Dr. Richa Gautam
National Institute of Industrial Engineering (NITIE), India
E-mail: richagautam07@gmail.com
Dr. Anju Singh
National Institute of Industrial Engineering (NITIE), India
E-mail: dranjusingh@gmail.com
Dr. Debraj Bhowmick
National Institute of Industrial Engineering (NITIE), India
E-mail: devraj.007@gmail.com
Submission: 04/03/2016
Revision: 16/03/2016
Accept: 23/05/2016
ABSTRACT
Corporate
Social Responsibility (CSR) is a desirable approach considering it reduces
risks, increases brand value, improves transparency, and has a possible impact
on the financial health of the business. Initiated as an act of philanthropy,
it has recently become mandatory as a part of the Companies Act, 2013 in India
which mandates CSR spending. The study had an objective to validate that CSR
disclosures lead to better financial performance of a company and vice-versa. The
study analyzed the relationship between CSR disclosure and financial
performance and vice versa using various approaches viz., exploratory to
understand the trends and practices and statistical by adopting multiple
regression modelling techniques. The results of the study reveal that the
company’s financial performance (profitability) has a cause and effect
relationship with the CSR disclosure and vice versa, which substantiated the
theories predicting that CSR can affect the financial performance of the
company. Keywords: Corporate Social Responsibility,
CSR Disclosure, Indian companies, Financial performance
1. INTRODUCTION
Social performance is the
organization’s commitment to creating and fairly distributing value among its
stakeholders in and around its area of influence, as well as ameliorating
societal problems. The challenge is to
maintain balance between economic growth and enabling quality of life for all
sections of society so that they live with dignity, thereby ensuring a license
to operate.
In India, this has been mandated
under Schedule VII, Section 135 of Companies Act, 2013 and The Company (CSR
Policy) Rules, 2014 by Ministry of Corporate Affairs (MCA), which direct
businesses to ensure spending 2% of their net profits on Corporate Social
Responsibility (CSR). Previous studies suggested that, being socially
responsible brings about tangible (better financial performance, increase in
share price etc.) and intangible benefits (shareholder and investor trust,
enhanced brand image etc.) for a business. Therefore, under the social
dimension, this study attempts to gauge the relation
between CSR disclosure and financial performance of a company in the Indian
context.
The study attempts to understand the
reason Indian companies disclosed CSR practices even when it was not mandated,
and ascertain whether such practice resulted in improved financial performance
of the company in any form. The research addresses this by including a
comprehensive sample covering top 500 Indian companies.
1.1.
Statement of Problem
There are numerous studies
supporting relationships (positive, negative, neutral or no relation) between
CSR and a company’s profitability in western countries. Lack of consensus on
the nature of relationship and less number of such studies in the Indian context
were major drivers for this research. Thus, with the current study, researcher
attempted to derive this relationship with a new set of variables i.e. Global
Reporting Initiative (GRI) aspects, (GRI, 2002) and profitability measures of
the company.
1.2.
Research Objectives
a. To validate the relationship between CSR
disclosure and financial performance of a company
b. To understand the direction of causality
in the relationship
2. LITERATURE REVIEW
The literature survey focused on the
classification of articles, research papers from 1970 - 2014. The literature
collection started in 2007 and databases like Elsevier Science Direct, IEEE
Xplore, EBSCO, Proquest, Emerald and other online databases were explored.
Keywords used for the search were CSR, CSR disclosure, CSR and financial
performance, CSR in India, etc.
CSR Disclosure is mainly about the
CSR-related activities, targets achieved, and expenditure by the company for
the interest of its stakeholders, usually in the form of CSR report, Corporate
Citizenship report or Sustainability report. The objective is to provide
information to stakeholders that can help them assess long- and short-term
business concerns including risk, cash flow, and consistency in addressing
societal or environmental concerns.
Studies were conducted to determine
the extent an audience is interested in social responsibility reports (BUZBY; FALK,
1979; MOBLEY, 1970). The results of these studies were mixed, but most agreed
that investors employ criteria that require consideration of some of the social
activities of firms when making investment decisions.
In India, the guidelines for
voluntary reporting on CSR are the CSR Voluntary Guidelines (2009, 2010) by the
MCA and the Guidelines on CSR for Central Public Sector Enterprises (2010,
2012). However, not all companies adhered to these guidelines due to its
voluntary nature; besides, general observance of law in India is slack (PRIETO‐CARRÓN; LUND-THOMSEN; CHAN; MURO, 2006).
However, recently, there was a
change in the legislative landscape with the introduction of Companies Act,
2013 and CSR Rules, 2014 (KANSAL; JOSHI; BATRA, 2014). This research is
positioned in the pre-mandated phase, which attempts to investigate what
factors affected companies’ disclosure or non-disclosure on CSR in the
pre-mandated phase. This research would address the requirement of an inclusive
study in the Indian context that elucidates the determinants of CSR disclosure.
2.2.
CSR Disclosure and Financial
Performance
The research by Porter and Kramer
(2002) was considered path-breaking in ways that it reaffirmed the belief that
economic investments lead to social returns and even social investments can
result in economic benefits. In view of the same, they recommended that
businesses should emphasize on both financial and social returns.
The concept of streamlining CSR to
the company’s core competency is advocated by the London Benchmarking Group
model (LBG- leading standard for measuring and benchmarking corporate community
investment). Since CSR performance is communicated via CSR disclosures, the
latter may play an inevitable role in achieving tangible or intangible
benefits.
Some researchers investigated the
relation between CSR and financial performance, using both accounting and
market measures. According to some, financial performance is a key factor for
evaluating and understanding CSR disclosure.
