The literature review in this section is centred around two theoretical frameworks. One pillar emphasized on the theories related to CSR where it focused on the engagement of CSR and its involvement with employees’ management. Subsequently, the other highlights the theory of reputational risks and two components of reputation – quality of management and employee quality.
2.1 Corporate Social Responsibility (CSR)
Companies commit to engage in CSR for various motives. The most notable motive of utilizing CSR by companies was for self-interest that is in pursuance of competitive advantages, profit maximization and prevent themselves from getting into financial crises. According to Chen (2011), companies can strengthen their competitiveness and generate responsibility while developing strategies through the use of accountability and transparency components in which it can achieve CSR. Aside that, surveys have been conducted and found that 61% consumers will support socially responsible companies along with an increased demand from the public on the transparency of a company’s CSR (SCE, 2004; Michel, 2002). This showed that implementation of CSR can cause more public to support the company hence an increase positive influence on a company’s returns and reputation. On the contrary, Elkington and Rowland (1999) proposed a concept whereby corporates should not be directed and managed merely just on the goal of generating profits but also to take social and ecological consequences into account. This means aside from focussing on their own benefits and goals, firms need to think about stakeholders’ interests and expectations.
Carroll (1991) suggested that CSR functions like a pyramid which consist of management responsibility to comply in regulations, to respect society’s ethics and improved the quality of life of its stakeholders. This means that adhering to CSR can have influence not only on social and environmental issues but also on the whole business operation. A theory proposed that it is critical for companies to understand society’s expectations on their business behaviour or there would be a presence of “CSR risks”. CSR risks can result in company positioned in a financial loss through consumer boycotts and business-opportunity loss (Kytle and Ruggie, 2005; Zaman, 2004). Regester and Larkin (2005) pointed out that on the report of a US public opinion survey, 50% consumers have boycotted companies attributable to bad customer service, poor quality products or environmentally unsounded actions. This showed that if potential and emerging CSR risks are identified and managed quickly, it can prevent negative impacts such as bankruptcy happening to a company. However, this research lacks generalisability as it was carried out in United States and cannot be applied to other counties especially the ones that are still developing and do not practise CSR commonly.
When a CSR risk transpired, this can lead to external stakeholders question a company’s legitimacy and behaviours. Nylander (2010) stated that a company have to be sensitive to the shift in expectation of its stakeholders so that CSR risks can be anticipated. This implies that in order to identify the risks, it is therefore important to engage with stakeholders and take notice of their expectation on the company. Nonetheless, companies need to be able to determine the stakeholders that would dominate in causing the most impact on the business as well as who would be affected by such activities. In the opinion of Krick et al. (2005), identification of the most influenced stakeholders can enable an organisation to prioritize attention and action that promote its goals without neglecting the interests of relevant stakeholders.
Within the CSR literature, many scholars have focused on the effects of implementation CSR from powerful shareholders’ and external stakeholder’s perspective. For instance, Margolis and Walsh (2001) evaluated 100 studies related to the quantification between CSR and corporate financial performance in which they found that there is a significant relationship. This means implementing CSR can produce an increase in corporate financial performance which is the main goal of shareholders. Botero (2015), however, disputed indicating that when a company wants to be remain it in a competitive position, its long-term policies should not only be concern with shareholders but must also take all people related to the company or affected by its activities into consideration. This means that aside from maximising profits for shareholders, the firm have to think of ways to generate wealth and better conditions for the other stakeholders especially own employees.
Cropanzo et al. (2001) emphasized that employees’ attitudes and behaviours can be heavily affected based on how fair they consider the actions of the company they are working for are. The judgements are on whether management is trustworthy, non-biased and if they were being treated as legitimate members of the firms. Earlier researches have demonstrated that with CSR initiatives embedded into corporate’s policies, it can increase the productivity and performance of staffs as well as their commitment to the organisation (Larson et al., 2008; Brammer et al., 2007). Alongside more loyal employees, it can allow the company to give a good image to the public in the sense that they are treating their employees fairly and ethically leading to customers and potential employees being more interested and support in the company.
A big factor for the viability of the organisation is the management’s ability to create and distribute value to its primary stakeholders. Clarkson (1995) specified that mistreatment and dissatisfaction of employees prompt to them being disengage from the firm. This withdrawal can jeopardize the organisations’ survival as well as generating reputation crises, putting them in a bad position in the market. However, with such serious potential negative impacts, the role of CSR towards stakeholder management in assisting company’s reputation is still underrated and delinquent (Saul, 2012; Kim et al., 2010). Saul (2012) stated that although sometimes companies might be committed to improve, they might only centre around one dimension of the CSR approach. This might lead to employees feeling ‘left out’ as they think that companies are only motivated to include CSR due to the desire its image to be more sustainable by pleasing external stakeholders’ expectations instead of on them too. Business should ensure that CSR is ingrained as part of company’s ethos so members of staff feel relevant and considered themselves as part of the company. This can lead to more commitment and motivation to work. Therefore, for top management, aside from governing the business operation, they have to consider the interaction they have with lower ranking employees. Since some studies suggested that CSR towards stakeholder management is underrated, the paper wants to distinguished the reason behind the reasons of its undervaluation despite bringing various advantages.
