1.1 Research Background and Overview
In recent times, academic, researchers, managers, and industry professionals have shown significant interest in the concept and theory of corporate social responsibility (CSR) (Wang et al, 2016, Schrempf-Stirling, Palazzo & Phillips, 2016, Dyck et al, 2019). This increasing interest owes its existences to variety of factors including stakeholders’ interests, improvement of corporate image, and contributing towards society. The conception of corporate social responsibility as well as sustainability is responsible for bringing changes within the business role in context to stakeholder’s management has reinforced the conception of the organization’s role in society and environment (Lins, Servaes & Tamayo, 2017). Globalization, economic recession, and changing market conditions are responsible for fostering change within the business and organizations. In competitive and fluctuating conditions, success for long-term is sustainable through shard value. At the same time, it is essential to sustain economic and social value. This approach significantly alters the company’s attitude towards shareholders since it focuses on improving economic performance as a long term goal rather than short term one.
Issues pertaining to the environment have also led to the adoption of CSR. For instance, energy efficiency, sustainability, environmental protection, protection of workers, waste management, water conservation, and management of depleted resources have contributed to its popularity (Martin, Petty & Wallace, 2009, Gennari & Salvioni, 2017, Becchetti et al, 2012, Crane, Matten & Spence, 2019). Increasingly, firms are in the dilemma to publish their data associated with CSR to support transparency and to ensure that they are accordance to the governmental rules and regulations. According to Crane, Matten & Spence (2019), 95% of the valuable brands have adopted CSR.
At the same time, widely scandalized financial scandals such as Enron and Worldcom have influenced the organizations to think beyond the concept of wealth maximization of the shareholders (Becchetti et al, 2012). The reputation of the organization and to manage stakeholder’s relations is considered to be a major theme for sustaining long-term survival. In such event, investors themselves are interested in incorporating ethics to increase their profits (Becchetti et al, 2012). As a result, trend of adopting corporate social responsibility (CSR) has been increasing globally. This trend is prevalent in both developed and developing countries including United States, United Kingdom, Australia, Belgium, China, France, India, Brazil and Iran.
The concept of maximizing shareholder value is the central theme of finance. According to Martin, Petty and Wallace (2009) assert that the fundamental objective of the firm is to increase the equity related to the shareholders. Gennari and Salvioni (2017) assert that the concept of CSR concepts with globalization and changes in financial markets is responsible for creating value for both organizations and potential investors. Stability is a central theme in maintaining long-term relations with investors in context to corporate decision making since it increases the shareholders’ value, increases profitability and improves overall performance of the firm. Furthermore, CSR and sustainability adoption helps in reducing both business and investment risks for both organizations and shareholders.
In a study conducted by Kim and Kim (2014), the impact of CSR in context to shareholder value was studied by evaluating the CSR’s “strengthening” and “concerning” activities of restaurants, which were publicly listed. Previous studies pertaining to CSR as quoted by Kim and Kim (2014) primarily focused on stock returns level. The researchers identified another factor pertaining to shareholder value, which was systematic risk. The dependent variables were systematic risk and Tobin’s Q. The latter has been identified as a “performance metric”, which is used in the field of management, marketing and economics. It used as a testing metric for understanding the influence of “strategy choices of shareholder value” (Kim & Kim, 2014, p.123). The control variables identified by researchers included size of the firm, return on assets (ROA), and leverage. Based on their testing, the results of the study demonstrates that shareholder value increased through strengthening actions since it increased Tobin’s Q value. Weak actions pertaining to CSR showed decline in shareholder value since it showed that systematic risk increased. The results of the study demonstrate that restaurants in hospitality sector can benefit from CSR activities in terms of finance because of CSR strengthening activities are linked with equity returns.
