This document discusses the concepts of corporate social responsibility (CSR) in China. It begins with background on CSR and how it has become more important for Chinese firms. It then discusses some challenges for CSR in China, such as short-term business goals and a lack of CSR reporting. The document also examines how CSR relates to profitability and sustainability, noting there is limited research on this relationship in developing countries like China. Finally, it provides definitions of CSR and discusses the development of CSR concepts over time.
Corporate Social Responsibility Activities of Tata Group
The relationship between csr, profitability and sustainability in china
1. CHAPTER 7
THE RELATIONSHIP BETWEEN
CSR, PROFITABILITY AND
SUSTAINABILITY IN CHINA
Qingqing Yang and David Crowther
BACKGROUND
The concept of corporate social responsibility (CSR) has been widely used in
the world, and it is related to the idea that organizations should be not only
concerned about making a profit but also engaged in actions which benefit
society beyond the interests of the firm and whatever is required by law
(McWilliams, Siegel, & Wright, 2006). The concepts and definitions of CSR
are different according to different academics, and the impact of business on
the shareholders from CSR considerations could be analysed and used by
different CSR models. These CSR models could take three main forms:
social–economic, stakeholder and triple-bottom-line (Zu, 2008).
CSR in China has become important and essential through a company’s
whole business and strategy-making process. Nowadays, firms in China do
not have an increasing position in the global market, although China has a
sound and fast developing economy with high gross domestic product
(GDP), consumer price index (CPI) and other economic indicators. And the
official statistical outcomes showed that there is a serious crisis about CSR
in some fields of China. For example, more than 263,500 people died in
industrial accidents in two years, 2004–2005 (Fewsmith & Zheng, 2008).
Business Strategy and Sustainability
Developments in Corporate Governance and Responsibility, Volume 3, 155–175
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2. 156 QINGQING YANG AND DAVID CROWTHER
Another example is related to the milk powder that contains tricyanamide,
which has a toxicity that affected some babies (CSR-China.net, 2008). Thus,
it is apparent that several firms pay most attention to profit rather than
social effect. There is no doubt that CSR is a new entity for Chinese native
firms and some other firms, even though large-scale companies have only a
superficial knowledge in CSR activities.
In addition, the business culture in China is another challenge for firms’
CSR considerations (Schwalbach, 2010). Firms in China often set short-
term business goals which are related to financial performance such as
increasing earnings per share, and business goals force managers to make
decisions according to the concept of making money as soon as possible.
In addition, CSR reporting in China has a short history. The first CSR
report in China came from the Shell Corporation (CSR-China.net, 2008), and
almost no native corporation disclosed CSR information in China before
2005. In 2007, the industry of state electricity grid was the first state-owed-
enterprise to produce a CSR report; several state-owed enterprises followed.
Furthermore, the environmental reporting which began in the 1970s and
1980s supplied a basic model for CSR reports and audits, and an
environmental report has been considered in an increasing position as a
component of a firm’s comprehensive annual report in Europe (Chandler &
Werther, 2010). CSR reports also have been considered an essential and
important tool for firms to communicate with stakeholders, and the
advantages of these CSR reports of transparency and honesty are that they
supply external observers with effective chances to evaluate the organization,
its managers, and policies (Chandler & Werther, 2010). According to KPMG
(2008), there was a 30% jump from 2005 to 2008 in the percentage of large-
scale companies that disclose CSR reports; about 79% of the world’s largest
companies provide the CSR information in a publicly available form.
Thus, whatever the concepts or actual activity, Chinese firms have low
sensitivity and consciousness about CSR when compared with European
firms in the early years. However, the consciousness of CSR’s importance
has increased in China of recent years. For example, the CSR alliance of
Chinese financial corporations, which consists of several responsible and
excellent corporations and entrepreneurs, was established at Peking
University from April 2006 (CSR-China.net, 2008). This alliance combines
the integral power of different industries. Meanwhile, this alliance is a non-
governmental organization which has the most influence power and
credibility in the field of CSR in China. Moreover, the CSR alliance of
Chinese financial corporations emerged through this former conference, and
this alliance facilitates the increase and enhancement of native corporations’
3. The Relationship Between CSR, Profitability and Sustainability 157
CSR through the process of making a profit. Corporations, society and nature
can thus coexist and develop in a harmonious and balanced environment.
Then in 2008, the first CSR evaluation of Chinese financial corporations
was held (CSR-China.net, 2008). This conference represented increasing
numbers of native corporations in China that started paying attention to the
sustainability of the business through taking more responsibility for CSR
(CSR-China.net, 2008). These activities all meant that the corporations in
China started to focus on the powerful influence and positive effect of CSR
considerations.