2.2 Reputation Risk Management (RRM)
Corporate reputation has been labelled as a construct of growing importance and has been recognised as one of the significant factors that plays a role in improving the firm’s value. This intangible asset can offer attractive returns when managed properly, just as it can bring considerable amount of threatening damages if mishandled. In the case of the former, the returns for a good reputation are improving recruitment, enhancing customers’ confidence in the product, increase sales and financial performance (Brammer and Millington, 2005; Jacob, 2012). On the other hand, for the latter, a tarnished reputation can lead to the loss in confidence from an exodus of clients, unmotivated and decrease in employees along with a spiralling cost of capital (Schanz, 2006). Rayner (2004) supported that further by asserting that a survey conducted on the top 2000 private and public organisations found that ‘loss of reputation’ was seen as the greatest risk faced and ‘failure to change’ coming as second.
The future of the reputation and the effects followed are based on how the decisions that are made by key stakeholders on the information they have on the uncertainties faced, that may be both threats or opportunities. Gaultier-Gaillard et al. (2009) emphasized that these decisions can either allow the organisation to establish and reinforce its “social license to operate” or “completely end its line of survival”. With such a fragile, easily-destroyed asset, the sources of uncertainties need to be accurately and effectively identified, analysed and managed which is where the RRM comes in. Even though effectuating RRM has its advantages, the concept of it has caused academic controversy. Some studies have supported this opinion, stating that it is hard to distinct RRM from the management of other business systems and processes (Hutton et al., 2001). This implies that modelling a RRM to study in a systematic manner is quite impossible thus making it hard to measure. Regardless of the controversy, some organisations have been seen to seek and manage their reputation risks.
As previously stated, reputation is rarely measured and usually underestimated because it is contextual which means that individual companies focus on different various aspects of reputation depending on their situation (Deephouse and Carter, 2005). Scholars reviewed literatures and observed that these studies focused on six elements of reputation – financial performance, quality of management, social and environmental responsibility performance, employee quality, emotional appeal and the quality of the goods/services provided (Bebbington et al., 2008; Fombrun and Gardberg, 2000; Fombrun, 1998). Be that as it may, it is criticized that these studies are subjective, which implies key stakeholders used their own individual perceptions and understanding of the meaning ‘reputation’ to dictate their own organisation’s status. Dowling (2004) added on, stating that studies contemplating on how corporate reputation is created among key stakeholders lacked information, revealing that there is a research gap in these studies. As so, the paper studies the employee quality and quality of management aspects of reputation.
Most recently, it has been suggested that stakeholders’ perceptions of a firm’s values and ethics plays a significant role towards corporate reputation. Larkin (2002) emphasized that stakeholder relations matter because it revolves around corporate governance, stakeholder engagement, organisational performance, social reporting and compliance in addition to corporate reputation and brand equity. This implies that primary and secondary stakeholders have various impacts on the whole dynamic of the business, one way or another. Additionally, he emphasized that understanding reputation from what stakeholders’ perceptions and expectations are is fundamental to RRM where there must be an active monitoring and managing relations with stakeholders. Having said that, Sternberg (1999) claimed that not everyone takes interest in the company and even so, many interests are ‘divergent’ thus making it hard to balance. This showed that if companies need to consider all stakeholders’ point of views, it would require extra resources and energy therefore leading to an increase in output costs.
Former research has found an important relationship of employees and organisational culture having a significant part in effectuating corporate reputation (Hanz and Schultz, 2003; Kennedy, 1977; Gotsi and Wilson, 2001). The findings shown that employees can build reputation by reflecting their own experiences to customers. This means that depending on how well employees internalised and share the brand and company’s value as well as how well the actions and activities collaborate with the brand will determine the success of the company (Rokka et al., 2014; De Chernatony, 1999). In this context, employees’ management are a requisite element in the “corporate reputation formation process”. Wallace and de Chernatony (2007) said that if employees consider they are not valued or are being taken advantage of by companies, they would become saboteurs to act against the company which is followed with reputation being destroyed. Conversely, Dowling (1986), although agrees with the importance of employees contributing towards the reputation development, emphasized that communication role is also essential where employees should be trained in passing the appropriate image to external stakeholders.
