Essay: Review of literature on Corporate Social Responsibility Disclosure

Literature review

INTRODUCTION

The purpose of this chapter is to present a review of the literature on Corporate Social Responsibility Disclosure. This includes prior studies relating to the theoretical as well as the conceptual background on Corporate Social Responsibility Disclosure in Nigeria and other countries, and the relationship between Corporate Social Responsibility Disclosure and corporate characteristics.

2.2  CONCEPTUAL FRAMEWORK

Several definitions have been given for corporate social responsibility but the most frequently used definition of CSR is that which is given by the Commission of the European Communities in 2001. The commission defines CSR as “a concept whereby companies integrate social and environmental concerns in their business operations and their interaction with their stakeholders on a voluntary basis”.

Corporate social responsibility(CSR) concerns actions by companies over and above their legal obligations towards society and environment.

The World Business Council for Sustainable Development(WBSD) in 1999 defined CSR as “the commitment of business to contribute to sustainable economic development, working with employees, their families, the local community and society at large to improve quality of life in ways that are both good for business and good for development”. The basic idea of CSR is that business and society are interwoven rather than being distinct entities; therefore, society has certain expectations for appropriate business behavior and outcome. Simply put, CSR is the obligations firms have towards society as well as those affected by their organizational policies and practices.

Carroll(1991) categorizes CSR into four types: economic, legal, ethical and discretionary, and organizes them into a pyramid. In this pyramid, economic responsibility is the most important and fundamental responsibility. However, it is almost impossible to maximize firm value and financial performance if companies are not socially responsible and share with the public their CSR information as was suggested by the definitions given by the Commission of the European Communities and the World Business Council for Sustainable Development(WBCSD). Although it seems a little utilitarian and strategic, it is generally accepted that companies engaging in CSR activities usually concern themselves with the disclosure of related information because of its contribution to the overall well-being of the organization. This is because Corporate Social Responsibility Disclosure(CSRD) is helpful to assess the congruence between the social value implied by CSR activities and the social norms-legitimacy(Dowling and Pfeffer, 1975). Corporate Social Responsibility Disclosure (CSRD) is a critical way for companies to communicate with society, to convince the public that they are meeting their social expectations (Branco and Rodrigues, 2008).

However, the concept of CSR has been criticized on so many fronts. So many authors argue that CSR is not really helping the disadvantaged as they believed that it is used to get higher profit. The disclosure of CSR is designed to hide the most vicious corporate activities. CSR disclosures serves to deflect criticism of corporate activities and provide corporations with the rationale to pursue the activities they were charged to do. As  Devinney (2009), pointed out, “CSR is not free lunch and despite some hopes to the contrary, there is little, if any, logical or empirical evidence that more social activities on the part of organizations are likely to be socially enhancing and that in fact they can be socially harmful”. Also, CSR is used by many companies as a cover to enhance their public image and achieve better financial results, but they do not have a genuine commitment to other stakeholders besides shareholders and management personnel of the company.

Doane (2005), argued that “while companies are vying to be seen as socially responsible to the outside world, they also become effective at hiding socially irresponsible behaviors, such as lobbying activities or tax avoidance or evasion measures”. It has also been argued that CSR is more of a Public Relation issue where firms act mainly in order to appeal to customers’ consciences and desires but with the true intention of helping themselves. CSR helps firms to build brand loyalty and forge a personal connection with customers (Campbell, 2007).

2.3 PERIODIC STUDIES

There are a number of studies which have discussed the disclosure of CSR from different points of view and context( for example Deegan and Gordon 1996; Kuasirikun and Sherer, 2004; Khemir and Baccouche, 2010; Menassa, 2010). These studies have used different CSR concepts in their research. Empirical literatures on CSRD explains practices, determinants and patterns of disclosures.

2.3.1 CORPORATE SOCIAL RESPONSIBILITY DISCLOSURE IN DEVELOPED AND DEVELOPING COUNTRIES

Prior studies regarding the investigation of corporate social responsibility disclosure have covered various countries and contexts. The studies of CSR in the western countries have provided more progressive benchmarks, while studies on developing countries focus on whether the countries disclosed CSR information or not. It appears that the trend of CSRD is increasing. Gray et al,(1995a) reviewed CSR literature in the UK the year 1979 to 1991, and indicates that there has been a substantial change in the pattern of social and environmental disclosures during that period.