Manchiraju and Rajgopal (2017) study emphasized on investigating the impact of CSR on shareholder value in the Indian business sector. In 2013, the Indian government had introduced a new law pertaining CSR, making, it mandatory for Indian businesses to invest 2% of their net income in funding CSR programs. Adopting an empirical investigation approach, the researchers obtained data from Centre of Monitoring Indian Economy. The researchers primarily investigated the impact of CSR on shareholders’ value in context to the mandatory Indian CSR law. For this purpose, two types of firms were identified by the researchers: firms that were affected by the mandatory rule and firms that were not affected by the mandatory law. The findings of the study revealed that firms affected by the mandatory rule experienced decline in their shareholders value as compared to firms that were not affected by it. The findings also revealed that firms that invested in CSR on their own experienced an increment in their shareholder value. Thus, the researchers concluded that CSR mandatory rule burdened firms and thus, decreased their shareholder value, whereas absence of mandatory rule showed the opposite effect.
While significant attention has been given to CSR, studies pertaining to it solely focus whether its adoption benefits the firm in terms of sustaining competitive advantage or whether it increases shareholders value or whether it helps in management for stakeholders relations (Crane, Matten & Spence, 2019). While the concept of CSR and shareholders value is the central theme of this research, it specifically outlines how CSR and shareholder value is an American phenomenon. Therefore, this study extends its discussion to CSR and shareholder value, while analyzing tracings its origins by analyzing wide range of academic resources. It will also highlight the concept of CSR in other countries.
1.2 Research Aims and Objectives
The aim of this research to investigate whether the concept of CSR is an American phenomenon or not by analyzing literature pertaining to it and to compare different conceptions of CSR in other countries. The objectives of the research are as follows:
1.3 Research Methodology
Based on the nature of this research, this research has adopted qualitative approach in investigating CSR and its impact on shareholders’ maximization value through the analysis of previous researches conducted in this domain.
The synthesis of literature suggests that CSR has two perspectives: shareholder perspective and stakeholder perspective (Frynas & Yamahaki, 2019). The former was introduced by Milton Friedman that views that CSR helps businesses to increase its profits. He further presents an argument that “if businessmen do have a social responsibility other than making maximum profits for stockholders, how are they to know what it is? Can self-selected private individuals decide what the social interest is?” (Frynas & Yamahaki, 2019) Based on this perspective, shareholders perspective is seen as a moral hazard. On the other hand, stakeholder’s perspective view that focuses on increasing the value of the firm through the management of relations with all the stakeholders associated with the organization. This perspective is well-received in literature and it is viewed as a theory that serves the interest of the stakeholders, which ultimately helps in influencing their willingness to invest in the company in variety of ways (Tran, 2019, Frynas & Yamahaki, 2019). Researchers who support that CSR and financial performance have a negative relationship believe that stockholders only behave to serve their interest and therefore, the business invest in social responsibilities to only increase profitability and the wealth for the owners (Wang et al, 2016, Schrempf-Stirling, Palazzo & Phillips, 2016, Dyck et al, 2019, Crane, Matten & Spence, 2019).
Proponents of stakeholder theory believe that firms invest in CSR activities to have positive impact on financial performance (Chandler, 2019). Based on this perspective, CSR extends itself to fulfill the needs and requirements of all the stakeholders involved in the company including customers, workers, suppliers, governmental agencies, and communities. However, critics also oppose this perspective. Sims (2003) states that big corporates that are recognized globally fail because of the stockholders of the company expect significant returns on the investments they have made, customers focus require good quality products, employees want to be satisfied with their jobs, and local communities expect businesses to be socially responsible. Thus, stakeholders’ management becomes a burden for the company and leads to their failure. As similar perspective has been asserted by Frynas & Yamahaki (2019).
An alternate perspective proposes that CSR activities does not benefit financial performance. This has been put forward by researchers such as Aupperle et al., 1985 and Teoh et al (1999) (Frynas & Yamahaki, 2019). The results of their study demonstrate that CSR activities impact on financial performance cannot be determined because of factors that are confounding in nature. These factors fail to identify the link between CSR and financial performance. As a result, researchers and industry professionals have struggled with the accurate conception of CSR. According to Frynas & Yamahaki (2019), attempts have been made to provide a clear and concise concept of CSR, confusion is prevalent in theorizing it. Dyck et al (2019) proposes that the definition of CSR is varied and complex. Schrempf-Stirling, Palazzo & Phillips (2016) propose that studies have demonstrates that CSR differs in terms of its concepts and meanings because of vast number of literature is available on it.