An empirical study of corporate social responsibilty and profitability.

Goyal, Swati ; Saini, Amarjit ; Singh, Inderpal 等

Introduction

[ILLUSTRATION OMITTED]

Spirituality and Corporate Social Responsibility (CSR) have had a deep rooted connection in India. In this age of global competition, corporates are beginning to realize the stake that it has as a part of the society. There is a growing realization that they should contribute to social activities globally with a desire to improve the immediate environment where they work and many companies are taking keen interest in such activities (Shinde, 2005). This has given rise to the concept of Corporate Social Responsibility (CSR).

The rise of the concept of corporate responsibility in its various forms and guises such as business ethics, corporate social responsibility, corporate citizenship, sustainability or the stakeholder view of the firm, seems inseparable from the rise of supply-side economics and theories of competitiveness. At first, corporate responsibility may have been conceived and perceived as a critical outsider agenda, but today it is increasingly understood as integral to the efficient, effective and sustainable functioning of markets and businesses. Interestingly, this is without even considering the explicit ethical dimension captured by the "Triple e- Model" of efficiency, effectiveness and ethics (Gasparski and Ryan, 1996).

According to Infosys founder, Narayan Murthy, "Social Responsibility is to create maximum shareholders value working under the circumstances, where it is fair to all its stakeholders, workers, consumers, the community, government and the environment". In India companies are playing an important and influential role as far social projects in the field of health and education are concerned. Making profits on a sustained basis is a necessary condition for any company to survive for long. In today's globalized and increasingly competitive world, sustained profitability is not possible unless all direct stake holders recognize the changes taking place and work towards ensuring sustained profitability. They have also to create a positive brand image which attracts customers to the products and services offered by the company. Following all laws and caring for the environment makes good business sense, and helps in image building. These matters have to be the core of the CSR of a company. Foreign companies are working in this direction and developed countries setting milestones for the developing countries, where the companies must accept obligation to be socially responsible and to wish for the longer benefits of the company.

Commission of the European Communities (2001) stated that being socially responsible means not only fulfilling legal expectations, but also going beyond compliance and investing 'more' into human capital, the environment and the relation with stakeholders. CSR is not a philanthropic activity where a company gives without expecting a return or a benefit. In CSR, it is about ethical investing. Wood (1991) put that CSR seek to limit the negative impact of business on society, while optimizing its social performance.

CSR is generally understood to be the way a company achieves a balance or integration of economic, environmental and social imperatives while at the same time addressing shareholder and stakeholder expectations. CSR is generally accepted as applying to firms wherever they operate in the domestic and global economy. The way businesses engage/involve the shareholders, employees, customers, suppliers, governments, non-governmental organizations, international organizations, and other stakeholders is usually a key feature of the concept. Corporations are motivated to involve stakeholders in their decision-making and to address societal challenges because today's stakeholders are increasingly aware of the importance and impact of corporate decisions upon society and the environment.

Previous Research/Review of Literature

Several research studies have examined corporate social responsibility (CSR) and its effects on business performance, but their results vary widely. This may stem from flawed analyses by regressing financial performance on corporate social performance, and/or perhaps from several inadequately controlled variables. Previous studies did not recognize investment in research and development as a critical variable because there is considerable empirical evidence to indicate that it has a strong positive impact on profitability. This misidentification creates biased estimates of the financial impact on corporate social responsibility.

McGuire, Sundgren and Schneeweis (1988) found that prior year's stock returns and accounting-based performance measures are related to current measures of CSR, but that a past record of good social performance does not affect the current financial performance of a firm. Waddock and Graves (1997) suggested that positive stakeholder relationships can reduce the likelihood of difficulty when dealing with groups such as employees, customers, and the community.

