CHAPTER 5: METHODOLOGY
5.4 Dependent Variables
Corporate social strategy was measured in three ways: Aggregate CSS (ACSS),
Breadth of CSS (BCSS) and Depth of CSS (DCSS) using KLD strength measures. As
introduced in Section 5.2, the KLD database has been used extensively as a measure of
CSR, however, no consensus has emerged to date with regards to the appropriate
operationalization of the construct (Margolis & Walsh, 2003). To illustrate, Appendix A
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database; although early studies converged on a simple sum of strengths and weaknesses,
the heterogeneity of subsequent operationalizations is evident.
Recent studies, however, have demonstrated that CSR and CSiR (Corporate Social
Irresponsibility) are in fact two separate and distinct constructs (Strike et al., 2006) and
that summing KLD strengths and weaknesses therefore masks important information
about a firm’s CSR posture (for example, a firm can score a +2 in diversity, and a -2 on
the environment and thus end up with a CSR score of zero). As such, there have been
recent calls for all new CSR analysis to treat the two constructs separately (Mattingly et
al., 2006). This approach has face validity given that the strengths measures capture
specific firm-level decisions to engage in different types of CSS which are therefore a
more direct measure of strategic choice than a combined strengths/weaknesses score,
where weaknesses are often measured as fines or penalties. The use of KLD strengths
separately has therefore become the preferable methodological treatment of KLD data
(Godfrey et al., 2009; Kacperczyk, 2009) and is the approach taken in this study.
Aggregate CSS (ACSS). In order to assess the overall trends in CSS over time, I begin with an aggregate score of CSS which includes the KLD strengths in six
dimensions: diversity practices, employee relations, community relations, the
environment, human rights and the product quality categories (a proxy for consumer-
focused initiatives). As is common in prior research, the corporate governance dimension
is not included as the items measured are not deemed to reflect strategic choices regarding
CSS initiatives. A list of the individual items measured in each dimension can be found
in Appendix B.
An important consideration in longitudinal studies is to ensure that the underlying
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Vandenberg, 2010). Within the KLD database, the total number of CSS initiatives in each
category has varied over the years as social and stakeholder issues have become more or
less salient to the underlying notion of corporate social responsibility. For example, the
total number of CSS initiatives measured by KLD in 1991 in the six areas was 27 and
included items such as no lay-off policies in the employee category (dropped in 1994) and
positive operations in South Africa in the Human Rights category (dropped in 1995). On
the other hand, as other issues grew in importance (e.g., progressive gay/lesbian policies
which were added to the diversity score in 1995) these were incorporated into the KLD
measures such that the total number of initiatives in the six areas recorded had grown to
34 by 2009. As such, a simple count of the total number of CSS initiatives over time
might artificially capture changes in measurement rather than actual changes in growth in
CSS participation. As such, a firm’s ACSS is measured as a percentage of CSS initiatives
the firm participated in out of the total possible CSS score for that year. In this manner,
ACSS is able to capture the relative strength of engagement in CSS as well as model the
growth of a firm’s engagement in ACSS over time.
Note that while some studies apply a weighting scheme to the different
dimensions of CSR (e.g., Waddock & Graves, 1997), a more common approach is to give
each dimension equal importance (e.g., Bouquet & Deutsch, 2008; Garcia-Castro, Arino
& Canela, 2008; Hillman & Keim, 2001). Given the focus on assessing the overall growth
of CSS over time, there is no a-priori rationale to suggest prioritizing particular sub-
categories over others. Furthermore, research has demonstrated that there are no statistical
differences in results obtained with weighted or un-weighted measures (Hull &
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Breadth of CSS (BCSS). As with ACSS, simple count data could mask underlying changes in measurement rather than actual changes in the breadth of a firm’s CSS. As
such, I created a measure of CSS dispersion based on Palepu’s (1985) entropy measure of
diversification. The entropy measure for BCSS was constructed as follows. Consider a
firm has decided to participate in N CSS areas. Let Pi be the share of the ith area in the
total number of areas in which the firm participates. Then:
N Breadth of CSS = ∑ [Pi ln(1/Pi)]
i=1
where Pi is the share of total strengths in area i and ln(1/Pi) is the weight of each
area i (the logarithm of the inverse of its share). This measure, therefore, takes into
consideration two elements of CSS: (i) the number of stakeholder and/or social issue
areas in which a firm participates, and (ii) the relative importance of each area in terms of
total number of strengths. The entropy measure can therefore range from 0 to 2 where the
closer the score to 0, the narrower the breadth of CSS (with 0 indicating perfect
concentration in one area, or no dispersion). While novel to the area of CSR, the entropy
measure has been extensively used and validated in the corporate diversification literature
in a manner conceptually similar to the one used herein (Hoskisson, Hitt, Johnson &
Moesel, 1993; Palepu, 1985).
