impact of coporate social responsibility on fianncial
TRANSCRIPT
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International Journal of Accounting & Business Management
www.ftms.edu.my/journals/index.php/journals/ijabm
Vol. 5 (No.2), November, 2017
ISSN: 2289-4519 DOI: 24924/ijabm/2017.11/v5.iss2/93.111
This work is licensed under a
Creative Commons Attribution 4.0 International License.
Research Paper
IMPACT OF COPORATE SOCIAL RESPONSIBILITY ON FIANNCIAL PERFORMANCE: A STUDY ON MANUFACTURING COMPANIES LISTED IN
LONDON STOCK EXCHANGE (LSE)-UK
Bikon Ghosh BSc(Hons) Accounting & Finance Graduate
Lords Ashcroft International Business School
Anglia Ruskin University, UK
Abdul Basit Lecturer
School of Accounting & Business Management
FTMS College, Malaysia
Zubair Hassan Senior Lecturer
School of Accounting & Business Management
FTMS College, Malaysia
ABSTRACT The purpose of this study is to examine impact of Corporate Social Responsibility (CSR) on financial
performance. The research is carried out on 36 manufacturing and production companies listed in the
London Stock Exchange (LSE) within the period of 2011-2015, with the total observations of 180. The
subsectors considered are Aerospace and Automotive, Mining, Industrial Goods, Food, Beverage and
Tobacco, Domestic Goods, Industrial Machinery and Equipment, Healthcare and Paper Products.
The independent variable used in this research is Corporate Social Responsibility (CSR) broken into
4 constituent: Corporate giving, Employee safety, Greenhouse gas emission reduction and waste
reduction. The dependent variables used are Return on Assets (ROA) and Return on Equity (ROE).
Sampling technique used in this research is convenience sampling. The research paradigm adopted a
positivist approach and quantitative data was used. This study adopts an explanatory research design,
and secondary data is collected and analyzed using E-views software to generate the descriptive, and
regression statistics. Furthermore, the findings in this study show that Corporate giving, Employee
safety and waste reduction have no significant impact on financial performance. However,
Greenhouse gas emission reduction has significant but negative impact on financial performance. The
study concludes that reduction in greenhouse gas emission enhances returns on assets and
shareholders’ equity. It is recommended that other researchers use long-term financial performance
indicators such as Tobin Q or Stock return be used with a wider time frame to get a more solid
conclusion.
Key Terms: Corporate Social Responsibility, Financial Performance, Corporate giving, Employee
safety, Greenhouse Gas Emission Reduction, Waste Reduction, ROA, ROE, LSE and United Kingdom
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1. INTRODUCTION
The purpose of this study is to examine the impact of Corporate Social Responsibility
(CSR) on financial performance in manufacturing and production companies listed in the
London Stock Exchange (LSE). The United Kingdom is recognized as the ninth largest
manufacturer globally (ONS, 2017). The manufacturing sector contributed 25% to the United
Kingdoms’ Gross Domestic Product (GDP), and 10% to United Kingdoms’ Gross Value
Added (GVA), also the United Kingdom manufacturing sector accounted for 45% of total
exports in 2015 (ONS, 2017). The manufacture of motor vehicles, trailers and semi-trailers
saw the largest growth in the value of manufacturers’ sales in 2015, with an increase 2.6%
(ONS, 2017). These impressive figures show that the manufacturing and production sector is
a key contributor to the economy of the United Kingdom, thus the manufacturing and
production subsectors considered for this study include Aerospace and Automotive, Mining,
Industrial Goods, Food, Beverage and Tobacco, Domestic Goods, Industrial Machinery and
Equipments, Healthcare and Paper Products.
The concept of Corporate Social Responsibility (CSR) identifies the ability of a
business to look beyond fulfilling financial and legal obligations by voluntarily engaging in
socially responsible activities to ensure the growth and development of the environment in
which it operates (McGuire, 1963). Various theoretical approaches and models exist in the
context of Corporate Social Responsibility (CSR) which has been employed by numerous
researchers. The pyramid model of CSR introduced by Carroll (1979) has been applied by a
number of researchers (Ganescu&Gangone, 2013; Fadun, 2014). Triple Bottom Line
proposed by Elkington, (1998) have been used in a lot of studies as well (Boyd, 2006; Lee
and Ha-Brookshire, 2017). Also the Instrumental Stakeholder theory introduced by Jones,
(1995) which is a CSR practical framework of the Stakeholder theory originally proposed by
Freeman (1988) have been applied in numerous studies (Brammer and Millington, 2008;
Hillman &Keim, 2001). Additionally the Porter’s Competitive Advantage Theory proposed
by Micheal E. Porter (1990) has been used by some researchers (Waddock and Graves 1997).
Furthermore, Bitanga and Bridwell (2005) have applied the UN Global Compact principles
(UN, 1999).The pioneering researchers on the concept of Corporate Social Responsibility
(CSR) are Chester Barnard, J. M. Clark and Theodore Krepps, these researchers studied the
concept of CSR through the 30’s and 40’s respectively (Carroll, 1999). Through the 60’s and
the 70’s neoclassical economist Milton Friedman (1962, 1970) the progenitor of capitalism
debated on profit maximization being the only social responsibility of managers and
companies to the society. During the late 70’s, Archie B. Carroll (1979) made an
evolutionary contribution to the concept of CSR by proposing a four dimensional framework
that shows how companies should be responsible to the society. In the 80’s Freeman (1984)
contributed a great deal to the literature by arguing that firms must satisfy a variety of
constituents (stakeholders) that can influence their outcomes. In the early 90’s Elkington
John (1994) linked the concept of Corporate Social Responsibility with Sustainability by
integrating the economic, environmental and social performance of a business (Ghelli, 2013).
