Carroll and Buchholtz (2003) (Carroll and Buchholtz, Business & Society: Ethics and Stakeholders Management 2003) defined Corporate Social Responsibility (CSR) as the “economic, legal, ethical and discretionary expectations that society has of organizations at a given point in time.
The awareness and evolution of CSR over the last few years has rapidly increased and the movement can be observed today. Investors and stakeholders today, not only monitoring the bottom line but the company’s contribution towards the society as well. Therefore, the companies are expected to be more responsible in running their business and work towards becoming a socially accountable organisation.
CSR is used as a control mechanism where business ensures its active response with what is required by the law, abide by ethical standards which are based on national or international norms (The Manila Times 2017). It encourages the company to make a positive impact on the environment and stakeholders including consumers, employees, investors, and communities, among others. CSR is an initiative or effort taken by the corporate bodies to give back to society as a token of gratitude, from which they earn and become successful. (Yadav and Jain 2016)
Studies show that majority of consumers concurred the idea of, in tandem of achieving business targets, companies need to contribute to CSR agenda as well and generally will receive positive response from consumers for the charity work done by companies (The Manila Times 2017). Studies were done by Somerville also indicate that consumers loyalty increased and are willing to spend more on retailers that support charity and engaged in CSR activities. Today, more consumers are demanding companies to change their practices, in becoming more transparent and contribute to society and making the world a better place.
(a) Theoretical Perspectives
The classical view on the role of business in society is known as the shareholder’s theory. Milton Friedman proposed that the sole purpose and responsibility of business is to increase profit (Friedman 1970). He stated that the company’s assets are to be used solely for the benefit of shareholders and not for social purposes. The statement is based on the argument that the management is hired as agent of the principal (shareholders) to manage and run the company for their benefit, as the shareholder might have some hindrance of running the business themselves such as expertise or time, and therefore the management is legally and morally obligated to serve the shareholders’ interest and have moral responsibility to act always in the long-run best interest of the shareholders. Over time, there have been cases where some companies that focus solely on making profits, slowly deteriorate and involves in corporate scandals and corporate crimes.
In contrast, the stakeholder theory is based on the sentiment that beyond shareholders, there are other parties that are affected by the action taken by the companies, either benefits from or are harmed by, whose rights are violated and respected by corporate action. Dr. F. Edward Freeman in his book, Strategic Management: A Stakeholder Approach, suggested that shareholders are merely one of many stakeholders in a company. In this ecosystem, it involves anyone invested and involved in or affected by, the company: employees, environment, vendors, government and more. Freeman’s theory proposed that the company’s achievements lie in satisfying all its stakeholders, as well as those who might profit from its stock (Freeman 2010).
As resources such as time, money and material available to companies are limited and scarce, companies have to take into consideration that being socially or environmentally responsible will definitely have some impact to the costs in the organization, which in turn reduce the level of company profitability (Iqbal, et al. 2012). Nonetheless, companies still embodied CSR as generally the CSR activities will somewhat contribute and increase awareness via corporate public relations, media campaigns and reputation management. Therefore, companies face challenges and in dilemma as to fulfill its shareholder’s expectation vis-à-vis corporate responsibility with their limited resources.
As illustrated in the case of Dodge v. Ford Motor Co. in 1919 (Case Brief 2018), the Supreme Court of Michigan held that a company is run in the interests of its shareholders rather than stakeholders. In this case, Mr. Ford had discontinued the payment of an annual special dividend to the shareholders of Ford Motors as well as reduced the costs of Ford cars. The gist of the case is that Mr. Ford claimed that the company needed the capital for expansion and he did not wish the cost of growth to be borne by customers in the form of more expensive cars. However, the court ordered Mr. Ford to pay to its shareholders, the special dividends and noted that his altruistic motives were irrelevant.
Based on the precedent case as illustrated above, it is clear that managers have a legal duty to their shareholders to ensure profit maximization, however not the full extent of their duties. In order to ensure profit maximization to its shareholder, the companies need to be sustainable for a long period of time. Therefore, managers also have a duty to the society where they operate. Even though the force of law may not back this responsibility, it is crucial that a company does not only focus on profit making to the detriment of society. This means that the companies need to satisfy the needs of its customers, their employees, the Government and society at large and CSR aims to promote socially beneficial activities that would ensure the sustainability of the company.
On that account, it is vital to determine is there any relationship, whether it is positive, negative or neutral between CSR and Corporate Financial Performance (CFP) particularly in Malaysia as a developing country. In recent time, some corporate bodies have generally adopted CSR practices; the extent of CSR participation towards community well-being is still debatable. The main problem faced in Malaysia is lack of transparency and commitment towards CSR.
(b) Dependent Variable and Independent Variables
This quantitative study involved analyzing the details provided in the Annual Reports and sustainability report for companies listed in Bursa Malaysia specifically the REITs companies. Comparisons of the financial performance prior implementation of CSR and after the adoption of CSR will also be studied to determine whether there is a positive, negative or neutral relationship.
