The relationship between csr, profitability and sustainability in china
CHAPTER 7THE RELATIONSHIP BETWEENCSR, PROFITABILITY ANDSUSTAINABILITY IN CHINAQingqing Yang and David Crowther BACKGROUNDThe concept of corporate social responsibility (CSR) has been widely used inthe world, and it is related to the idea that organizations should be not onlyconcerned about making a proﬁt but also engaged in actions which beneﬁtsociety beyond the interests of the ﬁrm and whatever is required by law(McWilliams, Siegel, & Wright, 2006). The concepts and deﬁnitions of CSRare different according to different academics, and the impact of business onthe shareholders from CSR considerations could be analysed and used bydifferent CSR models. These CSR models could take three main forms:social–economic, stakeholder and triple-bottom-line (Zu, 2008). CSR in China has become important and essential through a company’swhole business and strategy-making process. Nowadays, ﬁrms in China donot have an increasing position in the global market, although China has asound and fast developing economy with high gross domestic product(GDP), consumer price index (CPI) and other economic indicators. And theofﬁcial statistical outcomes showed that there is a serious crisis about CSRin some ﬁelds of China. For example, more than 263,500 people died inindustrial accidents in two years, 2004–2005 (Fewsmith & Zheng, 2008).Business Strategy and SustainabilityDevelopments in Corporate Governance and Responsibility, Volume 3, 155–175Copyright r 2012 by Emerald Group Publishing LimitedAll rights of reproduction in any form reservedISSN: 2043-0523/doi:10.1108/S2043-0523(2012)0000003011 155
156 QINGQING YANG AND DAVID CROWTHERAnother example is related to the milk powder that contains tricyanamide,which has a toxicity that affected some babies (CSR-China.net, 2008). Thus,it is apparent that several ﬁrms pay most attention to proﬁt rather thansocial effect. There is no doubt that CSR is a new entity for Chinese nativeﬁrms and some other ﬁrms, even though large-scale companies have only asuperﬁcial knowledge in CSR activities. In addition, the business culture in China is another challenge for ﬁrms’CSR considerations (Schwalbach, 2010). Firms in China often set short-term business goals which are related to ﬁnancial performance such asincreasing earnings per share, and business goals force managers to makedecisions according to the concept of making money as soon as possible. In addition, CSR reporting in China has a short history. The ﬁrst CSRreport in China came from the Shell Corporation (CSR-China.net, 2008), andalmost no native corporation disclosed CSR information in China before2005. In 2007, the industry of state electricity grid was the ﬁrst state-owed-enterprise to produce a CSR report; several state-owed enterprises followed.Furthermore, the environmental reporting which began in the 1970s and1980s supplied a basic model for CSR reports and audits, and anenvironmental report has been considered in an increasing position as acomponent of a ﬁrm’s comprehensive annual report in Europe (Chandler &Werther, 2010). CSR reports also have been considered an essential andimportant tool for ﬁrms to communicate with stakeholders, and theadvantages of these CSR reports of transparency and honesty are that theysupply external observers with effective chances to evaluate the organization,its managers, and policies (Chandler & Werther, 2010). According to KPMG(2008), there was a 30% jump from 2005 to 2008 in the percentage of large-scale companies that disclose CSR reports; about 79% of the world’s largestcompanies provide the CSR information in a publicly available form. Thus, whatever the concepts or actual activity, Chinese ﬁrms have lowsensitivity and consciousness about CSR when compared with Europeanﬁrms in the early years. However, the consciousness of CSR’s importancehas increased in China of recent years. For example, the CSR alliance ofChinese ﬁnancial corporations, which consists of several responsible andexcellent corporations and entrepreneurs, was established at PekingUniversity from April 2006 (CSR-China.net, 2008). This alliance combinesthe integral power of different industries. Meanwhile, this alliance is a non-governmental organization which has the most inﬂuence power andcredibility in the ﬁeld of CSR in China. Moreover, the CSR alliance ofChinese ﬁnancial corporations emerged through this former conference, andthis alliance facilitates the increase and enhancement of native corporations’
The Relationship Between CSR, Proﬁtability and Sustainability 157CSR through the process of making a proﬁt. Corporations, society and naturecan thus coexist and develop in a harmonious and balanced environment. Then in 2008, the ﬁrst CSR evaluation of Chinese ﬁnancial corporationswas held (CSR-China.net, 2008). This conference represented increasingnumbers of native corporations in China that started paying attention to thesustainability of the business through taking more responsibility for CSR(CSR-China.net, 2008). These activities all meant that the corporations inChina started to focus on the powerful inﬂuence and positive effect of CSRconsiderations. As one of the developing countries in the world, China shows how CSRconsiderations can also be analysed and viewed from the point of view ofdeveloping countries. Moreover, according to Pollard, Stewart, and Sun(2010), there are several reasons for considering CSR in developing countrieswhen compared with developed countries, and these reasons are as follows: Developing countries have the most proﬁtable growth markets for business because the developing countries represent rapidly expanding economics. Actually, social and environmental crises will give more inﬂuence to developing countries in the world. Social and environmental effects will give developing countries both positive and negative inﬂuences in the ﬁeld of economic growth, invest- ment and other business activities. Developing