The Impact of CSR Reporting on Russian and Dutch Companies Performance

Background

Corporate Social Responsibility (CSR) concept has become one of the main business trends over the last few years. CSR approach refers to companies' voluntary initiatives to take responsibility for both positive and negative impacts on society and environment caused by their core business activities. Recent studies demonstrate that CSR-oriented companies have a higher level of employee engagement, which leads to a better customer service and, as a result, to 19 times higher return on assets (Tennant, 2015). Moreover, companies that report on their CSR practices are more likely to obtain new funds and, consequently, contribute to their financial performance(Carroll & Shabana, 2010).Therefore, implementation of CSR strategies can be considered as a crucial component for any modern company necessary to maintain its competitive advantage.

Problem statement

The disclosure of CSR practices is not mandatory in most countries around the world. That is why, quite a few companies prepare their annual CSR reports. This leads to the lack of transparency regarding core business operations, as a result of which, investors may unintentionally provide their funds to the companies that are engaged into harmful or illegal practices. Considering the above-mentioned facts, the main goal of this thesis is to encourage more organizations to issue CSR reports in order to become more transparent for their stakeholders and publicity. In order to achieve this, the impact of CSR strategies on Corporate Financial Performance (CFP) will be determined. The methodology is based on the regression analysis of the CSR data for Russian and Dutch organizations. The study aims to complete the following tasks:

· To develop a unified operationalization of CSR concept for Russian and Dutch companies;

· To identify CSR-CFP relations for Russian companies;

· To analyze CSR-CFP relations for Dutch companies;

· To compare the strength of CSR-CFP relations between Russian and Dutch companies;

· To derive relevant conclusions regarding the existence of CSR-CFP relations and determine further areas for investigation of this topic.

In order to achieve main research objectives, this paper is divided into three chapters. The first chapter focuses on the scope and history of CSR. Moreover, it determines unknown areas of corporate responsibility topic by providing an analysis of previous studies. Chapter2firstly develops research hypotheses basing on the existing academic literature discussed in the previous section. After that a description of the data, variables and research method is provided. Final chapter of the thesis discusses the results of our statistical analysis and draws conclusions about the validity of research findings.

Professional significance

Previous academic papers have extensively examined CSR-CFP relations using the data of Western companies. Most researchers (Purnamasari (2015); Firli and Akbar (2016); Chin-Shien Lin (2015)and etc.) have revealed a positive but small effect of CSR on CFP. The authors explain such insignificant CSR impact by the existence of external variables or situational contingencies that could substantially bias the results (Margolis & Walsh, 2009). Therefore, further investigation that accounts for such kind of factors has to be performed in order to determine the strength of CSR-CFP relations.

Both in Russia and The Netherlands CSR concept has been mainly examined in qualitative research papers. Quite a few quantitative studies that investigate CSR-CFP relations in these countries have been conducted. Hence, this research contributes to the existing literature by providing a quantitative evidence of CSR impact on CFP.

The results of the paper could become useful for managers and owners of Russian and Dutch companies. Thus, a positive CSR impact on corporate financial indicators may encourage more organizations to implement strategic CSR and disclose the results in their annual reports, which will make their business operations more transparent.

Delimitation of the Study

This thesis covers only the analysis of Russian and Dutch companies' CSR performance. That is why, the research findings may not be applicable to organizations from other countries. Additionally, the results could be affected by incorrect operationalization of CSR concept due to the absence of unified measurement standards. Finally, the sample size might not be sufficient to make proper statistical inferences.

Chapter 1. Understanding of Corporate Social Responsibility (CSR)

1.1 Definition of CSR scope and its components

corporate social responsibility model

Corporate Social Responsibility could be considered as a new phenomenon both for Russian and European companies. In order to develop and implement sustainable business strategies, companies' management should have a clear view of CSR concept including its main components. Moreover, a working definition of CSR is necessary to ensure understanding of this topic and, consequently, perform high-quality research in this field.

Traditionally CSR has been perceived as companies' responsibility to make some contribution to the life of local community or society in general. However, there still exist a big question concerning of what CSR actually is. Previous research papers provide several definitions of CSR. One of the earliest researches on CSR topic states that Corporate Social Responsibility contains economic, legal, ethical and philanthropic expectations that any community has about any type of businesses(Carroll A. B., 1979). According to Carroll (1979), organization has to be constantly profitable for its owners and investors to fulfill their economic expectations. Moreover, while earning this profit a company should comply with relevant legislation and commit to ethical principles. Finally, a business has to contribute at least some share of its earnings to society through philanthropic activities(Carroll A. B., 1979). Such an approach was called Carroll's Pyramid presented in the Figure 1.

Figure 1 - Carroll's Pyramid of CSR components

Economic responsibility has become the foundation of Carroll'sPyramid since most organizations are mainly set up for profit-making activities. Second position has been given to legal responsibilities because any firm is expected to conduct its operations within the scope of the law. The third stage of the Pyramid belongs to ethical responsibilities that go beyond official law. These are norms and values that firms are expected to meet by society, even though such standards are not required by legislation. Final stage of the Pyramid refers to philanthropic activities performed by companies to improve social well-being and become a good corporate citizen(Carroll A. B., 1979). However, some organizations consider themselves as socially responsible if they contribute significant amounts of their financial resources to charity. This position is misleading since such corporations may still conduct their core businesses without commitment to ethical principles holding sweatshops' employees or violate legislation and practice tax evasion. Therefore, Carroll's Pyramid requires businesses to comply with all the four elements to be considered as socially responsible.