In recent years, global issues such as Human Rights, Child Labour, Anti-Corruption and
Poverty have been added to the CSR literature by intergovernmental organizations like the
United Nation (UN) and the Organization for Economic Co-operation and Development
(OECD) (Ghelli, 2013). Recent studies have been conducted in developed also in developing
countries. Madorran and Garcia (2016) carried out their research focusing on Spanish
companies taken from the IBEX 35 stock market index. Madugba and Okafor (2016) carried
out a research in of listed banks in Nigeria. Ferrero-Ferrero, Fernández-Izquierdo, & Muñoz-
Torres (2016) carried out their research in listed companies of the EU-15 countries.
Gherghina and Vintilă (2016) carried out their study on listed companies in Romania.
PekanovStarčević, Mijoč&Mijoč, (2016) carried out their study on 158 Croatian companies
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listed on the Zagreb Stock Exchange. A number of related studies have been carried out in
the United Kingdom. Samy, Odemilin and Bampton (2010) carried out a research on 20
British companies. Liu, et al., (2016) carried out their study on 62 FTSE 100 companies in
the United Kingdom. Brammer, Brooks, &Pavelin, (2006) carried out their research by
measuring the stock returns of 451 UK quoted companies among the FTSE All share Index.
Singh (2014) carried out his study on Uk companies divided into 34 firms for the industry of
crude petroleum, 32 firms for mining metal and 38 firms for pharmaceutical industry from
the ORBIS Database. Gatsi and Ameyibor (2016) carried out their research on 43 companies
listed in the London Stock Exchange. Previous studies have shown inconsistency in
measuring Corporate Social Responsibility by using total number of words under in
Corporate Social Responsibility reports. However, this research focuses on measuring
outcomes, thus giving a solid representation on the impact of CSR on financial performance.
In the lenses of manufacturing companies are constantly criticized by stakeholders on how
current issues on social responsibilities, environmental responsibility and climate change are
being tackled. The current increasing pressure is not only articulated by customers, but also
by suppliers, employees, community groups, governments, as well as nongovernmental
organizations and local community groups (Brammer& Millington, 2008). Berman et al.,
(1999) adds that companies may be exposed to regulatory risk, legislative and fiscal action.
On the other hand, if companies can fulfill the expectations and interests of stakeholders’ it is
likely to be beneficial (Andriof, Waddock and Rahman, 2002). Hence, companies can
achieve their goals of enhancing profitability and increasing the shareholder value (Jensen,
2001). This research will be beneficial to the author by building a great magnitude of
understanding on the concept of CSR. This paper will also provide knowledge on how CSR
activities influence short-term financial performance in the UK manufacturing companies.
Furthermore, this research, will add substantially to the corporate world as longitudinal data
is used, hence the study will help the managers by building a timeline of events through 5
years, to indicate how the changes in the key variables adopted and the general effect of CSR
activities on the financial performance of the manufacturing and production industry.
Furthermore, this study will be beneficial to research students as it provides a range of
literature and in depth analysis on how CSR activities can affect profitability in
manufacturing companies in the United Kingdom.
Research Objectives
To examine the impact of corporate giving on financial performance (ROA and ROE)
To examine the impact of Employee Safety on financial performance (ROA and
ROE)
To examine the impact of Greenhouse Gas (GHG) Emission on financial performance
(ROA and ROE)
2. Literature Review
Bowen (1953) introduced the first formal definition, stating that the social
responsibilities of businessmen as 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. Friedman (1970) states that the only social responsibility
of a business is to properly utilize it resources, maximize the wealth of the shareholders,
engage in the free market system and operate in a legal manner. Carroll (1979, p.500) states
that social responsibility of business encompasses the economic, legal, ethical, and
discretionary expectations that society has of an organization at a given point in time.
Furthermore, Holmes and Watts (2000) defines Corporate Social Responsibility as the
continuing commitment by business to contribute to economic development and behave
ethically while improving the quality of life of the workforce and their families as well as of
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the community and society at large. Different definitions have been assigned to corporate
giving. Adams & Hardwick (1998) defines corporate giving as the aggregate of charitable,
community and political contributions. Brammer& Millington (2006) describe corporate
giving as nonmonetary as well as monetary. Employee safety in the workplace is meant to
provide employees with work conditions that reduce or eliminate work-related diseases and
occupational injuries to enable a physical and psychological well-being (Lowe et al., 2003).
Employee safety is a critical factor to take into account in order to achieve economic,
environmental and social objectives (Coats and Max, 2005). Greenhouse gases (GHGs) are
known as gases that absorb and re-emit energy that radiates upward from the sun to the
earth’s surface, adding heat to the lower atmosphere, causing the Earth’s surface to be
warmer hence changing the Earth’s climate(IPCC, 2017). The principal greenhouse gases that
are emitted into the atmosphere solely through human activities are carbon dioxide (CO2),
methane (CH4), nitrous oxide (N2O) and chlorofluorocarbons (CFCs) which are the key
drivers of global warming (IPCC, 2017). ROA is an accounting-based measure and an
indicator of the financial health of the firm (Selling and Stickney, 1989). ROA captures the
internal efficiency of the firm as it measures the firm’s use of capital and indicates the
profitability of investments in real assets (Selling and Stickney, 1989). ROE is a financial
ratio showing how much profit a company generates with the money invested by its
shareholders (Easton, 2004). It shows to the e tent company is utili ing its investments to
generate earnings growth. R E is measured dividing net income of the company by
shareholder e uity (Easton, 2004).
