The Relationship between CSR and CFP

Among the earliest empirical studies on the CSR-CFP relationship are Bragdon and Marlin (1972), who used Council on Economic Priorities ratings and accounting measures and Moskowitz (1972) who employed reputational indices. Some literature reviews and meta- analyses on studies that examine the CSR-CFP link include Margolis and Walsh (2001), Orlitzky and Benjamin (2001), Orlitzky et al. (2003), Lyon and Maxwell (2004), Wu (2006) and Orlitzky and Swanson (2008). The literature offers inconclusive results on the CSR-CFP nexus (cf. Lundgren, 2011). Some empirical review studies report positive relationship (Cochran and Wood, 1984; McGuire et al., 1988; Margolis and Walsh, 2003; Orlitzky et al., 2003; Wu, 2006; Beurden and Gössling, 2008) whilst others report negative

14 relationship (Griffin and Mahon, 1997; Brammer et al., 2006) and still others report neutral relationships (Aupperle et al., 1985; McWilliams and Siegel, 2000).

Some researchers including Godfrey and Hatch (2007) attributed the mixed findings on CSR-CFP linkage to authors using multiple-industry data sets, aggregated dimensions of CSR (e.g. workers relation, environmental management and corporate philanthropy) and cross-sectional observations. Again, the direction of the CSR-CFP connection may be different because of empirical, methodological and theoretical drawbacks and because of the type of proxy measures used for CFP (Aupperle et al., 1985; Griffin and Mahon, 1997; McWilliams and Siegel, 2000).

The evidence on the direction of the CSR-CFP nexus appears to support a positive relationship. For instance, Roman et al. (1999) reported that 33 studies they reviewed showed a positive CSR-CFP link, 5 showed negative relationship and 14 found neutral relationship. Margolis and Walsh (2003) conducted a meta-analysis of 127 multiple regression studies on the CSR-CFP link over the period of 1972-2002. The authors concluded, “Corporate social performance has been treated as an independent variable, predicting financial performance, in 109 of the 127 studies. In these studies, almost half of the results (54) pointed to a positive relationship between corporate social performance and financial performance. Only seven studies found a negative relationship; 28 studies reported non-significant relationships, while 20 reported a mixed set of findings” (Margolis and Walsh, 2003 p. 274). The authors critiqued the techniques employed and the conflicting use of proxy variables. Orlitzky et al. (2003) also investigated the population of primary

15 studies that examined the CSR-CFP relationship. After correcting for sampling and measurement error, they performed a statistical analysis of the outcomes from 52 studies and found a positive CSR-CFP link. Wu (2006) conducted a meta-analysis of 121 empirical studies exploring the CSR-CFP association and found a positive link implying that socially responsible firms are likely to have more benefits relative to costs. Wu (2006) also found that firm size had no clear effect on either CSR or CFP. More recently, Beurden and Gössling (2008) conducted a meta-analysis of studies that investigate the CSR-CFP nexus and identified many factors that influence this relationship. They found a positive CSR- CFP relationship indicating that “Good Ethics is Good Business”. They also found in about half of the studies that size was a major variable that influenced the CSR-CFP linkage. Overall, earlier empirical evidence appears to champion a positive relationship. A number of justifications are advanced for the positive link. They include the social impact hypothesis (Freeman, 1984), which is supported by the instrumental view of stakeholder theory and the trade-off hypothesis (Vance, 1975). It is also argued that the real expenditures on CSR are smaller compared to the potential gain to the business. For example, the cost of engaging in CSR may be much less relative to the benefits that result. Another reason advanced for the CSR-CFP link is that profitable businesses have available slack resources due to their higher CFP that can be channelled into CSR activities (Waddock and Graves, 1997; Preston and O'Bannon, 1997). This is the slack resources hypothesis. The term “slack resource” implies “potentially utilisable resources” indicating that businesses that do well appear to do good (George, 2005). Besides, Good management theorists contend that good management practice is highly correlated with CSR (Waddock and Graves, 1997).

16 Some studies suggest a “virtuous circle” between CSR and CFP based on both the slack resources and good management hypotheses (Waddock and Graves, 1997; Nelling and Webb, 2009). This implies that a rise in CFP results in a rise in CSR because good financial performance may lead to more resources that are available to pursue CSR goals. Also, increases in CSR may increase CFP as more CSR activities may increase investor or customer confidence in the firm in question or boost the morale of employees to work hard to cut down costs, thereby generating higher level of CFP.

The issue with many of these CSR-CFP linkage studies is that there is room for methodological improvement. Existing studies are yet to take advantage of the frontier efficiency and productivity change techniques. Specifically, performance can be measured by the theory of frontier efficiency. Exception include Vitaliano and Stella (2006) and Paul and Siegel (2006). The first empirical chapter proceeds in the direction of Paul and Siegel’s (2006) idea and adds to the existing literature by examining the CSR-CFP connection using technical efficiency and profitability indicators as proxies for CFP. The approach used in this study will help to answer the research question 1b that asked whether there exists a direct link between CSR and CFP in the first empirical section of the study.

Another limitation of earlier studies is the use of samples from a multiplicity of industries. This is because each industry has peculiar attributes, different stakeholders and different reasons and methods of engaging in CSR that differentiates it from other industries (Griffin and Mahon, 1997; Rowley and Berman, 2000). Using several industries in a single empirical analysis could confound the choice of suitable proxies for CSR and CFP (Griffin and Mahon, 1997). To the best of our knowledge, no study has examined the CSR-CFP

17 nexus within the Ghanaian banking industry. The approach adopted in this study is also different from most CSR-CFP linkage studies in that, the analysis considers just a single industry, i.e. the banking industry, where firms use similar resources to generate similar products and services. The approach used here does not combine different industries for the analysis, thereby sidestepping the difficulties associated with unobserved firm heterogeneities that may require the analyst to control for several industry differences. Our approach is in line with a recent call by Simpson and Kohers (2002), Godfrey and Hatch (2007) and Beurden and Gössling (2008) for industry-specific studies. Considering CSR within the banking industry is also interesting, especially when compared with the manufacturing sector. The reason is that manufacturing industries may engage in CSR activities because their actions have negative externalities on the environment such as pollution. But the banking industry does not generate such kind of externalities. Hence, CSR is voluntary.

3.6 Conclusion

This chapter has explored the definitional and the multidimensional construct of CSR. The potential costs and benefits of CSR are examined paving the way to justify the concept into DEA banking intermediation model. The chapter has reviewed various measures of CSR and CFP and explored the CSR-CFP nexus literature. The next chapter discusses the need for appropriate specification of inputs and outputs for banking efficiency intermediation model. The chapter examines this issue, noting the importance of CSR.

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Chapter 4