|Type of paper:||Thesis|
|Categories:||Business Analysis Ecology Social responsibility|
CSR and CSP are prominent concepts in the field of business and society. Albeit researchers have continuously tried to create a clear distinction between them, they are frequently used as synonyms in empirical research (Margolis et al., 2007). It may be because CSP is an extension of the CSR concept that concentrates on actual results realized rather than the general notion of responsibility to society and businesses' accountability (Carroll, 1999). The concept of CSR has recognized that firms have many different kinds of trusts and seeks to define the scope of corporate responsibility in society as well as the criteria for measuring firm financial performance in the social arena (Surroca, Tribo,, & Waddock, 2010).). It follows that while the CSR concept emphasizes obligation and accountability to society, CSP focuses on actual outcomes and results of firms' social efforts (Kolb, 2018). Also, as CSR cannot be simplified into social responsibility, there is no unique definition of CSR as its dimensions are comprehensive and broad. Thus, the CSP concept is a natural consequence of CSR as it is an assessment of a firm's social responsibility activities (Margolis et al., 2007). According to Bosch-Badia, Montllor-Serrats & Tarrazon (2013), firms interact with the stakeholders voluntarily and ensure the interrelation of social and environmental concerns to firm social responsibility. For reason of measurability, the CSP concept will be used in this study to analyze the interrelation between the actual outcomes and result of firms' social performance and their respective financial performance.
The linkage between CSP and ESP
One of the various dimensions of CSP that has evolved into a critical component in the measurement of social responsibility has been defined as environmental social performance (ESP) (Wood, 1991). While CSP measures the aggregate outcome of a firm's social responsibility resulting from various domains, ESP solely assesses firm financial performance in the realm of the natural environment. It is the increasing importance of environmental issues such as the usage of clean energy, pollution prevention, recycling as well as the demand for environmentally sustainable products, that has induced the development of the ESP concept (Kotler & Lee, 2005). Relative environmental strengths and good ESP comprise a firm following a policy of restricting the negative impacts of its business on the natural environment and acting proactively to preserve the natural environment (Jayachandran et al., 2013). Contrarily, relative environmental weaknesses and bad ESP encompass a firm producing natural hazards, such as greenhouse gas emissions, harmful chemicals and other pollution, that destroy the natural environment (Orlitzky, Siegel, & Waldman, 2011). Both good and bad ESP are essential aspects of the assessment of responsible as well as irresponsible behaviour and may affect firm financial performance.
Within the ESP concept, the word performance implicates a measurement, whose result can either be good or bad. Firms that seek to improve the environmental social performance proactively invest in assets that seek pollution reduction to improve ESP. When looking at corporate social responsibility, one should note that both CSP and ESP are different aspects that deliver a significant effect on ROA. Also, this creates the differences endured by responsible and irresponsible firms as they practice CSR. Therefore, this study defines good ESP, with a positive value, as responsible firm behaviour and bad ESP, with a negative value, as irresponsible firm behaviour.
Incentives for responsible firm behaviour
The desirability for companies to behave in an environmentally compatible manner is based on several factors as well as instrumental, ethical and institutional incentives. The type of incentive is likely to affect a firm's approach to responsible behavior.
Next to their pragmatic nature, helpful motives are fundamentally concerned with the managerial beliefs that engaging in social initiatives can have a direct impact on profitability in the sense that they can improve revenue or protect existing profit levels (Bronn & Vidaver-Cohen, 2009). An instrumentally incentivized firm is likely to promote only those environmental practices stakeholders are eminently sensitive about. Besides helping firms to meet stakeholder demands, environmental initiatives are developed by these companies due to the belief that such activities can lead to a competitive advantage, present new business opportunities, or protect the firms from costly regulation (Aguilera, Rupp, Williams, & Ganapathi, 2007). Environmental issues not strategically relevant to instrumentally incentivized firms might be unconsidered because of the lack of pressure for their resolution (Peloza, 2006).
In opposition to the financial arguments for responsible behavior and ethically incentivized firm behaves environmentally responsible due to a perceived moral obligation. According to Porter and Kramer (2006), firms have a moral responsibility toward society, and their behavior should be congruent with social norms, values and expectations of performance. In turn, society grants legitimacy and power to those firms that do not abuse their power and adhere to societal responsibilities (Davis, 1973). In doing so, firm behavior is judged based on predefined expectations and societal principles (Shaw & Barry, 2001). Therefore, while firm behavior is considered appropriate, firms can enjoy power and legitimacy. Otherwise, they might be punished and pressured toward the adherence to societal rules and norms (Fischer, 2004). Overall, it is for the dependency on the acceptance and recognition of society, that ethical behavior is the base of the very existence of any firm.