As one of the developing countries in the world, China shows how CSR
considerations can also be analysed and viewed from the point of view of
developing countries. Moreover, according to Pollard, Stewart, and Sun
(2010), there are several reasons for considering CSR in developing countries
when compared with developed countries, and these reasons are as follows:
Developing countries have the most profitable growth markets for business
because the developing countries represent rapidly expanding economics.
Actually, social and environmental crises will give more influence to
developing countries in the world.
Social and environmental effects will give developing countries both
positive and negative influences in the field of economic growth, invest-
ment and other business activities.
Developing countries face a different series of CSR challenges and
characteristics that are quite different from developed countries.
Furthermore, Visser, Matten, Pohl, and Tolhurst (2007) have pointed out
that CSR has distinctive characteristics in developing countries, including the
following:
CSR benchmarks such as CSR codes, standards, management system and
reports are less formalized and institutionalized in developing countries
when compared with developed countries.
Formal CSR is often used in large-scale and international companies,
especially the firms which have been recognized as multinational brands
or have obtained a certain status in the global market.
CSR is associated with philanthropy or charity in a large scale of
developing countries – for example CSR is often been reflected through
corporate social investment in education, health, environment and other
community services.
The most important and effective way for business in developing
countries to make a social impact refers to making an economic
4. 158 QINGQING YANG AND DAVID CROWTHER
profit – for example through investment project, job creation, taxes
and technology transfer.
The order which related to the CSR banner is often different in developing
countries – for example improving work conditions, supply-chain integrity
and poverty alleviation.
Many firms which take CSR issues in developing countries will present
themselves as dilemmas or trade-offs – for example strategic philanthropy
versus political governance, job creation versus higher labour standards
or development versus environment.
Therefore, there is a special circumstance for CSR considerations in
developing countries, especially in China.
Moreover, the concept which combines economic profits with CSR
considerations played a prominent role during the 1970s and 1980s, and this
concept was based on Friedman’s (1970) views, which pointed out that an
organization’s main responsibility is to its shareholders. Then a new perspect-
ive aligned CSR with profit-making outcomes when a firm faces increasing
competition and a changing global business environment (Lee, 2008).
To satisfy different requirements from different shareholders, the firm
which takes the CSR considerations should adjust a series of business actions.
Actually, the social preferences from shareholders can affect corporate profit
strategies (Free, 2010). As a strategy to maximize profits, CSR considerations
are also affected by the shareholders’ preferences. In detail, the firm will take
a non-strategic form of CSR if the shareholders have preferences which
need monetary utility and ignore corporate social performance (Free, 2010).
According to Kizmueller (2008), there are four basic combinations of stake-
holders, shareholders preferences and CSR considerations:
The firm which is purely profit oriented will focus on maximizing profits,
and just take considerations in CSR when shareholders demand it.
And if the shareholders of the firm take care of the corporate environ-
mental and social conduct, CSR considerations will often be taken as an
element of the business strategy.
Furthermore, the motivations of firms that engage in CSR considerations
through business are still based on a large-scale profit orientation. According
to Aras and Crowther (2010), CSR is widely accepted by firms to help them
achieve the target of obtaining profitability. As a result, CSR issues and
considerations certainly influence both profitability and financial perfor-
mance of a firm in a certain way, and CSR considerations can maximize their
social performance as well as their financial results (Nussbaum, 2008).
5. The Relationship Between CSR, Profitability and Sustainability 159
Corporate reputation is one of the most common driving forces to
facilitate firms consideration of CSR (Visser et al., 2007). Good corporate
reputations, together with CSR considerations, will help business:
retain and recruit top talent,
facilitate strong partnerships,
increase sales,
enhance shareholder value and
withstand crises.
Furthermore, from the economic perspective, there is a relationship
between a firm’s CSR activities and its economic performance. According to
Bhattacharya, Smith, and Vogel (2010), several research efforts on CSR
have moved to focus more on how CSR can contribute to profit maximi-
zation. Strategic CSR could also be used to capture a firm’s market value
and competitive advantage. Furthermore, academic resources have both
positive and negative viewpoints about the relationship between CSR and
profitability – but not in China.
On the other hand, CSR also risks potential negative financial effect to
the firm (Heugens Dentchev, 2007). According to (Mullerat, 2009), CSR
policy is only credible when the company supervises and audits its day-to-
day business. In addition, The Economist argues that CSR has nothing to do
with a firm’s core business strategy, because ‘the proper business of business
is business’ (European Commission, 2002). The European Commission
points out that CSR should not be able to improve business, although most
firms believe that CSR can generate competitive advantages in the whole
market (European Commission, 2002).
