CSR and Corporate Financial Performance: Key Mediating Factors

Introduction

Even as corporate social responsibility (CSR) increasingly becomes imperative, more and more corporations are taking part in social responsibility campaigns — though with varying outcomes. Organizations that adopt CSR tend to enhance relations with core stakeholders, increase trust, and strengthen their competitive advantage (Simionescu, 2015, p. 246). CSR also enables companies to strengthen credibility with stakeholders, thereby shaping how the company relates to its stakeholders and vice versa. As a result, companies' transaction costs are significantly reduced, providing a financial advantage. Furthermore, as indicated by many scholars, a positive relationship exists between corporate financial performance (CFP) and CSR.

On the other hand, some scholars regard the relationship between the two variables as mixed, negative, or even unpredictable. Neither a purely negative nor a purely positive relationship is entirely reliable, because several intervening variables influence how CSR and financial performance interact. The discussion that follows is conducted through a review of published literature.

Indeed, the relationship between financial performance and corporate social responsibility is a complex one. Developing a sustainable competitive advantage has been overlooked as an important outcome of the customer satisfaction matrix. Reputation is another critical factor that influences corporate performance and has been overlooked, even though it serves as a useful mediator (Algame & Pirzad, 2017, p. 1454). Variations in a company's earnings relative to its social responsibility activities represent key capability differences. The social relationship between the company and its stakeholders is also central to this dynamic. The stakeholder's ability to influence the performance of a company represents the power a firm has to identify, activate, and benefit from opportunities that enhance the stakeholder relationship through CSR.

CSR, CFP, and the Factors Affecting Their Relationship

CSR was first identified as a distinct concept in 1953, when Howard Bowen offered a rough definition in a book titled Social Responsibilities of the Businessman. Bowen described the commitment of business people to pursue decisions, policies, and activities aligned with the goals and values of society. Owing to differing interests, numerous definitions of CSR have since emerged, creating some confusion around the concept (Algame & Pirzad, 2017, p. 1454). Nevertheless, across the various definitions, the idea of business firms engaging with environmental and social issues remains constant.

There is no doubt that financial performance remains the dominant consideration in the global economy today. Companies are valued based on their financial performance and worth, and the prevailing focus is on how shareholder profits can be maximized (Algame & Pirzad, 2017, p. 1455). The ideal functioning of the financial and economic system in any organization depends on an effective financial sector. Meanwhile, despite the central role of manufacturing and industrial entities, the service sector has emerged as a critical component because of its turnover, versatility, and interactive design.

To enhance organizational performance, CSR is an important factor. It can influence financial performance positively, as outlined by stakeholder theory, or negatively, as argued by critics (Ali, Danish & Asrar-ul-Haq, 2020, pp. 167–168). Stakeholder theory holds that organizations should strive to satisfy their stakeholders, as doing so produces optimal output from those stakeholders and improves stockholder profits (Ali et al., 2020, p. 167). Conversely, some scholars argue that CSR hurts financial performance, on the grounds that maximizing profits is the primary purpose of any business. This perspective holds that managers are agents of shareholders and their core mandate is to enrich those shareholders; therefore, managers should only undertake actions that produce profits (Ali et al., 2020, p. 168).

Given that these competing forces shape the CSR–CFP relationship, it is important to identify the specific factors that mediate it. Research findings indicate that the following factors are particularly influential:

Corporate Image and Customer Satisfaction

i. Corporate Image (CI) (Ali et al., 2020, p. 167)
ii. Customer Satisfaction (CS) (Ali et al., 2020, p. 167)
iii. Consumer-Company Identification (CCI) (Deng & Xu, 2017, p. 517)
iv. Competitive Advantage (Algame & Pirzad, 2017, p. 1455)
v. Stakeholder Ability to Influence (SAI) (Simionescu, 2015, p. 247)

Corporate image is how the public views an organization — its reputation. It is also defined as the overall assessment customers make based on a firm's past results and behavior, which in turn defines the company's perceived ability to deliver benefits to its various stakeholders (Algame & Pirzad, 2017, p. 1456). More specifically, a corporation's image is the outcome of customers' perceptions formed through prior encounters and both direct and indirect information arising from the company's past activities. Signals of a positive reputation include reduced operating costs, a high rate of returning customers (which increases sales), and the ability to raise product prices.

The available literature exploring the relationship between corporate image and firm performance consistently finds that a positive corporate image produces both financial and non-financial gains. Organizations with a positive image are less exposed to risk than those with a negative one. Firms with a positive image tend to enjoy greater sales and higher returns than those projecting a negative image. A positive corporate image leads to improved financial performance and client satisfaction. Rising demand, higher product prices, and customer loyalty all improve performance (Ali et al., 2020, p. 168). Customers are willing to pay more for products and services when a business has a strong reputation.

Customer satisfaction refers to how a customer feels about a product or service. It is a primary outcome of marketing and acts as a link across the various phases of consumer buying behavior. Satisfied customers, for example, are likely to make repeat purchases. Satisfied customers also commonly share their positive experiences with others, effectively engaging in word-of-mouth advertising on behalf of the company. The converse is equally true: dissatisfied customers engage in negative advertising. Behaviors such as repeat purchases and positive word-of-mouth directly influence a company's viability and profitability (Algame & Pirzad, 2017, p. 1456). Most organizations use customer satisfaction as a performance indicator, and its relationship with organizational performance is proportional — the more satisfied customers are, the higher the organization's performance.

Conclusion

Ali, H. Y., Danish, R. Q., & Asrar-ul-Haq, M. (2020). How corporate social responsibility boosts firm financial performance: The mediating role of corporate image and customer satisfaction. Corporate Social Responsibility and Environmental Management, 27(1), 166–177.

Deng, X., & Xu, Y. (2017). Consumers' responses to corporate social responsibility initiatives: The mediating role of consumer–company identification. Journal of Business Ethics, 142(3), 515–526.

Simionescu, L. N. (2015). The stakeholders' ability to influence the relationship between companies' financial performance (CFP) and corporate social responsibility (CSR). Annals of 'Constantin Brâncuși' University of Târgu-Jiu: Economy Series, 2(1), 245–250.