countries face a different series of CSR challenges and characteristics that are quite different from developed countries. Furthermore, Visser, Matten, Pohl, and Tolhurst (2007) have pointed outthat CSR has distinctive characteristics in developing countries, including thefollowing: CSR benchmarks such as CSR codes, standards, management system and reports are less formalized and institutionalized in developing countries when compared with developed countries. Formal CSR is often used in large-scale and international companies, especially the ﬁrms which have been recognized as multinational brands or have obtained a certain status in the global market. CSR is associated with philanthropy or charity in a large scale of developing countries – for example CSR is often been reﬂected through corporate social investment in education, health, environment and other community services. The most important and effective way for business in developing countries to make a social impact refers to making an economic
158 QINGQING YANG AND DAVID CROWTHER proﬁt – for example through investment project, job creation, taxes and technology transfer. The order which related to the CSR banner is often different in developing countries – for example improving work conditions, supply-chain integrity and poverty alleviation. Many ﬁrms which take CSR issues in developing countries will present themselves as dilemmas or trade-offs – for example strategic philanthropy versus political governance, job creation versus higher labour standards or development versus environment. Therefore, there is a special circumstance for CSR considerations indeveloping countries, especially in China. Moreover, the concept which combines economic proﬁts with CSRconsiderations played a prominent role during the 1970s and 1980s, and thisconcept was based on Friedman’s (1970) views, which pointed out that anorganization’s main responsibility is to its shareholders. Then a new perspect-ive aligned CSR with proﬁt-making outcomes when a ﬁrm faces increasingcompetition and a changing global business environment (Lee, 2008). To satisfy different requirements from different shareholders, the ﬁrmwhich takes the CSR considerations should adjust a series of business actions.Actually, the social preferences from shareholders can affect corporate proﬁtstrategies (Free, 2010). As a strategy to maximize proﬁts, CSR considerationsare also affected by the shareholders’ preferences. In detail, the ﬁrm will takea non-strategic form of CSR if the shareholders have preferences whichneed monetary utility and ignore corporate social performance (Free, 2010).According to Kizmueller (2008), there are four basic combinations of stake-holders, shareholders preferences and CSR considerations: The ﬁrm which is purely proﬁt oriented will focus on maximizing proﬁts, and just take considerations in CSR when shareholders demand it. And if the shareholders of the ﬁrm take care of the corporate environ- mental and social conduct, CSR considerations will often be taken as an element of the business strategy. Furthermore, the motivations of ﬁrms that engage in CSR considerationsthrough business are still based on a large-scale proﬁt orientation. Accordingto Aras and Crowther (2010), CSR is widely accepted by ﬁrms to help themachieve the target of obtaining proﬁtability. As a result, CSR issues andconsiderations certainly inﬂuence both proﬁtability and ﬁnancial perfor-mance of a ﬁrm in a certain way, and CSR considerations can maximize theirsocial performance as well as their ﬁnancial results (Nussbaum, 2008).
The Relationship Between CSR, Proﬁtability and Sustainability 159 Corporate reputation is one of the most common driving forces tofacilitate ﬁrms consideration of CSR (Visser et al., 2007). Good corporatereputations, together with CSR considerations, will help business: retain and recruit top talent, facilitate strong partnerships, increase sales, enhance shareholder value and withstand crises. Furthermore, from the economic perspective, there is a relationshipbetween a ﬁrm’s CSR activities and its economic performance. According toBhattacharya, Smith, and Vogel (2010), several research efforts on CSRhave moved to focus more on how CSR can contribute to proﬁt maximi-zation. Strategic CSR could also be used to capture a ﬁrm’s market valueand competitive advantage. Furthermore, academic resources have bothpositive and negative viewpoints about the relationship between CSR andproﬁtability – but not in China. On the other hand, CSR also risks potential negative ﬁnancial effect tothe ﬁrm (Heugens Dentchev, 2007). According to (Mullerat, 2009), CSRpolicy is only credible when the company supervises and audits its day-to-day business. In addition, The Economist argues that CSR has nothing to dowith a ﬁrm’s core business strategy, because ‘the proper business of businessis business’ (European Commission, 2002). The European Commissionpoints out that CSR should not be able to improve business, although mostﬁrms believe that CSR can generate competitive advantages in the wholemarket (European Commission, 2002). Note that there is relatively limited academic research on the relationshipbetween CSR and the proﬁtability of a ﬁrm in a developing country. Inaddition, several ﬁrms in China still concentrate on proﬁts which can meetbusiness targets, and they have less consciousness in the ﬁeld of CSR activities.CSR report veriﬁcation is generally deﬁned as a process of obtaining andevaluating objective evidence in order to make sure a disclosure made by a ﬁrmabout its environmental, social or economic performance is appropriate andcorrect (Visser et al., 2007). Moreover, CSR report veriﬁcation often examinesthe performance data and whether management has considered policiessuch as codes of conducts and international agreement. Companieswhich trade in the ﬁnancial market can rank highly on the Dow JonesStock Index because evidence of CSR improves their reputation (McWilliamset al., 2006).
