation between philanthropic activities and TBL performance cannot be assessed in this research. Besides that, transactional activities seem to relate negatively to TBL performance, while integrative activities seem to relate positively to TBL performance. In addition, the correlation
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matrix shows a non significant positive correlation between partnership types and TBL performance (r=.054, p>.05), indicating that a more integrating type of business-NGO partnership relates to higher TBL performance. So although the influence of philanthropic activities cannot be measured in this research, the non-significant positive correlation between partnership types and TBL performance and the outcome that integrative activities relate more positive to TBL performance than transactional activities do, seem to provide some evidence that there might be such a relation as formulated in hypothesis 4. Since the results are non-significant there is no full support for this hypothesis, but the outcomes may indicate that it might indeed be that a more integrating business-NGO engagement relates to higher TBL performance. But since there is no significant relationship found, hypothesis 4 is not accepted.
5.3.2. Mutual relationships between triple bottom line performance components
To test the hypotheses concerning the mutual effects of the components of TBL performance, two additional regression analyses were conducted. For the first of these analyses, social
performance is the dependent variable, while environmental performance is the dependent
variable for the last one. For both analyses the control variables were included in model 1, whereas the independent variables were added in model 2. Tables 5 and 6 show the results for both regression analyses. As can be seen in table 5, model 1 explains 15.5 percent of the variances in the dependent variable social performance (R²=.155), whereas model 2 accounts for 23.2 percent of the variances in this variable (R²=.232). Model 1 of the last regression analysis (table 6 explains 14.6 percent of the variances in the dependent variable
environmental performance (R²=.146), and model 2 explains 17.4 percent of the dependent
variable (R²=.174).
Hypothesis 5, which predicts that a higher financial performance relates to a higher social performance, is supported by the outcomes of the second regression analysis which can be found in table 5 (β=.308, p<.05).
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The results of the third regression analysis, in table 6, show that there is no significant relationship between financial performance and environmental performance (β=-.137, p>.05). Also the direction of the relationship is different than expected. Therefore, hypothesis 6, concerning the presumption that a higher financial performance relates to a higher environmental performance, is not accepted.
Hypothesis 7, about the presumed relationship between higher social performance and higher environmental performance, is tested by both the second and the third regression analysis. The results of the second regression analysis (β=.160, p>.05) and the third one (β=.172, p>.05) indicate that, although the direction of the relation is positive as was expected, there is no significant relationship between social performance and environmental performance of firms. Therefore, hypotheses 7 is not accepted.
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6. Discussion
Many papers have been written about CSR activities and a lot of research has been done on collaborations between the business sector and NGOs. At the same time, inspired by the work of Elkington (1997), an increasing number of corporations are convinced that their performance measurement should not only be based on financial performance, but also on social and environmental performance. Now these three streams of CSR literature gain more and more attention, it becomes clear that an essential combination of these views has not yet been made in earlier research. The purpose of this paper was to make that combination, by finding an answer to the question which sort of partnerships between the business sector and NGOs relate with higher TBL performance, and by taking a look at the mutual relations of the TBL performance components.
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In this section, the outcomes of this paper are discussed, and compared with the results of prior research. Afterwards, managerial implications are mentioned, as are the limitations of this paper. Finally, some recommendations for further research are made.
6.1. Theoretical contribution
This study does not add new insights to the relationship between the philanthropic type of business-NGO collaboration and firms’ TBL performance, since the sample was not suited to investigate that relation. The paper does, however, present findings about the other distinguished types of relationships between the business sector and NGOs.
First, it shows that the transactional type of business-NGO partnership is not positively related to TBL performance as was expected. This relationship even seems to be slightly negative, although not significantly. This finding is open to several interpretations. One possible explanation is that firms that engage in a transactional partnership with a NGO focus too much on this single partnership and neglect other CSR activities. For example, a firm that invests a lot of time and money in a transactional partnership with a NGO to take care of a social project in its neighborhood, may fail to look at its environmental performances, such as pollution emissions, water management or waste management. So by engaging in a more integrative relationship with a NGO than just philanthropy, firms might view at CSR in a more narrow view because of the more intensive relationship with a single NGO, thereby focusing only on one of the three pillars of TBL performance. If this would be the case indeed, firms engaging in transactional collaborations with NGOs would score relatively high on the TBL performance component they focus on, and relatively low on the other two components. This could mean that there can be a positive relationship between a transactional type of a business-NGO partnership and one of the TBL components, when there is no relationship with the transactional collaboration and the complete TBL performance. This would be an interesting question for further research.
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Another explanation for the absence of a positive relationship between a transactional type of business-NGO partnership and TBL performance might be that the aspects that differentiate a transactional partnership from a philanthropic partnership in theory, do not make the difference in practice. According to Austin (2000), the important differences between a philanthropic relationship and a transactional relationship are aspects as more overlap in mission and values between company and NGO, stronger personal connection at the leadership level of both organizations, increased understanding and trust, the transfer of core competencies and a more equal exchange of resources between the two institutions, and a more frequent communication. The findings of this paper may indicate that these differences are mainly theoretically applicable, while they are not of big importance in practice when it comes to explaining TBL performance of companies.