One of the aspects in understanding
the relation between CSR and financial performance is to understand the
direction of causality, i.e., what acts as an antecedent and consequent for
this relationship. In the context of this study, it would refer to whether CSR
disclosure leads to better financial performance or better financial
performance leads to enhanced CSR disclosure.
One general drawback observed in the
empirical studies was that they could not distinguish financial performance for
preceding, current and succeeding year’s CSR disclosure and, therefore,
suggested no reliable inferences about the direction of causation. Practically,
McGuire et al., (1988) were the first to consider financial performance with
respect to past, concurrent and subsequent to CSR performance.
While in most of the studies,
economic performance covered a common five-year period with respect to the
social disclosure periods, studies by Mahapatra (1984) and Mills and Gardner
(1984) considered economic performance period as concurrent to the CSR
performance period for analysis. Mills and Gardner (1984) studied the
relationship between social disclosure and economic performance and concluded
that companies are likely to disclose CSR and its expenditure when the
financial statements indicate favorable economic performance. On the other
hand, Shane and Spicer (1983) considered financial performance subsequent to
the CSR disclosure period, finding a positive relation.
Studies by Waddock and Graves (1997)
and McGuire et al., (1988) revealed that CSR was positively linked with prior
financial performance and social performance is both a predictor and consequence
of the company’s financial performance. The two conflicting theories with
respect to the direction of causality between CSR and financial performance is
the Slack Resources Theory or the positive impact of financial performance on
CSR, and the Good Management Theory or the positive impact of CSR on financial
performance (WADDOCK; GRAVES, 1997).
The Slack resource theory indicates
that better financial performance results in slack financial resources for
companies to invest in social endeavors, thus, highlighting that better
financial performance would be a predictor of better social performance (MCGUIRE
et al., 1988). Good Management theory suggests that better CSR management
practices improve relations with stakeholders resulting in better financial
performance of the company.
Waddock and Graves (1997) followed a
time lag method to reveal that there exists a positive relation between CSR and
financial performance through time. Preston and O’bannon (1997) analyzed the
relationship between indicators of CSR and financial performance with large
United States (US) corporations. The results showed that better financial
performance results in superior CSR activities and its disclosures. This
further positively enhances the financial performance of the subsequent year.
Negative association: The studies suggesting a negative
relationship between social and financial performance believe that responsible
companies face competitive disadvantage as they incur costs that might
otherwise be avoided or should possibly be borne by the government (AUPPERLE et
al., 1985). Also, high social responsibility leads to additional costs that put
a company at an economic disadvantage compared to less socially responsible
companies (BRAGDON; MARLIN, 1972; VANCE, 1975, ULLMANN, 1985).
These costs could be the result of
promoting community development plans, extensive charitable donations,
establishing procedures for environmental protection, and maintaining
operations in economically depressed locations, (MCGUIRE et al., 1988).
According to Friedman (1970) and some neoclassical economists, there are less
quantifiable economic benefits for being socially responsible while there are
various costs that affect the bottom line, thereby reducing profits and shareholder
returns.
Crisostomo et al., (2011) examined
the relationship considering firm value and financial performance in Brazil and
concluded that CSR is value destroying, as a negative correlation between CSR
and firm value was obtained. With a similar argument, other authors stated that
investments, expenditures or activities not associated with the main objective
of the company indicate diversion from the main purpose of the company and that
of the resources from shareholders.
Vance’s (1975) research, which
analyzed the relation between corporate social involvement, reputational
indexes and the percent change in the price per share, concluded that, in the
short-run, CSR was inversely linked with profitability and a negative relation
between change in share prices and corporate social involvement was observed.
Positive Association- In contrast to
the above assertions, Margolis and Walsh (2001) inventoried 95 studies between
1972 and 2000 and conducted a meta-analysis, which revealed that a majority of
the studies concluded with a positive relation.
Keim (1978) argued that social
performance might be consistent with capital maximization intentions of the
company. Heinze (1976) conducted a study based on the measure of social
involvement similar to that of Vance, 1975 as a dependent variable. This study
supported a positive correlation between social involvement and profitability.
Bowman and Haire (1975) used the
proportion of social involvement-related sentences in companies’ annual reports
as an index to measure social involvement. Their findings support that social
involvement does not threaten the investor’s profits, and it is not
dysfunctional for a company to be socially involved.
Ingram (1978) conducted a market
study to examine the associations of social disclosure based on accounting data
and concluded that a significant positive relationship exists between CSR
disclosure and cumulative excess returns. Another study on social disclosures
by Kansal et al., (2014) analyzed the relationship between financial and
non-financial company characteristics and social responsibility disclosures by
Indian companies.
The study concluded that company
size and industry category correlate with the company’s social disclosures. In
the Indian context, Kapoor and Sandhu (2010) similarly suggest a positive
impact of CSR on profitability and insignificant positive impact on corporate
growth (KAPOOR; SANDHU, 2010).
Neutral association: Some empirical results also suggest a third
possibility in terms of neutral or no relationship between social and financial
performance. Proponents of this thought argue that due to the existence of
several intervening variables between social and financial performance,
expecting a relationship could be unreasonable, except by chance (ULLMANN,
1985).
Confirming to Ullmann’s
interpretation, McWilliams and Siegel (2000) suggested that the relationship
tends to disappear when accurate variables are introduced into econometric
models, thereby concluding that CSR has a neutral effect on financial
performance.