Note that there is relatively limited academic research on the relationship
between CSR and the profitability of a firm in a developing country. In
addition, several firms in China still concentrate on profits which can meet
business targets, and they have less consciousness in the field of CSR activities.
CSR report verification is generally defined as a process of obtaining and
evaluating objective evidence in order to make sure a disclosure made by a firm
about its environmental, social or economic performance is appropriate and
correct (Visser et al., 2007). Moreover, CSR report verification often examines
the performance data and whether management has considered policies
such as codes of conducts and international agreement. Companies
which trade in the financial market can rank highly on the Dow Jones
Stock Index because evidence of CSR improves their reputation (McWilliams
et al., 2006).
6. 160 QINGQING YANG AND DAVID CROWTHER
DEFINING CSR
There have been many attempts to define and clarify the definition and
concept of CSR. Basically, a good definition of CSR was presented by the
Institute of Directors, a UK-based trade group: CSR comprises the actions
that manage the impacts that both businesses and other organizations have
on the environment and society beyond the entities’ legal obligations. In
particular, CSR activities determine how organizations interact with their
employees, suppliers, customers and parties and how willing they are to
protect the environment (Lea, 2002). The concept of CSR was mentioned
initially by Friedman (1970), who pointed that the social responsibility of an
organization is to make profit. Other practical definitions of CSR have been
put forth by other academic resources. According to McComb (2002), CSR
is generally defined as the notion that firms look beyond profits to their
larger role in society. CSR also refers to a firm linking its operations with
transparency, values, employee relations and compliance with legal require-
ments. However, as a corporate philosophy, CSR can be seen as a driving
force to strategic decision-making, partner selection, hiring practices and,
ultimately, brand development (McComb, 2002).
A much better definition of CSR has been argued by Crowther and Green
(2004), who have pointed that all definitions of CSR are pertinent and
represent a dimension of the issue. The best definition of CSR is related to what
is – or should be – or the relationship between CSR and the global market,
local government and individual citizens – for example the relationship
between a firm and its stakeholders (Crowther Green, 2004).
From an economic perspective, the document titled ‘A Guide to Corporate
Social Responsibility’ states that CSR is
a method of analysing the interdependent relationships between businesses
and economic systems,
a method of analysing the extent of social obligations that a corporation has
to its society,
a method of considering political regulations on how these obligations can
be met and
a way to generate benefits for a firm that meets identified obligations (United
Nations, 2009).
Moreover, CSR is a factor that has influenced the relationship between
business and society over the past 20 years, and several firms have recog-
nized that CSR concepts and theories could facilitate improvements in their
own social impacts and in addressing social considerations that will help
7. The Relationship Between CSR, Profitability and Sustainability 161
their long-term success. According to United Nations (2009), there are three
basic drivers of CSR:
1. Values: Changing values have been noticed within businesses that are
responsible for the production of goods not only with wealth creation but
also with environmental goods.
2. Strategy: It is very important for the strategic long-term development of
a firm to consider society and the environment.
3. Public pressure: Firms will become more socially responsible when they
acknowledge and respond to pressure from consumers, media, states,
local governments and other public bodies.
From another perspective, CSR could supply more opportunities for
greater market access, cost saving, better productivity and more innovation
for firms as well as increased social benefits and general community
development (Mullerat, 2009). With the development of CSR concepts, the
standard and principles of CSR regulations become more important and
essential. In general, there are about nine principles in four processes that
relate to CSR in the United Nations Global Compact, and these extensive
consultation processes address:
1. human rights,
2. labour and
3. environment (Mullerat, 2009).
DEVELOPMENT STORY OF CSR CONCEPTS
CSR concepts date from the early twentieth century. In 1929, the dean of the
Harvard Business School mentioned that business should recognize the
magnitude of its responsibilities for the future of society (McNally
Company, 1982). With the development, discussion and debate of CSR issues,
most current CSR considerations are related to environmental and ethical
issues throughout the business process.
CSR is a controversial topic that continues to attract attention even after
the argument about whether CSR is relevant to business (Freeman
Liedtka, 1991). Moreover, the specific concept of CSR was initially put forth
by Friedman (1962), who pointed that an organization’s social responsibility
is to make a profit when it engages in open and free competition without
deception or fraud.