The same interpretations are applicable to the outcomes of the tests concerning the relationship between a integrative type of business-NGO collaboration and TBL performance, although in a less strict way since an almost significant positive relation was found for this collaboration type. First, the integrative type of business-NGO collaboration can also lead to a more narrow view on CSR activities than the transactional type of partnership does, since the integrative partnership is more intense and demands more time and money. The focus of the company could again go mainly to one of the components of TBL performance, thereby neglecting the other parts. This leads to a less strong positive relation between an integrative type of partnership and complete TBL performance than it would have been if the focus was more on all three components of TBL performance.
Besides that, the argument of the applicability of Austin’s (2000) differentiating aspects in practice, could be valid as well in the case of the integrative type of business-NGO partnership. The aspects that make the difference between a transactional and an integrative type of collaboration are according to Austin (2000) a high mission mesh, deep personal
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relationships and trust across the institutions, a joint value creation, an ongoing attention from top management, and a organizational integration of both institutions in execution. The findings of this research may indicate that these differences between both types of partnerships as described by Austin (2000) are mainly theoretically applicable, and not practically when it comes to explaining differences in TBL performances.
Furthermore, from this paper it appears that a more integrative type of business-NGO partnership is not necessarily related to a higher TBL performance. Based on Austin (2000) it was expected that this would be the case, but this research showed that, while there was found a non-significant positive correlation between partnership types and TBL performance, such an assumption would be to general with too many exceptions. Also for this finding the explanations could be that Austin’s (2000) differentiating aspects between partnership types may not be practically applicable to account for TBL performance differences, or that a more intensive partnership leads to a narrow focus on one of the TBL performance components, thereby neglecting the other determinants and thus the overall TBL performance. Since there are some firm indications for a relationship as mentioned in hypothesis 4, further research could be done with a sample that does provide the opportunity to measure the influence of philanthropic activities on TBL performance.
Next to the findings about different business-NGO partnership types and their relation with TBL performance, this research also investigated the mutual effects of triple bottom performance components. For instance, this paper found a positive relationship between the financial performance and the social performance of firms. This is in line with the findings of Stanwick and Stanwick (1998), McWilliams and Siegel (2000), and Posnikoff (1997). Since no conclusions can be drawn about the causality of the relationship, these findings are open to several interpretations. First, it can be the case that performing financially well gives a company enough resources to put in social projects, thereby boosting their social
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performance. Of course, it might as well mean that companies that put a lot of effort and money in social activities, see their sales, and thus their financial performance, grow as a consequence of an improved reputation. This would be in line with the finding of Aguinis and Glavas (2012), who state that CSR often leads to increased customer loyalty and an enhanced reputation of the firm. Lastly, financial performance and social performance may also interact continuously, boosting each other to higher levels.
In this study also the relationship between financial performance and environmental performance was investigated. This led to an interesting finding that is different than expected and is deviating from the outcomes of a major part of research on this topic. In their papers, Dowell, Hart, and Yeung (2000), Russo and Fouts (1997), and Porter and Van der Linde (1995) all found positive relationships between financial performance and environmental performance. This study, however, found no significant relationship between these two components of TBL performance, and even a negative direction of the relationship, although non-significant. This finding is in line with the results of Barnett and Salomon (2006), who did research on the relationship between the use of environmental criteria for investments and financial performance.
The outcome of this research has multiple possible explanations. First, a difference with the relationship between financial performance and social performance and the relation between financial and environmental performance may be that a firm does not profit financially from its environmental activities because these activities may be less visible for consumers than social activities are. In that situation, environmental projects do not improve the firm’s reputation as social activities do. Therefore sales are not boosted and so neither is the financial performance.
Another interpretation of the absence of a significant relationship between financial performance and environmental performance is that it is harder to perform environmentally
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well than socially well for a bigger company. Since financial performance significantly relates with company size (measured by number of employees and total revenues), it can be assumed for this interpretation that a firm that performs financially better, is a bigger firm. In that case, an explanation for the absence of a relationship between financial performance (bigger companies) and environmental performance versus the positive relationship between financial performance (bigger companies) and social performance, might be that it is more difficult for a bigger company to control their pollution emissions, waste management and water management. For social performance, on the other side, being a bigger company might have advantages as being able to support more local social projects since the firm is active in more locations, has more employees to volunteer, and has more financial resources to invest in projects than smaller companies have. It would be interesting for further research to focus on different sizes of companies, and investigate the relation between firm size and environmental performance.
Finally, this paper found no significant relationship between social performance and environmental performance. While prior research indicates that there is a positive relationship between both components (Stanwick and Stanwick, 1998; Poduska, Forber, and Bober, 1992; Reilly, 1992), this paper only finds a non-significant positive direction of this relationship. Since the relationship between social performance and environmental performance is almost significant in this study, a possible explanation for the deviation of the results of this paper from the outcomes of prior research may be that the sample size is not sufficiently big. Further research could repeat this test with a larger sample size to find out whether it is the sample size that leads to the absence of this relationship, or something else.