Aupperle et al., (1985) used both
short-term (one year) and long-term (five year) corporate performance as a
measure for CSR and Return on Assets (ROA). The results proved no statistical
significance between CSR orientation and financial performance. They suggested
that it was not possible to support the concept of positive or negative
association between profitability and CSR orientation, and it is neither
beneficial nor harmful for a company to fulfill its social responsibilities.
2.5.
CSR disclosure and
Non-financial determinants
Thus far, several
studies have explored the financial as well as non-financial determinants of
CSR disclosures and attempted to identify its linkage with financial
performance (WADDOCK; GRAVES, 1997), including size of the business (HACKSTON;
MILNE, 1996), company age (CORMIER; MAGNAN; VELTHOVEN, 2005) and nature of
industry. Some studies focused on public sector companies (SINGH; AHUJA, 1983)
or banking sector companies (HOSSAIN; REAZ, 2007).
Company Size: Various studies in the literature
affirm that company size has an influence on CSR disclosures (DIERKES; PRESTON,
1977; PATTEN, 1992; ROBERTS, 1992; HACKSTON; MILNE, 1996; ADAMS; HILL; ROBERTS,
1998). This led to an assumption that larger companies disclose more on CSR
than smaller companies (PURUSHOTAHMAN; PHIL; ROSS, 2000; GRAY; JAVAD; SINCLAIR,
2001; HOSSAIN; REAZ, 2007; ARAS; AYBAR; KUTLU, 2010; SIREGAR; BACHTIAR, 2010).
Moreover, large companies have
stakeholders who are interested in the social initiatives undertaken by the
company (COWEN et al., 1987), and,
therefore, impel a need to legitimize a company’s actions, limit governmental
intervention (PURUSHOTAHMAN et al.,
2000), and ensure cash flow (CRISOSTOMO ; FREIRE ; VASCONCELLOS , 2011). The studies by Porwal
and Sharma (1991) and Kansal
et al., (2014) also concluded that company size correlates with social
disclosures of the company.
Industry type: Many studies in the developed countries have suggested that
sector or industry type is associated with CSR disclosure (COWEN et al., 1987; ROBERTS,
1992; Tilt, 1994; HACKSTON; MILNE, 1996; ADAMS et al., 1998; GRAY et al., 2001;
GRAAFLAND; VAN DE VEN; STOFFELE, 2003; KOTONEN, 2009).
The association could be due to
government pressure, consumer perceptions (COWEN et al., 1987) or
industry-specific social or environmental impacts (DIERKES; PRESTON, 1977;
COWEN et al., 1987; PATTEN, 1992; ROBERTS, 1992; HACKSTON; MILNE, 1996). The study by Hossain and Reaz (2007) was specific to the
banking sector in India.
Country: Characteristics specific to each country may also have a role in
the intensity of CSR (CRISOSTOMO
et al., 2011). The relationship of CSR
disclosures, as determined by financial attributes, has been widely
investigated in developed countries (HANIFFA; COOKE, 2005; AMRAN; DEVI, 2008;
CRISÓSTOMO et al., 2011; MAHADEO; HANUMAN; OOGARAH-SOOBAROYEN, 2011).
It is understood from the literature
that there is dearth of research undertaken in developing/under-developed countries where
CSR is absolutely required, given the lower social provisions (BAUGHN; MCINTOSH, 2007; DOBERS; HALME, 2009). In
the Indian context, it was found that research is limited to the nature of CSR
disclosure (SINGH; AHUJA, 1983; COWEN et al., 1987; VASAL, 1995; CHAUDHRI;
WANG, 2007; MURTHY; ABEYSEKERA, 2008; KANSAL et al., 2014). Despite
India being a fast growing economy and several Indian companies featuring as
Fortune companies, CSR disclosure-related research here is scanty.
Company Age: The age of a company can
influence CSR efforts, as long-established ones are constantly under
stakeholder scrutiny and, thus, more likely to contribute to voluntary social
disclosures (KANSAL et al., 2014). Some researchers (CORMIER et al., 2005; ROBERTS,
1992) reported a positive relationship, while others (RAHMAN; ZAIN; AL-HAJ, 2011)
denied any relationship between Company age and CSR disclosures.
Research Gaps:
The research
gaps identified in the study are three-fold, (a) no consensus on the sign of
relationship between CSR disclosure and financial performance. (b) Studies not
distinguishing between past, concurrent, and subsequent year’s financial
performance in relation to CSR, thus incapable of inferring about the direction
of causation. (c) Lack of such studies in developing countries.
First,
the ambiguity in a definite relationship and signage (+, -, ±) between CSR disclosure and profitability was
identified as a gap, based on the criterion of examining appropriateness of
constructs and variables in the extant literature. All these studies have
considered different financial (stock market based or accounting measures) and
non-financial parameters (age, size, industry type, risk, reputation, award,
etc.) for analyzing the relationship.
Second,
the direction of relationship was not unanimously approved and this was also
identified as a research gap. The causality with respect to Slack resource
theory and the Good management theory with a time lag needed to be examined.
The studies did not provide any justification of cause and effect relationship
between CSR disclosure and financial performance.
In
addition to the above, another gap was found pertaining to understanding CSR
disclosures and its determinants in India in the pre-mandated phase, i.e., the
period before the guidelines on CSR for Central Public Sector Enterprises
(2010, 2012) and the Companies Act 2013 were issued, in India. The impetus was
to know in terms of what actually drove social disclosures in the pre-mandated
period and what were the tangible benefits to the companies due to such
disclosures.