The other component of reputation, quality of management, is studied in this paper. Srivatava et al. (1977) stated that reputation can have an effect on operational performance which can indirectly influence the equity’s evaluation performance. This showed that how the quality of management is transmitted to the outside can affect the value of the company. Quality of management consists of for example, corporate governance, organisational processes and performance, leadership and visions (Bebbington et al., 2008). It is a wide range of measures of business performance and aims to provide a comprehensive picture of the processes an organisation uses to set strategy and manage its assets to achieve their business goals (Rayner, 2004). In short, it is how a business is directed and managed. According to Martin and Burke (2012), the fastest way to lose reputation is through the endurance of disasters in corporate governance. This is because when there is a fail in governance, it would stop the company from its development in the market. Hence, slowing down the growth of its reputation to be known. In the worst case scenario, a failed governance could be reported out to the public which then lead to the tarnish the reputation by changing the perceptions and confidence customers have on the company.
Fombrun and Shanley (1990) did a study on 292 large US firms about reputation building and corporate strategy. Their findings shown that publics’ impression on an organisation’s reputation is based on the information they have about the firm’s structural positions within the organisational field. Furthermore, they also found that a business’s historical performance and other non-economic cues have the capacity to change reputation status (Rose and Thomsen, 2004). The research, no matter how has its limitations. One of it was that the researchers did not specify the dimensions of the reputation they measured and assumed a single underlying construct therefore making it hard to ‘pin-point’ the exact influences on reputation. Earlier researches suggested that when there is a presence of strong reputation, firms are able to signal consumers about product quality and charge premium prices easier (Boyd et al., 1996). This implies that an established reputation can allow for a smoother-running business operations and giving them more control of their profit margins.
2.3 Integrative Theories on both CSR and RRM
Reputation is seen as a multi-dimensional key asset of corporations and can be examine from various aspects. It was theorised that there are two classifications of reputational risks (Lizarzaburu, 2014). With the first being reputational risk in immediate situations, these are ones that are impossible to anticipate due to the imperceptible nature such as an earthquake. They happened out of the blue and could not be stopped thus affecting the normal operation of the company. On the other hand, the second categorization is the expected reputational risk. This type of risks can be anticipated by the company with a RRM system and through CSR activities so that the consequences can be minimised. Foreseeing potential risks that can happen in the near future allow companies to prepare strategic plans and allocate resources so the impact can be reduced to the least. Current researches streaming on the association of both CSR and reputation have proposed company’s main primary attraction is centred around how the performance of CSR actions are determined the perceptions on firm’s prestige (Esen, 2013; Fombrun and Shanley, 1990).
Crises, especially reputational risks, can arise causing devastating impacts on the reputation therefore during such times, it is pivotal to have an excellent comprehension of these risks and adopt an efficient RRM. Past intellectuals proclaimed that CSR possessed the value, acting as a form of insurance policy against negative events to the firm whereby it can aid in minimizing the harmful impacts that happens to a firm (Klein and Dawar, 2004). Aside from embedding CSR initiatives, earlier researches have been theorising that corporations are also using CSR reporting, from the RRM viewpoint, to document issues on social responsibility so that the risks towards reputation is lessen along with maximising their earning potential. Organisations are using this type of reporting as it can influence the perceptions of stakeholders such as how well the corporations are practising CSR and developing more principles to show company’s commitments (Bebbington et al., 2008; Aid, 2004; Meng and Zhao, 2010). Other theories, further supported, claiming that the existence of such reporting is because of legitimacy theory. It is believed that organisations utilize CSR reporting as they are dependent upon legitimacy for their continuation to operate and having the report would help in legitimise their relationship with the society and various other stakeholders (Deegan et al., 2002). Unerman (2008), per contra, criticised the study suggesting that RRM should only be used in a somewhat blunt matter, rather than categorise as one of the elements in CSR reporting. He further stated that the trade-offs of CSR reporting and reputation risks were crudely assessed hence having RRM being weighted in terms of the likely impact on the reputation of a company is unreliable.
When a company decides to expand, for example, entering into a new market that is not within their area of core competence, all the underlying risks that are associated with have to be clearly defined as they can have long-term effects on reputation. Hence, besides RRM, there has to be presence of a good quality of management (Croft and Dalton, 2003). Over the years, there has been many discussions about the management quality of a business and what it comprises of. There has been an increase desire for the expand of a broader corporate governance concept that extends to CSR (Hopkin, 2001). The recent reported scandal that surfaced related to the data scandal between Facebook and Cambridge Analytica has not only shown the significance of quality of management but also of CSR. This implies that CSR and quality of management have a relation between each other. Businesses are often face with huge amount of pressure to have the best quality of management whilst protecting their intangible assets such as reputations and customer base but above all, they have to act responsibly. Testa (2008) stated that there is an increase in trend for the better corporate governance and accountability has fix its concentration on the organisations’ responsibilities towards the environment and society rather than only on its stakeholder groups.