The independent variable (IV) in this study is CSR and the dependent variable (DV) used is the corporate financial performance (CFP). This study will be using two DVs i.e.
i. ROA or the return on asset, which indicates the amount of net profit, generated which each ringgit invested in assets or how effective the company in converting asset to invest in net income. ROA is calculated as the net profit / total assets.
ii. Tobin’s Q Ratio (Q), which is a neutral indicator that is more sensitive to variations and is calculated as (Equity + Total Debt) / Total Assets.
(c) Hypotheses Development
Many researchers have carried out research on CSR globally over a period of time. Those researches have identified few characteristics in the company that is able to assist in predicting the relation and affects in the disclosure of corporate social responsibility information in the annual report. Stakeholders use these characteristics as tools to assist then in making decision in terms of valuing company performance
The financial performance and REITs bottom-line benefit can be associated with CSR. However, in many cases the time frame of the costs spent and benefits gained are out of alignment—the costs normally are incurred immediately, but the benefits gained are not often realized on a quarterly basis. On the Human Resource Management, particularly the employee relations’ side, for example, it is practical to have flexible scheduling to allow workers to achieve desirable work-life balances. This may enhance the productivity of the employee, reduce absenteeism, and may make it easier to recruit and retain high caliber staff. Since the benefits to be reaped by REITs are not immediate, it is quite difficult to relate the cost and benefit to the company.
To understand the relationship between CSR and firm financial performance, we propose an integrated model that integrates intellectual capital as a mediator and industry type as a moderator into the relationship between CSR and firm financial performance.
Therefore, from the discussion above as well as researches done by another researcher previously, this study formulates following hypothesis:
Ha – CSR has significant relationship and association between Corporate Social Responsibility (CSR) and Corporate Financial Performance (CFP)
H1 – CSR does have an impact and improve the bottom line and financial performance of a company
H2 – The disclosure on CSR activities affects the stock prices of REITs
H3 – Will REITs Company, in the long run, are able to sustain without any CSR activities
(d) Theoretical Framework
According to Warren (Warren 2003), business and society have a complicated relationship. Companies generally have become the major institution of business in society and proven vital to economic and social development, therefore, it can be concluded that economic activity is closely interrelated to social, environmental and political systems. Since it is interrelated, businesses possess impact and risk towards society, environment and political such as pollution or unemployment, thus companies must be responsible for these consequences. By being irresponsible, businesses could cause social and environmental crisis and later will bring about suffering to shareholders, customers and employees alike.
As indicated earlier resources available to companies are limited and scarce, thus adopting the CSR activities will definitely have some impact on the costs in the organization, which in turn reduce the level of company profitability. Henceforth it is crucial to determine the impact of CSR on financial performance as to give better insight and demonstrate how these efforts may add value to businesses.
Research methodology
(a) Research Design
Research Design is a master plan and a guide in setting research questions to be formulated at the beginning of the study to determine the cause and effect of the variables, as well as understanding the findings and meaning of the results.
In order to analyze the impact of CSR towards the financial performance of REITs, this study will be applying the quantitative research, which involves the process of collecting, analyzing and interpreting the observations to draw inferences on the relationship.
For this study, secondary data will be used which it has been collected and analyzed by other agency. The secondary data was applied in the study to test the relationship between corporate financial performance and CSR as the study sought to describe how financial performance is associated with CSR. A descriptive study describes the characteristics of a phenomenon, therefore, it provides a clear view of how things are concerning the opinions, facts and attitudes.
A simple random sampling and judgmental sampling technique were also used together with ROA and Tobin’s Q ratio were used in this study as it suited to this study as it ensured that each REITs company listed in Bursa Malaysia had an equivalent opportunity of being incorporated into the sample.
(b) Population and sampling 8m
As the aim of this study is to establish the relationship of REITs CSR with its financial performance thus, a sample of all 17 REITs companies listed in Bursa Malaysia was selected to be studied. The sample was then split into two main groups, prior to implementing CSR and after effect.
(c) Measurement Instrument 10m
CFP is typically measured using accounting-based or market-based indicators. Accounting based indicators such as return on assets, return on equity, return on capital employed, net operating income is normally used. For market-based indicators – stock returns, market value of a company are used to indicate the CFP.
However to measure CSR is complicated for two reasons. First, a consensus is missing on the theoretical meaning of the CSR concept itself and secondly, the concept is multidimensional with relatively heterogeneous dimensions. Due to the lack of consensus and complexity of the concept, many different approaches have been used in the literature to measure CSR.
Reference was made and derived from previous literature reviews and a checklist was constructed based on the reviews in order to make valid interpretation from data however, some changes has to be made to suit the latest CSR development.
(d) Statistical Techniques 7m
In determining which statistical techniques to be used, since this study is to determine the relationship of CSR and CFP, simple linear regression together with correlation will be used.
(e) Limitation of the Study
CSR was measured using financial spending for this study however admits that CSR has numerous dimensions and can be measured in other ways than just financial spending. Due to monetary constraints and time, only financial spending was used to measure CSR performance among the REITs listed in Bursa Malaysia.
The study was also limited by the number of years within which data was collected and REITs companies listed in Bursa are just a handful. If the number of years and companies within which the study was carried out were to be increased then probably the results would be different. Lastly, the study is limited by its data sources since the data on CSR was obtained from the company’s annual report and the firm’s corporate social responsibility reports updated in the various companies websites thus, the accuracy of the data as obtained from the source may limit the results of the study.