This
research considered an organization as a closed system, with various
characteristics like company size, industry sector, and financial performance
which may impact the CSR disclosure. The study tested the relationship between
CSR disclosure on financial performance or vice versa, considering CSR
disclosure of the current year and financial performance variables of the
previous and subsequent year.
It
is assumed that CSR disclosure acts as an antecedent factor that facilitates
better financial performance. On the other hand, when financial performance
becomes an antecedent factor, it leads to better CSR disclosure. Figure 1
depicts the possible antecedent factors for fostering CSR disclosure and subsequent
organizational financial benefits with time lag.
Figure 1: Factors determining CSR disclosure
Construct and Variables: Figure
3 represents the construct with CSR disclosure and financial performance
variables. Since constructs are not directly observable, researchers use
indicators or variables as a way of measuring or classifying most of the
particulars of the construct (KAREN, 2006).
CSR Disclosure: CSR
disclosure is the communication medium to provide information on the social
performance of a company. While many theoretical attempts have been made to
understand and explain why companies voluntarily disclose CSR performance (DOWLING;
PFEFFER, 1975; GUTHRIE; PARKER, 1989; GRAY; KOUHY;
LAVERS, 1995; PATTEN, 1992), it was Gamerschlag, Moller, and,
Verbeeten, (2011) who pointed out that preventing taxes or other regulatory
actions are the major concerns for managers, thereby concluding that possibly,
companies’ disclose CSR performance
because it serves an economic interest. CSR disclosure for 500 sample companies
was studied for conducting this research. As an outcome, CSRWT was considered
as a variable for CSR disclosure (weighted average of company score after
content analysis + Karmayog score).
Financial Performance: Financial accounting and
stock-market performance measures for financial performance have been used in
the previous studies. Majority of studies have used ROA, sales, total assets,
asset growth and operating income growth as accounting-based measures.
The current study also used
accounting-based measures such as Return on Capital Employed (ROCE), ROA and
Profit after Tax (PAT) for company’s financial performance. Secondary data on
ROCE, ROE and PAT for sample companies was collected from the CMIE Prowess
database, which has data from company annual reports for companies listed in
the Indian stock exchanges.
To ascertain the causality, the
research extracted 2008-09 (one year before the CSR disclosure) and 2010-11
(one year after the CSR disclosure) financial data from Prowess and examined
the relationship. The CSR disclosure was derived from 2009-10 sustainability /
CSR reports. This method is similar to the one adopted by Waddock and Graves (1997) and Aras et al.,
(2010).
Control Variables: Size of a company can be an important control variable since size may
influence company capacity to undertake CSR activities (DIERKES; PRESTON, 1977;
PATTEN, 1992; ROBERTS, 1992; HACKSTON; MILNE, 1996; ADAMS et al., 1998). This
study used the log of total assets and log of sales as a proxy for the
estimation of company size.
To
control the effect of sector on social disclosure, sector dummies were
incorporated into the models. The dummy control variables for sectors were
classified based on Standard Industrial Classification (SIC) while some sectors
were grouped based on similarities so as to ensure minimum observations.
Hypotheses: In alignment with the research by
Waddock and Graves (1997),
the hypotheses were formed on two bases, viz.,
CSR and financial performance have a positive relation and CSR is both a
predictor and consequence of the company’s financial performance with time lag
(for previous and subsequent years).
In Figure 3, size
and industry type are treated as control variables and hence depicted with
dotted lines. Based on the construct, the hypotheses were framed to ascertain
the existence of relationship between CSR disclosure with prior and subsequent
year’s financial performance. The hypotheses attempt to address the sign and
direction of causation for the relationship, as depicted in Figure 2 and Figure
3. The two hypotheses formulated are:
·
H1- CSR disclosure is positively
associated with prior financial performance (Slack resource theory)
·
H2- CSR disclosure is positively
associated with future financial performance (Good management theory)
Figure
2: Direction of relationship and causality
Figure
3: Hypothesis and Construct
4. RESEARCH DESIGN AND METHODOLOGY
Research Design: For this study, a descriptive
design has been adopted for which an exploratory literature survey was
conducted to understand the current state of research on CSR disclosures.
Descriptive design helped in identifying and defining various variables and
formulating hypothetical statements based on the variables.
Descriptive design primarily focuses
on explaining how a phenomenon works for the research. In a time frame
perspective, this research design employed a cross-sectional study approach.
The reason for selecting this approach is that it is extremely difficult to
conduct a longitudinal study for a wide variety of organizations. This approach
collects information at one point of time from a sample, or, more specifically,
helps to take a snapshot analysis of the phenomenon.
Research Method: This study uses both Qualitative
and Quantitative research methods. In qualitative research, an inductive
exploratory method is used, which primarily describes, explores and gains
understanding about a concept. It is usually based on qualitative data, which
is examined for trends and themes.
For this research, the qualitative
method included a study wherein the complete CSR literature, including CSR
disclosure, CSR management, CSR practices in company, etc., were surveyed. This study utilized the quantitative
research method to verify and validate the model conceptualized from literature
survey. Quantitative study uses Regression analysis to examine the proposed
research framework. This approach basically takes the explanatory approach and
investigates relationships between variables.
Unit of Analysis: Since this study focuses on CSR
disclosure of an organization, the unit of analysis in this research is the
organization.
Data Collection: Secondary data for the
quantitative study was derived as a result of the qualitative study (content
analysis of sample company reports describing their CSR efforts). As the unit of analysis of this study is
organization, it is necessary to identify the organization disclosing on their
CSR performance. Organizations pertaining to different sectors and types were
also considered. Special attention was given to maintaining heterogeneity of
sample.