In addition, good social performance and good managerial practice may be related, so this in turn may lead to strong financial performance. Hillman and Keim (2001) found that increased CSR leads to enhanced financial performance and vice versa. Verschoor and Murphy (2002), used the top 100 "Best Corporate Citizens" as reported by Business Ethics magazine, found that firms with strong social values and practices exhibit superior financial performance. Hillman and Keim (2001) suggested that misspecification arises from using broad measures of CSR in the models, and that a more focused approach is warranted. They concluded that stakeholder management leads to improved shareholder value but that social issue participation does not. Corporate social responsibility has also attracted the attention of mutual fund investors, and a number of funds using CSR as a screening device for investment selection. Orlitzky et al (2003), integrated 30 years of research from 52 previous studies and used meta analytical techniques to support the proposition that corporate social performance and corporate financial performance are positively correlated and statistically significant. Interestingly, the meta analysis revealed a higher correlation between financial performance and a company's management of its social impact than between financial performance and a company's management of its environmental performance. Studies by investment analysts and fund managers on the performance of socially responsible investment fund products and sustainability indices are also regularly reported in order to attract investors and encourage participation. A number of narrative reviews and theories (Aupperle e.t al. 1985; Griffin and Mahon 1997; Husted 2000; McWilliams and Siegel 2001; Pava and Krausz 1995; Ullmann 1985; Wartick and Cochran 1985; Wood 1991a, 1991b; Wood and Jones 1995) have proposed conceptual explanations for the existence (or lack thereof) of a causal relationship between CSP and CFP, but failed to provide clear cut answers. Previous reviews of this area have suggested that factors, such as stakeholder mismatching (Wood and Jones 1995), the general neglect of contingency factors (Ullmann 1985), and measurement errors (Waddock and Graves 1997) explained inconsistent findings. Other authors, failing to see important differences between theory and operational context, are even more pessimistic and call for a moratorium of CSP-CFP research (Margolis and Walsh 2001; Rowley and Berman 2000). In their subsequent work, Margolis and Walsh (2003) had also mapped studies investigating the CSP-CFP relation using wider span of period (1972-2002) and 127 published studies for that period. Of the studies, 70 studies (55 percent) reported positive direction, while only 7 studies showed negative direction, 28 studies supported inconclusive result and 24 studied found in both directions. Gray (2006), in his review of studies investigating the relationship between CSP and CFP, had argued to lead to the inconclusive result. This argument is also supported by Murray et. el (2006) in their cross section data analysis. However, using the longitudinal data analysis, they found different result. In the most recent study, Hill et. al. (2007) investigated the effect of corporate social responsibility on financial performance in terms of market-based measure and provided the positive result in the long-term horizon

Recent investigation undertaken by Baron et al. (2009) demonstrates that these questions remain unanswered. These authors examined the connection between CSR and CFP combining the variable "Social Pressure" as a moderating factor of this relation. The inclusion of this factor to the study leads to a neutral relation between CSR and CFP. However, when excluding the activity of the variable "Social Pressure" from the model the authors find that the relation is associated to sector, producing a negative relation to industrial corporations, while producing an opposite result for the commerce and service sectors. In Dubai, Rettab et al. (2009) found that CSR affect positively organizational performance meanwhile the results in Taiwan are in the direction of a positive effect in reducing risk of damage to brand evaluations in the long run and in long-term fiscal advantage instead of influence on short-term financial performance.

Objective of the Study

The objectives of this paper are

* To examine the causal relation between corporate social responsibility (CSR) and Corporate Financial Performance (CFP)

* To compare recommended expenditure with actual amount spent on CSR.

* To Study the responsiveness of Indexed and non-indexed companies in terms of social obligations.

Hypothesis

[H.sub.1]: CSE (Corporate Social Expenditure) and CFP (Corporate Financial Performance) are independent from each other.

[H.sub.2]: There is no significant difference between recommended and actual expenditure made by corporations for social programmes.

[H.sub.3]: Non-Index based companies and indexed companies are contributing same amount for CSR Programmes.

Research Design

The study is descriptive in nature and analytical research aiming at answering what is the level of responsiveness of Indian companies in terms of social obligations in comparison with the planned expenditure. An attempt has been made to explore the relation between CSR expenditure and financial performance. The work is of descriptive in nature and attempting to determine, describe, or make a comparative analysis between indexed and non-indexed corporations.

Sample Design

For the financial year 2007-08, top 1000 firms are examined, which are rated by karmyog (A Non- Government Organization) for social programs. Out of which 37 companies found associated with social programs and parted some part of their revenue for society in the financial year under study. Based on theoretical assertions and empirical evidence in the literature a positive relationship has been witnessed between CSR and financial performance. With the help of descriptive and inferential measures, It has found that financial performance does not have much positive impact on CSR. Moving further, categorization has been made on the basis of index based (Nifty) and non-index based companies to compare the level of commitment towards society.

Data Collection

Data used for study is secondary in nature and has been collected from a data -base maintained by Karamyog (an NGO), working for social programs which was established in the year 2004.

Data Anlaysis

Inferential statistics has been used to test the hypothesis. To find the significant difference between planned and actual expenditure Chi-square test has been used at 5 percent level of significance and further t-test is applied to find the level of responsiveness between indexed and non-indexed companies.

Results and Analysis

Indian companies in the year 2007-08, contributed a very small amount for social programmes and plans. There aren't any standard approaches to social responsibility and the model a company is adopting depends largely on the kind of objectives it seeks to achieve. Most of the companies found to expend some of the amount only for the sake of formality. In the year 2007-08 only 37 companies contributed for CSR programmes out of 1000 top Indian corporates and its constitute only 3.7 percent participation by the corporations and it is further important to see the amount spent by them is as per the recommended expenditure or not.

