The relationship between csr, profitability and sustainability in china


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The relationship between csr, profitability and sustainability in china

  1. 1. 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
  2. 2. 156 QINGQING YANG AND DAVID CROWTHERAnother example is related to the milk powder that contains tricyanamide,which has a toxicity that affected some babies (, 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 (, 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 (, 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’
  3. 3. 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 (, 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(, 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
  4. 4. 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).
  5. 5. 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).
  6. 6. 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
  7. 7. 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.
  8. 8. 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
  9. 9. 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
  10. 10. 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,
  11. 11. 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
  12. 12. 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
  13. 13. 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,
  14. 14. 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.
  15. 15. 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.
  16. 16. 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
  17. 17. 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
  18. 18. 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.
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