Sampling: The sample used for both the
qualitative and quantitative study was the same. The population included India’s top 500 Companies that were
ranked by Dun and Bradstreet on the criteria of total income, net profit, net worth
and market capitalization. They were from private, public or government sector
and spread across various industry types.
For qualitative analysis, it was
this study’s aim to do an in-depth analysis of organizations’ CSR disclosure,
which would give a wide and correct insight of CSR disclosure based on GRI
aspects.
Scoring Method: The top 500
companies in India were rated as per their CSR disclosure on 18 GRI aspects
using binary codes 0 and 1. The summation of the ratings resulted in a
company-specific score (Variable CSR_Disclosure). Another company-specific
score was obtained from Karmayog (KARMAYOG, 2007), which rated these companies
on a 0-5 scale.
Both these scores
were considered for the study by giving equal weightages to each and, thus,
devising a comprehensive variable CST_WT (CSR_disclosure and Karmayog rating). This helped in achieving
an inclusive method to enable coalition of the entire gamut of disclosure
scores to achieve a weighted company score.
Statistical techniques: This study has used multiple
regression as the main statistical technique apart from other descriptive
statistics (i.e. Mean, Standard Deviation, Correlation, etc.)
As a prelude to the empirical
analysis, a qualitative study was conducted with a purpose to explore the
definitions of CSR, elaborate on its development in India, and study the
theoretical concepts expounded by various researchers. It also examined how
India's top 500 companies deployed their CSR activities in business and
identified key CSR practices, mapping these against GRI standards (GAUTAM;
SINGH, 2010).
This study was
conducted in 2009. It involved secondary data collection and use of content
analysis technique to assess CSR practices of companies operating in India.
Karmayog rated Dun and Bradstreet’s list of India’s top 500 companies on a 0-5
point scale based on CSR disclosure available on company’s website and latest
annual report. Annexure II provides the criteria for rating companies.
Out of the top 500
companies that were considered for the study, 229 (46%) received a ‘0’ rating
for not reporting on CSR and were, therefore, excluded, leaving 271 companies
that reported on CSR. Further, around 26 companies were dropped out as they
reported on environmental parameters and not actually CSR. Therefore, a final
list of 245 (49%) companies was obtained, their reports were downloaded and
content analyzed.
The assessment was done
by mapping their reported aspects against the 18 social aspects from the GRI
framework (Figure 4), which are globally accepted and most widely used. These
social aspects were clubbed under Indicator categories: Society, Human Rights,
Labor Practice and decent
work, and Product Responsibility. A binary code of ‘0’ & ‘1’ was allocated
for not reporting/ reporting on the particular social aspect.
The assessment was
based on four criteria: the social indicators tracked by the company, the
innovativeness in CSR, linkage of CSR initiatives to business, and focus area
of CSR in each company. The study clearly mapped the CSR performance and
disclosures of 500 Indian companies against GRI social aspects.
Observations: It was observed that while 46%
companies did not report on CSR, around 8% scored 3 and 4 out of 5 from
Karmayog. Around 49% companies out of 500 companies were reporting on CSR. Most
of the companies report on donations, infrastructural interventions, primary
education, mid-day meals, etc.
Although spending on CSR was not
mandated while the study was conducted, it was still made a criteria for this
analysis whether a company discloses annual expenditure towards CSR. In most
reports there was no mention of CSR expenditure in their disclosures with an
exception of very few companies.
While a lot of CSR initiatives were
highlighted, Companies’ outreach for CSR activities was not justified in these
disclosures, which led to the assumption that companies are only making token
gestures towards CSR in tangential ways such as donations to charitable trusts
or Non-government Organization (NGOs), sponsorship of events, etc. and only a
few companies had a structured approach.
It was observed that Companies
hesitate to disclose the CSR management approach or strategy adopted by them
during the normal course of business or while acquiring a tract of land/ new
project, and what approach is followed for Resettlement and Rehabilitation
(R&R), compensation and employment advantage to Project-affected Persons
(PAP).
Conclusions: The main findings of the study are that
CSR has been adopted as a comprehensive business strategy, arising mainly from
performance considerations and stakeholder pressure. The study suggests that
business and CSR strategy appears to be on a convergent path, towards business
and CSR integration. CSR is on an upward learning curve and was primarily
driven by philanthropy in absence of any mandate.
This qualitative study was first of
its kind; as such an exhaustive study was not carried out for Indian companies.
This study was extended to derive a relation between CSR disclosure and
financial performance of the Indian companies. With this backdrop, the
researcher identified an exclusive approach to map the relationship between CSR
disclosures and financial performance. This study will be useful to any Indian
company in understanding more about its shortcomings and opportunities.
Figure 4: Graph depicting GRI reporting
trends by Indian Companies
Source: Gautam and Singh,
2010
This
research used 18 GRI social aspects for determining CSR disclosure. The unit of
analysis and the sample of 500 companies were same as used for the qualitative
study. Karmayog rating (0-5) was used as a criterion to extract the sample from
500 companies for the empirical research. The judgmental sampling conducted has
been described in the previous section.
For
the final 271 sample companies, their annual reports / CSR reports were
downloaded and analyzed. The disclosure related to CSR was derived from the
2009-10 CSR/ Sustainability reports of the sample companies similar to prior
studies that used secondary data from annual reports (GRAY et al., 1995; HACKSTON;
MILNE, 1996; HALL, 2002).
The
CSR activities reported in public documents might be overstated or understated,
so a content analysis was done on the sample companies by reviewing their CSR/
Sustainability reports along with mapping their disclosure on 18 GRI aspects.