160 QINGQING YANG AND DAVID CROWTHER DEFINING CSRThere have been many attempts to deﬁne and clarify the deﬁnition andconcept of CSR. Basically, a good deﬁnition of CSR was presented by theInstitute of Directors, a UK-based trade group: CSR comprises the actionsthat manage the impacts that both businesses and other organizations haveon the environment and society beyond the entities’ legal obligations. Inparticular, CSR activities determine how organizations interact with theiremployees, suppliers, customers and parties and how willing they are toprotect the environment (Lea, 2002). The concept of CSR was mentionedinitially by Friedman (1970), who pointed that the social responsibility of anorganization is to make proﬁt. Other practical deﬁnitions of CSR have beenput forth by other academic resources. According to McComb (2002), CSRis generally deﬁned as the notion that ﬁrms look beyond proﬁts to theirlarger role in society. CSR also refers to a ﬁrm linking its operations withtransparency, values, employee relations and compliance with legal require-ments. However, as a corporate philosophy, CSR can be seen as a drivingforce to strategic decision-making, partner selection, hiring practices and,ultimately, brand development (McComb, 2002). A much better deﬁnition of CSR has been argued by Crowther and Green(2004), who have pointed that all deﬁnitions of CSR are pertinent andrepresent a dimension of the issue. The best deﬁnition of CSR is related to whatis – or should be – or the relationship between CSR and the global market,local government and individual citizens – for example the relationshipbetween a ﬁrm and its stakeholders (Crowther Green, 2004). From an economic perspective, the document titled ‘A Guide to CorporateSocial Responsibility’ states that CSR is a method of analysing the interdependent relationships between businesses and economic systems, a method of analysing the extent of social obligations that a corporation has to its society, a method of considering political regulations on how these obligations can be met and a way to generate beneﬁts for a ﬁrm that meets identiﬁed obligations (United Nations, 2009). Moreover, CSR is a factor that has inﬂuenced the relationship betweenbusiness and society over the past 20 years, and several ﬁrms have recog-nized that CSR concepts and theories could facilitate improvements in theirown social impacts and in addressing social considerations that will help
The Relationship Between CSR, Proﬁtability and Sustainability 161their long-term success. According to United Nations (2009), there are threebasic drivers of CSR:1. Values: Changing values have been noticed within businesses that are responsible for the production of goods not only with wealth creation but also with environmental goods.2. Strategy: It is very important for the strategic long-term development of a ﬁrm to consider society and the environment.3. Public pressure: Firms will become more socially responsible when they acknowledge and respond to pressure from consumers, media, states, local governments and other public bodies. From another perspective, CSR could supply more opportunities forgreater market access, cost saving, better productivity and more innovationfor ﬁrms as well as increased social beneﬁts and general communitydevelopment (Mullerat, 2009). With the development of CSR concepts, thestandard and principles of CSR regulations become more important andessential. In general, there are about nine principles in four processes thatrelate to CSR in the United Nations Global Compact, and these extensiveconsultation processes address:1. human rights,2. labour and3. environment (Mullerat, 2009). DEVELOPMENT STORY OF CSR CONCEPTSCSR concepts date from the early twentieth century. In 1929, the dean of theHarvard Business School mentioned that business should recognize themagnitude of its responsibilities for the future of society (McNally Company, 1982). With the development, discussion and debate of CSR issues,most current CSR considerations are related to environmental and ethicalissues throughout the business process. CSR is a controversial topic that continues to attract attention even afterthe argument about whether CSR is relevant to business (Freeman Liedtka, 1991). Moreover, the speciﬁc concept of CSR was initially put forthby Friedman (1962), who pointed that an organization’s social responsibilityis to make a proﬁt when it engages in open and free competition withoutdeception or fraud.