Carroll (1979) proposed a four dimensional conceptual framework of corporate
performance which identifies the economic, legal, ethical and philanthropic domains of CSR.
Carroll also believes that the four domains are not mutually exclusive, and the framework
suggests that economic responsibility is the foundation upon which other responsibilities are
realized and achieved (Carroll 1979). McGuire (1963) proposes that the concept of CSR
explains the need for businesses to achieve certain responsibilities extended beyond
economic and legal duties. Proponents of Carroll’s pyramid believe that by identifying and
distinguishing the ethical and philanthropic responsibilities, the framework explicitly
identifies the responsibilities that extend beyond economic and legal duties (Crane &Matten,
2004). However, Friedman (1970) view holds that the only social responsibility of the
management of a business is to maximize the wealth of shareholders and operate in a legally
acceptable manner. Friedman (1970) believes that social issues should be addressed by the
free market and the government. Maignan and Ferrell (2003) found that French and German
consumers tend to prioritize legal responsibilities over ethical and economic obligations
whereas American consumers prioritize economic obligations. Visser (2006) also found that
economic responsibilities are of primary importance among African consumers, followed by
philanthropic activities and then legal and ethical obligations. Hockertsand Morsing(2008)
argue that there is no need to represent CSR as a hierarchy. Freeman, Wicks &Parmar (2004)
adds that the model places profit making over legal and ethical responsibilities, highlighting
some world known case studies: Enron, WorldCom and Tyco International. Carroll’s
pyramid model lacks instrumental value, as recent trend integrates the social, economic and
environmental aspects of corporate responsibility (Elkington, 1994; Visser&Sunter, 2002).
The concept of 'the triple bottom line'( TBL) was introduced by the British consultancy firm
founder John Elkington in 1994 (Hindle, 2009). Elkington (1994) proposed the TBL
framework in an attempt to measure sustainability. Rogers and Hudson (2011) have referred
to the model as the practical` framework of sustainability. Triple Bottom Line is a framework
aimed at moving beyond the traditional reporting of profitability as corporate performance
and incorporating social and environmental measures (Alhaddi, 2015). Elkington (1994)
suggests the integration of three different bottom lines as the core of a business responsibility.
The bottom lines are called the three Ps; people, planet and profits. Each bottom line is
treated with the same degree of emphasis, giving the framework a more balanced and
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coherent construct (Elkington 1997). However critics have questioned the validity and
practical usefulness of the framework (Slaper& Hall, 2011; Norman and Macdonald, 2004).
Norman and Macdonald (2004) having tested the model believe that the framework is
inherently misleading with no literal meaning, and an unhelpful addition to the current trends
of CSR. Further arguments on the framework has to do with its complexity in measurement
(Slaper and Hall, 2011; Hindle, 2009). Slaper and Hall (2011) argues that the three bottom
lines of the framework don’t have a common unit of measurement. Hindle (2009) argues that
the social and environmental concerns of a business cannot be quantified in the same respect
as financial figures that specify cost or benefits (profit/loss). The framework focuses on the
integration of three bottom lines which are economic, social and environmental (Epstein,
2008). However, it lacks a universal practicability as it doesn’t indicate the interdependent
relationship between the three bottom lines (Archel et al. 2008). During the World Economic
Forum in January 1999, United Nations Secretary-General Kofi Annan introduced nine
principles to business leaders. The tenth principle which is against corruption was added in
2004 after lengthy consultations (UN Global Compact, 2010). The Global Compact is not
designed as a code of conduct, but rather a voluntary initiative aimed at stimulating
responsible acts from businesses and also brings about convergence around universally
shared values (UN Global Compact, 2010). Mckinsey and Company (2004) strongly believes
that the Compact promotes networking; also mutual learning is fostered among businesses,
public institutions and civil society organizations. The UN Global Compact principles can be
considered as both a practical framework for action, and a platform for proving commitment
and leadership (Bitanga and Bridwell, 2010). However, critics have questioned the
nonbinding character of membership, arguing that compliance is not monitored as there is no
structure for accountability (Sethi and Schepers 2014). The Global Compact sets a platform
for opportunistic corporations to prepare grandiose reports of corporate citizenship without
true accountability (Sethi and Schepers 2014). Some critics disagree with the positive impact
that Global Compact claims to have on developing countries, highlighting that most of the
signatories are from developed countries (Bitanga and Bridwell, 2010). The stakeholder
theory was originally proposed by Richard Edward Freeman in 1984. The theory asserts that
firms must satisfy variety of constituents that can influence their outcomes; the constituents
are regarded as stakeholders (Freeman, 1984). He established a stakeholder model to show
the stakeholders that can influence business outcomes (Freeman, 1984). The instrumental
stakeholder view is an important strand of the stakeholder theory that explains connection
between Corporate Social Responsibility and financial performance (Jones, 1995). According
to Donaldson & Preston, (1995) the fundamental assumption of the instrumental stakeholder
view holds that a business can improve profitability by creating a competitive advantage
through proper and effective management of key stakeholders relationships. However, critics
believe that the stakeholder view serves as a ground for managerial opportunism, where the
managers inappropriately use the shareholders’ funds to boost their social status (Brugha and
Varvasovszky, 2000). Some other critics have pointed out that the theory lacks a specific
theoretical logic that truly explains the relationships between stakeholders and the firm
(Fassin, 2009). Numerous studies have tested the theory on the grounds of the relationship
between Corporate Social Responsibility (CSR) and financial performance. Waddock and
Graves (1997) found Corporate Social Performance (CSP) which is a widely cited as a
measure for the stakeholder approach, to be positively correlated to past and future financial
performance.