The sample companies were rated 0 or 1 based on their CSR disclosure on social
aspects.
The
score of 1 or 0 was given based on reporting or not reporting on the GRI
aspect, respectively. It was found that around 26 companies are reporting on
environment in the name of CSR. These were dropped from the sample, after which
a final list of 245 companies was obtained. Complete financial data for 214
companies was obtained from Prowess database on which further empirical
analysis was performed.
As
per the mixed results produced by earlier studies, the investigation for the
relationship between profitability and CSR disclosure in the current study used
three measures for financial performance viz., PAT, ROCE, and ROA. Data labels
used for financial performance variables are listed in Table 1. The study has
also used two measures to control for size, which are natural log of sales and
natural log of total assets.
Variables:
Table 1 provides the codes for financial performance used in the study along
with their description and financial year. Table 2 provides the codes for CSR
disclosure variables along with their description. CSRD
variable is the sum of GRI aspects given in Table 2 and includes variables CsrA
to CsrPR. CSRWT is the weighted score for CSR disclosure of a company, which
was calculated giving equal weightage (50%) each to Karmayog rating and CSRD
score.
Table 1:
Variables for Financial Performance
No |
Code |
Description |
Financial
year |
1 |
CoName |
Company name |
As on FY2008-09 |
2 |
PAT09 |
Profit After Tax |
FY2008-09 |
3 |
ROA 09 |
Return on Assets |
FY2008-09 |
4 |
ROCE 09 |
Return on Capital Employed |
FY2008-09 |
5 |
lnTA09 |
Natural log of Total Assets |
FY2008-09 |
6 |
lnSales09 |
Natural log of Sales |
FY2008-09 |
7 |
lnSales10 |
Natural log of Sales |
FY 2009-10 |
8 |
lnTA10 |
Natural log of Total Assets |
FY 2009-10 |
9 |
PAT11 |
Profit After Tax |
FY 2010-11 |
10 |
ROA11 |
Return on Assets |
FY 2010-11 |
11 |
ROCE11 |
Return on Capital Employed |
FY 2010-11 |
Table 2: Variables for CSR Disclosure or GRI social aspects
No |
Code |
Description |
1 |
CsrA |
Community |
2 |
CsrB |
Corruption |
3 |
CsrC1 |
Public Policy |
4 |
CsrC2 |
Anti Competitive behavior |
5 |
CsrE |
Compliance |
6 |
CsrF |
Investment and procurement
practices |
7 |
CsrG |
Non-discrimination |
8 |
CsrH |
Freedom of Association and
collective bargaining |
9 |
CsrI |
Child labor |
10 |
CsrJ |
Forced and compulsory labor |
11 |
CsrK |
Security plans |
12 |
CsrL |
Indigenous rights |
13 |
CsrM |
Employment |
14 |
CsrN |
Labor / Management Relations |
15 |
CsrO |
Occupational health and safety |
16 |
CsrP |
Training and education |
17 |
CsrQ |
Diversity and equal opportunity |
18 |
CsrPR |
Product responsibility |
|
CSRD |
CSR Disclosure = Total score for
disclosure on GRI aspects (No. 1 to 18) |
|
CSRWT |
CSR Weighted Score= 0.5* CSRD +
0.5* Karmayog rating |
The correlation matrix was used to check for significant
correlations between independent variables used in the multiple regression
models. For the models given in the next sub section, independent variables
used in Models 1, 2, 4 and 5 showed correlation coefficient values less than
0.2 and were deemed insignificant. For models 3 and 6, significant correlation
was observed between independent variables, but the values were less than 0.6.
Factor
analysis: The study utilized
factor analysis to support the factor structure of the variables and to
ascertain that the variables employed in the study were conceptually different.
Factor analysis was conducted with the aid of statistical software package SPSS
Version 20.0 using Principal Component analysis with Varimax rotation and
Kaiser Normalization.
The value of Kaiser–Meyer–Olkin (KMO) measure of sampling
adequacy was 0.583. It is a measure of sampling adequacy and is an index used
to examine the appropriateness of factor analysis. High values (between 0.5 and
1.0) indicate that factor analysis is appropriate while values below 0.5 imply
that factor analysis may not be appropriate (MALHOTRA; BRIKS, 2007). Factor
analysis identified three factors that accounted for 79.601% of the variance,
Multiple
Regression Analysis- In six models tested in this
research, linear regression was employed using IBM SPSS 20.0 to ascertain the
relationship between dependent and independent variables.
·
H1-
Better financial performance results in improved CSR
This
portion provides the results of the regression analysis using CSR Disclosure as
the dependent variable and financial performance, indicated by ROA, PAT and
ROCE as independent while natural log of total assets and natural log of sales
for same year were used as the control variables for size.
There
is a one year lag between the disclosure of CSR (FY-10) and the measures of
financial performance (FY-09). In order to examine the existence of
multicollinearity in the sample, the Variance Inflation Factors (VIF) was
investigated. It was observed that the degree of multicollinearity was well
below the acceptable limit of 10. The results show that the three models with
CSRWT as dependent variable and ROA, PAT and ROCE as independent variables are
statistically significant. Thus, results accept H1, which states that better
financial performance results in improved CSR disclosure. Model-wise interpretations
have been explained ahead.
Model
1: gives the results of using CSRWT as the
dependent variable and ROA as an independent variable (R-square = 0.0545, Std.
Error = 1.2017). Log of total assets and log of sales of the same year are used
as control variables. Result of multiple regression analyses is given in Table 3
which suggests that the relationship between CSRWT and ROA is significant.