162 QINGQING YANG AND DAVID CROWTHER A company which has a story of adherence to CSR creates success for itself(Mackay, 2007). Broadly, a ﬁrm’s CSR considerations address protecting theenvironment, acting with integrity and adhering to the highest ethicalstandards, ensuring a safe and healthy workplace and so on (Mackay, 2007). In recent years, CSR policies of socially responsible investing (SRI) haveoften been adopted by investment fund managers and investors through theprocess of strategic decision-making (Asongu, 2007). Furthermore, Crowtherand Green (2004) have pointed out that as a subject, CSR can indicate thesocial and environment effects from organizational behaviour. CSR also canimprove a company’s reputation and competitive advantages in the wholemarket so that the ﬁrm’s ﬁnancial performance can also be improved(Asongu, 2007). Finally, the vision related to the economic and legal obliga-tions is narrow and incomplete. CSR is more about emphases on avoidingharm to other people and the society, meeting stakeholders’ expectations,contributing available recourses to communities and helping society improvethe quality of life and environment (Asongu, 2007). Moreover, although CSR has several principles and concepts within itsdevelopment process, its practical understanding of still requires the contextof both place and time. THEORIES AND STRATEGIC CSRThe relevant theories and approaches of CSR can be classiﬁed into about fourparts: instrumental, political, integrative and ethical theories (Phadtare, 2011).The stakeholder theory of CSR states that a ﬁrm is responsible for a variety ofsupporters within a society, and this theory could reinforce CSR considerations(Keinert, 2008). The theory of the triple-bottom-line is a new concept thatpoints out that the success factors of a ﬁrm are determined not only by thetraditional bottom-line but also by other performance criteria such as CSRconsiderations (Keinert, 2008). Moreover, according to Crowther and Green(2004), traditional bottom-line accounting primarily considers internal factorsin its proﬁt-and-loss statement and ignores the potential costs that result fromcorporate activities in the external social environment. Finally, CSR theory isalso reinforced by a strategic meaning that indicates that CSR could facilitate aﬁrm’s sustainable competitive advantages through certain considerations forthe social and natural environment (Keinert, 2008). Meanwhile, strategic CSR is about deciding the issues initially suchas which department should take actions in CSR ﬁelds, the agenda ofcreating a CSR plan and determining which part of CSR to emphasize
The Relationship Between CSR, Proﬁtability and Sustainability 163(Porter Kramer, 2006). Through the strategic CSR, the ﬁrm can have thegreatest social inﬂuence and obtain larger business beneﬁts (Porter Kramer,2006). In addition, Armstrong (2010) has pointed that CSR strategy shouldbe integrated with both the business strategy and human resource (HR)strategy. Because HR strategy has the closest relationship with organiza-tional behaviour both outside and within the ﬁrm, CSR strategy can help aﬁrm obtain better performance by combining with HR strategy. Criticism of CSR arises from the opposite viewpoints, although severalconcepts, theories and announcement explain and analyse why CSR shouldbe considered through the business process. The main criticisms are thefollowing: CSR lacks the legitimacy of the political system (Brittan, 2003). Voluntary elements of CSR will increase costs and decrease revenues in both the short and long term, and CSR actions will reduce the degree of competition and reduce both economic freedom and market efﬁciency (Henderson, 2001). According to Doane (2005), a business should keep its eyes on making money and nothing else. The death of CSR may not be a bad thing. By using academic criticisms of CSR, it is easier for a corporation toeffectively analyse and address CSR issues. Several studies focus on the impactfrom CSR considerations on a ﬁrm’s ﬁnancial performance as related toincome, proﬁtability ratio and so on. Meanwhile, many articles and researchhave reported the link between CSR and proﬁtability. There also is someevidence to indicate that a positive relationship exists between CSR andimproved ﬁnancial performance (Andersen, 2004). Maignan found a positive relationship between CSR and return oninvestment, sales growth and proﬁt growth, and these conclusions werebased on information and data from an integrated survey. According toStewart, the performance of the most successful companies is based onthe criteria which are closely connected with how corporate citizenshipis deﬁned, reputation management, efﬁciency of management, productquality, innovativeness and responsibility to the community through theprogress of the decision-making. Research by Verschoor has pointed thatcompanies which commit to ethical behaviour or emphasize compliance witha certain code of conduct have obtained better ﬁnancial performancefrom a study of the 500 largest corporations in the United States.And research by Ruf and Colleague has found a link between CSR andﬁnancial performance. The hypothesis in that research was that changingCSR performance is positively related to current and future changes
