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Acknowledgements
I would like to express my gratitude to several people. I would like to thank Dr. Scurry and Dr.
van Veen for their guidance and invaluable constructive criticism. Furthermore, I would like to thank Hannah for her kindness and support during the past months. I would also like to thank my parents for their support and encouragement.
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Abstract
This research studies two relationships. First, the relationship between industry sectors and corporate social performance (CSP) is investigated. Secondly, the relationship between corporate social performance and corporate financial performance (CFP) is analyzed. The measurement for corporate social performance is the Good Company Ranking from 2013 and the sample contains all of the 70 listed MNEs from the Good Company Ranking. The influence of the categories employee CSP, environmental CSP, society CSP, and aggregated CSP are separately analyzed.
The corporate financial performance is measured by return on assets. ANOVA tests are executed to determine differences of corporate social performance among industries. A difference in corporate social responsibility rating among industries has not been found. A regression analysis is applied to test the CSP-CFP relationship. Only a negative relationship between employee CSP and financial performance is found. These findings stand in contrast to the stakeholder theory.
The practical implications of this research are that firms should keep costly corporate social responsibility at a bare minimum if the firm‟s only goal is a better financial performance. The originality of the research is that the three different categories of corporate social performance have been analyzed in the European context.
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Index
Acknowledgements ... II Abstract ... III List of tables... VII Table of figures ... VIII Index of abbreviations ... VIII
Chapter 1 Introduction... 1
1.1 Introduction ... 1
1.2 Problem definition ... 3
1.3 Structure of the thesis... 5
Chapter 2 Literature review ... 6
2.1 Corporate social responsibility definition ... 6
2.2 Evolution of corporate social responsibility ... 7
2.3 Components of corporate social responsibility ... 8
2.4 Corporate social responsibility dimensions in Europe... 10
2.4.1 Internal dimension of corporate social responsibility ... 10
2.4.1.1 Human resource management ... 10
2.4.1.2 Health and safety at work ... 11
2.4.1.3 Adaptation to change ... 12
2.4.1.4 Management of environmental impacts and natural resources ... 12
2.4.2 Corporate social responsibility: the external dimension ... 12
2.4.2.1 Local communities ... 13
2.4.2.2 Business partners, suppliers and consumers ... 13
2.4.2.3 Human rights ... 14
2.4.2.4 Global environmental concerns ... 15
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2.4.3 Summary on the European view of CSR ... 15
2.5 Stakeholder theory ... 15
2.6 Corporate Social Performance ... 16
2.8 Kirchhoff‟s Good Company Ranking ... 17
2.8.1 Society ranking ... 17
2.8.2 Employee ranking ... 19
2.8.3 Environment ranking ... 20
2.9 CSR relation to the industry across Europe ... 21
Chapter 3 Hypotheses and Conceptual model ... 23
3.1 Hypotheses ... 23
3.2 Conceptual model ... 26
Chapter 4 Methodology ... 28
4.1 Research perspective ... 28
4.2 Sample and data collection ... 28
4.3 Model ... 28
4.4 Dependent variable for hypotheses 1 ... 29
4.4.1 Market-based data ... 29
4.4.2 Accounting-based data ... 30
4.5 Independent variable for hypotheses 1 ... 31
4.6 Independent and dependent variable for hypotheses 2 ... 31
4.7 Control variables ... 31
4.7 Methods... 32
Chapter 5 Findings ... 34
5.1 Descriptive statistics ... 34
5.2 Correlation analysis ... 35
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5.3 CSP-CFP Relationship ... 36
5.4 Employee, Society, and environmental CSP measurement in relation to CFP ... 36
5.5 Descriptive industry analysis in relation to corporate social performance ... 37
5.6 Differences in corporate social performance among industries ... 38
5.7 Differences in society CSP, employee CSP and society CSP among industries ... 39
5.8 The industry as a moderator for the CSP-CFP relationship ... 40
Chapter 6 Discussion and conclusion ... 41
6.1 Discussion ... 41
6.2 Limitations ... 42
6.4 Conclusion ... 43
6.4 Further research ... 43 References ... IV Appendix A – Good company ranking, society ranking criteria ... XI Appendix B – Good company ranking, environment ranking criteria ... XIII Appendix C – Descriptive statistics for hypotheses 2a, 2b,2c and 2d... XVIII
VII
List of tables
Table 1 Descriptive statistics of the independent, the dependent and the control variables ... 34
Table 2 Correlation between variables ... 35
Table 3 Regression coefficients with the aggregated corporate social performance for the ROA ... 36 Table 4 Regression coefficients with the employee, society and environment ranking for the ROA ... 37
Table 5 Descriptive statistics of the industries‟ corporate social performance ... 38
Table 6 ANOVA test for the aggregated CSP ... 38
Table 7 ANOVA test for the society CSP ... 39
Table 8 ANOVA test for the employee CSP ... 39
Table 9 ANOVA test for the environment CSP... 39 Table 8 Stakeholder overall criteria ... XI Table 9 Customer-related criteria ... XI Table 10 Supply chain-related criteria ... XII Table 11 Social criteria (active contribution) ... XII Table 12 Social criteria (compliance) ... XII Table 13 Integrateing environmental aspects into business processes ... XIII Table 14 Company environmental performance ... XIV Table 15 Environmental aspects throughout the value chain ... XV Table 16 Ecological innovations ... XVI Table 17 Dialogue with stakeholders and environmental cooperation programs ... XVII Table 18 Descriptive statistics for the ANOVA test of the industry with the aggregated CSP as dependent variable ... XVIII Table 19 Descriptive statistics for the ANOVA test of the industry with the society CSP as dependent variable ... XVIII Table 20 Descriptive statistics for the ANOVA test of the industry with the environment CSP as dependent variable ... XIX Table 21 Descriptive statistics for the ANOVA test of the industry with the employee CSP as dependent variable ... XIX
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Table of figures