In a study conducted by Asatryran and Brezinova (2014) on the link between
corporate social responsibility and financial performance in the Airline Industry, data was
collected from the annual reports of 20 randomly selected airline companies in Central and
Eastern Europe. Yuwita and Kalanjati (2017) investigated the association between Corporate
Social Responsibility (CSR) disclosure and financial performance within cigarette companies
listed on Indonesian Stock Exchange. Tsoutsoura (2004) sampled 13 different industries,
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which involved mining, food, textiles, transportation, hotels and more. The author was able to
compare the outcomes of different industries, hence providing a broader picture on how
Corporate Social Responsibility impacts Financial Performance in the chosen country.
Asatryran and Brezinova (2014) measured CSR using variables such as Community
Performance, Environment Management Systems and Employee Relations, these variables
give more reliable information on the sector and how Corporate Social Responsibility
impacts financial performance.
Conceptual Framework:
Figure 1: Conceptual Framework
Liang and Renneboog (2017) found that cash donations have a positive impact on
ROA, implying that cash donation serve as a signaling mechanism of future corporate
performance because of their transparency. Seifert et al., (2003) found that corporate giving
have no significant impact on ROA, suggesting that strategic benefits from philanthropic
activities may offset the costs on corporate giving. Kim (2013) found that corporate donations
have a positive impact on future R A performance, he’s result is contingent on the fact that
Koreans recognize cash donations as the most aggressive method in carrying out social
responsibilities and this would cause rapid growth in short term business performance.
H1a: There is a positive significant impact of corporate giving on Return on Assets (ROA)
Zulfiqar (2016) found that there is no significant impact on cash donations and ROE,
implying shareholders’ return remain unaffected by spending on the corporate philanthropy
due to the capacity and profitability of the sampled companies to pay shareholders.Seifert et
al., (2003) found that corporate giving has no significant impact on ROE, suggesting that the
insignificant impact might be contingent on the fact that there may be so many other more
important primary factors that influence stock valuation, cash donation is regarded as a
secondary factor.
H1b: There is a negative significant impact of corporate giving on Return on Equity (ROE)
Fan and Lo, (2012) found that occupational health and safety management in the
fashion and textile industries have a negative impact on ROA, suggesting that adoption and
compliances to ccupational Health and Safety ( HS) might cause a strain on a company’s
financial position. Asatryan and Bře inová, (2014) also found that employee relations (which
includes employee safety) has a positive yet insignificant impact on ROA, suggesting that
although there is a need for airline companies within Central Eastern Europe to undertake
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CSR activities to boost their reputation and in turn increase ROA, no casualty exists between
the variables. Uadiale and Fagbemi (2011) found that employees’ relation which has no
significant impact on R A, implying that employee relation doesn’t have any effect on R A.
H2a: There is a negative significant impact of Employee Safety on Return on Assets (ROA)
It has been claimed that while workplace safety might be a source of additional costs
for the firm, it has potential benefits. For example, investment in human capital might lead to
higher operational performance through increased employee motivation and possibly higher
worker productivity, thus enhance profitability (Becchetti et al., 2008). Asatryan and
Bře inová, (2014) found that employee relations (which includes employee safety) has a
positive significant impact on ROE. Uadiale and Fagbemi (2011) found that employee
relations have a significant relationship with ROE, implying that Corporate Social
Responsibility towards employees increases the returns on shareholders’ e uity among
Quoted Conglomerate Companies in Nigeria.
H2b: There is a positive significant impact of Employee Safety on Return on Equity (ROE).
Rokhmawati, Sathye and Sathye (2015) found that increased amount of GHG
emissions led to a relative increase in ROA, implying that there are low penalties for
increased amount of GHG emissions and there is a lack of reasonable financial incentives for
reduced GHG emissions among manufacturing companies in Indonesia. Some researchers
have found an insignificant relationship between variations in greenhouse gas (GHG)
emission and ROA, implying that a decrease or increase in GHG emission has no significant
effect on ROA (Busch and Hoffman, 2011; Gallego-Alvarez, Segura and Martínez-Ferrero,
2015).
H3a: There is a negative significant impact of Greenhouse Gas (GHG) Emission on Return on
Assets (ROA)
Iwata and Okada (2011) discovered that greenhouse gas emission reductions have no
statistical significant impact on ROE. This result may be attributed to the fact that ROE does
not include debt but reflects equity capital. A number of researchers have found that
greenhouse gas emission has no significant impact on ROE (Nyirenda, Ngwakwe and Ambe,
2011; Busch and Hoffman, 2011). Gallego-Alvarez, Segura and Martínez-Ferrero (2015)
found that reduction in greenhouse gas emission increases ROE; hence companies that are
more proactive towards environmental issues, such as GHG emission reductions, can achieve
competitive advantage and thus better financial performance.
