Intrinsic factors of CSP

This section is looking inside the company and describes the intrinsic factors, which are related to and affect CSP. These are the CSP-CFP relationship, firm characteristics and the corporate governance CSP antecedents.

The relationship between CFP and CSP

Corporate financial performance (CFP) describes how well a company can use its assets and generate revenue. It also describes the financial health of a company over a certain time period (Investopedia.com, 2021). The various measures of CFP are considered later in this section.

In the CSP literature, the relationship between CSP and CFP is a widely researched topic. Consequently, the CSP–CFP relationship has been found to be positive, negative or neutral (Busch & Friede, 2018). Some scholars have also studied the bilateral relationship of CSP and CFP. This means that, while CSP positively affects CFP, CFP also positively affects CSP. In this section, the relationship between CFP and CSP is considered.

As far as the positive relationship between CSP and CFP is concerned, the good management theory is considered first. It focuses on the role of committed management as a CSP driver and is considered to be the most important predictor of a positive relationship between CSP and CFP (Orlitzky et al., 2003; Thomas &

Simerly, 1994; Weaver et al., 1999; Slater & Dixon-Fowler, 2009; Dixon-Fowler et al., 2013; Isaksson & Woodside, 2016). In the good management theory, the management of a company is committed to high CSP, leadership is important and processes—such as human resources management (HRM)—are working properly.

The financial success is ultimately the result of good management. Second, the stakeholder theory focuses on the influence of stakeholders in shaping CSP. It states that companies engage themselves and invest in CSR activities under the scrutiny of

various stakeholders, such as politicians, civil servants, customers and the public opinion driven by social pressure and media. (Clarkson, 1995; Chin & Sharfman, 2011; Baron, 2009; Brower & Mahajan, 2013; Agudo-Valiente et al., 2015). As a result, company reputation is improved and a company hopes to boost its financial performance in this manner (Makni et al., 2008). Third, the slack resource theory focuses on the excess financial resources as main CSP drivers. It predicts that better financial performance would contribute to the availability of slack resources, which would increase a firm’s ability to invest in responsible actions in the community and society as well as towards the environment (Waddock & Graves, 1997).

Of the theories that relate to the negative relationship between CSP and CFP, the trade-off hypothesis assumes that there is a negative impact of social performance on financial performance—CSP nets only a few economic benefits but has numerous additional costs, thus reducing profit and shareholder wealth (Waddock

& Graves, 1997). Similarly, the managerial opportunism hypothesis also assumes a negative impact of CSP on CFP. This approach relies on the following logic—

management wants to maximise profit and would use all resources to achieve this purpose (Weidenbaum & Vogt, 1987). In addition, the Friedman doctrine (1970) states that a business’ social responsibility is to deliver profit to shareholders.

Friedman’s doctrine represents the managerial opportunism approach at its best.

Scholars who have studied the bidirectional CSP–CFP relationship (Busch & Friede, 2018; Orlitzky et. al., 2003; Adegbite et al., 2019) tend to use the positive synergy hypothesis. According to it, a high level of CSP would lead to improved financial performance, which would in turn allow the company to invest more in CSP. This would again lead to better financial performance and the circle is continued, which Waddock and Graves (1997) call a “virtuous circle”. In contrast, according to the negative synergy hypothesis, a higher level of CSP could lead to lower financial performance, which could then prevent a company from making new CSP investments—thus forming a “vicious circle” (Makni et. al, 2008). The bi-directional nature means that CSP positively affects CFP, explained primarily by the positive synergy hypothesis above. Moreover, primarily according to the slack resource theory, CFP positively affects CSP. Some scholars consider the CSP–CFP relationship to be neutral (Koh et al., 2014; Lee et al., 2009; Zhao & Murrell, 2016;

Kyaw et al., 2017; Xie & Wang, 2017).

How can these different—sometimes even completely opposite—results be explained? To begin with, the context of each research study is different. Companies are in different phases of their life cycle, represent different sizes, geographies and industries and the samples for the study datasets are taken in different ways (Zhao

& Murrell, 2016; Stanwick & Stanwick, 1998; Agudo Valiente et al., 2012).

