Corporate Social Responsibility



Corporate Social Responsibility, CSR, is a concept which embraces the socially beneficial activities of businesses that promote the public interest apart from economic development and financial gains. This concept includes responsibility for the impact of their management activities on the environment, employees, communities, shareholders, and generally on the triple bottom line: people, planet, profit[1]. In other words, businesses should act in a more socially friendly manner, implementing social goals and programs and including in their decisions, policies and actions their obligations not only to the shareholders but to the stakeholders as well.

CSR is not something new; it is as old as trade and the business itself, tied to the development and evolution of private business from the beginning of commerce in the 16th century and later, to the industrial revolution[2]. However, the concept was formulated during the 20th century, especially the past 60 years, and has become one of the most controversial subjects of thought. Critics argue that it is irrelevant to the business nature or even a bad idea, elaborating that CSR distracts the corporation from its sole responsibility which is the maximization of financial returns to its shareholders. If this is the case, then managers should be aware of the negative consequences. Proponents claim that it is of strategic importance, arguing that businesses should care about CSR since the benefits flowing back in the long run are much more than their own immediate, short term profits. In this case, the businesses' management should take advantage of such activities and further investigate the potential profits from its engagement with CSR. This study incorporates the relationship of these two contradictory factors, CSR and financial performance (FP). It sets the question whether investing in socially responsible activities can affect the financial performance of a firm. The basic directions are two, either CSR presents a positive relationship with FP and can be translated into a competitive advantage, or the CSR investment costs outweigh the benefits so that the link is regarded as negative.

This study focuses on the extension of prior studies investigating the relationship between CSR and FP. Although there are numerous studies that have examined this subject in the past, the contradictory results presented as far, make this study even more challenging. Moreover, the contribution of the present study lies on the restricted sample of companies concerning only the banking sector and the use of the Centre Info S.A. innovative and international company ratings. Furthermore, the additional explanatory variables are collected according to the unique characteristics that apply in the banking industry, aiming at the construction of a model that will provide evidence about the relationship between CSR and FP. Consequently, this investigation is believed to contribute to the better understanding of this complex link, thus providing new and valuable information to all stakeholders that are related, directly or indirectly, to the firms under examination.


Literature Review

Evolution and Development of Corporate Social Responsibility

The concept of CSR has a long and diverse history; one could characterize it as timeless. Although evidence of some forms of CSR can be traced for centuries, with the introduction of industrialization CSR assumed a new dimension focusing mainly on the impacts of the businesses to the society and the environment. The early 1920's introduced the beginnings of the modern nature of corporate responsibility but according to BRASS centre, businesses had not yet realized their social significance and their responsibilities to the future of the civilization. However, Archie B. Carroll, characterizes the 1950s as the “modern era” of CSR adding that “so much has occurred since that time that has shaped our theory, research and practice”.

In 1953, Bowen, published his book “Social Responsibilities of the Businessman” which is considered to be the landmark of the modern period of literature regarding this topic. It should be stated that in that period, the concept of CSR was usually referred as social responsibility rather than corporate social responsibility, highlighting the absence of the corporation's dominance in the business sector during that period. Through his work, Bowen (1953) believes that the large businesses which hold in their hands a significant amount of power should be aware of their actions since they affect the community and the citizens in many aspects. In this point, it is worth stating the definition developed from Bowen (1953), since it comprises one of the fundamental definitions describing the social responsibilities of businessmen: “It refers to the obligations of businessmen to pursue those policies, to make those decisions, or to follow those lines of action which are desirable in terms of the objectives and values of our society”

In the 1960s, interest in CSR became more intense, since activists groups and others from all over the world, demanded from businesses to be more socially responsible. During this decade, there has been a noticeable attempt to better understand the concept of CSR mostly through literature work. One of the most significant writers in that period, setting the ground for further research on CSR was Davis (1960) who described it as “businessmen's decision and actions taken for reasons at least partially beyond the firm's direct economic or technical interest”. Davis (1960), also, believed that there is a relation between social responsibility and business power, positioning that if CSR and business power are set equal then avoiding social responsibility may lead to gradual erosion of the business's social power.

Moreover, McGuire (1963), another prominent academic, moved CSR to another level, defining that a business has certain responsibilities to society beyond the economic and legal obligations. Further in his work, he defined these responsibilities more precisely emphasizing mostly on interest in politics, in community, education and employees. It is also of interest to notice that in the late 60's the idea of voluntarism was introduced, when Walton (1967) emphasized that a corporation's social responsibility is not something coercive but includes a degree of voluntarism.

Moving towards to the 1970's, more and more academics were interested in CSR. In that point of time, new, more precise definitions were developed but a lot of attention was also given to new concepts such as social responsiveness, stakeholder theory, and corporate social performance. In 1970's, Johnson (1971) approached the stakeholder theory through his book stating that “a socially responsible firm is one whose managerial staff balances a multiplicity of interest”. By this “multiplicity of interest” the writer demarcates the obligation of the firm to provide its shareholders financial returns and its responsibility to “take into account employees, suppliers, dealers, local communities and the nation”.

The Committee for Economic Development (1971), CED, was another major contributor using a “three concentric circles” approach to describe CSR. The inner circle included the basic responsibilities in order to execute fundamental economic functions such as growth, jobs, and products. The intermediate circle suggested that those basic functions would be exercised “with a sensitive awareness of changing social values and priorities”. Finally, the outer circle outlines “newly emerging and still amorphous responsibilities that business should assume to become more broadly involved in actively improving the social environment”.