Campbell(2000) analyzed the data obtained from the company Marks and Spencer’s annual reports from 1969 to 1997 and concluded that the trend of CSRD grew over the period. Campbell(2004) reviewed the volume of voluntary environmental disclosure from ten UK firms across five sectors between 1974 to 2000. He found that the frequency of environmental disclosure was relatively small in the early 1980s, followed by a rapid growth in the late 1980s, and in the early 1990s.

Hartman et al, (2007) analyzed the CSR activities of sixteen(16) multinational firms in the US and European Union(EU). In their study, content analysis was used to investigate the communication of CSRD by focusing on language, citizenship, corporate accountability and moral commitment. Their results illustrated that US-based companies were focused on economic terms, while EU firms concentrated on both economic and sustainability terms.

Menassa (2010), investigated the characteristics and nature of CSRD in the Lebanese banking industry. The findings illustrated that human resources and products and customer related disclosures were largely reported by Lebanese banks, while the disclosure and degree of environment activities was weak. Their studies suggested that there was no significant difference in CSRD behavior of non-listed banks, banks with an overseas presence and listed banks in Lebanon. Bayoud and Kavanagh (2012) explored the practices of CSRD behavior in Libya by using interviews from managers of organizations. Their results indicate that reporting CSR information in annual reports is important to company performance.

Haji (2013) studied CSRD in Malaysia. The findings show that the level and quality of CSRD increased between two years of study. Ahmed Haji (2013) findings on CSRD shows that directors ownership, government ownership and firm size had a significant impact on the extent and quality of CSRD. Cormier et al, (2011) examined the effect of CSRD on information asymmetry reduction between managers and stock market. The data was gathered from 137 non-financial participants’ websites on the Toronto Stock Exchange in the year 2005. The results reported that CSRD was influenced by firm size, leverage, environmental news exposure and environmental performance.

Saida (2009) found that the country of origin of multinational corporations seems to affect the extent of environmental disclosure. This is consistent with Sastararuji and Wottich (2008) who explored CSRD in the construction industry in Sweden, Thailand and Brazil. They found that the regional factors influenced the level of CSRD in these countries. Rouf (2011) showed that the number of independent non-executive directors was associated with the extent of CSRD. Other control variables such as board audit committee, Board of Directors and return on equity were positively correlated with CSRD. Adams (2002) investigated the internal contextual factors influencing CSRD, which can be divided into three categories: corporate characteristics, general contextual factors and internal contextual factors. The data was collected in interviews with four German firms and three British firms in the chemical and pharmaceutical industry in 1998. He found that the internal background variables have considerable influence on the completeness, quantity, quality and comprehensive of CSR reporting.

Udayasankar (2008) conducted a study on CSR and firm size, and drew the conclusion that large and small firms were more likely to participate in CSR, while middle-sized firms had least participation in CSRD. Yahya & Bargebar (2014) investigated the impact of CSRD on financial performance of companies listed in the Tehran Stock Exchange employing multiple linear regression analysis. The CSRD measures(independent variables) for the study include economic, social and environmental dimensions while both accounting (Return on sales, ROA and ROE) and market (sales return and PE ratio) data constitute financial performance measures (dependent variables). The study reports a significant impact of CSRD dimensions on financial performance.

Kwambo (2009) examined the extent to which social disclosure affects the earnings per share of public companies in Nigeria. The study employed paired T-test for analysis and the result report that social disclosure has insignificant effect on the earnings per share of public companies in Nigeria. He concluded that there is the need to re-align social activities with corporate image which could relate positively to earnings of corporations. Olayinka and Temitope (2011) adopted qualitative research method to examine the relationship between CSR and financial performance in Nigeria, The study obtained data on variables that were believed to have relationship with CSR and financial performance, these variables includes ROA and ROE, community performance employee relation and environment management system. The findings show that CSR has a positive and significant relationship with the financial performance measures. Ebiringa et al (2013) examined the effect of firm size and profitability on the extent of corporate social responsibility disclosures by Oil and Gas firms in Nigeria. Secondary data retrieved from content analysis of the audited financial reports of the selected firms for 2011 financial year was employed in the study, the study used the ordinary least square regression for data analysis. The findings show that an insignificant negative correlation exist between firm size and corporate social responsibility disclosure while profitability is significantly positively related to corporate social responsibility disclosure of the companies.

