Corporate Social Responsibility (CSR) and Firm Performance
Yuxin Liang & Alexander Fleiss
Corporate Social Responsibility (CSR) became a buzzword in contemporary business, yet its roots extend far deeper than many realize. The genesis of CSR traces back to the early 20th century. Although the practice and conceptualization evolved significantly over the decades.
Moreover, this introductory exploration will delve into the background and evolution of CSR as we set the stage for an in-depth analysis of its influence on company performance, with special emphasis on sustainable competitive advantage, reputation, and customer satisfaction.
Moreover, CSR’s early inklings find theselves rooted in the philanthropic endeavors of wealthy industrialists in the late 19th and early 20th centuries. As a result of tycoons such as Andrew Carnegie believed in the ethical obligation of the wealthy to redistribute their fortune for public welfare. However, these acts were largely personal and detached from their business enterprises.
The post-World War II era witnessed an amplified social awareness and heightened expectations of businesses playing a role beyond just profit-making. This was the era when CSR began to crystallize as a defined concept, albeit a controversial one. The 1960s and 1970s became marked by social upheavals.
In addition, civil rights movements, and increased environmental consciousness.
Against this backdrop, companies began to realize that their responsibilities extended to environmental stewardship, fair labor practices, and community development.
However, it was not until the 1980s and 1990s that CSR took a more structured form. The rise of globalization and the emergence of multinational corporations led to the proliferation of international standards and guidelines, such as the UN Global Compact and ISO 26000. These aimed to create a unified framework for businesses to address social, environmental, and ethical challenges.
At its core, CSR revolves around the integration of social and environmental concerns into business operations. It encompasses a wide range of activities, from community investment and philanthropy to ethical supply chain management and eco-friendly initiatives. Moving into the 21st century, the lens through which we view CSR became further refined. It’s no longer just about ‘doing good’; it’s about ‘doing well by doing good.’ This subtle shift underscores the growing recognition that socially responsible practices can align with, and even bolster, business objectives.
This brings us to the crux of our research exploration:
The intricate relationship between CSR and company performance!
Several moderating factors serve as a bridge between these two domains. Firstly, sustainable competitive advantage achieved when companies utilize CSR. Not just as a peripheral activity but as a core strategy that differentiates them from competitors. For instance, firms that invest in green technologies or sustainable supply chains often find themselves ahead of regulatory curves, insulating them from potential future shocks and endearing them to a growing environmentally-conscious consumer base.
Reputation, too, closely tethered to CSR. In an era where information became ubiquitous. Firms with unethical practices find themselves quickly spotlighted and penalized. Conversely, companies known for their CSR initiatives are more likely to attract and retain customers, investors, and even top-tier employees.
Lastly, customer satisfaction has increasingly become intertwined with CSR perceptions. Modern consumers, especially millennials and Gen Z, often make purchasing decisions based on a brand’s ethical standing and environmental footprint. They’re willing to pay premiums for products that align with their values. Hence, CSR becomes a vital tool for companies to foster customer loyalty and drive satisfaction.
In conclusion, while CSR began as a fringe concept mostly associated with philanthropy, it has evolved into a central business strategy. Its nexus with sustainable competitive advantage, reputation, and customer satisfaction positions it as a pivotal factor influencing company performance. As we transition to the subsequent sections of our research, this interplay will be dissected in greater detail, shedding light on the multifaceted role of CSR in the modern corporate landscape.
Corporate Social Responsibility (CSR) has been a subject of extensive research for years, yet findings remain inconsistent and sometimes misleading. While some studies find a positive correlation between CSR and a company’s performance, others find either a negative or no correlation. There are suggestions that the methodologies used in many studies may have overlooked significant intervening variables, leading to potentially biased results. Critics argue that the relationship between CSR and company performance is more intricate than earlier research suggests. Consequently, there are calls for more nuanced research that considers intervening variables.
This study seeks to further investigate the relationship between CSR and company performance, emphasizing the role of sustainable competitive advantage, reputation, and customer satisfaction as moderating factors.
- Database Sources: While many studies used sources like company annual reports or Fortune’s Most Admired Companies, this study relies on an acquired survey specifically focusing on developing countries.