As mentioned above, during that period, apart from CSR, some writers were also interested in the concept of CSP. One of them was Sethi (1975), who discussed the subject in his article named “ Dimensions of corporate social performance”, trying also to distinguish between corporate behavior introducing apart from social responsibility, two other new concepts those of “social obligation” and “social responsiveness”. According to Sethi, social obligation refers to corporate behavior in regards to economic and legal constraints, whereas, by social responsiveness he refers to a preventive corporate behavior to social needs.

It is worth mentioning that another term was used trying to capture the functions of organizational management within the specific context of public life[3] . Preston and Post (1975) introduced the term “public responsibility” stating that “the scope of managerial responsibility is not unlimited, as the popular conception of ‘social responsibility' might suggest, but specifically defined in terms of primary and secondary involvement areas”. However, this version of responsibility was never suggested to be unlimited and thus never managed to supplant the term of social responsibility.

Carroll (1979), an outstanding academic who contributed to the development of CSR, in the late 70's tried to provide some clarifications regarding the component of CSR that goes beyond the businesses' responsibility to make a profit and obey the law. He referred to CSR as: “the social responsibility of business compasses the economic, legal, ethical and discretionary expectations that society has of organizations at a given point in time”. The ethical responsibilities include the adaptation of those standards and norms that the society regards as fair and just and expect the business to follow. The discretionary responsibilities encompass any voluntary actions assumed by businesses such as financial contributions, contribution to arts, education and generally to community. In 1983, the author further elaborated on the four part definition of CSR renaming the discretionary responsibilities to voluntary or philanthropic. Thus, summarizing, a business should “make a profit, obey the law, be ethical and be a good corporate citizen”.

During the last three decades, the work done on CSR is focused basically on empirical studies based mainly on the already existing and abundant literature. However, academics and researchers engaged with the further development of alternative concepts such as corporate social responsiveness, business ethics, stakeholder theory, CSP, corporate citizenship. Of course, the interest in CSR did not disappear, on the contrary, became the base for deeper investigation and new updated results. Regarding these new concepts, Epstein (1987) tried to relate the concepts of social responsibility, responsiveness and business ethics pointing out that these three concepts “dealt with closely related, even overlapping, themes and concepts”. The development of the ecological sensitivity and the emphasis given on the human force drive the constant evolution of corporate responsibility, affected and shaped according to competition and the needs that arise each moment. Although CSR is not imposed, the majority of businesses are motivated to apply corporate responsibility since it captures the relationships between business and society.

Why is CSR important to businesses?

Despite its controversial nature, CSR has become one of the more intense concerns within the business world. Businesses are called to combine their core financial operations in order to create returns to their shareholders with the adoption of a socially responsible character towards the society as a whole. Nowadays, CSR comprises a key element of modern corporate strategy, constituting a benefit not only to the society but to the business itself. Its importance is stated below:

  • Through CSR, businesses can build their brand, boost their reputation and create a more favorable public image. By achieving a satisfactory level of CSR, a business increases some of its most valuable assets: goodwill, trust and good reputation. By having a socially responsible profile, a company can enhance its competiveness and obtain a significant position in the minds of the customers. It is a fact that many consumers don't just prefer social responsibility but insist on it. According to analysts, consumers seek information about business practices and responsibility before making their decisions, adding that the majority of them would refuse to purchase a product or a service from a company that they believed is not socially responsible. Bearing in mind, how difficult and time consuming is to build up a good reputation and how easily it can be ruined within seconds, CSR can also reduce the risk of a sudden corruption of a company's reputation through incidents such as scandals or environmental accidents.
  • CSR creates economic benefits through increased revenues and cost reduction. By investing in social responsibility, companies receive benefits that outweigh the costs. They develop new innovative products and services in order to keep up with the constant competition, but this is what differentiates them in an environment where crowed marketplaces dominate. As consumers demand for a more active and responsible participation on behalf of the companies, this preference of environmentally friendly products is translated into profits, thus increasing the revenues of the company. However, this environmental awareness not only attracts customers but another crucial part of the company's viability, the investors. CSR reflects a positive reputation and strong management ability, thus investors and shareholders are more easily motivated to finance and support the company. Nevertheless, a company's income does not depend only on sales and financiers. Bearing in mind the importance of CSR, governments grant and finance businesses that operate in a socially responsible way or are willing to undertake projects in favor of the community. Additionally, by adopting CSR, companies reduce the financial risk they run as a result of more stable relations with the government and the financial community.

Companies can also boost their profits by reducing costs. By conserving or using alternative resources of energy, reducing wastes, emissions and recycling, companies help the environment but also help their own profitability. In other words, by adopting socially responsible programs, they retain the possibility to manage their spending correctly and reduce the operating costs, leading to an increased efficiency.

  • CSR and human resources. Companies introducing a responsible behavior have the advantage of attracting and retaining its staff easier than others. The concept of social responsibility does not affect only the business world, individuals as well are willing to provide as much as they can to help the environment and the society. For that reason they prefer to provide their working abilities to companies that are socially responsible. Such employees are much more satisfied with their job and develop a higher sense of morality when they are encouraged to actively participate in community activities, charities, environmental projects etc. On the other hand, from the company's perspective, the benefits are multiple. Apart from the fact that it is easier to attract employees, it is more possible that these employees will be much more productive and committed striving for a better performance of their company. Moreover, the company saves from the costs arising from recruiting and retraining new personnel, since this positive working environment makes the employees stay longer.