Depth of CSS (DCSS). To assess a firm’s depth of CSS, the concept of a ‘specialization ratio’ was also borrowed from the diversification literature, where the ratio
is the score for the industry sector with the greatest amount of sales divided by a firm’s
total sales (Hoskisson et al., 1993). Here, the specialization ratio for DCSS is calculated
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strengths in that area. Shallow CSS and Deep CSS are then defined on a continuum
ranging from 0 to 1 where the closer the score to ‘1’ the greater the depth of CSS.6
The following table illustrates how this decomposition will be used to map the
overall aggregate level of CSS (ACSS), the breadth of CSS (BCSS) and the depth of CSS
(DCSS).
Fi
rm
Table 5.2: Hypothetical Measurement of Corporate Social Strategy
E m pl oye e R ela tio n s D iv er sity C om m uni ty R ela tio n s E nvi ro nm ent H um an R ig h ts S p eci al P roduc ts Total Number of Strengths Total Number of Possible Strengths ACSS (Total Strengths/Total Possible Strengths) BCSS (Entropy Measure) DCSS (Special- ization Ratio) 1 6 0 0 0 0 0 6.00 36 16.7% 0.00 1.00 2 1 5 0 0 0 0 6.00 36 16.7% 0.45 0.83 3 0 3 3 0 0 0 6.00 36 16.7% 0.69 0.50 4 0 0 2 2 2 0 6.00 36 16.7% 1.10 0.33 5 1 1 1 2 1 0 6.00 36 16.7% 1.56 0.33 6 1 1 1 1 1 1 6.00 36 16.7% 1.79 0.17
As can be seen, each of the hypothetical firms in this “study” has earned a total of
six ‘strengths’. Under traditional methods of assessing CSP that rely solely on a count of
the total number of strengths (e.g. Strike et al., 2006), the CSP of each of these firms
would be equal. This is conceptually similar to the method used to measure ACSS,
however, ACSS has been adjusted by the total number of possible strengths which varies
by year. By adding BCSS and DCSS, this study highlights the nuances in breadth and
6 Note: I did not use the formula: strengths in the CSS area with the greatest amount of strengths divided by a firm’s total strengths as this was not deemed to accurately capture the depth construct. If a firm only has one strength in one area, this formula would grant the firm a specialization score of 100%. Dividing the greatest amount of strengths by the total number of possible strengths in an area was therefore considered a more representative measure of depth of CSS.
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depth within the different corporate social strategies. Firm 1, for example, has focused all
of its attention in one category - employee relations issues, while Firm 6 has taken a
broader approach and invested in all six areas. Similarly, one can see that Firm 1 has also
engaged in a deeper CSS having earned six strengths in employee relations while Firm 6
has only earned one, thus engaging in a shallow CSS with regards to this particular area.
With regards to the typology presented in Chapter 2, therefore, Firm 1 is likely to fall into
the quadrant of dedicated CSS, while Firm 6 would fall under the quadrant of diffuse
CSS. Although not formally hypothesized, the overall nature of the CSS of each firm can
therefore be assigned to a particular quadrant every year, a topic that will be revisited in
the discussion section.