164 QINGQING YANG AND DAVID CROWTHERin ﬁnancial performance after controlling for size, industry and the prioryear’s ﬁnancial performance. The analysis supported the hypothesis. More-over, the ﬁnancial performance in that research was measured by twoindicators: growth in sales and return on equity. In addition, CSR research started to focus on organizational investigationsinto the link between CSR and proﬁtability and how CSR can improve a ﬁrm’scompetitive advantages and ﬁnancial outcomes (Macdonald Marshall,2010). According to Macdonald and Marshall (2010), some business consul-tants and researchers believe that aligning the social and the economicelements of a ﬁrm’s responsibility could bring large proﬁt to the business. Aseries of evidence indicates that the positive outcomes from implementationsof CSR activities: boost the sales of products and increase a ﬁrm’s market share of the ﬁrm, increase reputation and brand management, improve a ﬁrm’s image compared with other competitors, attract and retain talent and promote employee productivity, decrease production costs and attract more investment and achieve better credit ratings. In short, CSR can increase the proﬁts and is thus of great economicsigniﬁcance (Macdonald Marshall, 2010). Furthermore, CSR could beconsidered as a competitive business strategy as well as an obligation for manyﬁrms; for example an American pro-business organization that has business forCSR, treats CSR as a method of achieving a its ﬁnal goal of proﬁt making aswell as activities that respect ethical values and protect the social environment(Macdonald Marshall, 2010). In addition, business beneﬁts from CSRactivities both tangibly and intangibly, such as raising more capital throughSRI funds and decreasing risk premiums, improving resource efﬁciency,improving staff motivation, engaging a better quality of supplier, expandingbusiness relationships, enhancing reputation and strengthening brand image aswell as supplying the responsible products and services (Barth Wolff, 2009).The experienced business beneﬁts from CSR activities will be treated aspotential incentives for the effective implementation of a CSR instrument(Barth Wolff, 2009). Moreover, according to Fernando (2010), there are aseries of advantages for ﬁrms when they take CSR considerations and activities: improved ﬁnancial performance, enhanced brand image and reputation, increased sales and customer loyalty,
The Relationship Between CSR, Proﬁtability and Sustainability 165 increased ability to attract and retain employees, reduced regulatory oversight and facilitated innovation and learning. Except for direct positive inﬂuence in the ﬁeld of ﬁnancial performance,the beneﬁts from CSR activities could be considered as potential factors thatwill visibly inﬂuence a ﬁrm’s proﬁtability ratio. The potential beneﬁcialfactors which lead to positive ﬁnancial performance will be analysed andillustrated in a separate part of this literature review. From the perspectivesof managers, CSR performance is closely associated with ﬁnancial outcomessuch as proﬁtability ratios and solvency ratios. According to DiPiazza,business leaders believe that social responsibility is a means of achievingproﬁtability, and a millennium poll of more than 1,000 chief executives in33 nations in Europe, Asia and Americas shows that several CEOs considerthat a ﬁrm’s proﬁtability also takes into account socially responsible actionstowards employees, shareholders and society. From the economic perspective, the theory of the ﬁrm could be applied toanalyse the relationship between CSR performance and proﬁt outcomes. Thetopic which combines economic proﬁts with CSR activities became moreimportant during the 1970s and 1980s, and this discussion was often built onFriedman’s (1970) viewpoints that the core responsibility of an organization isto its shareholders (Fernando, 2010). A new viewpoint from Lee (2008) pointsout that a ﬁrm can survive through combining CSR performance with proﬁt-making process in a highly competitive global business environment. Manage-ment is required to make adjustments to ﬁt different stakeholders according tothe broad interpretation of CSR such as environmental responsibility andsustainability (Lee, 2008). In other words, the activities analysed under theeconomic CSR viewpoints are used to increase proﬁts and reduce the cost ofconsumers. According to Devinny (2009), several research articles which focuson the economic proﬁt of CSR performance indicate that there is no deﬁniteanswer to how CSR facilitates the proﬁt-making process, but Heath and Nihave pointed that a positive relationship between CSR activities and ﬁrm’sperformance can be found through an extensive literature review. POTENTIAL BENEFITS AND PROFITS FROM CSR ACTIVITIESThe theory of the ﬁrm for studying the beneﬁts of CSR was introducedby Jones, and this theory points that, as a result of higher returns and
166 QINGQING YANG AND DAVID CROWTHERproﬁts, companies which repeated transactions with stakeholders on thebasis of trust and cooperation were found to be honest, trustworthy andethical. McWilliams et al. (2006) developed a formal model of proﬁtmaximizing and CSR. In this model, two companies produce identicalproducts, but one ﬁrm could add an additional social characteristic or specialtyto the ﬁrm’s products, and these products were valued by certain consumersand potential stakeholders (McWilliams et al., 2006). Managers in this modelhave the ability to determine the level of resources to devote to CSRperformance through a cost–beneﬁt analysis, and managers also evaluate thecost of satisfying the demand for CSR activities. Managers thus have the powerto decide what amount of CSR is the optimal point for their proﬁt-orientedﬁrms (McWilliams et al., 2006). From the research, we can conclude that theﬁrms should consider CSR as a strategic investment with positive proﬁtoutcomes. Based on the theory from McWilliams and Siegel, tested that theoryempirically using ﬁrm-level data and information on both social environmentand accounting proﬁtability, and they found that ﬁrms with higher attributesin social environment performance had superior ﬁnancial performance. By contrast, Heugens and Dentchev (2007) pointed that CSR has appro-ximately seven major risks, most of them related to the negative ﬁnancialeffect from CSR activities. For example the CSR issues for ﬁrms will beincreased by the poor risk communications, and this negative factor willlead to problems of safety and environment. Aras and Crowther (2010) haveshown that there is a negative link suggesting that CSR is a cost for the ﬁrmand reduces overall ﬁnancial performance. In addition, the resulting costfrom CSR activities will make the ﬁrm less competitive and suffer negativeeconomic impacts (Aras Crowther, 2010). REPUTATION MANAGEMENTAs an important element of today’s business, reputation managementplays an essential role in proﬁt making. Through improved reputationmanagement, a ﬁrm can obtain more competitive advantages and marketshares in an entire industry. Thus, the positive relationship between CSRand reputation management can indirectly improve a ﬁrm’s ﬁnancialperformance. CSR performance can be considered as the important factor that reinforcesthe good reputation of a ﬁrm with social theory (Klewes Wreschniok, 2009).The norm of normative reputation is related to the normative or social
