The Role of Corporate Social Responsibility in Enhancing Firm Performance (1)

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RESEARCH PROJECT

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The Role of Corporate Social Responsibility in Enhancing Firm Performance

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Background

The concept of corporate social responsibility (CSR) has attracted significant interest from researchers in the past few decades. More and more firms are acknowledging that they should desist from privatizing their gains and socializing their losses. Firms can communicate their CSR practices through the annual reports or through individual CSR reports. However, communicating CSR practices through individual CSR is usually perceived as superior to other means of providing CSR disclosure. This is highlighted by the fact that more than 80% of companies across the globe report on sustainability. This shows that CSR has become widely adopted as a global norm. Therefore, firms that fail to acknowledge this fact risk misaligning their activities with the accepted global practices, which may have a negative impact on the firms (KPMG, 2020). According to KPMG (2020), among 96% of the world’s largest 250 companies have annual sustainability reports with most of these companies having senior CSR managers (KPMG, 2020). Despite the increased focus on CSR, a significant number of studies on the impact of CSR on firm performance have been misleading or inclusive.

Statement of the problem

There is no consensus among scholars on the impact of CSR on firm performance. According to Yang and Yang (2016), there is a negative correlation between CSR and firm performance. On the other hand, Oeyono, Samy, and Bampton (2011) claim that there is a positive correlation between CSR and firm performance with Liping, Yan, and Yujian (2016) claiming there is no relationship between CSR and firm performance.

Therefore, historical empirical research on the role of CSR in firm performance have been inconclusive with most of the studies having contradictory findings. Despite the inconclusive studies on the impact of CSR on firm performance, research undertaken by Park, Lee, and Kim (2014) show that a significant number of companies engage in CSR initiative with the number increasing steadily. This shows that firms acknowledge their importance towards the society. Therefore, it is vital to undertake research to explore the link between CSR and firm performance as this would guide firms in making CSR investment decisions. Therefore, the general business problem is that despite encouragement from various parties including the government, academia, and other stakeholders, there is little empirical research to support the notion that CSR leads to improved value creation to the stakeholders of the firms, which leads to improved firm performance. The specific business problem is that some firms do not have the right strategies to evaluate the effectiveness of CSR.

Literature Review

There has been a significant increase in the awareness of CSR in the past few decades. Several scholars have undertaken research on the relationship between the implementation of CSR and performance. However, difficulties in simultaneously maximizing the economic, ecological, and social benefits has led made CSR be subject to various controversies.

Several studies have determined that there is a positive relationship between CSR and the performance of a firm. According to Obeidat et al. (2019), CSR has a positive impact on the performance of a firm since the implementation of CSR initiatives supports the interests of the stakeholders of the firm. This consequently leads to the increase in the goodwill of the firm, which increases the value, social legitimacy, and marketing potential of a firm, which ultimately improve the performance of the firm. As highlighted by Hu et al. (2021), having a shared vision in the implementation of CSR initiatives would improve the effectiveness of innovation and performance of a firm. Choi and Yu (2014) undertook a study that showed that employees’ perception of CSR initiatives has a positive impact on organizational commitment and organizational citizenship behavior. Organizational citizenship behavior mediates the relationship between the CSR initiatives and the performance of the organization while organizational commitment indirectly mediates the relationship between CSR and the performance of an organization. This is one of the

A significant number of studies have also demonstrated there is no significant relationship between the implementation of CSR and the performance of a firm. According to Surroca, Tribó, and Waddock (2010), there is no significant relationship between CSR and a firm’s performance. Surroca, Tribó, and Waddock (2010) claim that previous research on CSR and performance fail to acknowledge the mediating impact of intangible resources. Therefore, they claim that there is an indirect relationship between CSR and performance that depends on the mediating impact of the intangible resources of the firm. Alafi and Hasoneh (2012) posit that a positive or negative correlation between CSR and a firm’s performance is not 100% reliable since the relationship may be influenced by other mediating variables that help in defining the relationship.

Friedman (1970) and other neoclassical economists use the agency theory to support the claim that CSR has a negative impact on firm’s performance. They claim that it leads to the misappropriation of resources that may otherwise have been used to improve shareholder value. Yang and Yang (2016) conducted a study that showed that CSR has a negative impact on the performance of small and medium-sized enterprises. It distracts them from their core income-generating activities. Masulis and Reza (2015) also claim that managers have incentives to over-invest in CSR activities due to various reasons such as to create a positive reputation, to earn higher salaries, or distract people from the poor performance of the organization. Managers are the primary beneficiaries of CSR initiatives at the expense of shareholders (Krüger, 2015). As such, CSR leads to an increase in the firm’s costs, which has a negative impact on the performance of the firm. Barnea and Rubin (2010) claim that CSR initiatives that are more likely to be driven by agency problems have a negative impact on the shareholder value in the long-run even despite the fact that they may have a positive net value (NPV) in the short-term.