- Survey Development: The initial survey was crafted based on an extensive literature review, then vetted by 10 executives (not part of the sample) for content validity. Refinements made based on their feedback.
- Survey Structure: Efforts made to avoid biases: no preferred responses, concise instrument, clear wording, and separation of independent and dependent variables in the survey.
- Sampling: Only firms from the industrial manufacturing and consumer products sectors were considered, given their significant environmental and societal impact. 1250 firms listed, targeting top managers for responses due to their direct involvement in organizational affairs.
- Response Rate: The study achieved a 16.4% response rate, which, although appearing low, aligns with similar studies on CSR where top managers are surveyed. The response rate also might reflect the nascent stage of CSR awareness in developing countries.
- Valid Responses: After filtering, 205 responses deemed valid for analysis. A comparison between early and late respondents showed no significant differences, indicating non-response bias was not an issue.
- Firm Demographics: 57.7% of responses were from industrial manufacturing, and 42.3% from consumer products. The average firm age was 28 years, and the mean employee count was 176. Most had an annual sales revenue between $100,000 and $1,000,000.
- CSR Measurement: CSR measurement was based on Carroll’s (1979) dimensions (legal, economic, discretionary, ethical). A 29-item, 5-point Likert scale was used.
- Corporate Reputation Measurement: The study used a 5-item scale, focusing on the general perception of a firm’s reputation.
- Customer Satisfaction Measurement: The study used a 7-item scale focusing on product/service quality, value for price, and meeting customer expectations.
- Competitive Advantage Measurement: 5 main dimensions were used, including product/service quality, corporate image, market position, differentiation, and growth.
- Firm Performance: Measured through the Balanced Scorecard (BSC) methodology, focusing on financial performance. Respondents compared their firms to competitors using a 5-point Likert scale.
- Factors Considered: Firm’s size, age, and revenue were considered as control variables given differing opinions about their influence on the CSR-firm performance relationship.
- Measurement: Single questions addressed each control variable: firm age (years in business), firm size (number of full-time employees), and sales revenue.
Analysis and review
According to the above statistics applying linear regression to the datasets, we can observe several relationships between different factors, as denoted by the arrows and beta values. The relationships and their respective unstandardized beta values, standard errors (S.E.), and critical ratios (CR.) are as follows:
- Customer satisfaction and CSR (Corporate Social Responsibility): A positive relationship with a beta value of 0.678.
- Reputation and customer satisfaction: A positive relationship with a beta value of 0.382.
- Reputation and CSR: A positive relationship with a beta value of 0.411.
- Competitive advantage and reputation: A positive relationship with a beta value of 0.548.
- Competitive advantage and CSR: A positive relationship with a beta value of 0.457.
- Firm performance and reputation: A strong positive relationship with a beta value of 0.709.
- Firm performance and competitive advantage: A strong positive relationship with a beta value of 0.822.
The asterisks indicate statistical significance, with a significance level of p-value < 0.001, which indicates the corresponding independent variable has an association with the dependent variable.
From the above relationships, we can deduce that:
CSR is a significant factor influencing customer satisfaction, reputation, and competitive advantage. Among those three, reputation and competitive advantages turn out to be the influencers of corporate financial performance. And customer satisfaction could boost reputation, which has a positive relationship with firm performance.
Many studies have explored the direct relationship between Corporate Social Responsibility (CSR) and firm performance, with some finding positive correlations and others finding negative or neutral ones. Despite such mixed results, the exact manner in which CSR relates to firm performance remained unclear.
This study aimed to address the existing research gap by introducing three mediating variables: customer satisfaction, reputation, and competitive advantage. The findings indicate that engaging in CSR leads to enhanced customer satisfaction, which in turn positively affects a company’s reputation and competitive advantage. This chain of effects indirectly boosts firm performance.
In conclusion, the study only analyzes three mediating variables:
- customer satisfaction
- competitive advantage
Furthermore, we have already discovered their indirect relationships. Therefore, we can boldly hypothesize that there are many other mediating variables between CSR (Corporate Social Responsibility) and firm performance. Lastly, by continuously adding and refining mediating variables, we can uncover more relationships between these mediating variables and firm performance. Then, we can apply multiple linear regression to those variables. Thus, providing us a sense of how firm performance relates to CSR.