H3b: There is a negative significant impact of Greenhouse Gas (GHG) Emission on Return on
Equity (ROE)
Iwata and Okada (2010) found that waste emission has a negative significant impact
on ROA in dirty industries among Japanese manufacturing companies, relating the outcome
to the fact that dirty industries are faced with higher cost as in regards to more severe
environmental sanctions and higher risks due to failure to comply with the laws and
regulations, and lawsuits. King and Lenox (2001) found a significant, positive impact of
waste prevention and future ROA, implying that environmental proactive firms that prevent
waste generation through recycling and innovative technologies experience a lagged increase
in ROA.
H4a: There is positive significant impact for waste on Return on Assets (ROA)
A number of studies have been carried out to find out the relationship between waste
management and ROE. Iwata and Okada (2011) discovered that waste emissions do not have
significant impacts on ROE, stating that exhaustive measures have been carried out by
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Japanese environmental regulators; hence the influence of waste emissions may be restricted
to the relatively narrow range of stakeholders. Obara et al., (2017) found that expenditure on
waste reduction among Oil and Gas companies in Nigeria has a high positive and significant
influence on ROE, stating if waste emissions are to increase, environmental oriented
shareholders’ may decide to pull out of the business hampering the ability of the business to
continue in operation and reducing the overall income of the business which will
automatically reduce the return on equity.
H4b: There is positive significant impact for waste on Return on Equity (ROE)
3. RESEARCH DESIGN AND METHODOLOGY
The positivist approach is adopted for this research as data on the key variables
constructed from aforementioned empirical theories, are collected in a quantifiable form and
measured precisely in order to verify or falsify the predetermined hypotheses of this research
(Smith, Thorpe and Jackson, 2013). This research is approached using quantitative data as
measurable data for the key variables are obtained from annual, sustainability, environmental
and corporate social responsibility reports of the sampled companies, tracked over a specific
period of time using statistical analysis in order to nullify and validate hypothesis that capture
the trends and facts on how CSR impacts financial performance in the UK manufacturing and
production sector (Quinlan, 2015). The quantitative approach is beneficial to this study as
data collection process in unstructured, enabling the researcher to identify the precise
specification for the key variables thus achieving high levels of data reliability (Hair et al.,
2006). This study adopts mixed research designs which include explanatory and descriptive.
Descriptive design is adopted as it helps describe the basic relationship between the key
variables and the sample through time, whereas explanatory design helps to provide answers
to the research questions by identifying the reason behind the impact of the independent
variables on the dependent variable (Smith, Thorpe and Jackson, 2013). Explanatory research
design is used as the entire aim of this study is to identify and explain the reason behind the
impact of corporate giving, employee safety, greenhouse gas emission reduction and waste
reduction on ROA and ROE (Collin and Hussey, 2013). Exploratory research design is not
suitable for this study as it is only applicable when there is limited knowledge or high level of
uncertainty on a topic (Zikmund et al., 2010).This study adopts a longitudinal research design
as measurable data collected from sampled firms are tracked over the time-span of five years,
within 2011-2015 (Walliman, 2011). Cross-sectional describes relationship between
variables at a single time (Zikmund et al., 2010). Longitudinal design is the most appropriate
for this study as the research questions and hypotheses are affected by how the key variables
change over the chosen time span of 5 years (Hair et al., 2006).
Data Collection Method
This research is conducted using secondary data as it enables the researcher have easy
and quick access to data, it is more cost saving than primary data in the context of this
research (Stevens, et al., 2006). Also the quantitative data required for this research is made
available in the annual, sustainability, environmental and corporate social responsibility
reports of the sampled companies (Smith, Thorpe and Jackson, 2013).
Population and Sample
In this research, the target population is 244 listed manufacturing companies in the
London Stock Exchange under the following subsectors; aerospace and automotive, mining,
industrial goods, foods, beverage and tobacco, domestic goods, Healthcare, paper products
and industrial equipment. Szklo (1998) have described sample size as a subset or a small part
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of an entire population. For this study, 50 companies were considered as the sample size,
however 36 companies were chosen due to limited data for key variables in corporate reports.
Table1: illustration of sample size
Sector Total Population Sample Size
Aerospace and Automotive 12 4
Mining 73 7
Industrial Goods 30 5
Foods and Beverage 33 11
Domestic Goods 17 3
Healthcare 42 3
Paper Products 2 1
Industrial machinery 35 2
Total 244 36
Most manufacturing companies listed in the London Stock Exchange recently started
reporting their environmental performance, and the European Union (EU) made CSR
reporting mandatory in 2014, and data was taken for 2011 to 2015. ). In this study, the sample
size and technique was chosen due to data availability and time restraint.
Accessibility & Ethical Issues
Accessibility can be understood as the extent at which statistical information required
is available and accessible for a research purposes (OECD, 2006). It has been empirically
observed that corporations are constantly adapting to trends and developing their websites in
order to interact with the public about financial and non-financial performances (Walliman,
2011). Based on this study, data gathered on key variables are extracted from annual,
sustainability, corporate social responsibility and environmental reports of the sampled
companies which are made available on their corporate websites.