Furthermore, measuring CSP is challenging (Igalens & Gond, 2005) and the CFP–

CSP result is not a direct result (Xie & Wang, 2017). Also, the feedback loops subsequent to a specific CSR action are missing in many cases (Witek-Hajduk &

Zaborek, 2016). In addition, CEO and management team attitudes towards CSR play a key role when assessing whether or not CSR will be a part of company strategy (Weaver et al., 1999).

As can be seen from the above, the impact of CFP on CSP is complex. One reason for this complexity is that there are many CFP measures, which seem to have an impact on CSP in different ways. CFP measures are divided into accounting-, growth-, risk- and market-based measures (Busch & Friede, 2018). Of the accounting-based measures, the most common financial performance measure is return on assets (ROA) in the slack resources literature (Daniel et al., 2004). It is also very commonly used as a financial performance measure in the CSP literature (Busch

& Friede, 2018; Makni et al., 2008; Callan & Thomas, 2009; Waddock & Graves, 1997). Other accounting-based measures used in the CSP literature are return on equity (ROE) and return on sales (ROS) (Callan & Thomas, 2009; Waddock &

Graves, 1997; Makni et al., 2008). Growth-based measures—sales growth and personnel growth—are seldom used in the CSP literature; however, sales growth is often used in the growth company literature (Chen et al., 2015; Ahlström &

Ficekova, 2016; Moreno & Castillas, 2007; Colombelli et al., 2014). An example of a risk-based measure is debt per equity, while an example of a marked-based measure is company valuation or price per share (Busch & Friede, 2018).

Accounting-based CFP is more strongly related to CSP than growth-, risk- or market-based CFP (Busch & Friede, 2018). Return on assets, turnover per person and value add per person are used in the empirical part of this research as accounting- based CFP measures, while the accounting-based ROA is used as the proxy measure of slack resources. This research uses accounting- and growth-based measures of CFP because they were readily available in the dataset.

In addition to the fact that different CFP measures make the CFP–CSP relationship complex, there is another aspect that makes the CFP–CSP relationship difficult to understand—slack resource scholars share the opinion that there is a lag from social investment to the moment in which it can actually be registered as an improvement in social performance (Ahlström & Ficekova, 2016; Yilmaz, 2013). As is demonstrated above, the slack resource theory states that excess financial resources allow a company to invest in social responsibility either when solving environmental, social or health issues or when coming up with new sustainable products and services, which then help get the virtuous circle spinning. According to the good management theory, the company management then uses slack resources in order to improve CSP (Orlitzky et al., 2003). The most common lag applied in quantitative research is one year (Ahlström & Ficekova, 2016; Yilmaz, 2013); however, Moore (2001) concludes that one year might be too short to avoid the distortions caused by rogue figures. Most of the previous research agrees that “prior” CFP affects CSP more positively than concurrent CFP (Moore, 2001). In addition, most often in temporal lag research, the aggregate value of CSP is used as a measure (Waddock &

Graves, 1997; McGuire et al., 2003; Busch & Friede, 2018; Adegbite et al., 2019;

Ahlström & Ficekova, 2016; Yilmaz, 2013). Busch and Friede (2018), however, find that social CSP has a stronger relationship with CFP than environmental CSP, but the difference is insignificant. On macro level ecological time-lags have been researched (Watts et. al., 2020). It is obvious, however, that the company level temporal lags are shorter than in macro level conservation projects. Hence, it seems that time lags in different CSP dimensions have rarely been researched in relation to CFP.

Firm characteristics and CSP

Firm characteristics used in this study include the size, company age, level of internationalisation and the industry of a company. Many researchers have found a positive relationship between company size and CSP (Stanwick & Stanwick, 1998;

Arminen et al., 2018; Agudo Valiente et al., 2012; Bouquet & Deutsch, 2008; Moore, 2001) and between the level of internationalisation and CSP (Symeou et al., 2018;

Aquilera-Caracuel at al., 2015). The larger a company is, the higher its CSP. Company size often relates to how international the company is—thus, the more international a company is, the higher its CSP. Research has provided evidence from 44 countries about the role internationalisation plays (Attig et al., 2016).

As far as company age is concerned, Moore (2001) and Roberts (1992) provide evidence that the older a company is, the higher its CSP. This is related to a company’s brand image—the more known a company is, the higher its stakeholder expectations are, which then motivates the company to act in a responsible manner.

