This chapter presents the study background, the purposes, the questions that frame the insight for the study and the research significance. The definitions of key terms are included in order to provide to the concerned readers a comprehensive focus of this entire research.
Background of the Study
Corporate social responsibility (CSR) has received a great deal of attention in the past few decades in the business field. Nevertheless, the issue of the social responsibilities of business is not a new topic for academic research. Among the first scholars to perceived this issue was Adam Smith, who despite being represented as one of the main advocates of self-interest in the economic literature, he developed a sound rational for the need of social responsibility by business and honesty in the market place in many of his books. In his Lectures on Jurisprudence (Smith, 1760), he argued that the goal of the salesman is not to obtain the maximum benefit in each deal, but rather to maximize the benefit deriving from the total deals. Not being honest may cause the number of deals to decrease therefore diminishing the salesman’s total benefit. In the Theory of Moral Sentiments (1759), later on Smith defends honesty in market place and need of “social responsibility.”
It took more than 200 years later on when researchers in the field of management studies began to tackle the issue of a business’s social responsibilities in the 1950s, with the first definition of CSR generally attributed to Howard Bowen and his work Social responsibilities of the businessman (1953). In the following years, a number of scholars submitted different definitions of CSR but a widely accepted definition is still missing. The main reason for this dilemma is that the concept of CSR is very broad and inclusive and it is constantly evolving concept. For instance, over the time, the main focus of firms investing in socially responsible activities shifted from the improvement of the working conditions of employees to the investment on environmental and social issues. Johnson (1971) writes: “a socially responsible firm is one whose managerial staff balances a multiplicity of interests.
Instead of striving only for larger profits for its stockholders, a responsible enterprise also take into account employees, suppliers, dealers, local communities, and the nation” (p.50).
Jones argues: “Corporate social responsibility is the notion that corporations have an obligation to constituent groups in society other than stockholders and beyond that prescribed by law and union contract” (Jones, 1980, p. 59). Finally, Hopkins (2003) writes that “CSR is concerned with treating the stakeholders of the firm ethically or in a responsible manner.
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‘Ethically or responsible’ means treating stakeholders in a manner deemed acceptable in civilized societies” (p.1).
In a research paper survey conducted by Deutsche Bank Climate Change Advisers (2012), all of the surveyed academic studies agree that companies with high ratings for CSR and environmental, social and governance factors have a lower cost of capital in terms of debt (loans and bonds) and equity. This shows that the market recognizes that these companies are lower risk than other companies and rewards them accordingly. This study also acclaim a correlation between financial performance of companies and what it perceives as advantageous environmental, social and governance strategies, at least over the medium (3-5 years) to long term (5-10 years). 89% of the examined studies shows that companies with high ratings for environmental, social and governance factors exhibit market-based outperformance, while 85% of the studies show these types of company’s exhibit accounting-based outperformance. Recent studies reported that 70% of international CEO’s believed CSR to be even vital to firm level profitability (Vogel, 2005).
CSR as concept in the eyes of researchers is not a new topic, but with new business models and extreme competitiveness it found increased popularity among firms around the world (KPMG, 2011; Porter, 2008; Reid & Toffel, 2009). Companies found long-term interest to be socially responsible because it provides competitive advantages (KPMG, 2011).
For example, by enhancing the societal environment in which firms exist, they contribute to the wealth development of that society and in the long-term, this increases their market size in the form of new customers (Carroll & Shabana, 2010; Drucker, 1984). Companies are tackling CSR, because it can increase recognition and improve their brand, their reputation and their financial performance (KPMG, 2011; Melo & Garrido-Morgado, 2012). In overall CSR is empirically supported to provide a direct and indirect impact on firm performance.
Direct impact can appear in the form of positive financial performance, while indirect impact can be enhanced brand image or market reputation (Drucker, 1984; Harrison, Bosse, &
Phillips, 2010; Moon & deLeon, 2007). CSR in academics is part of the strategic management field (Drucker, 1984; Mintzberg, 1983; Porter, 2008). Strategic management supports the alignment of firm level policies and strategic priorities thus are interrelated to CSR. So the strategic management concept entail a systematic analysis of internal and external factors associated with customers and the organization itself, it supports the design of optimal management practices. CSR research is not only limited to strategic management, but is using a specific theory perspective to assess firm level outcomes (performance). CSR
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related research could also address strategic intent and firm level choices regarding the enablement or operationalization of CSR.