It is essential for researchers to take note of possible ethical issues that interfere with
reliability during research process (Smith, Thorpe and Jackson, 2013). These ethical issues
include data manipulation and copyright issues (Kamat, 2006). It is the duty of the researcher
to ensure that the research process is carried out in a professional manner. For this research,
secondary research is adopted thus no major ethical issues was encountered by the researcher.
Data Analysis
For this study, E-views software is used to generate statistical information from data
analysed. E-view is regarded as the most effective software tool used for forecasting
(Weathington, Cunningham, and Pittenger, 2012). In order to undertake statistical analysis on
the quantitative data gathered, E-views is used to generate descriptive, correlation and
regression statistics. The results gathered are further used to conclude research. In this
research, descriptive statistics was used to show the casual link between the variables, the
sampled companies and the period investigated (Collin and Hussey, 2013). ). Multiple
regression analysis is the most applicable for this research in order to measure the effectof
multiple independent variables; corporate giving, employee safety, greenhouse emission
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reduction and waste reduction on the dependent variables; return on assets (ROA) and return
on earnings (ROE) (Kleinbaum et al., 2013).
4. RESULT AND DISCUSSION
Descriptive Analysis
Table 2: Descriptive Means
Variables Mean Standard Deviation
Corporate giving 0.002715 0.007102
Employee Safety -0.06366 0.305366
GHG Emission reduction 0.014225 0.16299
Waste reduction -0.01351 0.272091
ROA 0.097083 0.116632
ROE 0.258276 0.481755
The results in Table 2 shows that among the independent variables, employee safety
has the highest influence on the sampled companies with an average mean value of -0.0636
and a standard deviation of 0.3053. This implies that workplace injury dropped by 6% among
the sampled companies during the period investigated. The average workplace injury in
manufacturing companies in the UK is at its lowest which is 2%, and the rate of workplace
injury have dropped by 40% since 2002 (ONS, 2017).It is also indicated in the table that the
average mean for greenhouse gas (GHG) emission is 0.014 and the corresponding standard
deviation is 0.305. This implies that the average greenhouse gas emitted by the sampled
companies increased by 1.4% during the period investigated. Increase may reflect increased
output among the sampled companies. The table also shows that corporate giving attained an
average mean of 0.0027 and a corresponding standard deviation of 0.007. This implies that
0.2% of the revenue generated among the sampled companies was for corporate giving
during the period investigated. The results show that corporate giving may be of minimal
importance among the sampled companies. It is highlighted in the table above that the
independent variable waste has a mean value of -0.013 and a standard deviation of 0.272,
hence the overall amount of waste generated among the sampled companies during the
investigated period dropped by 1.3%. This result may be driven by innovation among the
sample companies.
Regression Analysis
Return on Assets (ROA) - Model 1
Table 3: Summary of ROA Model r2 Adjusted
r2
F-statistic Probability
(F-statistic)
Durbin-Watson
Statistic
1 0.540167 0.393857 3.691929 0.000 1.838912
According to Table 3 model 1 shows that r2 equals 0.540, indicating that only 54% of
the dependent variable (ROA) can be predicted by the independent variables (corporate
giving, employee safety, greenhouse gas emission reduction and waste reduction). The
Adjusted r2
shows a value of 0.394 indicating that the model is a poor fit for this study as the
figure is less than 0.6 (Faraway, 2002). The f-statistic value shown in the table is 3.692,
ISSN: 2289-4519 Page 103
indicating the value of the relationship between the independent variables and the dependent
variable. Also the f-statistic probability value shown is 0.000 indicating the overall
significance of the model. Lastly the value shown in the table above for the Durbin-Watson
statistic is 1.839, and it falls within the range of 1.5 to 2.5, indicating that there is no
autocorrelation among the sampled companies used in this research (Dufour and Dagenais,
1985).
Table 4: Beta Coefficient Variables Coefficient Std. Error t-statistic Probability
Corporate giving -2.2939 2.101369 -1.09162 0.277
Employee Safety 0.029301 0.024663 1.188079 0.2369
GHG Emission Reduction -0.1274 0.049695 -2.5636 0.0115
Waste Reduction 0.023039 0.029463 0.781942 0.4356
According to Table 4, the beta coefficient value for corporate giving is -2.294 with a
probability significance value of 0.277 (p>0.05) (Hair et al., 2006). Thus, indicating that
corporate giving has a negative insignificant impact on ROA. This implies that corporate
giving have no statistical impact on ROA. This result is in line with that of Seifert et al.,
(2003), however Zulfiqar (2016) who found a positive impact on ROA. Also the beta
coefficient value for employee safety is 0.029 with a probability significance value of 0.237
(p>0.05) (Hair et al., 2006), hence employee safety has a positive insignificant impact on
ROA. This implies that reductions in workplace injuries have no statistical significant impact
on ROA. These results are in line with that Asatryran and Brezinova (2014) and different
from that of Fan and Lo, (2012) who found a negative significant impact. Greenhouse gas
emission reduction has a beta coefficient value of -0.127 with a probability significance value
of 0.011 (p<0.05) (Hair, 2006), indicating that greenhouse gas has a negative significant
impact on ROA. This indicates that a reduction in greenhouse gas emission leads to an
increase in ROA. Gallego-Alvarez, Segura and Martínez-Ferrero (2015) and Hart and Ahuja
(1996) had similar findings while Iwata and Okada (2011) found no statistical relationship.