Criticism over CSR

Advocates of CSR strongly believe that the role of businesses is not just restricted in its traditional functions of providing goods and services, generating employment and obeying the law; they should also behave responsibly and take actions supporting the needs of all communities related to them. However, critics base their negative view of CSR on the fact that it is controversial to the nature of the business and it might be subject of questionable motives. Many academics have expressed their opinion that the sole responsibility of a business is to maximize the profits of its shareholders. One of the first and maybe most famous proponent of this view was Milton Friedman who stated that a business should generate profits and obey the law but have no other responsibility or obligation to social matters.

Another argument against CSR includes some questionable motives for those businesses engaging in CSR. Critics believe that it is just a form of “window dressing” for some companies that are engaged in CSR. Such companies adopt CSR in order to distract the public from their unethical operations and harmful products. Moreover, they argue that there exist companies that start CSR only to benefit from the reputation and the publicity they receive, with a sole objective to maximize their profits. However, sooner or later, it will become clear to anyone that these companies are unable to promote the interests of the community as a whole through their “responsible” operations.

Previous Theoretical and Empirical Studies and Hypothesis Development

It is a fact that Corporate Social Responsibility (CSR) and the measurement of Corporate Social Performance (CSP) follows different approaches throughout economic literature; these approaches can be grouped into three categories The first constitutes the theoretical frameworks linking ethical and economic assumptions. The second is the empirical research into the link - positive, negative, or neutral - between social and financial performance as a measure of the value added to a firm by good social and environmental behavior, and the third is the research of the generation and implementation of accountability or reporting systems allowing researchers and practitioners to generate a complete and homogeneous system for measuring corporate social performance (Gonzalez, Torres, Izquierdo, 2006).

Regarding the first approach, a number of academics and economists have developed different theoretical frameworks during these 60 years of CSR study. Although some were already presented earlier, the scope of this part is to provide a clear image of the most important concepts over CSR. The instrumental stakeholder theory (Donaldson and Preston, 1995) argues that there is a positive relationship between good management and stakeholders, which improves financial performance (Freeman, 1984; Waddock and Graves, 1997). This theory affirms that CSR may be an organizational device that leads to more effective use of resources (Orlitzky et al., 2003), which finally concludes in a better CFP.

Friedman (1970) and Jensen (2001) are more skeptical about the supposed positive externalities caused by CSR since they believe that socially responsible actions are investments without payoffs and, therefore, against the shareholder's interest.

Carroll (1979) and Freeman (1984) believe to the existence of groups other than shareholders interested in companies' activities. On the other hand Friedman disagrees with this opinion since he believes that the only responsibility of a business is towards its shareholders. Friedman argues to the maximization of profits for shareholders within the legal framework, which means that a firm has no obligation to do any social responsible action since this is the role of state. Freeman's stakeholder theory (1984) implies that if stakeholders have different but balanced claims, managers can augment the efficiency of the organization in responding to external demands. The achievement of the results depends not only on satisfying the bilateral relationship with these groups, but also by coordinating and prioritizing the interests of multilateral stakeholders.

Another question that arises is if the market is able to value intangible assets, such as a firm's reputation, which is produced by its ethical behavior as a collective. Brickley (2002) argues that this is possible adding that also the market should be able to demand social actions from firms. In order to achieve this, individuals as well must take action, especially those who have an ethical concern and have the power and the resources to give a clear message to the firm. The banking system is able to fulfill these two conditions and can generate ethical engagements, not only for its customers, but also for society through the marketing of ethical financial products. (Munoz-Torres, Izquierdo,2006)

The empirical evidence on the link between CSP and CFP is a debatable topic; the three hypotheses are to be positive, negative, and neutral link. Griffin and Mahon (1997) did a twenty-five year time period summary, from 1972 until 1997, of the empirical evidence on the CSP and CFP. Other summary studies offered by Waddock and Graves (1997) and Preston and O'Bannon (1997) examine all possible hypotheses of relationship between CSP and CFP.

The first empirical investigations exanimate the relationship between stock market returns and one dimension of corporate social performance. [Vance (1975), Belkaoui(1976), Alexander and Bucholz (1978)] .Over the years, the CSP- CFP link evaluated. Initially empirical investigations were often interested in a single dimension of CSP such as pollution, whereas within the years new methodologies were used and concluded in cross-sectional studies over multiple industries, countries and regions with accounting data from large corporations as the measure of financial performance (Griffin and Mahon,1997).

According to Griffin and Mahon (1997) summary in numerous articles they reviewed and ended up to the following conclusions. Firstly, there is no unanimity on the results of empirical investigations about CSP-CFP link. Secondly, most of the investigations support the hypothesis that there is a positive CSP-CFP link. However, some of studies have found a negative relationship; the majority of these studies compared the reaction of the stock market to potential illegal activities or product problems. Moreover, there is also a number of inconclusive studies since they found both a positive and negative link in the same study.

In 1997, Frooman carried out such an empirical investigation in order to define the possible link; he did an analysis of 27 event studies analyzing the relationship between stock market reaction and socially irresponsible and illegal behavior. He came to the conclusion that there is evidence for a positive CSP-CFP link since the market reacted negatively to firms that committed socially irresponsible or illegal acts.