Figure 1: The Pyramid of corporate social responsibility (Carroll, 1991) ... 9 Figure 2: Dimensions of CSR according to the European Commission (2001) ... 10 Figure 3: Conceptual model ... 27
Index of abbreviations
CFP Corporate financial performance CSP Corporate social performance CSR Corporate social responsibility EC European Commission
EU European Union HR Human resources
NGO Non-government organization MNC Multinational company MNE Multinational enterprise ROA Return on assets
ROE Return on equity
R&D Research and development
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Chapter 1 Introduction
1.1 Introduction
Corporate social responsibility (CSP) has become more and more popular over the last decades, in the world of academia as well as in corporations (Madsen and Stenheim, 2014). One of the reasons for this is the increasing pressure from stakeholders to integrate corporate social responsibility in firms (Helmig, Spraul and Ingenhoff, 2013; Weaver, Trevino and Cochran, 1999). The pressure comes from various stakeholders such as nations or non-government organizations (NGOs). Furthermore, consumers and other stakeholders can perceive firms that are socially responsible as positive (Stanaland, Lwin and Murphy, 2011). One of the most famous examples of a firm failing to understand the importance of corporate social responsibility is Nike in the 90s. Nike had no corporate social responsibility policy that covered working conditions, which became a problem when they outsourced to low-wage, low-regulation countries. Nike received a negative public image, when the working condition in these low- regulation countries came to light. Nike had no policies against child labor, in fact, no policies about labor conditions in general, which led to a bad public perception and a worse financial performance (DeTienne and Lewis, 2005; Boje and Khan, 2009). All of Nike‟s negative consequences could have been prevented by having a comprehensive corporate social responsibility policy in place. In this regard, the European Commission (2001) argues that firms should pursue social responsibility, internationally as well as in Europe. In addition to that, European firms should see themselves as part of the society and act accordingly.
The reasoning of the European Commission is similar to the stakeholder theory, one of the two main theories on the primary objective of a firm. The stakeholder theory states that the interests of many different stakeholders, such as employees or customers, should be fulfilled. The other theory is the shareholder theory, which states that the primary objective of any firm is to maximize the value for shareholders. In contrast to the view of the European Commission, the shareholder-value approach states that the firm‟s management should only focus on generating profit for their owners and ignore the interest of other stakeholders (Lazonick and O'sullivan, 2000). Nevertheless, more and more organizations integrate corporate social responsibility into their firm strategy, as it is perceived as a win-win situation for the firm and their stakeholders
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(Dawkins and Lewis, 2003; Idowu et al., 2013). Therefore, corporations and especially large Multinational Enterprises (MNEs) adopt social and ecological aspects as strategic commitment (Reimann, Rauer and Kaufmann, 2014). Drivers for the ethical behavior of a firm can be found in different theoretical frameworks, for example Jones (1995) argues that ethical behavior enables a firm to achieve competitive advantage through the development of long-lasting and productive relationships with its stakeholders. Another framework by Russo and Fouts (1997) uses the resource-based view, and the authors argue that corporate social performance can constitute a source of competitive advantage.
The question that arises from this behavior is what drives companies to engage and practice corporate social responsibility. Are ethical, institutional forces or economical considerations the primary reason for reporting and practicing corporate social responsibility? Researchers, such as Friedman (1962), would argue that firms are entirely self-interested and would practice voluntary corporate social responsibility only to generate an economic benefit. Those benefits could come in various shapes such as an improved reputation and brand management or better access to capital (Graafland and van de Ven, 2006; Roberts, 1992). Some companies recognize those positive effects of corporate social responsibility but are not willing to spend money to become more socially responsible. This leads to greenwashing, which is a practice where firms falsely promote their organization‟s environmental efforts or spread deceptive information regarding an organization‟s environmental strategies, motivations, or goals (Idowu et al., 2013). Du (2014) explored the impact on the financial performance of firms that have been exposed of greenwashing, and found strong evidence that firms that are exposed of greenwashing are highly negatively associated with financial returns. Furthermore, Walker and Wan (2011) show that firms which only take symbolic actions towards being socially responsible are negatively related to financial performance. Greenwashing can also be a reason for the mixed results of the CSP- CFP relationship. Firms that do greenwashing pretend to have a high level of corporate social performance but they don‟t. This could lead to problems when researchers want to regress against the financial performance. The problem is that it is very hard to indentify and separate the firms that do greenwashing from the legitimate socially responsible firms.
The European Union and the different industries as well as other European institutions play a part in shaping the European landscape of business ethics and social responsibility. In addition to
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that, the recently developed Good Company Ranking (Kirchhoff Consult AG, 2014) offers researchers and practitioners a new and detailed proxy for corporate social performance. More and more researchers try to replicate the large-scale US American empirical research on the topic of the casual relationship between CSP and CFP in different contexts, such as the European context. Furthermore, most US American studies control for industry. The assumption that one has to control industry has been widely adopted even for studies on continental Europe. But it has yet to be tested how the CSP ratings differ among European firms.
