Link Between CSR and Financial Performance Only the Literature Review chapter

Excerpt from Only the Literature Review chapter :

Corporate Social Responsibility Practices in Beijing of China

Theoretical perspectives of corporate social responsibility

The basic idea of CSR is that business and society are interwoven rather than separate entities (Wood 1991). As discussed, a number of theories have been identified in the literature to explain CSR. For example, stakeholder theory explains how CSR is important, and the social contract and legitimacy theories explain why CSR is important (Moir 2001). CSR includes a number of theories and many studies have discussed agency, stakeholder and social contract that are behind the concept of CSR; these theories and CSR approaches under the themes of economics, politics, social integration and ethics (Parsons and Sociales 1961). Garriga and Mele (2004) described four groups of theories consistent with Parson in 1961: instrumental, political, integrative and ethical theories. According to these scholars, instrumental theory relates to the economic features of the interactions between businesses and society. This is consistent with the wealth creation of the shareholders. Political theory relates to the social power of the company and emphasizes the relationship between society and its responsibility in the political arena associated with this power. This theory leads organizations to accept social duties and rights or to participate in certain social co-operations. The third theory discussed by Garriga and Mele (2004) was integrative theory which suggests that the business ought to integrate social demands. Under this theory, Garriga and Mele argue that an organization depends on society for its continuity and growth as well as for the existence of business itself.

Stakeholder theory

Stakeholder theory is a theory of organizational management and business ethics that deals with principles and values in managing an organization (Freeman and Phillips 2002; 2003). According to this theory, stakeholders are recognized as the group of people interested in the company's activities (Freeman 1983). Table 3.1 shows what stakeholders expect from their organizations.

(Source: Adapted from Cannon 1994)

The originator of the stakeholder concept, Freeman, defined stakeholders as any group or individual who can affect or is affected by the achievement of the organization's objectives' (1984). Recently, Freeman et al. (2004) redefined the term as ?those groups who are vital to the survival and success of the corporation'. The WBCSD (1999) identified stakeholders as representatives from labor organizations, academia, churches, indigenous people, human rights groups, government and NGOs,

Shareholders, employees, customers/consumers, suppliers, communities and legislators. Further, Friedman (2006) identified stakeholders as customers, employees, local communities, suppliers and distributors as well as shareholders. Other groups and individuals are also considered stakeholders, including, the media, the public, business partners, future generations, past generations (founders of organizations), academics, competitors, NGOs or activists, stakeholder representatives such as trade unions or trade associations of suppliers or distributors, financiers other than stockholders (debt holders, bondholders and creditors), competitors and government, regulators and policymakers.

According to stakeholder theory, the company's major objective is to balance the expectations of all stakeholders through their operating activities (Ansoff 1965). The way businesses involve shareholders, employees, customers, suppliers, governments, NGOs, international organizations and other stakeholders is usually a key feature of the CSR concept (Fontaine et al. 2006). Clarkson (1995) stated that the fundamental aspect of stakeholder theory is determined the stakeholders of an organization and reveal the organization's responsibility for them. In addition, they are important to the organization because their investment is subject to risk due to the activities of the organization.

Social contract theory

According to Weiss (2008) a social contract'is a set of rules and assumptions about behavioral patterns among the various elements of society'(p.161). This theory combines organizational attention with stakeholder management. Much of the social contract is rooted in the traditions of society. The theory says that the social contract is formulated between people and organizations when exchanging something. Weiss stated that basic social contract theory is mutual trust and relationship between the organization and the stakeholders (Weiss 2008).

Weiss (2008) argued that firms can succeed only by formulating contracts with the customers and public. He further stated that a social contract can be considered actioned in an ethical manner. This can be addressed by following questions: What is the nature of the contact, and are all parties satisfied with it? Are customers satisfied? With the products and services and how they are treated by a company's representatives? Are suppliers, distributors and vendors all satisfied by the contractual? agreements with the corporations? Do members of the communities in which the company is located believe the company is a responsible and responsive citizen? Does the company pay its fair share of taxes? Do employees believe they are paid a fair wage, have adequate working conditions and are being developed? (p. 162).