2.4 DISCUSSION OF VARIABLES

2.4.1   PROFITABILITY AND CORPORATE SOCIAL RESPONSIBILITY

DISCLOSURE

Profitability is the ability of a business to make profit. Prior studies have suggested that profitability has a relationship with the level or extent of a firm’s corporate social responsibility activities and disclosure. According to the stakeholder theory, economic performance of a firm influences management’s decision to be involved in corporate social responsibility activities and disclosure. According to Gray et al (2001), a firm that is not performing well is less likely to have the financial ability to disclose more information to satisfy the needs of the various stakeholders of the firm. Campbell (2007) proposes that, “firms will be less likely to act in socially responsible ways where they are currently experiencing relatively weak financial performance”. Prior empirical studies carried out on the relationship between profitability and corporate social responsibility disclosure have produced mixed results. Some research found the relationship between profitability and corporate social responsibility disclosure to be positive(see for example, Ismail and Chandler 2005; Roberts 1992), while others claimed that there is no significant relationship(see for example, Stanwick and Stanwick, 2004). Also, Gray et al (2001) found a significant but weak association between profitability and corporate social responsibility disclosure. In this study, profitability will be measured using Profit After Tax (PAT). The hypothesis in this study is to test if there is a positive relationship between profitability and corporate social responsibility disclosure.

2.4.2  COMPANY SIZE AND CORPORATE SOCIAL RESPONSIBILITY

DISCLOSURE

Prior studies have suggested that a company’s size is positively related to the extent to which an organization discloses its corporate social responsibility activities, as Ayadi (2004) noted: larger firms are more likely to be scrutinized by both the general public and socially sensitive special interest groups. This indicates that large firms are more likely to disclose more CSR information than small firms. According to Brammer and Pavelin (2008), larger firms receive more attention from the public as these firms are more likely to be diversified across geographical and product markets and thus these companies might have larger and more diverse stakeholder groups. According to the political cost hypothesis of positive accounting theory, larger firms have higher political costs because of their visibility which might lead to higher government and society attention (Setyorini and Ishak 2012). Also large firms have more shareholders who might be interested in the firm’s social disclosures. Some empirical studies claimed there is a significant and positive relationship between company size and corporate social responsibility disclosure(see for example Stanwick and Stanwick , 2006).  While others find no such relationship. The hypothesis in this study is to test if there is a significant relationship between firm’s size and the extent of a firm’s corporate social responsibility disclosure.

2.4.3  LEVERAGE AND CORPORATE SOCIAL RESPONSIBILITY

DISCLOSURE

Several studies carried out in the past on the relationship between leverage and corporate social responsibility disclosure have produced mixed results. Some have argued that more highly leveraged firms disclosed voluntary information in order to reduce their agency cost, this claim is based on the agency theory. However, Brammer and Pavelin (2008) claim that a low degree of leverage ensures that creditor stakeholders will exert less pressure to limit management discretion over CSR activities, which are only indirectly linked to the financial performance of the firm. Also, Purushothaman et al (2000) argue that highly leveraged companies may have closer relationship with their creditors and thus disclose more CSR information in their annual reports.

Reverte (2009), however, does not find any relationship between corporate social responsibility disclosure and leverage. The hypothesis in this study is to test if there is a significant relationship between leverage and corporate social responsibility disclosure.

2.5  THEORETICAL STUDIES

In the few decades in which Corporate Social Responsibility Disclosure has been in practice, several authors have used various theories in explaining Corporate Social Responsibility Disclosure practices. These theories include: legitimacy theory, stakeholder theory, institutional theory, political economy theory, stewardship theory and agency theory. However, there is no single theory which can be used to completely explain this practice.