Another approach to the scope of CSR was addressed by John Elkington in 1994. According to him, a business has to comply with Triple Bottom Line (TBL) that includes profit, people, planet(Elkington, 1994). “Profit” dimension accounts for companies' earnings and losses. “People” dimension measures how well a firm performs its social responsibilities. The last dimension “planet” examines whether a company is environmentally responsible. Hence, TBL aims to assess financial, social and environmental performance of business within a particular period of time. Elkington believes that any company will pay attention only to those areas which it measures in its balanced scorecard(Elkington, 1994). That is why, this approach requires companies to track their social and environmental impact to demonstrate their awareness about externalities they cause and, consequently, control their behavior in order to become more socially responsible.

Considering other definitions, it should be noticed that the European Union describes CSR as a concept where organizations integrate their environmental and social concern in their main business activities on the voluntary basis(European Commission, 2001). This definition stresses that social responsibility means not only a fulfillment of official rules set by law but also going beyond ordinary compliance, investing more in human resources, environment and other stakeholders.

Modern view on CSR was introduced by Michael Porter in 2011. The concept was called “Shared Value”. It refers to a management strategy where companies find business opportunities in social problems. Ordinary CSR concept focuses on giving society something back or minimizing harmful effect of business on local community. Shared Value offers business to maximize its competitive advantage by solving social problems in new markets or for new customers. According to Porter, a company could be considered as an experienced in CSR if its business model is built around social issue and “Shared Value” approach is implemented at the enterprise level or, at least, at the level of voluntary initiative(Porter & Kramer, 2011).

To sum up, the concept of CSR has a broad range of definitions and scopes. Nevertheless, it can be concluded that most experts agreed to recognize a business as socially responsible if it complies with the following criteria. Firstly, a company has to fulfill economic, legal, ethical and philanthropic expectations of society. Secondly, a firm should implement sustainable practices and initiatives that go beyond the legal necessities stated by official law. Additionally, to be considered as advanced CSR user a business should build its core operations around a particular social problem that requires an urgent solution. Hence, applying the above-mentioned criteria, it is possible to identify the degree to which a business is a socially responsible.

1.2 History and evolution of CSR

The concept of CSR started to emerge in the 1920s in the USA. At that time business ethics was growing especially fast in the U.S. where enterprises faced a high risk of being penalized by courts for unethical behavior that significantly deviates from Ethical Codes of Conducts(Hoffman, 2007). The main focus during that period was on employees' welfare. Thus, primary responsibility of companies was to provide their employees with living wages which were sufficient to maintain family, to get education, proper health service and recreational activities. Next stage in the CSR evolution happened in 1950s when civil rights took leading positions among the main values of American society. The period referred to numerical anti-racial strikes and boycotts, which made most firms offer equal opportunities for employment regardless race, nationality or gender(ECI, 2017).

During the 1960s environmental issues appeared for the first time in the scope of CSR. Moreover, this period may be considered as official birth of corporate responsibility since the first companies started to implement ethical codes of conducts and values statement that all the employees had to follow (ECI, 2017). In 1970s rights of consumers were included into CSR concept. To control the relations between consumers and businesses, Consumer Bill of Rights were established. Hence, since that time corporations have become obligatory to maximize positive impact not only for their shareholders but also for other stakeholders such as customers, employees and environmental organizations (ECI, 2017).

By 1980s the concept continued to promote corporations' responsibilities for maintenance of consumer rights, employees' safety and sustainable environment (Moura?Leite, 2011). However, during that time a belief of free market economy and policy of de-regulation arose. American economist Milton Friedman proposed a view that corporations had to commit to self-regulation of ethical behavior rather than to be regulated by government(Friedman, 1970).In 1990-2000s it became clear that corporate self-regulation was not effective, having resulted in several scandals regarding sweatshops issues in developing countries, financial fraud and other unethical behavior of multinational companies(ECI, 2017). CSR concept received a particular attention from international business community after a large scandal with Enron and Arthur Anderson corporations when it became obvious that Enron's executives performed financial fraud and auditors of Arthur Anderson did not manage to detect it. As a result, both companies went bankrupt, leaving hundreds of employees without their jobs and investors without their money. This scandal demonstrated inability of companies to undertake a self-control for their responsibilities and ethical behavior. In order to prevent the repetition of such mistakes, international companies started to pay more attention to CSR polices that provides some degree of control for their behavior. Moreover, some governments and non-profit organizations (NPOs) also responded to the problem of unethical corporate behavior by issuing ethical guidelines and code of conducts(Cernusca, 2011). For instance, Sarbon-Oxley Act for the U.S. corporations or EU Non-Financial Disclosure Directive for the EU organizations made it mandatory for all the publicity traded companies to disclose both financial and non-financial data about their business operations(ECI, 2017). After these events CSR practices became a strategic component formanywestern companies and started to emerge in corporate culture of eastern companies.

1.3 Theories that frame CSR

In order to conduct high-quality research and be able to operationalize CSR as a variable, it is important to develop a clear understanding of the views basing on which CSR concept exists. Therefore, this section will provide an analysis of two theories that form foundation for Corporate Social Responsibility.

1.3.1 Milton Friedman view

Increasing number of companies that actively develop and implement CSR practices into their business model has made researchers to investigate the effects of sustainable strategies on companies' performance. One of the main problems that is faced by many experts is operationalization of CSR concept as a measurable variable. Therefore, this section will firstly investigate possible ways of quantifying CSR activities and after that examines the results of previous papers which provide the assessment of the relations between CSR and corporate performance. Basing on existing theoretical background, research hypotheses will be developed.