Lastly, waste reduction shows a beta coefficient value of 0.023 with a probability
significance value of 0.436 (p>0.05 (Hair et al., 2006), showing that waste reduction has a
negative insignificant impact on ROA. This implies that waste reduction has no statistical
significant impact on the returns on assets. The findings in this study match that of González-
Benito and González-Benito (2005) and different from that of Chukwuma et al., (2017).
Return on Equity (ROE) - Model 2
Table 5: Model Summary of ROE Model r2 Adjusted
r2
F-statistic Probability
(F-statistic)
Durbin-Watson Statistic
2 0.721 0.633 8.130 0.000 2.225
According to Table 5, model 2 shows that r2 equals 0.721, indicating that 72.1% of
the dependent variable (ROE) can be predicted by the independent variables (corporate
giving, employee safety, greenhouse gas emission and waste generation). The Adjusted r2
shows a value of 0.633 indicating that the model is a good fit for this study as the value
indicated is less than 0.6 (Faraway, 2002). The f-statistic value shown in the table is 8.130,
indicating the value of the relationship between the independent variables and the dependent
variable. Also the f-statistic probability value shown is 0.000 indicating the overall
significance of the model. Lastly the value shown in the table above for the Durbin-Watson
statistic is 2.225, and it falls within the range of 1.5 to 2.5, indicating that there is no
autocorrelation among the sampled companies used in this research (Dufour and Dagenais,
1985).
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Table 6: Beta Coefficient of ROE
Variables Coefficient Std. Error t-statistic Probability
Corporate giving -7.94164 6.758584 -1.17505 0.2421
Employee Safety 0.018541 0.079321 0.233747 0.8155
GHG Emission reduction -0.4409
0.159831
-2.75854
0.0066
Waste reduction 0.056473 0.094762 0.595941 0.5522
According to Table 6, the coefficient value for corporate giving is -7.942 with a
probability significance value of 0.242 (p>0.05)( Hair, 2006). Thus, indicating that corporate
giving has a negative insignificant impact on ROE. This implies that corporate giving have
no statistical significant impact on returns on shareholders’ e uity. This result is similar with
that of Zulfiqar (2016) and Kim (2013), but different from that of Kwaning et al., (2014) who
found a positive impact. Also the coefficient value for employee safety is 0.019 with a
probability significance value of 0.814 (p>0.05) (Hair et al., 2006), hence employee safety
has a positive insignificant impact on ROE. This implies that reduction in workplace injuries
have so statistical significant impact on returns on shareholders’ e uity. This result is in line
with that of Uadiale and Fagbemi (2011). Greenhouse gas emission has a coefficient value of
-0.441 with a probability significance value of 0.007 (p<0.05) (Hair et al., 2006), indicating
that greenhouse gas emission has a negative significant impact on ROE. This implies that a
reduction in greenhouse gas emission leads to an increase the returns on shareholders’ e uity.
The result is in line with that of Hart and Ahuja (1996), but contradicts that of Delmas, Nairn-
Birch and Lim (2015) and Rokhmawati, Sathye and Sathye (2015).
Lastly, waste shows acoefficient value of 0.056 with a probability significance value
of 0.552 (p>0.05) (Hair et al., 2006), showing that waste reduction has a positive
insignificant impact on ROE. This implies that waste reduction has no statistical significant
impact on the returns on shareholders’ e uity. The result is in line with that of Iwata and
Okada (2011) but different from that of Obara et al., (2017) who found a positive impact.
The results for ROA show a coefficient value for corporate giving is -2.294 with a probability
significance value of 0.277. The results show that corporate giving has a negative
insignificant impact on ROA, implying that corporate giving have no statistical impact on
ROA. Also, the results for ROE show a coefficient value for corporate giving is -7.942 with a
probability significance value of 0.242. The results show that corporate giving has a negative
insignificant impact on ROE, implying that corporate giving have no statistical significant
impact on returns on shareholders’ e uity. This shows that corporate giving have no
statistical significant impact on financial performance.
The results for ROA show a coefficient value for employee safety is 0.029 with a
probability significance value of 0.237. The results mean that employee safety has a positive
insignificant impact on ROA, implying that reductions in workplace injuries have no
statistical significant impact on ROA. The result for ROE shows a coefficient value for
employee safety is 0.019 with a probability significance value of 0.814. The results mean that
employee safety has a positive insignificant impact on ROE, implying that reduction in
workplace injuries have so statistical significant impact on returns on shareholders’
equity.This shows that reductions in workplace injuries have no statistical significant impact
on financial performance. The results for ROA show a beta coefficient value of -0.127 with a
probability significance value of 0.011. The results mean that greenhouse gas has a negative
significant impact on ROA, implying that a reduction in greenhouse gas emission leads to an
increase in ROA.The results for ROE show a coefficient value of -0.441 with a probability
significance value of 0.007. This means that greenhouse gas emission reduction has a
negative significant impact on ROE. This implies that a reduction in greenhouse gas emission
leads to an increase the returns on shareholders’ e uity. This shows that reductions in
ISSN: 2289-4519 Page 105
greenhouse gas emission have a negative significant impact on financial performance. This
indicates that reduction in greenhouse gas emission adds financial value to the returns on
shareholders’ e uity and firms’ assets. Lastly, waste reduction shows a coefficient value of
0.023 with a probability significance value of 0.436. This shows that waste reduction has a
negative insignificant impact on ROA, implying that waste reduction has no statistical
significant impact on the returns on assets.The results also show that waste reduction shows a
beta coefficient value of 0.056 with a probability significance value of 0.552. This shows that
waste reduction has a positive insignificant impact on ROE, implying that waste reduction
has no statistical significant impact on the returns on shareholders’ e uity. This implies that
waste reduction adds no financial value to the returns on shareholders’ e uity and returns on
firms’ assets.