8. 162 QINGQING YANG AND DAVID CROWTHER
A company which has a story of adherence to CSR creates success for itself
(Mackay, 2007). Broadly, a firm’s CSR considerations address protecting the
environment, acting with integrity and adhering to the highest ethical
standards, ensuring a safe and healthy workplace and so on (Mackay, 2007).
In recent years, CSR policies of socially responsible investing (SRI) have
often been adopted by investment fund managers and investors through the
process of strategic decision-making (Asongu, 2007). Furthermore, Crowther
and Green (2004) have pointed out that as a subject, CSR can indicate the
social and environment effects from organizational behaviour. CSR also can
improve a company’s reputation and competitive advantages in the whole
market so that the firm’s financial performance can also be improved
(Asongu, 2007). Finally, the vision related to the economic and legal obliga-
tions is narrow and incomplete. CSR is more about emphases on avoiding
harm to other people and the society, meeting stakeholders’ expectations,
contributing available recourses to communities and helping society improve
the quality of life and environment (Asongu, 2007).
Moreover, although CSR has several principles and concepts within its
development process, its practical understanding of still requires the context
of both place and time.
THEORIES AND STRATEGIC CSR
The relevant theories and approaches of CSR can be classified into about four
parts: instrumental, political, integrative and ethical theories (Phadtare, 2011).
The stakeholder theory of CSR states that a firm is responsible for a variety of
supporters within a society, and this theory could reinforce CSR considerations
(Keinert, 2008). The theory of the triple-bottom-line is a new concept that
points out that the success factors of a firm are determined not only by the
traditional bottom-line but also by other performance criteria such as CSR
considerations (Keinert, 2008). Moreover, according to Crowther and Green
(2004), traditional bottom-line accounting primarily considers internal factors
in its profit-and-loss statement and ignores the potential costs that result from
corporate activities in the external social environment. Finally, CSR theory is
also reinforced by a strategic meaning that indicates that CSR could facilitate a
firm’s sustainable competitive advantages through certain considerations for
the social and natural environment (Keinert, 2008).
Meanwhile, strategic CSR is about deciding the issues initially such
as which department should take actions in CSR fields, the agenda of
creating a CSR plan and determining which part of CSR to emphasize
9. The Relationship Between CSR, Profitability and Sustainability 163
(Porter Kramer, 2006). Through the strategic CSR, the firm can have the
greatest social influence and obtain larger business benefits (Porter Kramer,
2006). In addition, Armstrong (2010) has pointed that CSR strategy should
be integrated with both the business strategy and human resource (HR)
strategy. Because HR strategy has the closest relationship with organiza-
tional behaviour both outside and within the firm, CSR strategy can help a
firm obtain better performance by combining with HR strategy.
Criticism of CSR arises from the opposite viewpoints, although several
concepts, theories and announcement explain and analyse why CSR should
be considered through the business process. The main criticisms are the
following:
CSR lacks the legitimacy of the political system (Brittan, 2003).
Voluntary elements of CSR will increase costs and decrease revenues in
both the short and long term, and CSR actions will reduce the degree of
competition and reduce both economic freedom and market efficiency
(Henderson, 2001).
According to Doane (2005), a business should keep its eyes on making
money and nothing else. The death of CSR may not be a bad thing.
By using academic criticisms of CSR, it is easier for a corporation to
effectively analyse and address CSR issues. Several studies focus on the impact
from CSR considerations on a firm’s financial performance as related to
income, profitability ratio and so on. Meanwhile, many articles and research
have reported the link between CSR and profitability. There also is some
evidence to indicate that a positive relationship exists between CSR and
improved financial performance (Andersen, 2004).
Maignan found a positive relationship between CSR and return on
investment, sales growth and profit growth, and these conclusions were
based on information and data from an integrated survey. According to
Stewart, the performance of the most successful companies is based on
the criteria which are closely connected with how corporate citizenship
is defined, reputation management, efficiency of management, product
quality, innovativeness and responsibility to the community through the
progress of the decision-making. Research by Verschoor has pointed that
companies which commit to ethical behaviour or emphasize compliance with
a certain code of conduct have obtained better financial performance
from a study of the 500 largest corporations in the United States.
And research by Ruf and Colleague has found a link between CSR and
financial performance. The hypothesis in that research was that changing
CSR performance is positively related to current and future changes
10. 164 QINGQING YANG AND DAVID CROWTHER
in financial performance after controlling for size, industry and the prior
year’s financial performance. The analysis supported the hypothesis. More-
over, the financial performance in that research was measured by two
indicators: growth in sales and return on equity.