1.2 Problem definition
40 years of empirical research regarding the topic of corporate social performance in relation to corporate financial performance did not provide a satisfying answer to how those two terms are related. Turban and Greening (1996, p.658) define corporate social performance as “a construct that emphasizes a company‟s responsibilities to multiple stakeholders, such as employees and the community at large, in addition to its traditional responsibilities to economic shareholders”.
Corporate social performance is a broad topic and finding a proxy that adequately reflects corporate social performance is complicated. Kirchhoff‟s (2013) report of the Good Company Ranking focused on three categories, employees, environment, and society, and found a sound proxy for corporate social performance. The Good Company Ranking has its limitations, which will be discussed in later in detail, just like any other corporate social performance proxy, but it provides valuable insights through the separation of the three categories.
The results of previous studies varied completely, some found no correlation, some found a strong correlation and others found a negative correlation. This can partly be explained by the fact that all these studies used different data for determining the corporate financial performance and the corporate social performance (Lee, 2008; Aguinis and Glavas, 2012). This can be a problem because it could mean that the proxy for CSP is not exact, or that it is also influenced by other factors. Nevertheless, most studies find a positive CSP-CFP relationship (Orlitzky, Schmidt and Rynes, 2003; Margolis, Elfenbein and Walsh, 2009). Different sets of data for the CSP should be tested to analyze the robustness of this CSP-CFP relationship. This research uses a different data set, the Kirchhoff Good Company Ranking. The rationale behind using the Good Company Ranking 2013 data set is that it is divided into three sections, environment, society, and employees, which in turn offers the possibility to individually analyze the relationship to
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corporate financial performance (Kirchhoff Consult AG, 2014). It is important to untangle the individual relationships to understand which part of the corporate social performance really drives financial performance in Europe. This could be very valuable for the management of firms, so that they can focus on certain aspects of CSR. Also, this could provide evidence why there have been mixed results in the research of the CSP-CFP relationship. Furthermore, this European context differs from the USA, and this can impact how industries focus on different parts of the corporate social responsibility. In addition to that, only little research has been done in relation to industry as a moderator in Europe.
The European Commission (2001) calls for further research in Europe on the subject of the CSP- CFP relationship. A review of existing studies shows that most research is done exclusively in the USA (Orlitzky, Schmidt and Rynes, 2003; Margolis, Elfenbein and Walsh, 2009). It is questionable whether or not the findings can be transferred to Europe. Transferability might be a problem because the USA differs culturally from Europe (Alm and Torgler, 2006; Payne, 2006;
Bisio, 2003). The USA traditionally has a stronger focus on the shareholder value theory and European firms generally tend to practice stakeholder capitalism (Baranowski, 2008). This can have implications for the CSP-CFP relationship in Europe. The stakeholder orientation in Europe might be independent from the financial performance, because cultural pressures force firms to be more stakeholder-oriented anyway. For example, in Germany a representative of the labor unions always sits in the supervisory boards. This representation of the employees could force firms to be more socially responsible without receiving financial benefits for it. This research tries to find out what parts of CSR really influence the financial performance. The findings could provide information to help management decide what kind of CSR needs improvement to tweak the financial performance. In addition to that, the antecedents of the industries for the different elements of CSR are investigated. Prior research focused on certain industries, but never investigated if there is a difference in CSR elements among European industries (Orlitzky, Schmidt and Rynes, 2003; Margolis, Elfenbein and Walsh, 2009). In addition to that, prior studies found that there is a difference among industries in general but did not address how industries differ among the different categories of CSR. The findings can show the management of firms a path for improvement in the areas in which they are lacking behind. Also, the findings could give academics the possibility to understand how certain categories of CSR might be the main drivers for financial performance in different industries.
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The reason for introducing a new set of data is that most studies about the CSP-CFP relationship use the same corporate social responsibility data sets, namely, the Fortune corporate social responsibility index or the KLD rating (Margolis, Elfenbein and Walsh, 2009). The originality of this research is that the three different categories of corporate social performance are analyzed in the European setting. Furthermore, what Margolis, Elfenbein and Walsh (2009) find in their meta-analysis about the CSP-CFP relationship is that most studies find a positive relationship, and by always using the same sets of data, one is likely to find similar results. Therefore, this research uses a new set of data, the Good Company Ranking, to further test the robustness of those findings and to find out which part of the CSP is actually responsible for impacting the financial performance. In addition to that, this research tries to find out how the industries differ among the CSR elements: employee, society and environment. From this, the following research question is derived:
To what extend do the areas employee CSP, environment CSP, and society CSP of European MNEs influence corporate financial performance and how does the corporate social performance differ among the industries?
The contribution to research on the CSP-CFP relationship is twofold. Firstly, the analysis of the individual elements of CSR enriches the understanding of the CSP-CFP relationship by providing evidence for a better understanding which parts of CSR are responsible for the financial performance. Secondly, the literature on the how CSP is different among European industries is lacking, and therefore this research contributes to fill this gap of knowledge.
1.3 Structure of the thesis
This chapter presented an introduction to the topic of the CSP-CFP relationship and the research questions. The following chapter gives a literature review and presents the stakeholder theory as well as theories developed around the concept of corporate social responsibility in Europe.
Chapter 3 builds on the theory found and presents the developed hypotheses. After that the methodology is presented in chapter 4. Then, the results from the analysis are presented in chapter 5. Finally, in chapter 6, a conclusion is drawn from the findings and limitations are acknowledged and further research is proposed.