The current CSR landscape is complex and multi-faceted. There are now literally hundreds of private and open CSR initiatives. All of them share same goal and that is desire to help and enhance business organizations so they can make improvement of social and environmental conditions in the society. The United Nations Global Compact (UNGC) has perhaps done the most to promote CSR and sustainability topic in recent years. UNGC is now the largest CSR initiative in the world with 8,000 corporate signatories and 4,000 other stakeholders from 145 countries (UN, 2013). UNGC have either been developed or formally agreed by governments and received high-level recognition by governments at an international level.
This research intends to examine the understanding of CSR for practitioners and scholars by investigating the topic from several perspectives. This research also responds to researchers call and focus on several aspects of the CSR and its effect (the customer, product). These claims are some of the reasons why researcher has chosen to address CSR in this thesis work.
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Purposes of the Study
CSR has been one of the most used terminologies in business texts over the last decades. The importance of behaving in a socially responsible manner has increased over the years, but the reality has always been a matter of debate. Many of researchers tried to find an answer whether CSR have impact on firm’s performance and this is going on a regular basis since the 1960s.
With the assumptions mentioned above, the purposes of this research are formulated as follows:
1. To analyze and examine the effect between UNGC and CSR.
2. To examine and analyze the effect between CSR and business performance.
3. To build an integrate model to measure the effect of UNGC and CSR on business performance (by using SEM with Smart PLS software).
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Questions of the Study
Deriving from the research purposes, the research questions are framed as follows:
1. Does UNGC (with variables anti-corruption, environment, labour and human rights) have effect on CSR (with variables vision, values and strategy, management systems, organization and processes, products and services, resource and environmental management, stakeholder management, communication and reporting)?
2. Does CSR (with variables vision, values and strategy, management systems, organization and processes, products and services, resource and environmental management, stakeholder management, communication and reporting) have effect on business performance (with variables (performance from financial perspective, performance from customer perspective, performance from internal business process perspective and performance from learning and growth perspective)?
3. What are the path parameter of UNGC on CSR and CSR on business performance and the total effect of this integrated model?
Significance of the Study
Research in the CSR field is important for two main reasons. CSR has strategic management implications and can influence how society, stakeholders and firms interact (Porter & Kramer, 2006). It also has the potential to improve overall firm performance based on a number of direct and indirect benefits (KPMG, 2011; Orlitzky, Schmidt, & Rynes, 2003).
Second, it is less researched how firms, both large and small, should properly tackle the topic of CSR. This is important, as CSR itself is becoming an important part of strategic management (Ziek, 2009). There are several reasons for this. The timing of CSR strategy can have a profound impact on results, that is, if a firm is rewarded or punished by the market for its behavior (Ramchander, Schwebach, & Staking, 2012). CSR needs to be communicated both internally and externally with clear communication goals (objectives). It also need to be communicated with consideration to new internet based communication tools in form of social networks such as Twitter or Facebook (KPMG, 2011).
Researchers in last 50 years (Barnett & Salomon, 2006; McWilliams & Siegel, 2001) tried to explain the relationship between a firms CSR and corporate financial performance in numerous works, these studies in general have lack certain factors. Most of the empirical studies that were conducted did not care to control for intangible factors (e.g. R&D intensity)
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that may influence a firm’s financial performance. In overall CSR is empirically supported to provide a direct and indirect impact on firm performance. Direct impact can appear in the form of positive financial performance, while indirect impact can be enhanced brand image or market reputation (Peter F Drucker, 1984; Harrison et al., 2010; Moon & DeLeon, 2007;
S. A. Waddock & Graves, 1997; Wood, 2010). Stakeholders now in modern society are increasing level of awareness since there is increasing evidence of the negative impact of businesses on environment and society. These activities are mostly confined within the spheres of firms from the developed nations, but this paradigm also changes with globalization and higher anticipation from society.
Majority of recent studies came out with propositions or models but did not make an attempt to develop testable hypotheses to find empirical support for the arguments put forward by the authors. This study aim to improve these shortcomings, also this research present a testable hypotheses and we provide a methodological framework that will use recent self-assessment data on corporate social responsibility and will try to pinpoint the role corporate social responsibility plays on whole firm performance. Research addressing CSR can take several avenues, for instance by using a specific theory perspective, or to assess firm level outcomes (performance). CSR related research could also address strategic intent and firm level choices regarding the enablement or operationalization of CSR. This research addresses some of these avenues and intends to enhance the understanding of CSR for practitioners by investigating the topic from a different perspective.
Based on the stakeholder theory and the institutional theory, the researcher can hypothesize that there is positive relationship exists between socially responsible behavior and firm performance in the company (O’Reilly & Pfeffer, 2000; Waddock & Graves, 1997).