In addition, CSR research started to focus on organizational investigations
into the link between CSR and profitability and how CSR can improve a firm’s
competitive advantages and financial outcomes (Macdonald Marshall,
2010). According to Macdonald and Marshall (2010), some business consul-
tants and researchers believe that aligning the social and the economic
elements of a firm’s responsibility could bring large profit to the business. A
series of evidence indicates that the positive outcomes from implementations
of CSR activities:
boost the sales of products and increase a firm’s market share of the firm,
increase reputation and brand management,
improve a firm’s image compared with other competitors,
attract and retain talent and promote employee productivity,
decrease production costs and
attract more investment and achieve better credit ratings.
In short, CSR can increase the profits and is thus of great economic
significance (Macdonald Marshall, 2010). Furthermore, CSR could be
considered as a competitive business strategy as well as an obligation for many
firms; for example an American pro-business organization that has business for
CSR, treats CSR as a method of achieving a its final goal of profit making as
well as activities that respect ethical values and protect the social environment
(Macdonald Marshall, 2010). In addition, business benefits from CSR
activities both tangibly and intangibly, such as raising more capital through
SRI funds and decreasing risk premiums, improving resource efficiency,
improving staff motivation, engaging a better quality of supplier, expanding
business relationships, enhancing reputation and strengthening brand image as
well as supplying the responsible products and services (Barth Wolff, 2009).
The experienced business benefits from CSR activities will be treated as
potential incentives for the effective implementation of a CSR instrument
(Barth Wolff, 2009). Moreover, according to Fernando (2010), there are a
series of advantages for firms when they take CSR considerations and activities:
improved financial performance,
enhanced brand image and reputation,
increased sales and customer loyalty,
11. The Relationship Between CSR, Profitability and Sustainability 165
increased ability to attract and retain employees,
reduced regulatory oversight and
facilitated innovation and learning.
Except for direct positive influence in the field of financial performance,
the benefits from CSR activities could be considered as potential factors that
will visibly influence a firm’s profitability ratio. The potential beneficial
factors which lead to positive financial performance will be analysed and
illustrated in a separate part of this literature review. From the perspectives
of managers, CSR performance is closely associated with financial outcomes
such as profitability ratios and solvency ratios. According to DiPiazza,
business leaders believe that social responsibility is a means of achieving
profitability, and a millennium poll of more than 1,000 chief executives in
33 nations in Europe, Asia and Americas shows that several CEOs consider
that a firm’s profitability also takes into account socially responsible actions
towards employees, shareholders and society.
From the economic perspective, the theory of the firm could be applied to
analyse the relationship between CSR performance and profit outcomes. The
topic which combines economic profits with CSR activities became more
important during the 1970s and 1980s, and this discussion was often built on
Friedman’s (1970) viewpoints that the core responsibility of an organization is
to its shareholders (Fernando, 2010). A new viewpoint from Lee (2008) points
out that a firm can survive through combining CSR performance with profit-
making process in a highly competitive global business environment. Manage-
ment is required to make adjustments to fit different stakeholders according to
the broad interpretation of CSR such as environmental responsibility and
sustainability (Lee, 2008). In other words, the activities analysed under the
economic CSR viewpoints are used to increase profits and reduce the cost of
consumers. According to Devinny (2009), several research articles which focus
on the economic profit of CSR performance indicate that there is no definite
answer to how CSR facilitates the profit-making process, but Heath and Ni
have pointed that a positive relationship between CSR activities and firm’s
performance can be found through an extensive literature review.
POTENTIAL BENEFITS AND PROFITS FROM
CSR ACTIVITIES
The theory of the firm for studying the benefits of CSR was introduced
by Jones, and this theory points that, as a result of higher returns and
12. 166 QINGQING YANG AND DAVID CROWTHER
profits, companies which repeated transactions with stakeholders on the
basis of trust and cooperation were found to be honest, trustworthy and
ethical. McWilliams et al. (2006) developed a formal model of profit
maximizing and CSR. In this model, two companies produce identical
products, but one firm could add an additional social characteristic or specialty
to the firm’s products, and these products were valued by certain consumers
and potential stakeholders (McWilliams et al., 2006). Managers in this model
have the ability to determine the level of resources to devote to CSR
performance through a cost–benefit analysis, and managers also evaluate the
cost of satisfying the demand for CSR activities. Managers thus have the power
to decide what amount of CSR is the optimal point for their profit-oriented
firms (McWilliams et al., 2006). From the research, we can conclude that the
firms should consider CSR as a strategic investment with positive profit
outcomes. Based on the theory from McWilliams and Siegel, tested that theory
empirically using firm-level data and information on both social environment
and accounting profitability, and they found that firms with higher attributes
in social environment performance had superior financial performance.