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Chapter 2 Literature review
The literature review critically assesses the theory on corporate social responsibility. Also, the European perspective from the European Commission is analyzed, as well as the stakeholder theory.
2.1 Corporate social responsibility definition
Mazurkiewicz (2004) points out that even though the concept of corporate social responsibility has been developing since the early 1970s, there is still no single commonly accepted definition of corporate social responsibility. In the Green Paper for corporate social responsibility, the European Commission (2001, p.5) defines corporate social responsibility as ”a concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis as they are increasingly aware that responsible behavior leads to sustainable business success.” This means that social responsibility goes beyond the legal requirements (McBarnet, 2009). But this becomes increasingly challenging with the globalization of production networks. Nowadays, MNEs have to extend their corporate social responsibility policies to overseas subsidiaries and also to suppliers, over which the MNEs only have varying degrees of operational control (O'Connor and Kjöllerström , 2008).
Furthermore, according to the European Commission (2001), companies should use human capital intensively to protect the environment and interact with their stakeholders. The corporate social responsibility concept is therefore an addition to the law, but corporate social responsibility should be applied where no law detailed out the requirements for being socially responsible. Therefore it requires companies to proactively pursue corporate social responsibility (European Commission, 2001). The enforcement of corporate social responsibility often happens through soft laws. A soft law is a quasi-legal instrument that is not binding. This instrument is often used in international contexts to not conflict with local hard laws. Adeyeye (2011) argues that universal corporate social responsibility standards are emerging in areas such as human rights and the environment, but that the standards are mostly enforced though soft laws, which makes them non-binding. On the one hand, these soft laws create awareness for corporate social responsibility issues, but on the other hand they need to be complimented with hard laws
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(Adeyeye, 2011). The author further mentions that the soft laws still lack adequate monitoring, transparency, and compliance mechanisms external to companies.
The European Commission (2001) further explained that corporate social responsibility aims to fulfill the interests of various stakeholders, such as shareholders, employees, public authorities, consumers, and non-governmental organizations (NGOs). This voluntary commitment of the companies will help to increase their profitability (European Commission, 2001). The rationale behind this is that corporate social responsibility has direct and indirect effects on the firm. A positive direct effect is, for example, the creation of a better work environment, which leads to more committed employees and a more productive workforce. Another positive direct effect can be the more efficient use of natural resources (European Commission, 2001). Indirect effects of corporate social responsibility can be a better brand or image for the firm.
Park (2014) also argues that corporate social responsibility is an important strategy and signifies that MNEs should meet the demands of local stakeholders in host economies. The identification of said relevant stakeholders can be challenging. Arenas, Lozano and Albareda, (2009) argue that the relevant stakeholders depend on the firm and its context, plus the relevant stakeholders cannot be generalized.
2.2 Evolution of corporate social responsibility
Corporate social responsibility originated from the American industrialization and the development of the Western enterprises system at the beginning of the 20th century. Corporate social responsibility was first mentioned by Oliver Sheldon in 1924 (Shin, 2014). Sheldon describes corporate social responsibility as the economic responsibility of a firm to produce valuable goods, as well as the moral responsibility of a firm to have social objectives. In the 1980s, the debate between Milton Friedman‟s shareholder theory and Edward Freeman‟s stakeholder theory arose. Friedman argues that organizations are only obligated to generate profits for their shareholders. This means that managers should not engage in social causes with the firm if it does not generate profit. This in turn also means that managers should engage in said social causes if that would generate more profit for the shareholders. Freeman on the other hand argues that a firm should try to assume responsibility for the firm‟s actions and encourage its positive impact on all the stakeholders, such as employees, customers, and the environment.
Critics of the stakeholder theory argue that corporate social responsibility is distracting the firm
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from the economic role of businesses (Ahmad and Crowther, 2013). Furthermore, corporate social responsibility is criticized as window-dressing or greenwashing, meaning that firms just pretend to be socially responsible to be more attractive for customers. But the shareholder theory is also critiqued; the shareholders only have a limited ownership since they do not own inventory etc., and that is why the shareholders cannot represent the whole firm (Boylan, 2001). In addition to that, the shareholders‟ true intentions are not clear; one cannot just assume that every shareholder only wants the firm to generate profit while ignoring other social responsibilities.
The debate between Friedman and Freeman largely impacted the research on corporate social responsibility and the understanding of the purpose of firms.
2.3 Components of corporate social responsibility
Carroll (1979) designed a conceptual model that tries to address the whole range of responsibilities an organization has to society; namely, economic, legal, ethical and discretionary categories of business performance. The author‟s model predominantly used the Anglo-Saxon research on corporate social responsibility (Crane, 2008). Carroll (1979) argues that economic responsibility is the base for a well-functioning firm. The primary goal of every firm is to produce and sell goods or services and to be profitable. This economic responsibility must be pursued within legal boundaries. The legal responsibility is the second requirement for every business to exist. The third obligation is the ethical category, which in contrast to the first two, economical and legal, has no clear rules. Ethical requirements are not necessarily codified into law, but members of society expect the firm to follow certain norms and rules. Even though those rules are not always codified, firms that break these ethical requirements can expect negative consequences if they break these rules. Consequences can for example be that many customers avoid a certain company (Carroll, 1979; DeTienne and Lewis, 2005). Lastly, the discretionary responsibilities are even less clear than ethical requirements. These responsibilities are mostly the expectation of society that the firm plays a certain role in society. This happens on a voluntary basis and it is more the society‟s members‟ hopes that a company will follow a certain behavior. “Examples of voluntary activities might be making philanthropic contributions, conducting in-house programs for drug abusers, training the hardcore unemployed, or providing day-care centers for working mothers” (Carroll, 1979, p. 500). Carroll reworks his corporate social responsibility into a pyramid in 1991, see figure 1. The pyramid shows that all obligations are interconnected and rely on each other. For an organization to be ethically responsible, it first
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needs to fulfill its legal and economic obligations (Carroll, 1991). Carroll (1991) also argues that the economic obligations are the most fundamental concern for every firm. Therefore, an organization needs to fulfill all of the four obligations, economic, legal, ethical, and philanthropic, to be a good corporate citizen. Carroll‟s pyramid of corporate social responsibility has been used in many studies but is predominantly an US American view on corporate social responsibility. The US American culture, economy and firm structure differ from that of other nations (Hofstede, 2011; Alm and Torgler, 2006; Payne, 2006; Bisio, 2003). The differences among nations make it questionable how transferable this framework is. For example, philanthropy has always been a big part of Indian firms, but it is not clear if that philanthropy makes them especially socially responsible in comparison to US firms (Arora and Puranik, 2004).