Purpose of Study

The objectives of this project is to determine the role of CSR in enhancing firm performance. It will strive to determine the dimensions of CSR that have a positive impact on firm performance. This would provide insights into how various dimensions of CSR have a positive (or negative) on firm performance.

Research Questions/Hypothesis

Research Questions

Q1. How do Saudi Arabian firms define CSR?

Q2. How do firms operating in Saudi Arabia manage CSR?

Q3. What CSR activities are undertaken by firms in Saudi Arabia?

Q4. How does CSR affect the performance of firms in Saudi Arabia?

Q5. Does CSR has a different impact on the four measures of performance used in the study (ROA, ROS, ROI, and general profitability)?

Hypothesis

H1: There is a strong positive correlation between CSR and firm performance

H0: There is no relationship between CSR and firm performance

Target Population (Sampling Technique and Sample Size)

A systematically organized and standardized approach as it was effective in obtaining data on the topic under investigation within a short period from a large sample size. The target population of the study comprised of 40 Saudi Arabian firms in diverse sectors listed in the Saudi Stock Exchange (Tadawul). Two firms were selected from each of the 20 sectors of firms listed in Tadawul. The two companies were selected based on their 2020 or latest financial reports. purposeful sampling was used in the selection of the participants of the research. The most profitable company and the least profitable company based on latest financial reports were selected for the study. The use of the most profitable and least profitable company in each of the 20 sectors of Tadawul would provide a good picture on the role of CSR in improving firm performance. In addition, selection of companies in all 20 sectors according to Tadawul classification of firms would provide a holistic view of the impact of CSR in improving firm performance regardless of the type of business operations of the firms.

Data Collection Approach

Sampling

Interviews and surveys were used in the collection of data. The interview would comprise of face-to-face interviews with a member of the senior management of the 40 firms listed in the Tadawul. A standardized survey will be disseminated to the managers of 40 firms listed in the Tadawul. The survey will adapted from previous studies to ensure it did not include any irrelevant questions in addition to facilitating the respondents understand the research questions to ensure they provided accurate responses. A five-point Likert scale would be used to determine the score in each questionnaire.

Variable Measurement

The CSR items would be adapted from the study undertaken by Guerrero‐Villegas, Sierra‐García, and Palacios‐Florencio (2018). It would comprise of 22 items that are classified into 4 groups – employee, customer, community, and environment. The extent of the involvement of the firm in CSR activities would be measured using 5-point scale that ranges from strongly disagree, which will be represented by 1 to strongly agree, which would represented by 5.

On the other hand, measured of financial performance would be adapted from the studies undertaken by Guerrero‐Villegas, Sierra‐García, and Palacios‐Florencio (2018) and Martinez-Conesa, Soto-Acosta, and Palacios-Manzano, (2017). The questionnaire would measure four items of performance. These include return on assets (ROA), return on sales (ROS), general firm profitability, and return on investment (ROI). A five-point Likert scale would be used to measure the performance of the firm. The score of the firm would range from 1, which would represent extremely unsuccessful to 5, which would represent extremely successful.

Data Analysis

The overall data from the Likert-type questions used in the study would be treated as interval since the composite score of each of the firms would be determined by adding the responses to the items that measure CSR and firm performance. SPSS statistical software would be used in the analysis of the data obtained from the research.

Descriptive statistics would be used to analyze individual questions to gain deeper insights into specific attributes of CSR or performance. Inferential statistics would be used to test the hypothesis of the research. Various statistical tests would be used to determine the correlation between different responses and patterns in the dataset derived from the research. These include chi-square test for independence and t-tests.

Potential Scope of the Project

The study will provide insights into how CSR has a positive impact (if any) on firm performance. It would evaluate different aspects of CSR and firm performance and determine the relationship between the two. The findings of this research would help managers in making decisions related to the CSR practices they should implement. It would provide scholars with insights on the application of various theories in defining the relationship between CSR and firm performance. This would help in advancing research on these theories. Since CSR is bound to become more and more prominent in relation to the practices of organizations, any research that provides insights on various issues related to CSR would go a long way towards facilitating proper decision-making of business leaders and managers, shareholders, customers, and the community in relation to CSR.

