Impact of Corporate Social Responsibility Disclosures on Institutional Ownership

1.1 Chapter Introduction

The Objective of this chapter is to present the background of the study and to provide the justification for the study. Thus, firstly the background of the study will be presented and secondly research problem, research objectives will be discussed. Finally, the significance of the study, limitations of the study has been discussed.

1.2 Background of the study

Today each and every business runs within the huge competitive market while facing new set of challenges. In earlier times, company did not give high attention to Social responsibility, but they were highly concerned about profitability. Today it has changed. Companies have to maximize the profit while comply with Corporate Social Responsibility (CSR). Companies that are concern about their financial performance should also be concern about maintaining high level of Corporate Social Performance (Mahoney and Roberts, 2007).

United Nations Global Compact Ethic Guidelines indicate that CSR issues will continue to grow in importance. CSR is the obligation of a business to maximize its positive impacts and minimize its negative impacts on the society. But different authors have differently defined CSR as follows.

Williams and Siegel (2011), described CSR as “actions that appear to further some social good, beyond the interest of the firm and that which is required by law”.

corporate social responsibility is a business system that enables the production and distribution of wealth for the betterment of its stakeholders through the implementation and integration of ethical systems and sustainable management practices. Corporate social responsibility (CSR) refers to strategies corporations or firms conduct their business in a way that is ethical, society friendly and beneficial to community in terms of development

Today CSR have increasing trend not just only business and academic world but also everyday life. There are lot of highlighted factors which leads to the interest of CSR such as poor business behavior to the customer, treating employees unfairly, ignoring the environment and the consequences of organizational actions.

Stocks exchange and other financial institution around the world are compelling to listed companies to provide information on their CSR activities. Example in South Africa all listed companies in the Johannesburg Stock Exchange must comply with a CSR based code of conduct. In many countries CSR is a not a mandate but it is a voluntary activity.

Companies not only concern the CSR activity but also they try to report their CSR activities because of many reasons. According to Manamperi and Rajapaksha (2012), those reasons are ,to inform stakeholders, to provide a more rounded picture of the company, to meet best practice in company reporting, to derive CSR‟s positive public relations benefits, to satisfy disclosure requirements of major shareholder, to ensure that employees are aligned to the company’s targets, to demonstrate an open management style, to reflect the importance attached to CSR by the company, to demonstrate to stakeholders that nonfinancial issues are also important.

Today Corporate Social Responsibility Disclosures (CSRD) has growing concern than earlier. Therefore, CSRD become an important research topic in business studies. To survive and prosper business should identify gap between the key stakeholder’s expectation and what the company gives to stakeholders. Business must adopt the system that bridges the gap between economic performance and social system.

Stakeholders are individual and groups who has innate interest in business organization’s activities and who directly and indirectly influence or being affected by the organizations’ purpose and strategies. Business should concern both primary stakeholder’s and secondary stakeholder’s expectation. Primary stakeholders are who directly engage in transactions with the firm and are very essential for the firm’s perpetual existence, survival and growth. Secondary stakeholders are who do not engage in transactions with the corporation and not very essential for firm’s perpetual existence, survival and growth.

The stakeholders, who have high level of interest of business and high level of power, are the key stakeholders. Stakeholder power is the extent to which individuals or groups are able to influence, induce or coerce others into following certain courses of action in favor of them. Investors are the one of key stakeholders. Within a business identify the two types of investors. One is individual investors other one is institutional investors.

Not only individual investors but also institutional investors are important to the organization because they bring liquidity to the organization. Institutional investors are organization which are pool large sum of money and invest those sums in securities, real property and other investment assets. Institutional investors can have some influence in the management corporations because it will be entitled to exercising to the voting rights of the company. Institutional investors are important to a business because they have massive amount of money for immediate investment and they have lot of power.

Institutional investors can react to the business, according to business CSRD activities. Therefore, this study tries to examine the impact of Corporate Social Responsibility Disclosures on IO in Sri Lankan context.

1.3 Problem Statement

Different authors have found different result when check the relationship between Corporate Social Responsibility Disclosure (CSRD) and institutional ownership (IOWN). Saleh et al, (2010) (Teoh and Shiu, 1990). Teoh and Shiu (1990), observe the institutional owners‟ attitudes towards CSR and sources of information about the activities. They learn that the investors usually do not change decisions about their investment on the basis of company's statement around CSR. In Sri Lankan context, there are some journal Articles related to CSR practices and impact of CSR on Corporate Financial Performance (CFP). According to Madurasinghe and Jahfer (2016), corporate social responsibility has a positive relationship with the financial performance measurement of return on equity with the return on asset in Sri Lankan banking sector. The research by Abeysinghe and Basnayake (2015) reveals that, there is a negative relationship between CSR disclosures and financial performance of selected domestic commercial banks. Researcher identified FP will not be totally depended on CSR disclosure. But I identified that, lack of journal articles related to CSRD and Institutional Ownership. Therefore, the question that needs attention is “Dose CSRD impact on IOWN in listed companies on CSE?” That is what this study tries to examine.

1.4 Research Questions

1. Is there a significant impact of CSRD on IOWN of highest turnover non-financial companies in Sri Lanka?
2. What extent of CSRD has significant impact on IOWN of highest turnover non-financial companies in Sri Lanka?

1.5 Research Objectives

1. To examine the significant impact of CSRD on IOWN of highest turnover non-financial companies in Sri Lanka.
2. To identify what extent of CSRD has significant impact on IOWN of highest turnover non-financial companies in Sri Lanka.

1.6 Significance of the Study

Today CSRD has become an increasing important issue in a firm‟s agenda (Burak and Morante, 2007). Through disclosing CSR activities, company can take many advantages. This study tries to identify the impact of CSRD on institutional ownership. Most probably institutional investors give more contribution to the business than individual investor. Because they have large amount of money and they have high power. Therefore, their influence to the business is high. Therefore, it is better to have an idea, to the business, how institutional ownership behaves according to the CSRD activities. Then business can easily plan their activities without harm to society and environment. If there is an impact on CSRD on institutional ownership, there is a chance to institutional investors, to influence on the business activities which are not comply on CSRD activities.

1.7 Limitation of the Study

1. This study use small sample of 25 non financial companies. This sample may be small in size and, by construction, composed of the most active CSR listed companies and thus may not be representative of the population of Sri Lankan firms,
2. This study examines corporate reports for only five years. (Financial year beginning with 1st of April and ending with 31st March.)
3. Disclosure in annual reports should not be taken as the complete measure of corporate social engagements. Sometimes CSRD by companies might be overstated or understated.
4. No proper or universal accepted theory for measuring CSRD impact quantitatively.
5. The study was use the institutional ownership as an organizational structure to examine the impact of CSRD.

1.8 Chapter Summary

Chapter one is the starting point of the dissertation. Researcher has mentioned theoretical background of the research topic which, ‘Impact of corporate social responsibility disclosures on institutional ownership of highest turnover non-financial companies in Sri Lanka’. This study has mentioned research problem, objectives, significance and limitations. This chapter provides explanations of the motivation behind the dissertation, the chapter concludes with the brief introduction to the rest of the chapters of this research.