The Relationship Between CSR, Proﬁtability and Sustainability 167reputation and corresponds to the demands of CSR, and the intangibleresource of reputation is the main source of competitive advantage of a ﬁrm.Indeed, a value-creating reputation could be seen as a special product of yearsof superior competence as perceived by stakeholders, and a strong reputationmanagement can generate a series of beneﬁts to a ﬁrm in crisis. Moreover,the good reputation management could be seen as the source of the initialcredibility. According to Moore and Seymour (2005), reputation management couldhelp ﬁrms distinguish themselves with the globalization, transparency andrising CSR expectations, and thus more and more ﬁrms have paid moreattention to the link between corporate reputation management andcompetitive advantage. The best stakeholders such us customers, investorsand employees can be attracted and retained through the strong corporatereputation (Moore Seymour, 2005). A survey of more than 100 large Euro-pean companies in 2003 by the Chicago-based multinational insurancebroker Aon found that ‘weak reputation’ was considered the second biggest of17 listed threats such as ‘product liability and ‘employee accident’ (Moore Seymour, 2005). Furthermore, risk-management committees related to reputation man-agement have been established by many organizations in recent years.For example, Barclays Bank has established a ‘brand and reputation’committee that pays the same attention to reputation management asﬁnancial and operational concerns in recent years. This recognition fromBarclays indicates that ﬁrms need to effectively manage reputation risk(Hancock, 2005). Another survey has concluded that some 93% ofcorporate directors of FTSE 100 companies in October 2002 believed thatdisclosure non-ﬁnancial information could improve a ﬁrm’s reputation andmanagement decisions (Hancock, 2005). Meanwhile, one model indicates adirect link between reputation and ﬁnancial performance such as shareprice and credit rating through a survey of about 500 US and 250 UKcompanies (Hancock, 2005). This ﬁnding shows that the reputationaccounted for about 27% of the FTSE 250 companies’ market shares,and damaged reputations required about four years to restore (Hancock,2005). According to Harris, about 75% of international ﬁrms havecorporate reputation inspection systems in place (from a survey of about800 CEOs in Europe and North America), and about 60% of UK ﬁrmsactively monitor their reputations. From the CSR perspective, Coombs (2011) has pointed that CSR becomesa core factor and driver for good reputation management. In addition,
168 QINGQING YANG AND DAVID CROWTHERboth CSR considerations and reputation management are dependent on thestakeholders’ expectations and that reputation managers pay as muchattention to CSR considerations and activities as to investors and ﬁnancialoutcomes (Coombs, 2011). Finally, in the ﬁnancial industry, reputation is established by trust with allstakeholders and can inﬂuence the entire value of ﬁnancial services ﬁrm asmuch as intangible economic assets (Idowu Filho, 2009). For a ﬁnancialservice ﬁrm, strong and effective reputation management could facilitate itsbusiness sustainability. The ﬁnancial industry (ﬁnancial service ﬁrms andbanks) engage in CSR considerations to enhance their intangible assets. Idowuand Filho (2009) have pointed that both bankers and ﬁnancial services pro-fessionals manage CSR and reporting in Europe. The observation shows thatthe ﬁnancial industry considered reputation management as an importantcompetitive advantage that could improve ﬁnancial performance, and a seriesof CSR activities could increase proﬁtability indirectly through enhancedreputation. In the crowded marketplace, CSR plays an important role through branddifferentiation based on special ethical considerations. According toMcElhaney (2008), several companies begin to classify CSR considerationsas a business strategy, and CSR considerations will lead to success increating proﬁts, increasing sales, expanding market shares and improvingbrand differentiation. In the long term, CSR activities can improve a ﬁrm’seconomical performance and sustainability to a large extent, thanks tobrand differentiation (McElhaney, 2008). CSR can be a source of branddifferentiation for outperforming other competitors in the highly competi-tive global market and obtaining competitive advantages when facing somany regulations and difﬁculties resulting from globalization (McElhaney,2008). For example, the Body Shop brand grew on the basis of ethicalsourcing of its products, and Starbucks has embraced fair-trade coffee inEurope (McElhaney, 2008). Nowadays, brand differentiation is seen as the core of a ﬁrm’s success,and it needs protection by the strategist who contributes CSR considera-tions to the ﬁrm’s decision-making process (Chandler Werther, 2010). Ingeneral, there are three main beneﬁts of CSR brand differentiation: positivebrand building, brand insurance and crisis management (Chandler Werther, 2010). Chandler and Werther (2010) have indicated that branddifferentiation from CSR activities has several advantages – for examplehigher brand differentiation could make a ﬁrm’s products more easilyrecognized and more competitively special.