Waddock and Graves (1997) using regression analysis, analyzed a total of 469 S & P 500 companies. Using a weighted composite measure of CSP they evaluated the CFP based on three accounting measures (return on equity, return on assets, and return on sales) .They also took under consideration the size, risk, and industry as control variables and tested various econometric specifications of the model including lagged variables and concluded in a positive CSP-CFP link.

Preston and O'Bannon (1997) used 67 large U.S. companies over the eleven-year period 1982-1992 and compared the CSP and CFP. They used three components of the Fortune Survey of Corporate Reputation to represent CSP and return on assets, return on equity, and return on investment to represent CFP. Preston and O'Bannon (1997), as well, found a positive CSP - CFP link.

Stanwick and Stanwick (1998) analyzed almost 115 firms using regression analysis of multiple cross-sections for the years 1987-1992. They used as dependent variable in the regression equation the measure of CSP which was based on the Fortune Survey of Corporate Reputation, whereas as independent variables were used the return on sales, size, and environmental performance variables based on the EPA Toxic Release Inventory. Stanwick and Stanwick (1998) came up with a significant positive relationship between CSP and CFP.

Simpson and Kohers (2002) recently analyzed the relationship in the banking industry and found a positive link between CSP and CFP. They used the Community Reinvestment Act Ratings 3 which covers a broader spectrum of bank functions, as a measurement of CSP. They argue that, although this system is not complete, it is multidimensional and specifically for the banking industry.

McWilliams and Siegel (2000) compared the relationship between CSP and CFP. They used an average of annual values for the period 1991-1996 for 524 large U.S. corporations in a regression model that used a dummy variable indicating inclusion of a firm in the Domini 400 Social Index (DSI 400) as the measure of CSP. The DSI 400 is a portfolio of socially responsible companies developed by Kinder, Lydenberg, and Domini, Inc. which developed the KLD index. The model included a measure of financial performance as the dependent variable and CSP, industry, and expenditures for research and development were independent variables. McWilliams and Siegel (2000) found that inclusion of the research and development variable in the model causes the CSP variable to be insignificant and concluded that there may not be a CSP-CFP link if the regression model is properly specified.

Prior, Surroca and Tribo (2008) investigated the connection between earnings management and corporate social responsibility (CSR). They used archival data from a multi-national panel sample of 593 firms from 26 countries between 2002 and 2004, and they concluded in a positive impact of earnings management practices on CSR; this relationship hold for different robustness checks. Also, they demonstrated that the combination of earnings management and CSR had a negative impact on financial performance.

Soana (2009) investigated the possible connection between social performance and financial performance in the banking sector. In a sample of national and international banks, the eventual correlation between social performance (proxied using ethical ratings) and financial economic performance (proxied using market and accounting ratios) has been examined. It emerges from these analyses that there is no statistically significant link that indicates any positive or negative correlation between CSP and CFP.

Waring and Edwards (2008) exanimated to what extent has Socially Responsible Investment (SRI) developed unevenly across countries with different corporate governance systems and how might we explain this? Secondly, what consequences does its uneven development have for human resource management (HRM)? They found that differences between the institutional, corporate governance and cultural characteristics of national business systems explain variations in the size and significance of SRI across countries, and also that SRI has an impact on HRM in institutional contexts such as where its influence is complemented by strong employee voice institutions.

Scholtens (2009) developed a framework to assess the social responsibility of internationally operating banks. He used more than 30 institutions and found significant differences among individual banks, countries, and regions. Also, there is evidence that the social responsibility of these banks has significantly improved between 2000 and 2005.

More recent empirical studies of the financial performance of socially responsible investment funds, such as Bauer (2005), Bello (2005) and Statman (2005), concluded that there is no significant difference in the returns on the relatively more socially responsible funds compared to conventional funds.

According to Griffin and Mahon (1997) the empirical investigations faced some problems, because the research process is not well supported theoretically or methodologically. One of these problems was that a large percentage, almost 78%, of the studies used samples from multiple industries. This provoked an issue since every industry has specific characteristics that make the nature of CSP unique and responds to different internal characteristics and external demands (Griffin and Mahon, 1997). In the same study arises an issue about the nature of stakeholder actions which appears to be an important influence on CSP and different industries face different portfolios of stakeholders with different degrees of activity in different areas (Griffin and Mahon, 1997). Rowley and Berman (2000) seem to agree and propose that CSP research should be defined in operational terms to a specific industry or setting. Simpson and Kohers (2002) suggest that focusing on a single industry emphasizes internal validity rather than the external validity of multiple industry analyses. Moreover, the use of only one industry is more useful since the econometric specification of the FP function can be more complete because unique characteristics of the industry can be included. (Simpson and Kohers,2002)

The second problem is the measurement of CSP. Apart from Griffin and Mahon (1997), also Carroll (2000) argues for multiple sources of information to produce a comprehensive measure of CSP. Previous studies used a single dimension of CSP measurements (Griffin and Mahon, 1997) but more recent studies use multidimensional measurements like the Fortune survey of Corporate reputation, the KLD index or other ethical ratings.