Project Implementation Plan

The project implementation plan is shown in the Gantt chart shown below. Time Frame (Gantt-Chart)

Activities Duration

(Days)

June

Time

( Month) July

Time

( Month)

Proposal 5 Literature Review 5 Data collection 15 Report writing 10 Submission of final

Report 5

References

Alafi, K., & Hasoneh, A. (2012). Corporate Social Responsibility Associated with Customer Satisfaction and Financial Performance: A Case study with Housing Banks in Jordan. International Journal of Humanities and Social Science, 2(15), 102-115.

Barnea, A., & Rubin, A. (2010). Corporate social responsibility as a conflict between shareholders. Journal of Business Ethics, 97(1), 71-86.

Cheng, B., Ioannou, I., & Serafeim, G. (2014). Corporate social responsibility and access to finance. Strategic Management Journal, 35(1), 1-23.

Choi, Y., & Yu, Y. (2014). The influence of perceived corporate sustainability practices on employees and organizational performance. Sustainability, 6(1), 348-364.

Fontaine, M. (2013). Corporate social responsibility and sustainability: the new bottom line?. International Journal of Business and Social Science, 4(4), 110-119.

Friedman, M. (1970, September 13). The social responsibility of business is to increase its profits. New York Times Magazine, 33, 126.

Guerrero‐Villegas, J., Sierra‐García, L., & Palacios‐Florencio, B. (2018). The role of sustainable development and innovation on firm performance. Corporate Social Responsibility and Environmental Management, 25(6), 1350–1362.

Hu, Q., Zhu, T., Lin, C. L., Chen, T., & Chin, T. (2021). Corporate Social Responsibility and Firm Performance in China’s Manufacturing: A Global Perspective of Business Models. Sustainability, 13(4), 2388.

KPMG. (2020). The KPMG Survey of Sustainability Reporting 2020. Retrieved from: https://assets.kpmg/content/dam/kpmg/xx/pdf/2020/11/the-time-has-come.pdfKrüger, P. (2015). Corporate goodness and shareholder wealth. Journal of Financial Economics, 115(2), 304-329.

Lee, S., Seo, K., & Sharma, A. (2013). Corporate social responsibility and firm performance in the airline industry: The moderating role of oil prices. Tourism Management, 38, 20-30.

Liping, Z., Yan, C., & Yujian, J. (2016). An empirical study on the relationship between corporate social responsibility and financial performance—based on the analysis and interpretation based on the perspective of corporate reputation. Jiangsu Social Sciences, 3, 95–102.

Martinez-Conesa, I., Soto-Acosta, P., & Palacios-Manzano, M. (2017). Corporate social responsibility and its effect on innovation and firm performance: An empirical research in SMEs. Journal of Cleaner Production, 142, 2374–2383

Masulis, R. W., & Reza, S. W. (2015). Agency problems of corporate philanthropy. The Review of Financial Studies, 28(2), 592-636.

Obeidat, B., Alkhalafat, F. H., Makahleh, N. A. A., & Akour, M. A. (2019). The Role of Corporate Social Responsibility in Enhancing Firm Performance: The Mediating Effect of Transformational Leadership. Journal of Business & Management (COES&RJ-JBM), 7(2), 162-191.

Oeyono, J., Samy, M., & Bampton, R. (2011). An examination of corporate social responsibility and financial performance. Journal of Global Responsibility, 2(1), 100–112.

Park, J., Lee, H., & Kim, C. (2014). Corporate social responsibilities, consumer trust and corporate reputation: South Korean consumers’ perspectives. Journal of Business Research, 67(3), 295–302.

Soana, M. G. (2011). The relationship between corporate social performance and corporate financial performance in the banking sector. Journal of Business Ethics, 104(1), 133-148.

Surroca, J., Tribó, J. A., & Waddock, S. (2010). Corporate responsibility and financial performance: The role of intangible resources. Strategic Management Journal, 31(5), 463-490.

Wang, Z., & Sarkis, J. (2017). Corporate social responsibility governance, outcomes, and financial performance. Journal of Cleaner Production, 162, 1607-1616.

Yang, W. & Yang, S. (2016) An Empirical Study on the Relationship between Corporate Social Responsibility and Financial Performance under the Chinese Context-Based on the Contrastive Analysis of Large, Small and Medium-Size Listed Companies. Chinese Journal of Management Science, 24, 143-150.