The Relationship Between CSR, Proﬁtability and Sustainability 169 INCREASED STAKEHOLDERS’ VALUES‘Stakeholder’ is closely related to the term ‘stockholder’, and it can bedelineated by managerial function. The following groups are within the scopeof ‘stakeholder’: top managers, employees in senior management positions, other employees, company owners, customers, suppliers, capital investors, competitors, the state, associations and organizations, and the general public, which is often represented by news media (Armstrong, 2010). According to Freeman (1984), stakeholder theory has pointed that themanagers should satisfy different requirements from stakeholders such asworkers, customers, suppliers and local communities that will affect a ﬁrm’sﬁnancial outcome. From that point of view, managers should considercertain CSR activities that are related to non-ﬁnancial information andsocial correspondence as well as requirements from stockholders or ﬁrmowners. The rationale for CSR and stakeholder values was also analysed byArmstrong (2010), who shows that the corporations can obtain strongcompetitive advantages by attributing CSR activities to primary stakeholders.The research into some 500 ﬁrms from Armstrong (2010) found that investingin stakeholder management via CSR considerations actually provides acompetitive advantage which can be treated as an effective resource and aspositive proﬁt-making capabilities for the whole ﬁrm. In addition, CSRactivities will affect primary stakeholders directly, and these activities canbeneﬁt both stakeholder values and shareholder wealth (Armstrong, 2010).From the study of Fernando (2009), the economic perspectives of CSR indicatethat CSR activities are related to how business ﬁrms maximize stakeholdervalues while balancing conﬂicting stakeholder interests. Thus, the effect onproﬁtability ratios that resulted from CSR considerations can be analysedfrom stakeholder values through the annual report.
170 QINGQING YANG AND DAVID CROWTHER The licence to operate can be protected by CSR considerations andactivities, and ﬁrms will obtain long-run efﬁciency without spending a largeamount of money competing with other business ﬁrms through a right licenceto operate (Willard, 2005). The ﬁrms have fewer inspections and paperworkfrom both national and local government agencies, and they may havepreference or ‘fast-track’ treatment when applying for operating permissions,licences or other formats of government permits (Fernando, 2009). SUSTAINABLE DEVELOPMENTA ﬁrm’s performance can be enhanced by CSR strategy for sustainabledevelopment. CSR strategies supply several beneﬁts to ﬁrms from bothinternally and externally. Externally, CSR strategies can create a positiveimage and goodwill and obtain a certain respect from competitors, customers,government agencies, investors and media. All of these external beneﬁts canpromote shareholder values and long-term sustainable development.Internally, CSR strategies form a sense of customer loyalty and employeetrust. Drakakis-Smith has redeﬁned the components of ‘sustainability’, and thisdeﬁnition contains a broad range of issues, with the concept of sustainabilitycombining environmental, economic and social factors (Roosa, 2008). In fact,CSR considerations have been linked to the ambitions of sustainabledevelopment after the year 2000 with the Final Declaration of the EuropeanCouncil of Lisbon (Lenssen, 2006). The communication of the 2002commission pointed out a clear link between CSR and ﬁrms’ sustainabledevelopment, and the commission also showed that CSR activities resultingfrom social and commercial pressure progressively led to ﬁrms’ value changes.In addition, CSR considerations have been considered an essential part ofsustainable development at both the local and the international level (Lenssen,2006). Finally, Spedding and Rose (2007) pointed out the beneﬁts forsustainable development from CSR consideration from both internal andexternal viewpoints. DISCLOSURE AND CSR REPORTINGFirms paid attention to CSR disclosures and CSR reporting according toproﬁts and other ﬁnancial positive outcomes, although CSR activities arevoluntary for all organizations. CSR disclosure or CRS reporting can also
The Relationship Between CSR, Proﬁtability and Sustainability 171facilitate a ﬁrm in obtaining better ﬁnancial performance under certaincircumstances. For CSR reporting standards, a number of CSR standardsare available for ﬁrms for reporting their CSR activities (Calder, 2008).First, SA8000 is a multinational social accountability standard for workingconditions. The ﬁelds of accountability from the SA8000 address: child labour, forced labour, workplace safety and health, the right to organize, discrimination, workplace discipline, working hours, wages and management systems for HRs (Calder, 2008). The Global Reporting Initiative, which is also called ‘a common frameworkfor sustainability reporting’, is the second widely recognized system for ﬁrmswhich actively report on CSR issues, and this framework pays more attentionto a ﬁrm’s sustainability as well as to human rights (Calder, 2008). Reportingfrom the Global Reporting Initiative addresses a ﬁrm’s economic, environ-mental and cooperative social performance, and CSR reporting is thepractical process of measuring, disclosing and being responsible to bothinternal and external stakeholders for the ﬁrm’s performance through theprocess of achieving sustainable development (Calder, 2008). From the 1970s and 1980s, there were several models for CSR reportsand audits through the whole evolution of CSR reporting. Nowadays, CSRor environmental reporting is of increasing importance as a component of aﬁrm’s comprehensive annual report (Chandler Werther, 2010). Theauditing ﬁrm KPMG has reported that there was about 30% increase from2005 to 2008 in the number of large ﬁrms which generated CSR reports, andabout 78% of the world’s largest ﬁrms now supply their CSR information inpublicly available forms (Chandler Werther, 2010). However, ﬁrms thatengage in ‘greenwashing’ or whose reports lack authenticity will receivenegative attention, probably because CSR reporting now receives moreattention in the global market (Chandler Werther, 2010). In addition, as pointed out by Donovan and Gibson, legitimacy theoryhas shown the relationship between proﬁtability and CSR disclosure: ﬁrmscan obtain a better proﬁtability ratio when their reports do not containinformation which will interfere with the ﬁrm’s ﬁnancial successful perfor-mance. Moreover, companies will disclose certain information related to