Figure 1: The Pyramid of corporate social responsibility (Carroll, 1991)
Carroll‟s (1991) model has its limitations, for example, the author wrote in his work of 1991 that the pyramid is a hierarchy of responsibilities, an order of dependence, whereas in his work of 2000, he argues that the model was simply conceived to get the point across that various obligations need to be fulfilled simultaneously. Carroll (1991) further describes his model as universally applicable, but so far this has not been tested throughout the different cultures outside of the USA. As one can see in the following chapter, the European view on corporate social responsibility can be very different from the view of Carroll. It cannot be generalized that every firm in Europe shares the view of the European Commission on the concept of corporate social
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responsibility; however, the European Commission is a powerful institution that influences the European landscape (Lee and Kirkpatrick, 2006).
2.4 Corporate social responsibility dimensions in Europe
The corporate social responsibility perspective that the European Commission (2001) adopted, differentiates between internal and external dimensions. The work is published in the „Green Paper - Promoting a European framework for Corporate Social Responsibility‟ by the European Commission (2001) and the dimensions address the activities of corporate social responsibility, as can be seen in figure 2.
Figure 2: Dimensions of CSR according to the European Commission (2001)
2.4.1 Internal dimension of corporate social responsibility
The internal dimension primarily relates to the employees and the corporate social responsibility factors that impact stakeholders within the firm. The issues that are addressed are human resource management, the adaptation to change, and the management of environmental impacts and natural resources.
2.4.1.1 Human resource management
A major challenge for MNEs is to retain and attract skilled workers (McDonnell, Hickey and Gunnigle, 2011). To do so, the European Commission (2001, p.9) recommends focusing on the following issues: “lifelong learning, empowerment of employees, better information throughout the company, better balance between work, family, and leisure, greater work force diversity, equal pay and career prospects for women, profit-sharing and share ownership schemes, and concern for employability as well as job security.” According to the European Commission
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(2001, p.9), cost savings can be achieved through “active follow-up and management of employees who are off work due to disabilities or injuries”. Furthermore, responsible recruitment practices involving non-discriminatory practices should be used. The process of lifelong learning should be applied and should primarily address the less skilled, less educated and older employees (European Commission, 2001). Also, local partnerships with educators and training programs should facilitate lifelong learning of all employees. Packer and Sharrar (2003) argue that lifelong learning is newly linked to corporate social responsibility and needs further exploration. Garavan and McGuire (2010) argue that human resource development or life-long learning, as mentioned by the European Commission, is expected to play a facilitative role in corporate social responsibility and ethics in firms. Yorks (2005) argues in this regard that human resource development should make the transition from only performance management to encouragement of a dichotomy of performance and development activities. Garavan and McGuire (2010) developed a framework that demonstrates how human resource development can make a long-lasting contribution to corporate social responsibility through its capacity to question a continual focus by organizations on efficiency and performance.
Dorssemont (2004) argues that the human rights issues are not related to the internal dimension.
Furthermore, the author points out that the important factor of human rights is put in the broad category of human resource management and that the corporate social responsibility discourse should go beyond the standards of legal compliance.
2.4.1.2 Health and safety at work
The productivity of employees is directly related to health and safety at work. Even though most countries have already adopted legal requirements, it is still beneficial for firms to take a proactive approach. MNEs often outsource parts of their production line to emerging economies because of the significantly lower labor costs in those countries. Nevertheless, MNEs should still keep high levels of health and safety standards at work, for their subsidiaries as well as for their suppliers and other stakeholders (European Commission, 2001). Reaching out to all stakeholders can be very challenging, and influence can be even more challenging (Thomsen, 2005). For example, if an MNE outsources its production to a different company, then the MNE only has a limited influence on said company.
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Utting, (2005, p. 348) argues that “reforms in corporate policies often take place in a context of double standards or counter-trends”. These trends include the worsening of labor standards and the conditions that are associated with outsourcing. Furthermore, Utting (2005) argues that the voluntary agendas in relation to corporate social responsibility are perceived as inferior to legal regulations.
2.4.1.3 Adaptation to change
Adaptation to change can happen because of different scenarios, such as mergers and acquisitions. Firms which have to be restructured should do so in a socially responsible manner, which means to consider the interests and concerns of all stakeholders that are affected by the change and the decision (European Commission, 2001). The problem with this is that restructuring is often driven by financial performance problems and the primary concern for the firm that is restructuring is the firm‟s financial performance (Zu, 2009). Meeting the interests of other stakeholders is often a secondary objective since restructuring is rarely anticipated and firms cannot plan accordingly.