By contrast, Heugens and Dentchev (2007) pointed that CSR has appro-
ximately seven major risks, most of them related to the negative financial
effect from CSR activities. For example the CSR issues for firms will be
increased by the poor risk communications, and this negative factor will
lead to problems of safety and environment. Aras and Crowther (2010) have
shown that there is a negative link suggesting that CSR is a cost for the firm
and reduces overall financial performance. In addition, the resulting cost
from CSR activities will make the firm less competitive and suffer negative
economic impacts (Aras Crowther, 2010).
REPUTATION MANAGEMENT
As an important element of today’s business, reputation management
plays an essential role in profit making. Through improved reputation
management, a firm can obtain more competitive advantages and market
shares in an entire industry. Thus, the positive relationship between CSR
and reputation management can indirectly improve a firm’s financial
performance.
CSR performance can be considered as the important factor that reinforces
the good reputation of a firm with social theory (Klewes Wreschniok, 2009).
The norm of normative reputation is related to the normative or social
13. The Relationship Between CSR, Profitability and Sustainability 167
reputation and corresponds to the demands of CSR, and the intangible
resource of reputation is the main source of competitive advantage of a firm.
Indeed, a value-creating reputation could be seen as a special product of years
of superior competence as perceived by stakeholders, and a strong reputation
management can generate a series of benefits to a firm in crisis. Moreover,
the good reputation management could be seen as the source of the initial
credibility.
According to Moore and Seymour (2005), reputation management could
help firms distinguish themselves with the globalization, transparency and
rising CSR expectations, and thus more and more firms have paid more
attention to the link between corporate reputation management and
competitive advantage. The best stakeholders such us customers, investors
and employees can be attracted and retained through the strong corporate
reputation (Moore Seymour, 2005). A survey of more than 100 large Euro-
pean companies in 2003 by the Chicago-based multinational insurance
broker Aon found that ‘weak reputation’ was considered the second biggest of
17 listed threats such as ‘product liability and ‘employee accident’ (Moore
Seymour, 2005).
Furthermore, risk-management committees related to reputation man-
agement have been established by many organizations in recent years.
For example, Barclays Bank has established a ‘brand and reputation’
committee that pays the same attention to reputation management as
financial and operational concerns in recent years. This recognition from
Barclays indicates that firms need to effectively manage reputation risk
(Hancock, 2005). Another survey has concluded that some 93% of
corporate directors of FTSE 100 companies in October 2002 believed that
disclosure non-financial information could improve a firm’s reputation and
management decisions (Hancock, 2005). Meanwhile, one model indicates a
direct link between reputation and financial performance such as share
price and credit rating through a survey of about 500 US and 250 UK
companies (Hancock, 2005). This finding shows that the reputation
accounted for about 27% of the FTSE 250 companies’ market shares,
and damaged reputations required about four years to restore (Hancock,
2005). According to Harris, about 75% of international firms have
corporate reputation inspection systems in place (from a survey of about
800 CEOs in Europe and North America), and about 60% of UK firms
actively monitor their reputations.
From the CSR perspective, Coombs (2011) has pointed that CSR becomes
a core factor and driver for good reputation management. In addition,
14. 168 QINGQING YANG AND DAVID CROWTHER
both CSR considerations and reputation management are dependent on the
stakeholders’ expectations and that reputation managers pay as much
attention to CSR considerations and activities as to investors and financial
outcomes (Coombs, 2011).
Finally, in the financial industry, reputation is established by trust with all
stakeholders and can influence the entire value of financial services firm as
much as intangible economic assets (Idowu Filho, 2009). For a financial
service firm, strong and effective reputation management could facilitate its
business sustainability. The financial industry (financial service firms and
banks) engage in CSR considerations to enhance their intangible assets. Idowu
and Filho (2009) have pointed that both bankers and financial services pro-
fessionals manage CSR and reporting in Europe. The observation shows that
the financial industry considered reputation management as an important
competitive advantage that could improve financial performance, and a series
of CSR activities could increase profitability indirectly through enhanced
reputation.
In the crowded marketplace, CSR plays an important role through brand
differentiation based on special ethical considerations. According to
McElhaney (2008), several companies begin to classify CSR considerations
as a business strategy, and CSR considerations will lead to success in
creating profits, increasing sales, expanding market shares and improving
brand differentiation. In the long term, CSR activities can improve a firm’s
economical performance and sustainability to a large extent, thanks to
brand differentiation (McElhaney, 2008). CSR can be a source of brand
differentiation for outperforming other competitors in the highly competi-
tive global market and obtaining competitive advantages when facing so
many regulations and difficulties resulting from globalization (McElhaney,
2008). For example, the Body Shop brand grew on the basis of ethical
sourcing of its products, and Starbucks has embraced fair-trade coffee in
Europe (McElhaney, 2008).