Table 3: Model 1 - Regression
coefficients for dependent variable CSRWT
|
Unstandardized Coefficients |
Standardized Coefficients |
t |
Sig. |
|
|
B |
Std. Error |
Beta |
||
(Constant) |
1.1097 |
0.6514 |
|
1.7035 |
0.0901 |
ROA09 |
0.0116 |
0.0069 |
0.1179 |
1.6852 |
0.0935 |
lnTA09 |
0.3353 |
0.1976 |
0.1712 |
1.6966 |
0.0914 |
lnSales09 |
0.0783 |
0.1918 |
0.0412 |
0.4084 |
0.6834 |
* Indicates level of significance
* P <5%, **P<1% |
Model 2:
gives the results of using CSRWT as the dependent variable and RoCE09 as the
independent variable with log of total assets and log of sales of the same year
as control variables (R-square = 0.0722, Std. Error = 1.1904). The result of
the multiple regression analysis is given in Table 4 which suggests that the
relationship between CSRWT and ROCE is significant.
Table 4: Model 2 - Regression
coefficients for dependent variable CSRWT
|
Unstandardized Coefficients |
Standardized Coefficients |
t |
Sig. |
|
|
B |
Std. Error |
Beta |
||
(Constant) |
1.0088 |
0.6474 |
|
1.5581 |
0.1208 |
lnTA09 |
0.3817 |
0.1971 |
0.1949 |
1.9366 |
0.0542 |
lnSales09 |
0.0368 |
0.1911 |
0.0193 |
0.1923 |
0.8477 |
RoCE09 |
0.0074 |
0.0029 |
0.1793* |
2.5682 |
0.0110 |
* Indicates level of significance
* P <5%, **P<1% |
Model 3:
gives the results of using CSRWT as the dependent variable and PAT09 as an
independent variable; log of total assets and log of sales of the same year
have been used as control variables (R-square = 0.0670, Std. Error = 1.1937).
The result of multiple regression analysis is given in Table 5 which concludes
that the relationship between CSRWT and PAT09 is significant.
Table
5: Model 3: Regression coefficients for dependent variable CSRWT
|
Unstandardized
Coefficients |
Standardized
Coefficients |
t |
Sig. |
|
|
B |
Std.
Error |
Beta |
||
(Constant) |
2.049 |
0.743 |
|
2.759 |
0.006 |
lnTA09 |
0.133 |
0.211 |
0.068 |
0.631 |
0.529 |
lnSales09 |
0.072 |
0.190 |
0.038 |
0.378 |
0.706 |
PAT09 |
1.190E-05 |
0.000 |
0.193* |
2.343 |
0.020 |
*
Indicates level of significance * P <5%, **P<1% |
To test H2, ROA, ROCE and PAT were used as the dependent
variables and CSRWT as the independent variable, with the same measures of size
employed as control variables for the same year. Again, there is a one-year lag
between the disclosure of CSR (FY-10) and the measures of financial performance
(FY-11). Models 4-6 provide regression results for ROA, ROCE and PAT as
dependent variables and CSR disclosure as independent variable and are found to
be statistically significant. Results accept H2, which states that improved CSR
disclosure leads to better financial performance.
Model 4:
presents the regression result using ROA11 as the dependent variable, CSRWT as
the independent variable with Log of Sales and Log of total assets of previous
years as the control variables (R-square = 0.0824, Std. Error = 7.7527). The
result of multiple regression analysis is given in Table 6 which concludes that
the relationship between ROA11 and CSRWT is significant.
Table
6: Model 4: Regression coefficients for dependent variable ROA11
|
Unstandardized
Coefficients |
Standardized
Coefficients |
t |
Sig. |
|
|
B |
Std.
Error |
Beta |
||
(Constant) |
8.918 |
4.409 |
|
2.023 |
0.044 |
CSRWT |
1.401 |
0.460 |
0.215** |
3.044 |
0.003 |
lnSales10 |
3.405 |
1.486 |
0.251* |
2.292 |
0.023 |
lnTA10 |
-4.374 |
1.418 |
-0.340** |
-3.085 |
0.002 |
*
Indicates level of significance * P <5%, **P<1% |
Model 5:
gives the results when RoCE11 is used as the dependent variable and CSRWT as
the independent variable with Log of Sales and Log of total assets of previous
years as control variables (R-square = 0.1159, Std. Error = 21.4215). The
result of multiple regression analysis is given in Table 7 which concludes that
the relationship between RoCE11 and CSRWT is present and significant.
Table
7: Model 5: Regression coefficients for dependent variable RoCE11
|
Unstandardized
Coefficients |
Standardized
Coefficients |
t |
Sig. |
|
|
B |
Std.
Error |
Beta |
||
(Constant) |
21.011 |
12.181 |
|
1.725 |
0.086 |
CSRWT |
4.492 |
1.272 |
0.244** |
3.532 |
0.001 |
lnSales10 |
12.567 |
4.105 |
0.330** |
3.061 |
0.003 |
lnTA10 |
-14.920 |
3.918 |
-0.412** |
-3.808 |
0.000 |
*
Indicates level of significance * P <5%, **P<1% |
Model 6:
presents the regression result using PAT11 as the dependent variable and CSRWT
as the independent variable with Log of Sales and Log of total assets of
previous years as control variables (R-square = 0.3843, Std. Error = 18750.81).
The result of the multiple regression analysis is given in Table 8, which suggests
that the relationship between PAT11 and CSRWT is present and significant.