172 QINGQING YANG AND DAVID CROWTHERsocial environment and performance when the proﬁts are low (Chandler Werther, 2010). In this way, positive CSR disclosure maintains investor,customer, supplier and other stakeholder loyalty and investments. Schwester (2010) has pointed out that the primary measure of a ﬁrm’sproﬁtability performance is net income. The techniques of proﬁtabilityanalysis include EPS analysis, common-size analysis and alternative measureof income. And proﬁtability is not as same as proﬁt, and it can only bemeasured by ﬁnancial ratios which use ﬁgures from the income statement, thebalance sheet or other parts in an annual report. The annual report of aﬁrm offers a useful additional source of data for assessing a ﬁrm’s proﬁtperformance, as well as supplying an appreciation for trends and shifts in thebalance of the ﬁrm’s activities (Vause, 2009). Research data indicate that disclosure of CSR can facilitate a ﬁrm inachieving higher proﬁtability ratios when compared with the precedingyear, which did not have a CSR report. Furthermore, although this ﬁnancecompany has addressed CSR activities before the year 2009, the positiveimpacts on proﬁt are not obvious because stakeholders such us customersor investors could not observe the CSR programs directly and quickly.Most important, reputations need the support of previous CSR reportdisclosures. From the perspectives of ﬁnance, both the main proﬁtability ratiosand total asset turnover increased after the year of issuing CSR reportsformally, and these positive impacts extended to the following year. Forﬁnance companies in China, the positive effects on proﬁtability fromprevious CSR reports can be observed and approved in the short run, butthe effects from CSR activities without previous promotion need a long timeto be observed. CONCLUSIONSManagers classify CSR issues not only as environmental issues but also assupplying a fair-trade system and transparent ﬁnancial information forinvestors. The comprehensive awareness of CSR activities from managerssupply more guarantees for all stakeholders, and the attitudes which arerelated to integrity of those managers can also generate a higher reputationin the whole industry. Meanwhile, the wealth and fair right of the mainstakeholders in this company such as shareholders, customers, employeesand local communities can be protected more through CSR programs aswell as devotion and charity activities.
The Relationship Between CSR, Proﬁtability and Sustainability 173 Moreover, from the aspect of literature review, evidence indicates thatpositive outcomes from the implementation of CSR activities: boost the sales of products and increase a ﬁrm’s market share, increase reputation and brand management, improve the ﬁrm’s image compared with other competitors, attract and retain talent and promote employee productivity, decrease production costs and attract more investment and achieve better credit ratings (Macdonald Marshall, 2010). All of these potential CSR beneﬁts for this ﬁnance corporation have beenobserved and analysed in this research, so we can conclude that there is apositive relationship between proﬁtability and CSR in other viewpoints. The main groups that have been affected by the CSR issues are industryassociations, shareholders, local communities, customers, suppliers, compe-titors, employees and non-governmental organizations. Generally speaking,it is obvious that there is a strong positive relationship between CSR activitiesand short-run proﬁtability in China. In the long run, the positive effects onproﬁtability from CSR activities are not obvious but will be observed anddiscovered. REFERENCESAndersen, B. (2004). Bringing business ethics to life: Achieving corporate social responsibility. New York, NY: ASQ Quality Press.Aras, G., Crowther, D. (2010). A handbook of corporate governance and social responsibility. Surrey, UK: Gower Publishing, Ltd.Armstrong, M. (2010). Armstrong’s essential human resource management practice: A guide to people management. London: Kogan Page Publishers.Asongu, J. J. (2007). Strategic corporate social responsibility in practice. Lawrenceville, GA: Greenview Publishing Co.Barth, R., Wolff, F. (2009). Corporate social responsibility in Europe: Rhetoric and realities. Northampton, UK: Edward Elgar Publishing.Bhattacharya, C. B., Smith, N. C., Vogel, D. (2010). Global challenges in responsible business. Cambridge: Cambridge University Press.Brittan, S. (2003). How economics are linked to ethics. Financial Times, 2 September, cited by Sparks, R. (2003, May 19). A pragmatic approach to CSR, School of Management, the London School of Economics.Calder, A. (2008). Corporate governance: A practical guide to the legal frameworks and international codes of practice. London: Kogan Page Publishers.Chandler, D., Werther, W. B. (2010). Strategic corporate social responsibility: Stakeholders in a global environment (2nd ed.). London: Sage.
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