2.4.1.4 Management of environmental impacts and natural resources
The reduction of waste and the more efficient use of resources are not only beneficial for the environment, but can also lead to cost reductions for the firm. Therefore, management of environmental impacts and natural resources can increase the firm‟s competitiveness and profitability and at the same time reduce the environmental impact. It is questionable whether firms try to be more resource-efficient to be socially responsible or just to reduce costs (Simpson and Taylor, 2013).
2.4.2 Corporate social responsibility: the external dimension
The external dimension relates to the stakeholders that are outside of the firm. With increasing globalization, MNEs have to address more and more interests of several new stakeholders. In addition to the internal stakeholders such as shareholders and employees, there are also suppliers, business partners, customers, NGOs, the environment, and public authorities. The internationalization of the business environment has led to a discussion about a global corporate social responsibility (European Commission, 2001).
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Scherer and Palazzo (2011) argue that when it comes to global corporate social responsibility, one cannot make a strict distinction between labor in nation-state governance and in private businesses. The globalization has removed that division of labor. Globally operating MNEs have stated to fill the void of global governance.
2.4.2.1 Local communities
Firms operate in local social settings, not only in Europe but worldwide. On the one hand, companies provide jobs and offer benefits, wages, and tax revenues to local communities. On the other hand, companies are also connected to the local community in a symbiotic way because of their need of a healthy and stable community. Firms that operate in a certain area require certain skills from the local labor market. Also, the companies often get many customers from the local area that they operate in, which in turn makes reputation a crucial factor for attracting customers.
Corporate social responsibility, as well as being responsible, has an impact on the reputation and can become a major competitive advantage (European Commission, 2001). Jamali and Keshishian (2008) investigated the local partnership between NGOs and firms and found that many of those alliances lacked depth and only had a symbolic function. Therefore, the effectiveness of local partnerships that are stipulated by the European Commission, need to be viewed in a critical light.
The relationship of local and global corporate social responsibility in MNEs is still unclear.
Husted and Allen (2006) apply the strategic logic of the Bartlett and Ghoshal typology to corporate social responsibility. According to this logic, MNEs respond to the pressure for responsiveness and integration from stakeholders. In contrast to that, the institutional logic suggests that MNEs only replicate already existing product-market organizational strategies in their management for corporate social responsibility (Husted and Allen, 2006). Husted and Allen (2006) test both approaches and find that MNEs are reacting more to institutional pressures than to using a strategic analysis of stakeholders and social issues.
2.4.2.2 Business partners, suppliers and consumers
Business partners can make work easier and reduce complexity while increasing local understanding. The selection of business partners and suppliers is not always linked to competitive bidding. Relationships can also be established through joint ventures or other alliances. This can also improve the quality of the market. The adoption of a socially responsible
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practice by MNEs can affect the whole supply chain and positively impact the environment and other stakeholders. The social performance of a firm is not just generated by the firm itself, but also by their business partners. This means that if a company wants to improve its social performance, it needs to cooperate with its business partners, suppliers and consumers to work towards that goal (European Commission, 2001).
Spekman, Werhane and Boyd (2004) argue that globally integrated supply chains become more dominant among firms that seek to create a strategic advantage. Globally integrated supply chains can on the one hand create economic benefits, but on the other hand also bring social obligations with them. Many firms create codes of conduct to deal with the social obligations.
The problem is that it is unclear to what extend MNEs ought to be responsible for their suppliers and how the MNEs can enforce certain codes of conduct.
2.4.2.3 Human rights
According to the European commission (2001), the human rights dimension is of particular importance for corporate social responsibility and also has an impact on the entire global supply chain. Also, the OECD developed the Guidelines for Multinational Enterprises (Morgera, 2011).
Firms face the complex problem of identifying responsibilities regarding human rights, meaning what kind of responsibility the local government has and how far one can monitor business partners. While the European Union has several labor standard laws, there are still many countries that violate human rights. “Under increasing pressure from NGOs and consumer groups, companies and sectors are increasingly adopting codes of conduct covering working conditions, human rights and environmental aspects, in particular those of their subcontractors and suppliers.” (European Commission, 2001, p. 14). Companies adopt codes of conduct in regards to human rights for various reasons, among others to improve their corporate image. But those codes of conduct are just voluntary initiatives and not binding rules.
Spekman, Werhane and Boyd (2004) created a managerial framework to deal with the tension that can arise from the competitive opportunity of global supply chains and human rights.
Nevertheless, the authors agree that there are some firms that simply shut their eyes and try to avoid facing the human rights issue.
15 2.4.2.4 Global environmental concerns
According to the European Commission (2001, p. 16) “through the transboundary effect of many business-related environmental problems, and their consumption of resources from across the world, companies are also actors in the global environment.” Therefore, social responsibility can be pursued in the home and the host country. MNEs from Europe can directly impact the social and economic development in third world countries and therefore MNEs should operate socially responsible in a holistic approach.
Cetindamar (2007) investigates why MNEs adopt environmentally responsible practices. The author found that MNEs have not only ethical but also economic reasons for the adoption of environmentally responsible behavior.
2.4.3 Summary on the European view of CSR
The perspective of the European Commission has its flaws, but it also shows that there are significant differences to the predominantly US American view from Carroll. This research exclusively analyzes European MNEs and that is why the European perspective on CSR plays an important role. The framework shows that stakeholders can be categorized and this means that individual categories of stakeholders can be further analyzed in a CSP-CFP relationship.