6.2. Managerial implications
The findings of this study offers some interesting implications for managers. The main implication may be that managers that want to stimulate their financial performance, should
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focus on improving their social performance rather than their environmental performance. Although the causal direction of the relationship between financial performance and social performance has not been measured in this paper, the fact is that this relationship is significantly positive. This could mean that an improvement in the company’s social performance, by supporting local social projects for instance, leads to higher sales and thus to better financial performance, as a consequence of a boosted consumer reputation. Investments in a firm’s environmental performance may not have this positive influence on financial performance, since no significant relationship between financial performance and environmental performance was found in this study.
A second implication for managers that comes from this paper is the possibility that the choice for a particular partnership type with a NGO does not necessarily affect the firm’s TBL performance. A notion must be made that the hypotheses that led to this conclusion could not be tested on a completely satisfactory level because of some missing data, but taking the present data into account, managers should keep in mind that the choice of partnership type is not per se influencing the firm’s TBL performance. Managers may have to primarily estimate which partnership type fits their company best.
6.3. Limitations
The few missing data about partnership types, as is described above, is one of the limitations of this study. Because of the use of four different databases that were necessary to get the required data (WRDS COMPUSTAT to measure financial performance, WRDS KLD for social performance, CDP S&P 500 Climate Change Report 2013 for environmental performance, and all firms’ CSR reports for determining the most applicable partnership type), some firms had to be deleted from the sample because data about that firm was missing in at least one of the four databases. This treatment of missing data led to a reduced sample size that affected the statistical power of the tests in this research.
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Another limitation of this study is that the subdivision of business-NGO partnership types was in some cases debatable. Especially the companies in the S&P 100 are often engaged in dozens of partnerships with NGOs. That sometimes led to situations in which a company could be subdivided in the one category, as well as in another. Eventually the most suited category was picked, but this method is a limitation of this study.
Finally, the use of the WRDS KLD database led to another limitation of this study. This database can only be used to measure the performances of North-American firms, and therefore the outcomes of this research are only valid for companies from this region. Besides that, KLD uses a binary model that implies that all components of the social performance are equally important. For example, the use of child labor in a factory (which accounts for a 1 point deduction for the final score) can easily be compensated in KLD with a good retirement benefits program on the office (which accounts for a 1 point addition for the final score). The fact that very different components of social performance have the same weighting in KLD, is a limitation for the measurement of social performance in this research.
6.4. Recommendations for further research
This research showed that the type of business-NGO partnership does not per se relate with a firm’s TBL performance. Besides that, firms’ financial performance and social performance are positively related. These findings pave the road for future research in multiple ways. First of all, this study only finds relationships and correlations. However, it would be very interesting to do a study on the level of causality between, for instance, financial and social performance. This would provide managers with insights for their future strategy: Do investments in social projects lead to better financial performance? Or does this only work the other way around?
Another recommendation for further research is to replicate this study with a sample consisting of firms from all over the world, or from another continent than North America. It
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might be interesting to see whether there are differences between North American firms and firms from other continents, when comparing TBL performance and different business-NGO partnership types. It would then be recommendable to replicate this study with a larger sample size, to increase the statistical power of the analyses.
7. Conclusion
This research has analyzed the relationship between different types of business-NGO partnerships and TBL performance of companies. Furthermore, it has assessed the mutual relationships of the three components of TBL performance, namely financial performance, social performance, and environmental performance. In this section, the most important results will be discussed, as will be the managerial implications and directions for further research.
This research is especially based on the work of Elkington (1997) and Austin (2000). The former stated that firms should act socially and environmentally responsible, instead of only focusing on their financial goals, and should thus focus on their TBL performance. The latter defined three different types of partnerships between the business sector and NGOs, which can help companies to conduct their business responsible. On a continuum scale, with different levels of engagement and integration, Austin (2000) distinguished philanthropic, transactional, and integrative types of collaboration. By testing the combination of these two theories using a quantitative approach, this paper adds new insights to the current level of research on this topic.
One of these main insights this paper developed, is the finding that Austin’s (2000) different types of business-NGO partnership, although they strongly differ from each other in theory, do not have different relationships with TBL performance in practice. This may imply
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that managers who want to improve the TBL performance of their firm, should only pick a partnership type because it fits the company best, and not because one type stimulates TBL performance more than the other types of collaboration do.
Furthermore, this research also indicates that financial performance and social performance positively relate to each other, while no relationship was found between financial performance and environmental performance. The positive relationship between financial and social performance may mean that performing financially well provides the company with sufficient resources to invest in social activities, while it may also indicate that performing socially well leads to an increased consumer reputation which may lead to higher sales and thus better financial performance. If the latter would be the case, this would mean that managers could use investments in social projects as a tool to improve their financial performance.
Further research could be done on the level of causality between financial and social performance, and on the relation between financial and environmental performance to find explanations for the absence of a positive relationship between these components of TBL performance. Besides that, replicating this study with a sample that consists of firms from other parts of the world than North America would also add new insights in the way firms and their TBL performances differ from each other across the globe.
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