Table 8: Model 6: Regression
coefficients for dependent variable PAT11
Unstandardized Coefficients |
Standardized Coefficients |
t |
Sig. |
||
B |
Std. Error |
Beta |
|||
(Constant) |
-1,03,570.2881 |
10,662.4935 |
-9.7135 |
0.0000 |
|
CSRWT |
2,892.7981 |
1,113.3193 |
0.1501* |
2.5984 |
0.0101 |
lnSales10 |
5,756.5682 |
3,593.5380 |
0.1440 |
1.6019 |
0.1108 |
lnTA10 |
17,235.6246 |
3,429.3787 |
0.4537** |
5.0259 |
0.0000 |
* Indicates level of significance * P <5%, **P<1% |
7. RESULTS AND DISCUSSION
With the course of research, it is
implicit that while the mainstreaming of CSR as a core business issue has been
recent, it has been studied and researched for over 50 years. Its evolution has
been transformational as CSR has grown from a marginalized notion of
philanthropy into a multifaceted concept, which is pivotal for making business
decisions (COCHRAN, 2007).
CSR started as philanthropy in
India, matured as Industrialists and private sector began their active
involvement in the socio-economic development of the country, and gained
mainstream attention today as businesses abandoned their traditional engagement
with CSR and integrated it with a sustainable business strategy.
In India, CSR has progressed in the
form of four models with the help of visionaries- Ethical (M.K. Gandhi),
Statist (J.L. Nehru), Liberal (Milton Friedman) and Stakeholder (R.E. Freeman).
The highlight in this course of CSR evolution has been incremental, starting
from philanthropy to becoming mandatory. CSR has sustained the attention with
business and other stakeholders as it gradually surfaced as a significant
business dimension, starting from its establishment to being operational.
CSR practices in India are unique as
large business groups commit to nation building due to family tradition (BALASUBRAMANIAN
et al., 2005; SAGAR; SINGLA, 2004). A remarkable example is the Tata Group,
which established the Tata Endowment Fund (1892) for promoting talented youth
for higher studies abroad. Till 2013, CSR in India was not backed by any
legislation and, thus, there was a lack of standardized disclosure on CSR initiatives.
This situation was aggravated due to
the absence of any formal corporate reputation ratings such as Fortune,
Moskowitz, Kinder Lydenberg Domini (KLD), etc., which is recognized
internationally. The only platform in India, which provides rating to companies
on their CSR performance is Karmayog (Karmayog, 2007), but the acceptability or
usage of this platform by companies themselves or by various stakeholders has
not been established.
In India, the guidelines for
voluntary reporting on CSR are the CSR Voluntary Guidelines (2009,d 2010) by
the MCA and the Guidelines on CSR for Central Public Sector Enterprises (2010,
2012). In 2014, India became the first country in the world to mandate CSR
spending (2% of net profits) through Schedule VII of Companies Act, 2013 and
CSR Rules, 2014 (KANSAL
et al., 2014).
In addition, the mandate recommended
formation of a board-level CSR committee, which would guides, steers, and
monitor the designing policies, guidelines for CSR effectiveness measures, and
mobilise resources for the marginalised and vulnerable communities through
various CSR initiatives.
The study began with introducing CSR
and elaborated on the concept of CSR, evolution of its disclosure and detailed
the propositions made by studies (negative, positive, neural) regarding CSR
disclosure and financial performance in a business scenario. It scanned from a
theoretical perspective, the different arguments made for and against a
positive relationship between CSR disclosure and financial performance concurrent
or subsequent to the disclosure.
Two hypotheses were proposed and
were addressed with six empirical models. The first hypothesis was based on the
Slack resource theory while the second was based on the Good management theory.
This chapter examined the relationship between CSR disclosure and financial
performance of 214 companies by using data from the years 2008-2010 and
analyzed their financial and CSR disclosure data.
GRI social aspects were used as CSR
disclosure variables and PAT, ROCE and ROA as variables for financial
performance. The study moved beyond the limits of connecting CSR and financial
performance and went on to evaluate the direction of causation between the two.
In order to test the first
hypothesis, regression analysis was employed. CSR disclosure was used as the
dependent variable. Financial performance (profitability), indicated by ROCE,
ROA and PAT, were used as the independent variables. Natural log of assets and
natural log of sales were used as the control variables for size. In the second
hypothesis, ROCE, ROA and PAT were used as dependent variables. CSR disclosure
was used as the independent variable. Control variables used in the first
hypothesis were retained.
The first hypothesis, which states
that “better financial performance results in improved CSR”, was accepted and
positive relationship was found between indicators of financial performance and
CSR disclosure. The second hypothesis, which states that “improved CSR leads to
better financial performance,” was also accepted.
The six models used for the study
exhibited a trend towards a positive relationship (between CSR disclosure and
financial performance and vise versa). Moreover, the findings indicate that
variables like size and industry sector are insignificant when explaining the
aforementioned relationship.
A conclusion can be drawn based on
the empirical results of this study that CSR disclosures were made by sample
companies in the pre-mandated phase as it positively impacted the financial
performance of the company. The current study is capable of supporting the
opinion that such a relationship exists and has made an attempt to overcome
some limitations of previous studies.
The research used an exhaustive sample
of top Indian companies to ascertain the intent of CSR disclosure practices
within companies, even when it was not mandated. The results suggest that there
is a positive relation between the CSR disclosure practices and financial
performance of the company, thereby justifying the intent of CSR disclosures.
Thus, it addresses the requirement of an inclusive study in the Indian context
that elucidates the determinants of CSR disclosure.
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