Legitimacy theory

Legitimacy theory is based upon the notion that the firm activates a social contract, where it agrees to perform various socially desired actions in return for approval of its objectives, other rewards and its ultimate survival. Legitimacy theory posits that corporate disclosures react to environmental factors (economic, social and political) and that disclosures legitimize actions (Preston and Post 1975). It therefore needs to disclose enough social information for society to assess whether it is a good corporate citizen. In legitimizing its actions via disclosure, the corporation hopes ultimately to justify its continued existence (Lehman 1983). This theory is largely reactive in that it suggests that organizations aim to produce congruence between the social values inherent (or implied) in their activities and societal norms (Lindblom 1983). Corporate social disclosures may then be conceived as reacting to the environment where they are employed to legitimize corporate actions.

CSR and Company Performance (CP)

Considerable exertions have been made to help us comprehend the effect of CSR activities on company performance (Griffin and Mahon, 1997; Husted and Allen, 2000; Husted and Salazar, 2006; Marom, 2006; McWilliams and Siegel, 2001; Moneva et al., 2007; Orlitzky et al., 2003; Salzman et al., 2005; Schuler and Cording, 2006; Swanson, 1995, 1999; Waddock and Graves, 1997; Windsor, 2001; Wood, 1991; Wood and Jones, 1995; Wright and Ferris, 1997). While a number of studies reported a negative relationship (Vance, 1975), or no major association (Aupperle et al., 1985; Davidson and Worrell, 1990; McGuire et al., 1988; Preston, 1978; Spicer, 1980) between CSR and company performance, most of the studies conveyed an affirmative association (Abott and Monsen, 1979; Bragdon and Marlin, 1979; Graves and Waddock, 1994; Moskowitz, 1972; Spencer and Taylor, 1987; Waddock and Graves, 1997).

CSR and financial performance

Financial performance is a very significant pointer of the strategic value of CSR (Orlitzky et al., 2003). Margolis and Walsh's (2001) meta-analysis found that fifty-five percent of the one hundred and sixty studies inspected acknowledged an affirmative association between CSR and financial performance, twenty-two percent conveyed no association, and eighteen percent established an assorted association and four percent a deleterious association. Orlitzky et al. (2003) lead another meta-analysis and established analogous consequences. These studies provide credibility to the extensively acknowledged view that being socially responsible would, in a majority of cases, advance a firm's financial performance. Certainly, Aguilera et al. (2007) lately called for an end to the discussion on the relationship between CSR and financial performance, and argued that there is overpowering signs of an affirmative and major relationship between the two.

Many arguments and justifications have been put forward as to why CSR has an affirmative influence on financial performance (Allouche and Laroche, 2006). One of the noticeable urgings is that the ways in which a firm gratifies its investors and interconnects CSR activities to investors will leave a mark on its financial performance. Orlitzky et al. (2003, p. 405) noted that only when different stakeholder groups are satisfied will the organization's financial performance improve. Consequently, it can be argued that in developing markets, the connection between CSR and a firm's financial performance is dependent on stakeholders' observations of and ensuing responses to CSR exertions. Stakeholders' response to CSR exertions is arbitrated by the accessibility and concentration of data on CSR ingenuities and inclinations of stakeholders comparative to presented substitutes (Schuler and Cording, 2006). Hartman et al. (2007) put forward the argument that despite the inspiration for the arrangement, businesses must eventually connect their validation for CSR arrangement to stakeholders.

CSR and Employees

Roughly demarcated, worker obligation denotes the degree of worker contentment with the business and how they see their future connected to the business and so will be ready to sacrifice themselves to make the business work better (Jaworski and Kohli, 1993, p. 60). Aguilera et al. (2007) noted that workers judge their boss's CSR exertions centered on their interpretations of the business's CSR activities, results of the CSR activities, and the treatment of the application procedure. Researchers postulate that the social accountable or unaccountable acts will have a serious s effect on the workers (p. 843). Many studies have explored the connection between CSR and worker assurance (Albinger and Freeman, 2000; Backhaus et al., 2002; Greening and Turban, 2000; Maignan et al., 1999; Peterson, 2004; Turban and Greening, 1997). Largely previous exploration demonstrates that a business's collective accountability activities matter to its…

Cite This Only the Literature Review chapter:

"Link Between CSR And Financial Performance" (2014, July 20) Retrieved August 18, 2017, from

"Link Between CSR And Financial Performance" 20 July 2014. Web.18 August. 2017. <>

"Link Between CSR And Financial Performance", 20 July 2014, Accessed.18 August. 2017,