It is being observed under various studies that there is a positive relationship between Corporate Performance and Social expenditure. To validate the same, it has been applied on corporate performance (CFP) i. e, NPAT and Corporate social expenditure (CSE). By applying the Pearson correlation at 0.01 level, the correlation coefficient for the same is 0.974 which rejects the Hypothesis-I. By moving further an attempt has been made to find the dependency level of CSE on its annual profits (NPAT). For this purpose CSE has been taken as dependent variable on CFP as an Independent variable, where regression equation is CSE= a + b (CP). After applying the regression model, the R-square stands at 0.948 and the regression equation for the variables is CSE= 1.119+0.006(CSE) and the regression model is significant at 0.05 level of significance which shows a high dependency of social expenditure on Corporate performance but as far as change in expenditure in CSE to CP is concerned. It is found here that one rupee change in CP leads to .006 paise change in CSE. Indeed, this is a very small amount for social acts.

As far as Expenditure on social projects are concerned only 37 companies out of 1000 top Indian corporate are spending towards the same, which is relatively a very small portion of just 3.7 percent. Recommended expenditure is 0.02 percent of the total sales and it comes to 513.9 crores for 37 companies and they have spent 318.6 Crores for this purpose which is 61 percent of the recommended expenditure. If we exclude one company ONGC from the sample, the percentage stands at 38 percent. Moreover, the spending on Social programmes is very less. Few companies in India are publishing their CSR report, even these all are descriptive in nature and having no specific information as far as social projects of companies are concerned. During the period of 2007-08, only eleven companies spent more than 0.002 percent of its sales. All the information is suggesting a poor response on the part of companies. After applying the Chi-square test the calculated value is 224.71. which is much more than the tabulated value *(48.73) at 5 percent level of significance, which shows there is a significant difference between observed and expected expenditure and here it is concluded that companies are not sincere towards their social programmes and their expenditure level is very low as far as recommended expenditure is concerned, which rejects the null hypothesis H2.

Moving further, 37 companies are subdivided into two groups, one is indexed based and eight companies out of 37 are indexed based companies. The rest 29 companies comes under non-indexed category. The total of actual expenditure in terms of percentage is 1.304082 and the mean for the same is .16301 (Index-based Companies) and on the other hand the total of actual expenditure in terms of percentage is 6.77089 and the mean for the same is 0.23347(Non-Indexed).

Now, comparing the mean of Non Indexed companies 0.23347 with indexed companies .16301 and right tail (.23347>.1 6301) is tested at 95 percent level of significance and the t=2.90, which is more than Tabulated Value=1.64. which directs that expenditure made by Non-indexed companies are more than index based companies. Hence, leads to rejection on hypothesis H3.

Discussion of Findings

It is observed that out of 1000 top Indian companies only 37 companies are spending amount on social projects. Undoubtedly, this is a relatively a very small participation by Indian corporate in this regard. The result of present study reveals a positive relationship between CP and CSE. Where, Corporate Social Expenditure depends upon corporate financial performance. But, there is a significant difference between recommended expenditure for social programmes and actual spending made by corporates. It has been witnessed that majority contributed less than the recommended budget. Out of the sample of 37 companies 26 companies spent amount on social projects less than recommended one and 11 companies spent more than the recommended budget. The actual spending of 37 companies constitutes 38 percent of the recommended expenditure (after excluding ONGC). Further, when a comparative analysis is made between Indexed based companies (Nifty50) and non-indexed companies. It is found that Indexed based companies are only eight in number out of the sample of 37 companies and as far as CSR expenditure is concerned, non-indexed companies are contributing more than indexed companies.

Conclusion

After considering all the issues related with corporate social responsibility and analyzing the data it is being concluded that a company entering into a new market, for instance, perceiving CSR as an image-building strategy in its bid to minimize the risk associated with investing in a geography or product line, and to capture a big slice of the market. Often, it includes its CSR in its advertising and aligns it to its social marketing activities. On the same tune Indian companies are using descriptive measure for CSR reporting. No-doubt, Indian companies are aware about Corporate Social Responsibility, but corporations are irresponsible in this regard. This is evident from the analysis and we can't deny the least concern over here. No doubt, our accounting system is not encouraging the practices to adopt new and novel measure for corporate social disclosures. Our corporations are adopting descriptive measure for this purpose and even few public companies are following these practices. Here, need is to develop and as well as to adopt recent global measures. If companies are not contributing reasonable amount for this purpose, Government and regulatory authorities to take some concrete steps for the betterment of society. As far as incorporation of the concept in Indian context is concerned, we can't ignore Corporate social projects undertaken by Indian corporate like TATA, Reliance, Birla, BHEL, SAIL, NTPC and ONGC. But, we are following the descriptive measures for reporting and just specifying in the report, the area where company is having its projects. Above all contribution by Indian corporates towards social programs are not appreciable. Because, no specific annual spending, budgets and details of social projects are disclosed by companies. It is matter of debate, whether corporate are sincere for the social work or just doing the same for the sake of formality.

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Swati Goyal

Assistant Professor,

Continental Group of Institutes,

Punjab.

Amarjit Saini

Assistant professor,

Lovely Professional University,

Jalandhar.

Inderpal Singh

Assistant Professor, KCL Institute of

Management of Technology,

Jalandhar.