Nowadays, brand differentiation is seen as the core of a firm’s success,
and it needs protection by the strategist who contributes CSR considera-
tions to the firm’s decision-making process (Chandler Werther, 2010). In
general, there are three main benefits of CSR brand differentiation: positive
brand building, brand insurance and crisis management (Chandler
Werther, 2010). Chandler and Werther (2010) have indicated that brand
differentiation from CSR activities has several advantages – for example
higher brand differentiation could make a firm’s products more easily
recognized and more competitively special.
15. The Relationship Between CSR, Profitability and Sustainability 169
INCREASED STAKEHOLDERS’ VALUES
‘Stakeholder’ is closely related to the term ‘stockholder’, and it can be
delineated by managerial function. The following groups are within the scope
of ‘stakeholder’:
top managers,
employees in senior management positions,
other employees,
company owners,
customers,
suppliers,
capital investors,
competitors,
the state,
associations and organizations, and
the general public, which is often represented by news media (Armstrong,
2010).
According to Freeman (1984), stakeholder theory has pointed that the
managers should satisfy different requirements from stakeholders such as
workers, customers, suppliers and local communities that will affect a firm’s
financial outcome. From that point of view, managers should consider
certain CSR activities that are related to non-financial information and
social correspondence as well as requirements from stockholders or firm
owners.
The rationale for CSR and stakeholder values was also analysed by
Armstrong (2010), who shows that the corporations can obtain strong
competitive advantages by attributing CSR activities to primary stakeholders.
The research into some 500 firms from Armstrong (2010) found that investing
in stakeholder management via CSR considerations actually provides a
competitive advantage which can be treated as an effective resource and as
positive profit-making capabilities for the whole firm. In addition, CSR
activities will affect primary stakeholders directly, and these activities can
benefit both stakeholder values and shareholder wealth (Armstrong, 2010).
From the study of Fernando (2009), the economic perspectives of CSR indicate
that CSR activities are related to how business firms maximize stakeholder
values while balancing conflicting stakeholder interests. Thus, the effect on
profitability ratios that resulted from CSR considerations can be analysed
from stakeholder values through the annual report.
16. 170 QINGQING YANG AND DAVID CROWTHER
The licence to operate can be protected by CSR considerations and
activities, and firms will obtain long-run efficiency without spending a large
amount of money competing with other business firms through a right licence
to operate (Willard, 2005). The firms have fewer inspections and paperwork
from both national and local government agencies, and they may have
preference or ‘fast-track’ treatment when applying for operating permissions,
licences or other formats of government permits (Fernando, 2009).
SUSTAINABLE DEVELOPMENT
A firm’s performance can be enhanced by CSR strategy for sustainable
development. CSR strategies supply several benefits to firms from both
internally and externally. Externally, CSR strategies can create a positive
image and goodwill and obtain a certain respect from competitors, customers,
government agencies, investors and media. All of these external benefits can
promote shareholder values and long-term sustainable development.
Internally, CSR strategies form a sense of customer loyalty and employee
trust.
Drakakis-Smith has redefined the components of ‘sustainability’, and this
definition contains a broad range of issues, with the concept of sustainability
combining environmental, economic and social factors (Roosa, 2008). In fact,
CSR considerations have been linked to the ambitions of sustainable
development after the year 2000 with the Final Declaration of the European
Council of Lisbon (Lenssen, 2006). The communication of the 2002
commission pointed out a clear link between CSR and firms’ sustainable
development, and the commission also showed that CSR activities resulting
from social and commercial pressure progressively led to firms’ value changes.
In addition, CSR considerations have been considered an essential part of
sustainable development at both the local and the international level (Lenssen,
2006). Finally, Spedding and Rose (2007) pointed out the benefits for
sustainable development from CSR consideration from both internal and
external viewpoints.
DISCLOSURE AND CSR REPORTING
Firms paid attention to CSR disclosures and CSR reporting according to
profits and other financial positive outcomes, although CSR activities are
voluntary for all organizations. CSR disclosure or CRS reporting can also
17. The Relationship Between CSR, Profitability and Sustainability 171
facilitate a firm in obtaining better financial performance under certain
circumstances. For CSR reporting standards, a number of CSR standards
are available for firms for reporting their CSR activities (Calder, 2008).