On the other hand, one might also think that the younger a company is, the younger its entrepreneurs and management are—who would be more interested in responsible operations than older entrepreneurs. Nevertheless, there is no previous research on this topic.

As far as the industry of a company is concerned, industry level diversification does not seem to have an impact on CSP (Patrisia & Dastgir, 2017). What does seem to matter, however, is whether the company is in the product or service business. To elaborate on this, a product is a tangible item that can be put on the market for consumption, attention or acquisition. Service, on the other hand, is an intangible item that results from the output of one or more individuals (corporatefinanceinstitute.com, 2020). However, the portfolio of many manufacturing companies consists of both products and product-based services (Kowalkowski et al., 2017). A simple way to divide manufacturing companies into product and service companies is to look at how their turnover is divided between product and service components. If the product component turnover exceeds 50%

of the total turnover, then the company is considered to be a product company. The same principle is applied to the service component (Finnish Technology Industries, 2019). Consequently, according to previous research, service sector companies have higher CSP than non-service sector companies (Cheung at al., 2013; Huang & Yang, 2014; Witek-Hajduk & Zaborek, 2016).

The following section discusses CSR from the point of view of the CEO and top management, middle management, employees and the board of directors. These organs design, shape and implement CSP in a company and determine how it is communicated to other stakeholders.

The role of the skills and values of the CEO/top management

Organisations are reflections of their top managers (Thomas & Simerly, 1994;

Hambrick & Mason, 1984). Thus, top management commitment enables an

organisation to perform (Weaver et al., 1999). CEO’s international experience is positively related to CSP and significantly moderated by the CEO’s functional background (Slater & Dixon-Fowler, 2009). CEO’s international experience is related to the internationalisation level of a company, as discussed in the firm characteristics section. Furthermore, the more versatile the background of the CEO is, the more capable he or she is of taking CSP into consideration. The CEO holding a bachelor’s degree and being female positively affects CSP (Manner, 2010). It seems right that the higher the CEO’s education level, the better he or she understands various CSP aspects. Researchers seem to agree that innovation capability is one of the top capabilities and tools of a CEO when making CSP turn into high CFP through new business models, processes as well as products and services (Ruggiero

& Cupertino, 2018; Yang, 2010; Hull & Rothenberg, 2008; Pavelin & Porter, 2008;

Rothenberg et al., 2017).

The values of top management drive decision-making as well as organisational attitudes and CSP execution. However, narcissistic CEOs may use CSR actions as a response to their own personal needs and image reinforcement (Petrenko et al., 2014). This has a positive effect on CSR but a negative effect on performance.

Chatterjee and Hambrick (2007) agree about the positive impact on strategy deployment but state that the performance of companies run by narcissistic CEOs is neither better nor worse than that of other companies. Hubristic CEOs are more independent of stakeholders and tend to reduce responsible activities while increasing irresponsible activities in comparison to other CEOs. This is due to the assumption that, unlike narcissistic CEOs, hubristic CEOs care less about public opinion (Tang et al., 2014). CEO hubris is positively associated with the adoption of environmental innovation (Arena et al., 2018).

Referring to Kohlberg’s categorisation of individual moral development, Logsdon and Yuthas (1997) have developed a model of organisational moral development that emphasises the role of top management in CSP-related topics. In this model, the personal characteristics and moral development of top management are conveyed to other employees and thus shape the organisational moral norms of a company. This is supported by other researchers—management commitment to ethics is a dominant CSP driver (Muller & Kolk 2010). Furthermore, when ethical values are part of the performance evaluation, the influence on CSP may be positive (Wynder & Dunbar, 2016).

CEO incentives do not seem to have a relationship with CSP (McGuire et al., 2003).

On the other hand, short-term incentives might negatively correlate with CSP, whereas long-term focus positively correlates with CSP (Deckop et al., 2006; Jia &

Zhang, 2013). As a longer-term incentive, company shares are suggested (Chaigneau, 2018; Kang, 2017). Reasonable remuneration and quantifiable objectives work well with CSP—CSP is higher in low pay disparity firms than in high pay disparity firms (Hart et al., 2015; Maas, 2018). Additionally, 33% of companies set sustainability targets to the management (Maas & Rosendahl. 2016).