Griffin and Mahon (1997), regarding the third issue, found that many investigations used only one measure of Financial Performance (FP) and they proposed that multiple measures of FP should be used. Different analyses use different performance measurements and there is no consensus on the best way to measure results. They suggest that accounting measures rather than market-derived measures should be used because market measures may be picking up more than just FP. The choice of accounting measures and market ratios is certainly very important. McGuire, Sundgren and Schneeweis emphasize that some accounting measures are not suitable because results are often distorted by the manipulation of managers. But also the use of market ratios needs to be evaluated with attention, since it presupposes the existence of efficient markets in an informative and evaluative sense. (Soana, 2009)

The third approach is the research into the generation and implementation of accountability or reporting systems allowing researchers and practitioners to generate a complete and homogeneous system for measuring corporate social performance (Gonzalez, Torres, Izquierdo, 2006). Until the mid-nineties, companies used mainly the annual report as a measure of corporate performance which was not really helpful in reflecting the quality of CSP information. In the recent years, firms have started to use various instruments to report on their social activities. To illustrate this point, let us consider some of the first instruments such as the Sustainability Report or the Triple Bottom Line Reports (Newson, 2002), and the Social Report in France (ASSC,1975). In order to make it easy to include social and environmental dimensions in management systems and to allow internal and external stakeholders to measure CSP, various initiatives have been inserted. Social Accountability International launched the SA 8000 SAI (1997) standard helping the company's managers to dedicate with social responsibility activities which are in favor of the shareholders. The Accountability AA 292 Marta de la Cuesta-Gonzalez et al.1000 standard promotes the basis for measuring and reporting ethical behaviour in business. One of the most accepted initiatives is Global Reporting Initiative which proposes the Sustainability Reporting Guidelines as a voluntary framework for companies to report on the economic, environmental and social dimensions of their activities. (Gonzalez, Torres, Izquierdo;2006)

The evaluation of measurement of CSR led from a single dimension measure to multidimensional measures which ended up in the creation of indexes such as the Fortune Survey of Corporate Reputation and the KLD index developed by Kinder, Lydenberg, Domini & Co., Inc. (Griffin and Mahon, 1997). Other important specialized agencies that dedicate with ethical ratings are AEI, Axia,E. Capital Partners, EIRIS, Ethibel and SAM(Soana,2009). However, Soana (2009) argues that it should be specified whether the various specialized agencies base their ethical evaluations on methodologies that are subjectively formulated. Scholtens(2002) agrees, supporting that rating institutions like EIRIS and KLD that provide information about firms' social conduct and performance, cost a lot and it is not clear how the rating institutions arrive at their conclusions.

According to Soana (2009) there are five methodologies which have been used to quantify social performance in numerous empirical studies that have established the possible relationship between CSP and CFP. These are the “content analysis”, “surveys carried out using questionnaires”, ”ethical rating”, “undimensional” and “indicators reputational measures”. Although the majority of contributions appears to confirm the existence of a positive relationship between CSP and CFP, it seems to be no homogeneity on the results and so is impossible to generalize them in all markets and all sectors.(Soana 2009). Soana(2009) added that in examined analyses there were factors that were changing with each other. Some examples include different methodologies of social performance quantification, different indicators of financial-economic performance (accounting measures, market ratios, at times “adjusted” according to the corporate risk) as well as different historical series.

Despite the difficulties that arise concerning the deeper understanding of CSR, what really characterizes this concept is the continuous and growing interest of the academics and practitioners. Although the idea of a business being interested in social needs and issues apart from its fundamental goal - the profits - has developed a lot since the 1950's, the main concept it still the same. However, although the theoretical evolution is very important, unfortunately, it is never enough in order to clearly explain and understand a specific topic. Empirical research, on the other hand, is the most accurate solution. Concerning CSR, the theory developed in the 50's has been the base for future research trying to conclude whether acting in a socially responsible manner produces benefits not only to the community but to the business itself. There are three possible relationships, either there is a positive link between financial gains and CSR, or there is neutral or negative link. There are numerous empirical studies each trying to present a different point of view. The main concept remains the same; however, in each study the research methods, the financial performance and CSR measures and the variables tested differ in order to provide new results that cover the vacancies of the previous studies. This study is conducted in order to extend the already existing research performed throughout these years aiming at a more specific description of the controversial relationship between financial performance and CSR. In other words, it further investigates the effect, if any, of adopting a socially responsible behavior on the financial performance. The fact that differentiates this investigation from the past results includes both the usage of various measures of financial performance as well as the CSR rating which is divided into seven categories. More specifically, the financial measures comprise of four accounting ratios, ROA, ROE, annual price returns and Price/Book Value; each provides fundamental information about profitability but imprints this information through different aspects of economic measures. Regarding the CSR rating, most previous studies are based on indexes as described above such as the KLX index and Fortune Survey of Corporate Reputation. However, in order to create a more complete measure, apart from the global total score, each bank is scored according to its performance concerning labor, environment, business ethics, reporting, human rights and governance. Finally, the research is restricted only to the banking sector, including banks from 45 countries internationally, capturing in this way only the unique characteristics that arise in the banking industry.


Data & Research Methods

Sample & Data

Data on corporate social responsibility were obtained from the “Global Environmental, Social and Governance (ESG) Equity Research”, provided by Centre Info S.A. for the purposes of this study. The company investigates how firms integrate ESG dimensions into their daily operations and long-term strategic plans and provide ratings determining the degree of responsiveness of the companies to sustainability challenges.[4] The sample is restricted only to the banking sector and consists of 189 commercial banks from 45 countries internationally. The analysis concerns the year 2008.

Moreover, apart from then sample required concerning the CSR measurement, financial data about the independent and control variables are necessary in order to form the model and extract useful information and conclusions about the potential relationship between CSR activity and FP. All the accounting and financial data concerning the dependent variables - the financial performance measures - and all the control variables were retrieved from Thompson One Banker and Worldscope. Furthermore, in order to investigate for multicollinearity, the explanatory variables were tested using the VIF (Variance Inflator Factor) approach. Nevertheless, no problem of multicollinearity existed meaning that the variables don't correlate significantly with each other.