This study assume that despite a significant increase in overall spending and number of activities geared towards socially responsible behavior, studies didn’t prove impact was not significant. An increased level of awareness among the consumers and more self-promotion by the companies who are engaging in socially responsible activities might improve the likelihood of finding a significant impact in future.
CSR remains a vague term that covers many different activities, and as such, needs to be developed (Dahlsrud, 2008; KPMG, 2011; Maak, 2008). This problem is manifested by the definitions “a commitment to improve societal well-being through discretionary business practices and contributions of corporate resources” (Du, Bhattacharya, & Sen, 2010, p. 8) and
“actions that enhance a firm’s competitiveness and reputation” (Hill, Griffiths, & Lim, 2007, p. 18). Studies on management and CSR have further looked at CEO duality, CEO
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compensation and managerial control and less on how CSR is managed operatively (Walls, Berrone, & Phan, 2012).
Another concern is that few studies explore the driving forces behind CSR among customers (Lee, 2008) or inter-organizational dynamics, for example interaction processes and procedures (Simpson, Power, & Samson, 2007). Instead, most CSR studies have been more interested in corporate financial performance. Since almost all of the studies that dealt with the relationship between CSR and firm performance focused on financial aspects, we aimed to find out whether CSR have affected organization performance in more than financial context. This research also aimed to tackle the strategy preposition of CSR for companies.
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Delimitations and Limitations Delimitations
Delimitations of the study are the scope of the investigation in order to make research feasible. With this approach the study is delimited to Taiwan. Second, it is delimited to multinational companies in Taiwan. And lastly, this study will only explore the relationship among variables of UNGC, CSR and business performance.
Limitations
The major limitations are: research is conducted only among the workers working for multinational companies who has established office in Taiwan; research results might not be generalized into other CSR research contexts; research data cover only one amount of time;
and only one CSR measurement, one UNGC measurement and only one business performance measurement. With research scope mainly concerned about maximizing research robustness (based on survey data via questionnaires), this work can accept these limitations.
Definition of Terms
CSR
With the broad terminology in CSR field the researcher should at the first place explain that the distinction between CSR and corporate social performance, where is one of semantics, not one of substance, and that both terms “are often used interchangeably in empirical studies” (DB Climate Change Advisors, 2012, p. 5). CSR and corporate social performance similitude makes their comprehensive analysis a valuable reference for this research. Defining CSR, the authors distinguish between two schools of thought: One approach casts social performance as a multidimensional construct, encompassing a company‘s efforts to fulfill multiple responsibilities – economic, legal, ethical, and discretionary (Aupperle, Carroll, & Hatfield, 1985; Carroll & Shabana, 2010). A second approach casts social performance as a function of how a company treats its stakeholders (Clarkson, 1995). This research encompasses both approaches without distinction.
Even if a common definition of CSR does not exist, it is possible to find at least two common features in the definitions of CSR both provided above and proposed by other
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studies not cited here (Carroll, 1991; Khoury, Rostami, & Turnbull, 1999; McWilliams &
Siegel, 2001). The first feature is that any action or investment by firms, in order to be considered CSR, must be voluntary. This means that firms investing in order to improve the working conditions of employees are not investing in CSR if law requires that improvement to be achieved. The second common feature is the centrality of the concept of stakeholders, defined as “any group or individual who can affect or is affected by the achievement of the organization’s objectives” (Freeman, 1984, p. 46).
Business Performance
In this work the writer is using theoretical definition, where organizational performance depends on their achieved business objectives (Elenkov, 2002).
United Nations Global Compact
In this research the researcher entail the UNGC and their ten universal principles:
Human Rights
Principle 1: Businesses should support and respect the protection of internationally proclaimed human rights; and
Principle 2: make sure that they are not complicit in human rights abuses.
Labour
Principle 3: Businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining;
Principle 4: the elimination of all forms of forced and compulsory labour;
Principle 5: the effective abolition of child labour; and
Principle 6: the elimination of discrimination in respect of employment and occupation.
Environment
Principle 7: Businesses should support a precautionary approach to environmental challenges;
Principle 8: undertake initiatives to promote greater environmental responsibility; and
Principle 9: encourage the development and diffusion of environmentally friendly technologies.
10 Anti-Corruption
Principle 10: Businesses should work against corruption in all its forms, including extortion and bribery.
All the principles were drawn from the Universal Declaration of Human Rights (1948) and the International Labour Organization’s (ILO) Tripartite Declaration of Principles Concerning Multinational Enterprises and Social Policy (1977), which companies are expected to adopt within their own areas of business.
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