2.5.1   LEGITIMACY THEORY

Legitimacy theory is central to the social contract. Deegan and Unerman (2011), assert that the legitimacy theory relies on the notion that there exist a social contract between an organization and the society in which it operates. A number of studies have adopted legitimacy theory to explain why companies engage in CSR activities, how organizations gain and maintain their legitimacy. Legitimacy theory is based on the perception that rights and responsibility of companies come from society. Business has to operate within the boundaries of society in order to meet the expectations of society which include the provision of better goods and services to society. As an organization is part of a large social system, business need to operate within a social system, without any negative impact to society (Deegan, 2002). This could lead organizations to achieve their goals and sustain their profits. Many researchers have suggested that corporations legitimize their activities because corporate management reacts to society expectations(Guthrie and Parker 1990). Guthrie and Parker (1989) and O’Donovan (2002) argued that legitimacy theory is based on the perception that business is conducted in society through a social contract which management agrees to achieve, based on a number of social requirements, in return for approval of its goals. Organizations need to behave and disclose enough information for society to judge whether or not a company is a good corporate citizen.

Patten (1991) investigated whether the voluntary social disclosures are related to public pressures or profitability in the USA. He claimed that the disclosure of CSR activities in annual reports has been applied to report the movement of social activities in firms. Mobus (2005) used legitimacy theory to investigate the association between mandatory environmental performance disclosure and subsequent environmental regulatory performance by examining refining firms in the USA, The results suggest that companies would disclose higher amounts of environmental regulatory compliance information after being sanctioned for non-compliance.

Legitimacy theory helps, in part, to explain the extent to which CSR activities are disclosed by firms. Firms provide disclosures determined by laws or regulations in order to gain legitimacy with the state.

2.5.2 STAKEHOLDER THEORY

The stakeholder theory is another theory used to explain the motivation of corporations to disclose their environmental and social activities, According to Freeman (2010), a stakeholder is “any group or individual who can affect or is affected by the achievement of an organization’s purpose”. Business firms have responsibility to a broad spectrum of society which includes customers, employees, community, government, etc aside from the shareholders, Consequently, business firms have moral and ethical obligations to perform certain duties voluntarily to the aforementioned stakeholders,

According to Clarkson (1995), stakeholders can be divided into two groups : primary(economic) group and secondary(social) group.

Primary groups are those individuals who without their participation, the corporation will not survive as a going concern. In this group are included shareholders, employees, creditors, customers, suppliers and the public stakeholders group.

Secondary groups are those individuals who do not make any transaction with the organization, In this group are included the media, local and international organizations. Compared to the legitimacy theory, under the stakeholder theory, the firm has more  than one social contracts, which can influence or hurt the operations of the firm(Matthews 1993).

According to Donaldson and Preston (1995), stakeholder theory can be classified into three aspects, which are descriptive accuracy, instrumental power and normative validity, The aim of the descriptive accuracy theory is to explain the characteristics and behaviors of a firm, and how corporations manage and communicate with stakeholders to achieve the corporate goal, The purpose of the instrumental power theory is to identify the connection between corporate performance, such as profitability, and stakeholder management, The normative validity theory is used to interpret identification of morals for operation and management of corporations. However, Deegan et al, (2000) argued that the stakeholder theory can be divided into two branches: normative(ethical) branch of stakeholder theory and positive(managerial) branch of stakeholder theory. The normative perspective of the stakeholder theory treats all stakeholders fairly and does not take into consideration the power of each stakeholder(Deegan and Jeffry 2006). This perspective suggest that all stakeholders have the right to be provided with the information about how an organization’s operations affect them. That is, information about the firm’s social and environmental performance is disclosed to be accountable to all stakeholders irrespective of the element of power of each stakeholder. The other aspect which is the managerial branch of stakeholder theory takes into account the interest of selected number of stakeholders, who have significant p0wer to influence the activities of the organization. This perspective is based on the premise that organizations will respond to society through stakeholder power in order to influence corporate management. Under this perspective, information on social and environmental performance of the organization is disclosed to comply with the concerns and expectations of specific group or powerful stakeholders. This way, the disclosure of the firm’s information will be used as a strategy to maintain the support of  said stakeholders(Deegan and Blomquist, 2006; Islam and Deegan, 2008).  According to stakeholder theory, organizations aim to balance the expectations of all stakeholders through their operation. Managers ought to consider and maintain the expectations of all stakeholders group when making corporate social responsibility disclosure decisions.