Corporate financial performance measures

In order to measure the FP, this study is based on the results of previous researches and some very representative indicators are chosen. These indicators comprise mainly of financial ratios, frequently used in order to provide information over the performance and profitability of financial institutions, in this case commercial banks. The most common of those measures is the Return on Assets (ROA) which explains how capable are the bank managers to attract rational cost deposits, to invest them in gainful loans and other investments and keep the daily operations profitable action for the bank. (Gary Simpson, Theodor Kohers). Many empirical studies beyond the ROA used similar ratios such as the Return on Average Equity (ROAE), the Return on Average Assets (ROAA) and the Cost to Income Ratio (Soana,2009), however those preferred as the most efficient are the ROA and ROE profitability ratios. Moreover, there is another category of measures that shows the market performance, some of them consist of the Market to Book Value, the Price to Book Value and the Price/Earning (Soana, 2009). As measures of market performance indicators, the price to book value and the annual returns are proposed as the most appropriate variables and thus are used in the model.

CSR measures

As already mentioned above, the FP measures are four, ROA, ROE, annual returns and PRICE/ BOOK VALUE ratio. Concerning the CSR measures, the majority of past studies used a single dimension of CSR retrieved mostly from indexes. This research uses a multidimensional measure of CSR, as provided by the Centre Info, an element that characterizes this study as innovative. The data include seven separate fields for research. Firstly, there is a global CSR score that scores each bank individually from zero to hundred, providing a general overview. Then, the remaining six categories score each bank according to how responsible it is towards issues regarding the society and its stakeholders: reporting, business ethics, labor issues, environment, human rights and corporate governance.

Control variables

Different control variables are used to control the size, the growth rate, the leverage, the risk, the profitability, the liquidity and the region. Size, is a very preferable variable in many studies, where it controls the connection between variables of financial performance and social performance (Waddock and Graves, 1997; Hillman and Keim, 2001) since it is believed that big banks are more socially responsible. As a result, it is expected to be a positive coefficient in the size variables. The variable of size that is preferred is market capitalization. Also, the connection between CSR and growth rates is examined. The variable Total assets one year growth is used to explain the above connection, where a positive coefficient is expected verifying that banks with a growing trend are more willing to invest in socially responsible activities.

In order to investigate if there is FP and CSR link, variables of financial structure are used, the leverage class is one of them. The total debt/common equity is the chosen variables for this category. The leverage ratios are expected to have negative coefficients. An alternative path that controls the connection between FP and CSR is the risk exposure, which is presented in this study through price volatility variable.

Profitability is also controlled using earning assets/assets and dividend payout ratio. More profitable banks tend to be more interested to social responsible actions. So, it is expected to be a positive coefficient on profitability class. A complementary category is liquidity; more liquid banks have the ability to invest more to CSR. As a measure of liquidity is used the total loans/total deposits ratio, which is a measure concerning mainly the banking sector. Since this study is constrained to the banking industry, the use of bank specific ratios is anticipated, so the total capital / total deposits ratio is also chosen as one of the control variables.

An additional variable category that is used is the region trying to investigate whether there is difference of social responsibility activity among regions internationally. It is defined as a dummy variable which is equal to one according to the region where each bank belongs (Europe, Africa ,North America ,South America ,Oceania, Asia ), otherwise it is equal to zero. From the model, Europe, is extracted because it should be tested if there is any special evidence that presents a region to be more CSR active in comparison with the rest.

Research method

The majority of past studies investigate the relationship between CSR and FP by using econometric models and by setting two fundamental hypotheses; either there is a positive relationship that characterizes CSR and FP, or, on the other hand, there is a neutral or negative link. The present study follows the concept of the past researches; however, its innovative nature regarding the variety of the variables chosen seeks in new and updated results. Elaborating, in order to test for a relationship between FP and CSR, a regression model was estimated setting the financial measures as the dependent variable, the CSR measures as the independent variable, plus a set of control variables. The reason why the financial measures were used as the dependent variable in the model is justified by the fact that this research aims at the examination of the impact of CSR on financial performance, meaning that CSR causes FP.

The hypotheses tested so as to conclude at a possible link between CSR and FP, are:

  • Ho: there is a neutral or negative relationship connecting CSR and FP
  • H1: there is a positive relationship between CSR and FP

A positive and significant coefficient would reject the null hypothesis, thus resulting at a positive link between CSR and FP, whereas, a negative or insignificant coefficient would suggest that there is a negative or no relationship between the variables tested relatively.

The four financial performance measures were separately regressed upon the global CSR score and the six sub-categories of CSR measures, considering always the same set of control variables. So, eight regressions were performed to evaluate through the regression parameters and diagnostics the effect of CSR on FP. Specifically, the eight regressions relied on the following regression model:


Data analysis & Discussion

From the regressions carried out using the model designed above, the null hypothesis of no relationship between the FP and CSR is accepted in all four analyses carried out. Table 3A illustrates the results when setting the global score as the independent variable (regression “A”) and Table 3B illustrate the results when setting the six CSR sub-categories as the independent variable (regression “B”), relatively. The numbers that are marked in italics illustrate those variables that are statistically significant. However, the majority of the results in all eights regressions give insignificant coefficients, thus the probabilities exceed the 5% confidence level and the null hypothesis cannot be rejected.

