Edith Cowan University, ACC6025: CSR and Financial Performance

This report delves into the relationship between Corporate Social Responsibility (CSR) and financial performance, examining the shift in corporate accountability post-1924 financial crisis. It defines CSR, referencing the European Commission's and Carroll's definitions, and explores the positive, negative, and neutral impacts of CSR on financial outcomes. The study investigates the role of stakeholder and agency theory in this relationship, supported by research from Waddock and Graves (1997). The report also analyzes the Legitimacy, Stakeholder, and Institutional Theories within the context of CSR, including how these theories explain why organizations voluntarily disclose social and environmental performance. Furthermore, the report discusses different reporting standards like GRI and IIRC, and the pressures global firms face regarding CSR compliance. The research questions address how society perceives CSR reports, the importance of stakeholder expectations, relevant reporting practices, and the impact of CSR on firm profits, offering a comprehensive overview of CSR and its implications.

Answer to Q 1-Research topic: “Corporate Social Responsibility and the positive effects on
Financial Performance”.
It is observed that after the financial crisis of 1924, the environment of the corporate world
demanded the restructuring of relationship with their stakeholders. The stakeholders had look for
more accountability and prudence from corporate management. The European Commission
(2001) had expressed the definition of CSR as the concept, through which the corporate made
integrated effort to face the social and environmental concern in their respective business
operations to ensure their interaction with respective stakeholders on the basis of voluntary
service extension. CSR has discriminated the role of stockholders and stakeholders with the
assignment of responsibility for those entities, which got affected by the corporate of their
business practices. Instead of carrying out different researches on this subject, the subject of CSR
is awaiting clarity in conceptions. Different eminent scholars had tried to reach the conclusion of
the objective and way to accomplish regarding CSR; still the gaps are there in these aspects.
Basic problem was related to the definition of CSR definition. AV Caroll had made an attempt in
1983 to define the term. He uttered that corporate social responsibility includes the behavior of
any entrepreneur to ensure its venture as profitable economically, with other features like law
obeying, and supporting the society by ethical support. Hence, CSR is a philosophy to describe
the relationship between different stakeholders of the company.
The critiques of the subject of relationship between CSR and company financial performance
had found that the CSR has direct relationship with company financial performance or CFP. As
per stakeholder and agency theory, CSR is creating positive implication on CFP. Different
studies have supported this positivity. Through the research made by Waddock and Graves in
1997, they had assessed a number of 469 companies for this purpose with consideration of slack
resources and good theory of management. The outcome showed the positive relationship
between CSR and CFP in respect of old and future financial performance of the company. The
observation had empowered them to support the considered factors, the slack resources and good
management theory. Other studies in different industries also endorsed this view. The
hypothesis which is proving support to the theme of positive relation that CSR can enhance
1 | P a g e

competitiveness of any business. There are three different types of relationship between CSR and
CFP as concluded by the scholars. They are positive, negative and neutral. Positive implication
of CSR and CFP relationship endorses the concept of enhancing stock of recognizable capital,
better employee retention with good maintenance of working condition, development of new
business scopes by addressing different basic challenges of society. The negative conclusions
endorse that there are some hidden understanding which forces that commercial imperativeness
is not the only driving force for this mission; the shrewd directors advance their philanthropic
mentality through this approach in a misleading way. The neutral impact of CSR and CFP
relationship endorse the concept that CSR working style is independent lacking and financial
impact. Both are considered for its mutual exclusiveness and the internal relation is not
confirmed but it may exist by chance. The reasoning behind this concept says that the existence
of so many interposing variables between CSR and CFP does not prove the existence of this
relationship. (Maqbool & Zamir, 2018)
Answer to Q 3-Theories: Legitimacy theory, Stakeholder theory, Institutional theory.
Legitimacy Theory
There is another theory prevailing in the sector of corporate social responsibilities and
governance. This theory is known as legitimacy theory. This theory is described as a common
and generalized assumption or perception, which endorses the concept of actions of any entity as
proper, desirable and appropriate with the basics of some socially-built systems of values, norms,
definitions and beliefs. (Suchman, 1995) Like social contract theory, legitimacy theory is
structured with the notion endorsing the concept of contract between the society and the business
organization of social in nature. To run any business operation, the firm has to get the permission
from the authority to start and continue its operation with the ultimate accountability of the
business enterprise to the society in relation to its mode of operation with the deliverables by the
organization. This is elementary for any business organization to continue its operation as the
society is extending the permission to use the natural resources and the human resources
contained in the society. (Deegan, 2004)
Stakeholder’s Theory
2 | P a g e

The stakeholder’s theory is being introduced by R Edward Freeman. This theory classifies
different stakeholders in a business. There are basic divisions of two types of stakeholders-
internal and external. Internal stakeholders are consisting of employees, management and the
Board. External stakeholders are consisting of other stakeholders from outside, who has direct or
indirect interest in the performance of any company. They can be exemplified as creditors,
supply chain associates, the shareholders, the society, the government, the analytic bodies, and
other voluntary organization Athat are connected to the company by their work. This theory
endorses the concept of the people connected about the company by the performance of the
company or by their performance to the company.
Institutional Theory
Institutional theory is defined as such theory which gives guideline to the organizations for
different aspect of their activities to the stakeholders including the domain of social behavior.
This domain of social behavior is covered by corporate social responsibility report. CSR
reporting is the platform to understand the normal standardization of forms for reporting. The
latest trend of globalization of operations of business firms with assuring exclusive of CSR
reporting demands the following of standardized form of reporting with same format. This
feeling is reflected in the reports of institutional theory and CSR reporting, which are increasing
with its trend of different reporting standards like Global Reporting Initiative’s (GRI) G3.1 and
G4; International Integrated Reporting Framework introduced by International Integrated
Reporting Council (IIRC); and Sustainability Accounting Standards introduced by Sustainability
Accounting Standard Board SASB). (Einwiller, Ruppel, & Schanauber, 2016)These reports are
guidelines for the global business organizations. Considering the nature of these standards as
voluntary, the global firms face increasing pressure to comply with these reports from
government and societal pressure to enhance the comparison and prudence of CSR reports.
3 | P a g e

Bibliography
Deegan, C. (2004). Financial Accoutning Theory. Sydney: McGraw Hill, NSW.
Einwiller, S., Ruppel, C., & Schanauber, A. (2016). Harmonization and differences in CSR reporting of US
and German companies: Analyzing the role of global reporting standards and country-of-origin.
Corporate Communications: An International Journal , 21 (2), 230-245.
Maqbool, S., & Zamir, M. N. (2018). Corporate social responsibility and financial performance: An
empirical analysis of Indian banks. Science Direct , 4 (1), 84-93.
Suchman, M. C. (1995). Managing Legitimacy: Strategic and Institutional Approaches. Academey of
Managment , 20 (3), 571-610.
4 | P a g e