While ethical incentives result from a perceived moral obligation, institutional incentives arise from institutional pressures asserted on firms. More and more, firms observe an increasing positive reputational impact of engaging in environmental initiatives (Bronn & Vidaver-Cohen, 2009). It can be seen as a function of changes in the institutional environment which is "[...] characterized by the elaboration of rules and requirements to which individual organizations must conform to receive legitimacy and support" (Scott & Meyers, 1994). Accordingly, changing social values have established new legitimacy criteria for firms (Davis, 1973). Many firms now assume that environmental initiatives are as important as sharp bottom lines to retain public support for their businesses. Together, this perspective forms the basis for the notion of institutional incentives for responsible behavior, arguing that firms perform environmental initiatives principally due to institutional pressures (Bronn & Vidaver-Cohen, 2009). Various institutional constraints force firms to engage in responsible behavior, such as a growth in customer intolerance for firm practices that harm the environment and increasing public demand for holistic transparency (Aguilera et al., 2007).
Additionally, firms also face pressures from stakeholders, which hold them accountable for the environmental consequences of their activities (Cetindamar & Husoy, 2006). For instance, firms that match stakeholders' norms and expectations obtain environmental legitimacy, whereas bad ESP substantially decreases corporate environmental legitimacy (Bansal & Clelland, 2004). Correspondingly, firms believe that responding to these pressures is critical for their survival as well as their perceived legitimacy.
Firms have different reasons for responsible behavior, such as an increase in profitability, the wish to do something good, or institutional pressures. Depending on the incentive for responsible behavior, firms environmental initiatives might vary. For instance, a firm with ethical incentives is likely to aim for high environmental performance. In contrast, a firm facing institutional pressures is expected to restrict its compliance to the basic requirements without additional social or environmental initiative. An instrumentally incentivized firm, in turn, would probably seek to pursue those environmental initiatives yielding the highest return. While these incentives are the most likely, they are not exhaustive. It might also be the case that firms follow more than one incentive simultaneously.
Implications of responsible firm behavior
Besides the underlying incentive, there are different implications for responsible firm behavior. Within the CSP literature, the stakeholder theory and the resource-based view of the firm have become prominent theoretical frameworks that have often been used to describe effects in the CSP - firm financial performance link. Due to this fact, these frameworks will be used in this study to depict how responsible firm behavior impacts firm financial performance. Besides, there will be an explanation and analysis of opposing points of view.
According to the stakeholder theory, a firm can be described as a system of primary stakeholder groups, whose effective management is essential for firm existence and financial performance (Clarkson, 1995). According to Freeman (1984), firms should examine and take into account the interests of everyone who can considerably affect, or be affected by their welfare. It mainly applies to the group of primary stakeholders comprising of shareholders, customers, employees, suppliers, governments, as well as local communities (Jones & Wicks, 1999). Stakeholder theory allocates supreme importance to the societal role played by the firm (Agle, Donaldson, Freeman, Jenson, Mitchell, & Wood, 2008). In this framework, social and environmental initiatives are regarded as critical components of a firm's value creation processes (Schreck, 2011). In the following, the benefits firms can anticipate that addressing these stakeholders will be explained.
Stakeholder theory suggests that firms can derive benefits from responsible activities due to fewer interruptions arising from severe environmental risks and challenges (Jones & Wicks, 1999). Certain stakeholder groups, such as governments, local communities or customers, accurately evaluate possible environmental risks and challenges evoked by firms and, depending on their evaluation, may impose sanctions on irresponsible firms. Such sanctions can range from high penalty fees and production restrictions to consumer boycotts (Berman, Wicks, Kotha, Jones, 1999). In contrast, responsible firms adhere to environmental standards as well as expectations and can access state subsidy and receive tax advantages. Moreover, responsible firms benefit from increased sales resulting from an increased customer base or the ability to raise prices due to customers valuation of the environment attribute (Freeman, 1984; Hillman & Keim, 2001). In particular, stakeholders reward those firms that demonstrate environmentally compliant behavior and penalize the environmental sins of irresponsible firms.
Besides, responsible firm behavior creates other economic benefits due to a lower risk profile and lower costs. Shareholders and potential investors acknowledge that responsible firms are less controversial and that they produce products and services in a more responsible and less risky manner. Also, responsible firms are perceived as more conscious and mindful about their environmental footprint as well as pollutant emissions and are less likely to face adverse actions from other stakeholders (Fatemi, Fooladi, & Tehranian, 2015).
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