More specifically, regarding the ROA financial performance indicator, two regression models are tested, one using the global score as the independent variable and the other using the six CSR sub-categories together. For the first model, ROA - Global Score, the null hypothesis is accepted at the 0,932 confidence level, with an adjusted R squared for this regression equation equal to 0,327. As far as the control variables are concerned, the variable of assets growth rate and the ratio of capital to deposits represent a positive link (0,0 and 0,004 relatively), whereas the leverage ratio of debt to equity is negative and statistically significant at a probability level of 0,004, as expected, indicating that highly leveraged banks avoid investing in socially responsible activities. The second model ROA - CSR sub-categories, presents relative results, with an adjusted R squared equal to 0,309 and coefficients not strong enough to reject the null hypothesis and consider a positive CSR and FP link. Moreover, considering the control variables, those significant don't differentiate at all. The assets growth rate, the leverage and the capital to deposits ratio are those which present high coefficients, thus providing no extra information for further discussion.

The results for the two models using ROE ratio as the dependent variable, lead to the acceptance of the null hypothesis. The model ROE - Global score gives an adjusted R squared equal to 0,116 and a probability of 0,278. The volatility variable gives a low probability equal to 0,019. Moreover, the coefficient of assets growth rate (3,143) is positive and statistically significant, as expected, leading to the acceptance of the hypothesis that growing banks are more positive to social investment activities. The second model ROE - CSR categories illustrates similar results regarding the low CSR coefficients and the significance of the control variables. The null hypothesis is once more accepted; the very low adjusted R squared justifies the weakness of the model to support a positive relationship between CSR and FP, whereas the assets growth variable and the leverage ratio are the most significant control variables with positive coefficients equal to 3,157 and 2,234, relatively.

The third financial measure, Price to Book value, does not differentiate a lot from the other regression models described above. For both models, first testing the global score of CSR and then the CSR sub-categories together, once more the null hypothesis is accepted with a quite low adjusted R square. Regarding the control variables, in both cases, those significant are the assets growth variable, the ratio of total loans / total deposits and the variable regarding the price volatility. However, from the first model the variable of market capitalization gives a high coefficient (1,849); this outcome verifies our expectations regarding the size, suggesting that the bigger a bank is, the more socially responsible behavior it adopts.

Finally, the last two sets of the regression models based on the annual price returns as the financial measure, once more confirm the acceptance of the null hypothesis of no actual relationship between CSR and FP. The first model, where the Global score of social responsibility is regressed upon the annual price returns, gives a probability of 0,686 and an adjusted R squared of 0,394. For the second model the regression presents an adjusted R squared equal to 0,418, whereas the majority of the sub-categories have probabilities higher than 5%. However, the labor coefficient, with a low probability value of 0,060, allows us to accept the alternative hypothesis for a positive link. Nevertheless, this isolated fact is not strong enough in order to affect the model as a whole, leading to an actual positive relationship between CSR and FP. As far as the control variables are concerned, both sets, Annual returns - Global score and Annual returns - CSR sub-categories, present similar results. Those variables with high significance in both cases include the debt to equity (leverage) ratio, the capital to deposits ratio, the loans to deposits ratio and the price volatility.

The investigation on the region dummies does not provide significant evidence of CSR differentiation internationally. According to the results retrieved from the regressions carried out, although a very slight evidence of increased CSR activity is observed in Asia, the total study suggests that no specific region outweighs regarding the adoption of social responsibility in the banking sector.



This study explored the relationship between the CSR and CF at the banking industry. The empirical research was based on international data of commercial banks provided by international database SA. The unique characteristic of this study is that the sample consists of 189 banks from 45 different countries rated not only for the Global score but also for some sub-categories such as Reporting, Business Ethics, Labor, Environment , Human rights and Governance , all together. Although there have been other investigations testing the link between CSR and FP at the banking industry there is no a straight answer since the results are conflicted and the connection remains debatable. This analysis attempted to solve this problem using a large international sample concentrated only in the banking sector and multiple measures for the CSR (Global, Sub-categories), FP (ROA,ROE,PR/BOOK,AN. RETURNS) and control variables.

The results of investigation seem to support that there is no any strong evidence of positive relationship between CSR and FP. This could be translated that either banks have no economic profit from CSR investments, or otherwise banks' investments are done without any influence at the financial results which implies a negative link. To the above hypotheses seems to conclude also Soana(2009) without being able to confirm any of them. In order to explain our results it is good to have in mind the economic situation during the year of study. The data concerned the year 2008, a year of a wide economic recession. Banks were the first victim of this recession which is still going on. Our findings could imprint this situation proving that the financial results of banks have not been influenced at such a level from the CSR investments since financial performance has been affected more from different factors, and extraordinary situations.

Also, this neutral relationship between FP and CSR is explained through the nature of social investments. The majority of bank investments are long term, meaning that our research cannot imprint the possible relationship since it is restricted in a one year study and the benefits of these actions are observable in a long period. Also, there is the possibility that the CSR investments have no direct economic profit but conduce indirectly at financial performance. In other words, bank investments which are oriented at social responsible actions such as environmental or human rights, aim at boosting the fame and not at direct profit. To illustrate that point, we can think donations of banks at non-profitable organizations or “green” products which intend to create a positive reaction to society and present banks as social responsible organizations.