5. CONCLUSION
This research was conducted to examine the impacts of the Corporate Social
Responsibility (CSR) on manufacturing companies listed in the London Stock Exchange
(LSE). The research conveniently focused on 36 listed manufacturing companies in the
following subsectors; Aerospace and Automotive, Mining, Industrial Goods, Food, Beverage
and Tobacco, Domestic Goods, Industrial Machinery and Equipments, Healthcare and Paper
Products. In this research, regression analysis method was used to measure the impact of the
independent variables (Corporate Social Responsibility: Corporate giving, Employee Safety,
Greenhouse Gas Emission reduction and Waste reduction) on dependent variables (ROA and
ROE). E-views was used to generate the descriptive, correlation and regression statistics used
in this research. The following sections will discuss the extent at which the research
objectives are achieved. The results indicate that corporate giving has a negative insignificant
impact on ROA, implying that spending on corporate giving has no statistical impact on
ROA. Also, the results indicate that corporate giving has a negative insignificant impact on
ROE. The results show that corporate giving have no statistical significant impact on
financial performance. Judging from the corporate reports of the sampled companies,
financial motive is not the driving force for their corporate giving but their moral obligation
to the society they operate. However, some past evidence suggests a negative impact on
Corporate Social Responsibility towards the community and financial performance (Berman
et al., 1999; Kwaning et al., 2014.). The results show that employee safety has a positive
insignificant impact on ROA. This implies that reductions in workplace injuries have no
statistical significant impact on ROA. The results show that employee safety has a positive
insignificant impact on ROE. This implies that reduction in workplace injuries have no
statistical significant impact on returns on shareholders’ e uity and returns on total asset.The
lack of a statistical significant impact on financial performance, as indicated in this study,
shows that the UK market does not respond to reduction of workplace injuries, also a safer
workplace can’t serve as a strong marketing tool to attract customers. Similar results were
realized by Uadiale and Fagbemi (2011). The result shows that greenhouse gas emission
reduction has a negative significant impact on ROA. This indicates that a reduction in
greenhouse gas emission leads to an increase in ROA. The results also show that greenhouse
gas emission has a negative significant impact on ROE. This indicates that reduction in
greenhouse gas emission adds financial value to the returns on shareholders’ e uity and
firms’ assets. Considering the current attention given to global warming, Kyoto Protocol
issue environmental sanctions to defaulters which create additional costs, hence a competitive
disadvantage (Porter and Van Der Linde 1995). This may have caused manufacturing
companies in the United Kingdom to switch to reducing GHG emissions by using renewable
energy during production or buying emission points from companies that emit greenhouse
gases under the benchmark, hence boosting reputation, creating a competitive advantage and
in turn enhancing profitability (Porter and Van Der Linde 1995; United Change 2017).
ISSN: 2289-4519 Page 106
Lastly, the results show that waste reduction has a negative insignificant impact on ROA.
This implies that waste reduction has no statistical significant impact on the returns on
assets.The results also show that waste reduction has a positive insignificant impact on ROE.
This implies that waste reduction has no statistical significant impact on the returns on
shareholders’ e uity.
Recommendations
It is highly recommended that future researchers employ other variables that were not
considered in this research such as Tobin’s Qand cost of capital in order to capture long-term
financial performance. Also, the time span considered for this research was 5 years (2011-
2015); future researchers should endeavor to consider a wider time span to provide an
extensive representation of the impact of CSR on financial performance through time. It is
also recommended that future researcher should consider conducting research on a larger
sample size to provide a more in-depth analysis. Furthermore, it is highly recommended to
managers that they spend on the community in order to benefit from tax savings. Furthermore
it is advised that managers create a safe environment for their employees on the basis of
motivation. It is further recommended that manufacturing companies use renewable energy
and innovation so as to protect the environment in which they operate. Businesses are
recommended to invest in the communities where they operate to boost the economy they
depend on.
Limitations & Future Research Direction
For this research, a sample size of 36 manufacturing companies listed in the London
Stock Exchange (LSE) was chosen. However the entire population for the subsectors
conveniently chosen for this research amounted to 247 manufacturing companies. The entire
population could not be used as the sample size due to time restraint on the side of the
researcher and unavailability of complete data in corporate reports on the side of the 50
companies considered. However the reason for unlimited data is contingent on the fact that
the concept of CSR have evolved rapidly as recent trends have sprung up new dimensions
that goes beyond the basic vagueness of the concept. Hence some companies are not familiar
with reporting on the key variables proposed for this research in their corporate reports.
This research focused mainly on the manufacturing sector, future researchers are advised to examine the impact of CSR on financial performance in other sectors such construction or mining. In order to represent a global comprehensive understanding on the topic, future researchers are advised to conduct research on developing countries, and can further carry out a comparative study between developing and developed countries. Furthermore, future researchers are advised to study the impact of CSR on financial performance in other Stock Exchange in the UK such as FTSE.
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