2.5 Stakeholder theory
The European Commission (2001) argues that firms should not only fulfill the interests of the shareholders but also of the stakeholders. The stakeholder theory has established itself among strategy and management scholars (Phillips, 2011). The stakeholder theory states that a corporation should not only take care of the interests of the shareholder but also of other stakeholders. The Stanford Research Institute defines stakeholders as the “groups without whose support the organization would cease to exist” (Freeman and Reed, 1983, p. 89). This means that it is not possible to perfectly determine each stakeholder and that, depending on the situation or strategy, different stakeholders play a role for the firm. Nevertheless, it is possible to differentiate between external stakeholders and internal stakeholders (Phillips, 2011). Internal stakeholders are shareholders, the management, and the employees, whereas external shareholders include groups such as customers, suppliers, and governments. All these groups impact or are impacted by the actions of the firm. The problem of having so many different stakeholders is that they all have their individual goals that may be very different from each
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other. For example, shareholders usually want the share price to rise, whereas employees want higher wages. The management has to balance the contradicting interests of all the shareholders.
The instrumental stakeholder theory states that an organization should focus on all of the stakeholders that contribute to the firm‟s profits, without ignoring the other stakeholders, which may have the power to impact the organization‟s profit (Jones, 1995). The stakeholder theory therefore shows that an organization can be socially responsible but at the same time profitable.
Furthermore, the firm itself is interested in fulfilling the interests of different stakeholders to be more financially effective (Phillips, 2011).
2.6 Corporate Social Performance
A proxy is needed to measure to what extend firms are corporate socially responsible. Corporate social performance is the proxy that measures the corporate social responsibility. Capturing the corporate social performance is not that easy, because it cannot be directly observed. This is why in the past, different proxies were used to measure the variable corporate social performance.
There are two methods to measure corporate social responsibility, first the reputation index and secondly a content analysis of various firms‟ publications, especially annual reports and corporate social responsibility reports (Cochran and Wood, 1984). The reputation index is often generated by knowledgeable individuals around the firm, whereas a content analysis makes use of published data, such as annual reports. Annual reports are still the primary source for a content analysis, because not all companies publish comprehensive corporate social responsibility reports yet. The Governance & Accountability Institute found that in 2013, 72% of all 500 firms listed in the S&P index published a corporate social responsibility report (Ga-institute.com, 2014). The institute also found that this is a dramatic increase from the 52% in 2012 and about 20% in 2011. So, only recently the publication rate of corporate social responsibility reports has risen, which presumably makes it the primary source for content analyses in the future.
The content analysis of annual reports counts how often corporate social responsibility-related activities were mentioned in the firm reports (Cochran and Wood, 1984). The problem that arises from this method is that firm reports could mention certain activities or policies without actually practicing them. This is also known as greenwashing. Mentioning corporate social responsibility activities in reports could be used by firms as a publicity tool. Parkman (2014) analyses how greenwashing can become a problem for an industry. Greenness and sustainability have emerged
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as a factor for competitive advantage (Parkman, 2014). Nevertheless, sustainability is often self- regulated and without clear institutional standards. This missing standard allows firms to greenwash themselves without legal consequences. This can become a major problem for legitimate firms that are green and still bear the costs of being green.
Because of named disadvantages of a content analysis, most studies currently use a reputation index. The reputation is internally consistent because the same criteria are used for each firm (Cochran and Wood, 1984). Furthermore, the reputation index does not try to objectify certain dimensions that may be innately subjective. The disadvantage is that those rankings are subjective (Cochran and Wood, 1984). Different observers might judge certain criteria differently, which might have an impact on the reliability of the study. Furthermore, existing CSP proxies are mostly developed in the USA for US American firms, which limits the transferability to different contexts. This research focuses on European firms and tries to work with a European proxy to closely reflect the actual corporate social responsibility.
2.8 Kirchhoff’s Good Company Ranking
The Good Company Ranking evaluates large European MNEs and their results are discussed for example at the World Economic Forum (Habisch, 2011). The ranking for 2013 lists the 70 largest firms in Europe (Kirchhoff Consult AG, 2014). In contrast to US rankings, which are usually peer-group assessments and more subjective, the Good Company Ranking is criteria- based and evaluates the firms‟ performance against objective criteria (Habisch, 2011; Gazdar, 2006). The four criteria the Good Company Ranking takes into consideration are: Society, employees, environment and financial performance.
2.8.1 Society ranking
The category „Society‟ is a wide field, and therefore it is very heterogeneous. To reduce the complexity, the society ranking is split into five different sets of criteria: (1) stakeholder overall criteria, (2) supply chain-related criteria, (3) customer-related criteria, (4) social criteria (active contribution), and (5) social criteria (compliance). These sets of criteria were developed to avoid double counting of criteria from the rankings of employees and environment. The first set covers the overall society, whereas set 2 and 3 are more company related. Set 4 and 5 are created to count not only the positive efforts such as corporate citizenship, but also the company‟s efforts to avoid „negative‟ impacts. The full set of criteria and the scoring rules can be found in Appendix
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A. For example, category 1, stakeholder overall criteria, consisted of the following questions:
„Does the company have a clear strategy for “social responsibility”?‟, „Does the company have clear and operationalized objectives for the other main categories?‟, „Is there regular, institutionalized reporting on social issues? Is it externally audited?‟, „To what extent is there a dialogue with external stakeholders?‟, „Is there a comprehensive Code of Conduct? Is it integrated throughout the company?‟ (cf. Appendix A).
