An Impact of Profitability on Corporate Social Responsibility

Introduction

Since the 1980s, media, government, and the public have been increasingly concerned about the environmental and social consequences beyond corporate activities. Ecological scandals, employee welfare exploitation, and negative social responsibility news releases attract considerable publicity. Investors have easy access to detailed CSR ranking reports published by myriad organizations. As a result, CSR has evolved to appear on the inevitable agenda for corporate governance (Porter & Kramer, 2006). Corporates actively participate in CSR activities for a variety of reasons, such as risk management consideration (Eisingerich & Bhardwaj, 2011), brand differentiation enhancement (Fry et al., 1982; Griffin & Vivari, 2009), “triple bottom line” achievement which refers to the balance of “people, planet and profit” (Elkington, 1994), or the expectation of reduced scrutiny. Aside from earning a positive reputation, most firms invest in fragmented philanthropic activities instead of thinking about how CSR propositions could be integrated into their value chain. Some pioneering firms, such as Nestle and Clarins, that closely tied a social issue to business have turned out to benefit society while reinforcing strategy (Porter & Kramer, 2006). In China, CSR is a fairly recent notion that draws considerable attention and swiftly becomes popular over the decades. Fast economic growth, loose fiscal policy, and more liberal market transformation catalyze the crowd craze for commercial success. However, the absence of effective supervision provides convenience for shady corporate activities.

CSR Challenges in China

Poisonous baby milk, fake lamb products made from stray cats, industrial effluent secretly injected into underground water floors—such vicious incidents diminish trust from customers. To save their reputation and differentiate from venal peers, companies actively engage in CSR initiatives. The global expansion of Chinese multinational enterprises (MNEs) also facilitates Chinese firms to join the international trend of CSR investment (Msika et al., 2016). Despite the fact that the general public holds companies accountable for the social consequences of their operational activities, many firms are reluctant to fulfill social responsibility. Social responsibility is often viewed as “a cost, a constraint, or a charitable deed” for winners (Porter & Kramer, 2006). Many researchers try to prove that an upright CSR strategy could yield better financial performance either from a theoretical perspective or in an empirical approach, but the conclusion frequently gets refuted in developing markets.

Literature Review

The inquiry of the interactive relationship between CSR and corporate financial performance (CFP) can be traced back to the 1970s. The majority of researchers find a significantly positive relationship. Margolis and Walsh (2003) reviewed 109 papers since 1972 on this topic and found 54 positive, 28 insignificant, and 7 negative results. Twenty papers did not give explicit discoveries. For instance, Waddock and Graves (1997) used the CSR scores ranked by KLD as a measurement of CSR disclosure, and ROA and return on sales as measurements of CFP. They find that firms with better financial performance in the current year are more likely to have better CSR disclosures next year. Since 2005, Chinese researchers have also started to investigate this problem. Shen (2005), Yang and Yin (2009), Tian (2009), and Zhang (2013) have reported positive relationship findings.

Different voices emerge as public interest in CSR increases. For instance, Ingram and Frazier (1983) choose 79 American companies in the chemicals and oil industry as an empirical research sample and find that CFP has a weak negative impact on CSR disclosure. Controlling for corporate size and industry, Cowen et al. (1987) find that profitability has no significant influence on CSR disclosure. Researchers from China (Li, 2006; Wen & Fang, 2008) also find a negative relationship between CSR and CFP. Rowley and Berman (2000) believe the underlying logic connecting CSR-FP varies with specific cases, and the inquiry of their correlation “provides only a small piece of the descriptive puzzle.” van Beurden and Gössling (2008) use meta-analysis to review 34 typical papers since 1990 and find 23 positive, 2 negative, and 6 no correlation conclusions.

Conclusion

Profitability has a significant positive impact on CSR. Highly profitable firms usually have better social performance. Furthermore, the expectation of growth has a quadratic effect. As sales growth gradually increases to a certain value, a company’s willingness to invest in CSR also increases. After sales growth reaches a critical point, companies are more and more reluctant to fulfill CSR as growth continues to increase. Firms actively engage in CSR programs to distinguish themselves from other slow-growth firms. After the critical point, the managerial opportunism hypothesis dominates. Managers take advantage of the strong performance to increase their own benefits and reduce CSR expenditure. While profitability and growth of the previous year have no influence on the current year’s social performance disclosure.

References

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