Harjoto and Jo (2011) did an extensive study on various data sets they gathered to see if there was a link between governance and CSR. They found that firms use governance mechanisms, together with CSR regulations, to reduce conflicts of interests between managers and non-investing stakeholders. Furthermore, the study also shown engaging in CSR can benefit in operating performance and firm value, which showed that CSR can help in conflict resolution in company’s governance. Although there’s a significance in the study, it was find fault in failing to differentiate consumers’ preference of CSR engagement during the good and bad times which would have contributed towards to a better understanding of CSR as a product-differentiation. This study concluded that CSR can bring beneficial contribution towards the quality of management happening in a company. According to Testa (2008), exhibiting good governance is one of the major drivers to reputation and to market valuation, in which it helps in generating reputation capital. There is an identification of an existing association with CSR and reputational capital from past literatures and found that organisations see reputation as an investment (Fryxell and Wang, 1994). Brammer, Millington and Rayton (2007) pointed out that as more empirical research carried out to better grasp the concept of threats and opportunities corresponding with corporate, social and environmental responsibilities, this alludes to companies generating strategic capital from the acceptance of these responsibilities.
In addition to CSR and good quality of management, Gyomlay and Moser (2005) stressed that the treatment of employees is also another main driver of reputation. Treatment of employees can determine the financial performance of a company by affecting its reputational value. Many scholars argued that businesses having social responsiveness, it contributes towards the construction of propitious relationship with primary stakeholders upon which the business depends on for its continuity and prosperity (Clarkson, 1995). A theory, known as social identity theory, proposed that individuals associate themselves with the group memberships they belonged to (Tajfel, 1982). Engaging the association with a certain group can have an effect on one’s pride and self-esteem whereby individuals will try to establish a more positive self-concept of themselves (Ashford and Mael, 1989). Some studies found that employees prefer to work for socially responsive organisations because it associate them with socially responsible and positively-repute organisations thus aggrandizing their self-concept (Tajfel, 1982; Maignan and Ferrell, 2001). As employees are proud to related to favourable reputed companies, this can lead to them being more loyal and committed.
When there is a positive reputation, it can not only attract secondary stakeholders but also shareholders and employees. This can reflect towards an improve investment security and trustworthy partners (Gregory, 1991). In the study of Greening and Turban (2000), it was observed that implementing CSR can increase the size of their applicant pools as they
appear more attractive to prospective highly-skilled employees, instead of wasting resources to find them. It suggested that it allows firms to gain competitive advantages due to high contesting between applicants. Regardless of that, it is interpreted as somewhat having low validity because they did not run manipulation checks to examine if participants knew the purpose of the study and predicted they could have changed their behaviour thus their answers.
Signalling theory proposed that potential job applicants would receive and interpret “signals” about the working conditions and reputations of corporates even though they do not have full information about the organisation (Greening and Turban, 2000). These signals are interpreted differently by the various-minded individuals. Cable and Judge (1996) have demonstrated that potential employees weigh up their own values with the ones they perceived of that particular business. This process will allow potential employees to draw rational conclusions and decisions using the available information that they have on the firm (Wanous, 1992). On the contrary, Turban and Greening (1977) postulated that not everyone does the same thing specifically those with limited amount of choices would not consider or be influenced by either if firms practises CSR or have good reputation.
Recent survey evidence implied that notwithstanding secondary stakeholders, employee stakeholders also exert considerable amount of pressure regarding CSR on firms (Waddock et al., 2002; Smith, 2003). Brammer and Millington (2005) bring forward a response whereby companies could develop a range of mechanisms which involved their employees in their CSR initiatives. This will lead to an increase in more dedicated and loyal workforce as they feel their opinions are appreciated and valued. To the contrary, there are some papers that think cultural attitudes is important. For example, Hong Kong has very little low practices of CSR and their companies are encountered with little pressure from community that even government neglects in imposing existing any CSR legislations properly (Gao et al., 2005). In addition, Fombrun and Shanley (1990) think that stakeholders should also have diverse preferences over firm actions, process, outcomes and performances so that they would feel included as part of the firm. Plus, diverse preferences stimulate and challenge employees which consequently prevent them from getting bored of their daily work routine leading to more driven workers.
In essence, when companies are well-informed about their reputation risks, CSR practises towards employees’ management and quality of management beyond the law can become a strategic tool for RRM to reduce probably risks which in turn increase business competitiveness (Botero, 2015; Jacob, 2012). Nevertheless, the literature review conducted shown that there is a lack of empirical research exploring on CSR and the internal elements of corporate reputation management aforementioned. Reputation is based on stakeholders’ actions and perceptions of corporate actions (Meng and Zhao, 2010) and employees are the one that has the most interactions with these components. Thus, in this study setting, the research wants to look from employees’ point of view on their idea of CSR towards employee management and quality of management of reputation in a company along with whether there is any undervaluation on CSR practises towards the management of internal stakeholders.
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