First, SA8000 is a multinational social accountability standard for working
conditions. The fields of accountability from the SA8000 address:
child labour,
forced labour,
workplace safety and health,
the right to organize,
discrimination,
workplace discipline,
working hours,
wages and
management systems for HRs (Calder, 2008).
The Global Reporting Initiative, which is also called ‘a common framework
for sustainability reporting’, is the second widely recognized system for firms
which actively report on CSR issues, and this framework pays more attention
to a firm’s sustainability as well as to human rights (Calder, 2008). Reporting
from the Global Reporting Initiative addresses a firm’s economic, environ-
mental and cooperative social performance, and CSR reporting is the
practical process of measuring, disclosing and being responsible to both
internal and external stakeholders for the firm’s performance through the
process of achieving sustainable development (Calder, 2008).
From the 1970s and 1980s, there were several models for CSR reports
and audits through the whole evolution of CSR reporting. Nowadays, CSR
or environmental reporting is of increasing importance as a component of a
firm’s comprehensive annual report (Chandler Werther, 2010). The
auditing firm KPMG has reported that there was about 30% increase from
2005 to 2008 in the number of large firms which generated CSR reports, and
about 78% of the world’s largest firms now supply their CSR information in
publicly available forms (Chandler Werther, 2010). However, firms that
engage in ‘greenwashing’ or whose reports lack authenticity will receive
negative attention, probably because CSR reporting now receives more
attention in the global market (Chandler Werther, 2010).
In addition, as pointed out by Donovan and Gibson, legitimacy theory
has shown the relationship between profitability and CSR disclosure: firms
can obtain a better profitability ratio when their reports do not contain
information which will interfere with the firm’s financial successful perfor-
mance. Moreover, companies will disclose certain information related to
18. 172 QINGQING YANG AND DAVID CROWTHER
social environment and performance when the profits are low (Chandler
Werther, 2010). In this way, positive CSR disclosure maintains investor,
customer, supplier and other stakeholder loyalty and investments.
Schwester (2010) has pointed out that the primary measure of a firm’s
profitability performance is net income. The techniques of profitability
analysis include EPS analysis, common-size analysis and alternative measure
of income. And profitability is not as same as profit, and it can only be
measured by financial ratios which use figures from the income statement, the
balance sheet or other parts in an annual report. The annual report of a
firm offers a useful additional source of data for assessing a firm’s profit
performance, as well as supplying an appreciation for trends and shifts in the
balance of the firm’s activities (Vause, 2009).
Research data indicate that disclosure of CSR can facilitate a firm in
achieving higher profitability ratios when compared with the preceding
year, which did not have a CSR report. Furthermore, although this finance
company has addressed CSR activities before the year 2009, the positive
impacts on profit are not obvious because stakeholders such us customers
or investors could not observe the CSR programs directly and quickly.
Most important, reputations need the support of previous CSR report
disclosures.
From the perspectives of finance, both the main profitability ratios
and total asset turnover increased after the year of issuing CSR reports
formally, and these positive impacts extended to the following year. For
finance companies in China, the positive effects on profitability from
previous CSR reports can be observed and approved in the short run, but
the effects from CSR activities without previous promotion need a long time
to be observed.
CONCLUSIONS
Managers classify CSR issues not only as environmental issues but also as
supplying a fair-trade system and transparent financial information for
investors. The comprehensive awareness of CSR activities from managers
supply more guarantees for all stakeholders, and the attitudes which are
related to integrity of those managers can also generate a higher reputation
in the whole industry. Meanwhile, the wealth and fair right of the main
stakeholders in this company such as shareholders, customers, employees
and local communities can be protected more through CSR programs as
well as devotion and charity activities.
19. The Relationship Between CSR, Profitability and Sustainability 173
Moreover, from the aspect of literature review, evidence indicates that
positive outcomes from the implementation of CSR activities:
boost the sales of products and increase a firm’s market share,
increase reputation and brand management,
improve the firm’s image compared with other competitors,
attract and retain talent and promote employee productivity,
decrease production costs and
attract more investment and achieve better credit ratings (Macdonald
Marshall, 2010).
All of these potential CSR benefits for this finance corporation have been
observed and analysed in this research, so we can conclude that there is a
positive relationship between profitability and CSR in other viewpoints.
The main groups that have been affected by the CSR issues are industry
associations, shareholders, local communities, customers, suppliers, compe-
titors, employees and non-governmental organizations. Generally speaking,
it is obvious that there is a strong positive relationship between CSR activities
and short-run profitability in China. In the long run, the positive effects on
profitability from CSR activities are not obvious but will be observed and
discovered.
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