Public company data is evaluated and points are awarded, primarily based on a coding of the documents. Most of the data comes from annual reports as well as corporate social responsibility reports, and all the documents have been fully coded and reviewed. The data is reviewed individually within a research team under the direction of Professor Rüdiger Hahn from the University of Kassel. To ensure reliability of the data, several companies were evaluated by different researchers, which always resulted in a high level of agreement.
There are certain limitations when it comes to evaluating the impact on society. The data for the evaluation comes from public data that was created by the companies themselves. On the one hand, this kind of data can be problematic, because only firms that report comprehensively on their strategy and commitment can receive a high score. On the other hand, the criteria in Appendix A show that the reporting performance was evaluated as well, which rates transparency, a major corporate responsibility. Another limitation is that the reduction of complexity inevitably also reduces details of data and might ignore some firm‟s social activities in areas that are not investigated. This limitation also stems from the fact that firms do not report certain actions, for example to protect trade secrets. Plus, the absolute sustainability is not evaluated but the absolute sustainability of the company. For example, a company that has a product that is clearly not socially responsible, say chemical weapons, but has an excellent documentation and goals could score higher than a firm with a socially responsible product but no documentation at all. Therefore, one of the Good Company Rankings‟ limitations is that only the individual firms and their documentations are rated. Also, some industries such as banks are more secretive in general to protect their data. Nevertheless, the questions are equally weighted for each industry. Furthermore, the ranking evaluates corporate social responsibility reporting and does not evaluate the absolute social responsibility. For example, a firm with a business model focused fully on sustainability and responsibility and with poor reporting might score
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lower than a „regular‟ firm with excellent reporting. In addition to that, the ranking does not evaluate the orientation of the products with regard to product responsibility towards customers.
Tobacco firms, for example, did not receive a lower rating just for product orientation.
2.8.2 Employee ranking
The employee ranking was constructed by Professor Christian Scholz and Dr. Stefanie Müller, both from the University of Saarland, and Kaevan Gazdar. The full range of human resource management sustainability cannot be covered in a single ranking for all firms. The aspect of employee ranking focuses on three sections, to make the firms comparable and to reduce complexity: (1) What does the human resources strategy consist of? That is, how is the development of the relationship with employees articulated (planned social responsibility); (2) What specifically do companies do in the key action areas of sustainable human resources management (social responsibility practices)?; (3) What do companies report about their human resources activities in the quantitative part of the annual report (communicating social responsibility)? These three sections are weighted differently; 8 points can be achieved in planned social responsibility, as well as in social responsibility practices and 4 points in communicating social responsibility. The data stems from annual reports and corporate social responsibility reports of the firms, and in addition to that, all firms were asked to explain their HR strategy.
The planned social responsibility is evaluated on the HR strategy in place, whether it is both socially balanced and performance-oriented or not, and also if it is an action-oriented form that is clear and appropriate to the industry. It was found that most companies articulated their HR strategy clearly and that most HR strategies focused on the three core elements of training, social benefits and diversity. Most companies lack proper HR reporting and rarely provide concrete strategic statements.
For firms, social responsibility practices stands for flexibility, whereas for the employee it means individualization. Factors that were looked at were topic diversity, corporate volunteering, health and safety, and code of conduct. For code of conduct, a large gap for the statements on whistle blowing has been found. Some firms list violations and their consequences in detail, whereas others do not state any details at all. The description of values varies from a collection of platitudes to descriptions of coherently detailed principles. For the reporting on health and safety,
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most firms offered exact figures of fatal accidents, preventive measures and areas for improvement.
The communicated social responsibility shows whether or not the published data as part of external reporting is clear, comprehensive, and addresses the relevant stakeholders. In this case it is important that employees are addressed. This part does not evaluate what is reported, but rather how it is reported. This section explicitly only looks at the annual report, because that is the main medium to communicate with the major stakeholders and to provide information on all relevant business developments. The evaluation of the criteria is based on the HCR10, which is a standard for human capital reporting (cf. Scholz and Sattelberger, 2012). The standard uses 13 mandatory indicators for reporting within the annual report: external workforce costs, absentee rate, number of participants, part-time rate (head count), commitment index, participant days or hours, further training rate, age structure, uncontrolled turnover rate, number of employees fte (full-time equivalent), proportion of women, total HR costs, and number of employees (head count). Two points per section can be achieved for external workforce costs, absentee rate, number of participants, part-time rate (head count), and commitment index; and three points each for the remaining sections. The HR costs are evaluated by external workforce costs and total HR costs. The total number of employees should also show the number of full-time and part-time employees. The HR structure should show the age and the gender distribution. Training and education should give information about training days or hours of training, participants in training events, and the percentage of employees participating in training sessions. Motivation is measured with the uncontrolled turnover rate and the commitment index. The absentee rate is used for indicating the working environment. In addition to that, it is not only important that the indicators are mentioned but also the depth of reporting is important. A three level scheme was used to measure the depth: The first level: only the figure, without references to time or group.
The second level: the figure is broken down by reference to time or group. The third level: the figure is broken down by reference to time and group.
2.8.3 Environment ranking
Responsible for construction of the environment ranking are Professor Edeltraud Günther and Teresa Schreck, both from the Dresden University of Technology. Different industries face different challenges in regard to being environmentally responsible, which is why it is difficult to