Previous frameworks have also attempted to give possible explanations for a neutral, or nonexistent, relationship between CSP and FP. According to Waddock and Graves, (1997) the link between CSR and FP does not exist since the environment of society is so complicated that cannot explain the possible connection through a simple, direct relationship between them. Another hypothesis from McWilliams and Siegel (2001) is the supply and demand theory. They believe that every company has different level of production with purpose the achievement of maximization of profits. This production includes the social performance. As a result company produces social performance equal to the demand which is needed in order to maximize the profits. More clearly with different social performance productions firms will achieve the same maximization of profits.

Summarizing the model's results, this study concludes to the fact that there does not exist a positive link between CSR and FP, however there are some exceptions which indicated a significant relationship. Briefly is presented that the ROA model had a positive link with assets growth rate and ratio of capital to deposits, whereas a negative link with leverage ratio, the model ROE showed a correlation with volatility and assets growth rate, the Price to Book value followed the above results adding a high coefficient of market capitalization and finally the annual price returns models had significant control variables of debt to equity ratio, the capital to deposits ratio, the loans to deposits ratio and the price volatility. In relation with the region dummies no evidence of extraordinary social responsible activity has been found among the regions.

The findings of this empirical investigation could be, doubtfully, considered valuable since an attempt has been made to enlighten the very important but also complex relationship between CSR and FP, in the midst of an economic recession. Furthermore, the present work could be a trigger for future researches.

However, there are a number of limitations that characterize the present study and should be stated in order to have a clearer view of the results. Firstly, one limitation is the time horizon tested regarding the variables in the model. Elaborating, this study uses data for the CSR measurement, the financial performance and the control variables retrieved only for the year 2008. As mentioned above, banks aim at receiving benefits due to their engagement with socially responsible activities not in a short time period but the long run. So, actual results indicating a link between social responsibility and financial performance need a longer time horizon in order to capture the possible causality between the variables.

Moreover, it should also be stated that the results of this research might not be representative, due to the sample used, taking into consideration that during the year 2008 the international financial crisis was taking place, actually being at its peak. The banking sector was influenced widely from the financial recession; in consequence banks might not have invested as much on social responsibility activities comparatively to past years. This is a hypothesis worth mentioned considering the breadth of the financial crisis on the international economy.

Besides, another limitation concerns the CSR measurement. In past studies, the required data regarding the social responsibility measures were provided through several indexes and ratings such as the KLX index, the Fortune reputation survey, the Domini 400 Social Index, the CRA rating, the SiRi database, as used more commonly. In fact, the majority of studies performed on this topic extended the existing work by using a different measure of CSR, aiming at a more objective and realistic result that would overcome the past deficiencies. However, no one of these indexes and rankings are considered to be ideal measures of CSR. Indeed, they are thought to be subjective measures that are liable to manipulation when profits and interests arise. Moreover, they are unable to provide a large sample for each industry since they cover just a limited proportion of firms and despite the increasing trends they tend to be stable over time. This study introduces a measure of CSR which is innovative and unique to the literature; however, considering the negative elements of the other measures of social responsibility, it should be further examined for its validity and objectiveness, since a possible biased estimator of CSR might have influenced the results.

The acknowledgement of these limitations along with the increasing emphasis given on CSR, can guide future research in several directions. As mentioned above, one of the weaknesses of this empirical study is related to the short time period on which the findings are based, resulting to a possible misleading outcome since the actual effect of CSR on FP appears in the long run. Given the fact that the majority of previous studies examine samples that include up to five years, future work should focus on expanding the sample with data for at least a half decade. Moreover, the model could become more complete and robust by enriching the current CSR rating list with more banks internationally, bearing in mind their continuously increasing interest on socially responsible activities.

Another valuable direction for future research would be the comparative analysis of the effect of the financial crisis on the application of CSR in the banking sector. In other words, it would be interesting to examine whether this economic recession had an impact on the degree of social responsibility by testing three time periods: one before, one during and one after the crisis. Consequently, this study could lead to comparative conclusions regarding the relationship between CSR and FP during the time periods indicated above.

This study explores whether engaging with socially responsible activities influence the economic profits of banks, meaning that the expected causality is directed from CSR to FP. However, the reverse relationship is a possible situation that should be further examined and explored. In other words, this future work would investigate the opposite link, the one when FP causes CSR and would aim at figuring out whether banks invest in social responsibility according to their level of financial performance. So, this research would provide evidence for either a positive linear correlation between economic profits and CSR or a random relationship.

Finally, the majority of the past studies, along with the present one, provide support for a link, either positive or negative; however, they do not try to explain why this link exists since they are based on numerous suggestions and hypotheses. So, another valuable direction for future work should focus on the theoretical explanation of this relationship in order to fill the gap of a specific and accepted theoretical framework.

  1. The triple bottom line (also “TBL” or “3BL” captures an expanded spectrum of values and criteria for measuring organizational (and societal) success: economic, ecological and social. The concept of TBL demands that a company is responsible not only to the shareholders but to the stakeholders as well. The term “stakeholders” refers to anyone that is influenced directly or indirectly by the actions of the business.
  2. J.J. Asongu ,”The History of Corporate Social Responsibility”, Journal of Business and Public Policy History of CSR Volume 1, Number 2.
  3. Archie B. Carroll, “Corporate Social Responsibility, Evolution of a Definitional Construct”, Business& Society, Vol 38 No 3 September 1999, p 280
  4. Information retreived from the official website of Centre Info S.A.

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