To conclude of this section, it can be said that CEO characteristics, values, ethics and personal motivation are important drivers for both increasing and decreasing CSP.

Middle management contribution to CSP

Middle management typically plays a key role when implementing corporate strategy as a continuation of the expectations of owners, boards of directors and CEOs (Directors’ Institute of Finland, 2019). To achieve high CSP, the strategic intent of top management has to be extended to middle management as well. Good management includes important components, such as customer orientation, innovative business model, proactivity towards high CSP and strong organisational culture (Ganescu, 2012; Dentchev, 2004; Brower & Rowe, 2017; Isaksson &

Woodside, 2016; Tuppura et al., 2013). In addition, supporting processes—for example, human resources management, communication and standards—are in place in companies that have high CSP (Rothenberg et al., 2017; Luo & Bhattacharya, 2009).

Members of management may also have an agenda of their own to slow down CSP development—managerial entrenchment with non-shareholder stakeholders could have particularly negative effects on financial performance (Surroga & Tribo, 2008;

Florou, 2008). Preventing this comes back to the leadership, team-building and supervising skills of the top management.

Employees, CSP and meaning of work

The existing research shows that CSR brings many good things from the employees’

perspective. CSR branding increases the employers’ attractiveness in recruiting (Puncheva-Michelotti et al., 2018; Sharma & Prasad, 2018; Turban & Greening,

1997). This is especially true for job seekers in higher-level positions (Albinger &

Freeman, 2000). CSP has direct effects on the behaviour and attitudes of personnel (Riordan et al., 1997). A company should communicate its CSP proactively inside the company because CSP is positively related with organisational commitment (Stites & Michael, 2011; Tuppura et al., 2013). The phenomenon is multicultural because students in the USA, China, India and Taiwan all prefer an environmentally sustainable company as their future employer (Hanson-Rasmussen & Lauver, 2017;

Tsai et al., 2016).

The intentions of a company in terms of communication also have to be pure—

potential employees are least attracted to companies that integrate their social and financial goals. When communicating the mission statement, a company has to avoid language that is too high flowing and misleading (Hagenbuch et al., 2015; Carton, 2018). However, the majority of job candidates trade CSP for the conditions of employment (Sohn et al., 2015).

One important aspect for keeping good employees is creating meaning for their work—the meaning of work mediates between social performance and employee retention (Sun et al., 2019; Guerci et al., 2019; Arnoux-Nicolas et al., 2016). “The meaning of work” is defined as “work experienced as particularly significant and holding more positive meaning for individuals” (Sun et al., 2019). The meaning of work consists of many things and, besides providing meaning, the employers also have to meet the financial, social, organisational and achievement needs of their employees (Wong et al., 2017). Potential employees demand that companies should consider their social impact on both individuals and society as a whole entity (Sohn et al., 2015).

Board-related CSP topics

The company board is an important intrinsic factor for setting the framework and objectives of CSP for top management. Of all board-related topics, the independence of the board from company owners and the diversity of the board are considered in this context. The most researched aspect related to the board of directors seems to be the independency of the board—how independent it is from company owners positively affects CSP and this impact is stronger in civil law countries (Ortas et al., 2017). Especially in listed companies, the independence of the board is considered to also be an important topic from the company governance point of view (Directors’ Institute of Finland, 2019).

As far as the diversity of the board is concerned, both national diversity and educational background diversity of the board members seem to positively contribute to CSP (Harjoto et al., 2019). However, an even more researched diversity issue is that of the gender diversity of the board—female representation on the board of directors positively affects CSP (Boulouta, 2013; Giacalone et al., 2005; Byron &

Post, 2016; Macaylay et al., 2018; Kyaw et al., 2017; Biswas et al., 2018). This could be indicative of the fact that female directors pay more attention to and prioritise social issues more than male ones. This is especially true if the bottom line is not emphasised extensively (Fernandez et al., 2019). In addition to social matters, environmental ones also interest female directors more than male ones (Kyaw et al., 2017).

In addition to gender, the age of the board members affects CSP. It seems rational that the younger the board is, the more emphasis is put on CSP issues. It seems that CSR-related aspects are more important to the young generation (Hafsi & Turgut, 2013).