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1. Introduction
Can firms benefit by engaging in corporate social responsibility (CSR)? According to
the literature, for over three decades scholars have studied the relationship between
CSR and firm performance (FP) to answer the question (Margolis and Walsh, 2003).
Although results are mixed, the trend seems to suggest a moderately positive CSR-FP
relationship (Griffin and Mahon, 1997; Stanwick and Stanwick, 1998; Orlitzky et al.,
2003). However, purported benefits of CSR are numerous and include those beyond the
“pure” financial, from maintaining the license to operate, to risk reduction, to efficiency European Business Review
Vol. 22 No. 4, 2010
gains, and to tax advantages (Weber, 2008). Although vastly smaller in scope to pp. 411-431
CSR-FP studies, a few scholars have dedicated effort to empirically test additional q Emerald Group Publishing Limited
0955-534X
benefits of CSR. DOI 10.1108/09555341011056186
EBR In their study, Maignan et al. (1999) find that in a sample of American firms, CSR is
22,4 positively linked with employee commitment and customer loyalty. In a similar study,
Maignan and Ferrell (2001) find that CSR is positively linked with employee
commitment in a sample of French firms. Brown and Dacin (1997), Sen and
Bhattacharya (2001) and Scholder et al. (2006), in studying US firms, find that CSR
positively influences both consumers’ purchase intent and their perceptions of
412 companies’ products. Lastly, studying US firms from the Kinder, Lydenberg,
Domini & Co. database, Greening and Turban (2000) and Turban and Greening (1997)
find that demonstrating CSR is important for attracting prospective employees. While
each one of these studies offers important insight, they fall short of empirically testing
predicted benefits (Weber, 2008). Continued research is therefore necessary to further
untangle our understanding of how CSR benefits firms, given strong instrumental
undertones of the concept (Rowley and Berman, 2000; Mellahi and Wood, 2003).
Additional benefits that have seen little to no empirical study include employee
turnover, customer satisfaction, and firm reputation, especially in contexts outside of
the USA and Europe.
According to the literature, employee turnover, company reputation, and customer
satisfaction are highly important to scholarly study (Shaw et al., 1998; Mahon, 2002;
Homburg et al., 2005). Employee turnover is important because the loss of human capital
in firms can have dramatic effects on competitive advantage (Barney, 1991; Huselid,
1995). Reputation is important because it reflects how a given firm compares to its
competitors (Rao, 1994), while reflecting stakeholder impressions of the firm’s
disposition to behave in a certain manner (Clark and Montgomery, 1998). Each of these
can affect the ability to raise prices with consumers (Kihlstrom and Riordan, 1984),
provide a cushion to recover from crises or threats (Gregory, 1998; Peloza, 2006) and can
create mobility barriers within an industry (Wilson, 1985). Customer satisfaction has
long been studied in the literature and is seen as critical to firms’ profitability and an
overall mechanism by which a firm can achieve loyalty among the customer base
(Anderson et al., 1997). Further, the importance of reducing employee turnover,
building a strong reputation, and improving customer satisfaction continue to be among
the top priorities of corporate executives around the world (PricewaterhouseCoopers,
2007).
Is there something inherent in CSR that might lead to benefits such as lower
employee turnover, higher reputation, and improved customer satisfaction? The
literature suggests that there is. For example, Aguilera et al. (2007) suggest that CSR
meets the justice needs of employees thereby leading to lower turnover rates. Similarly,
customers develop either positive or negative perceptions of firms through their
evaluation of the fairness they demonstrate through product use and service
interactions, for example, Fornell et al. (1996). CSR is expected to demonstrate equity or
fairness towards customers, leading to higher satisfaction. Lastly, reputation is a
general attribute of firms and reflects the extent to which a firm is perceived as good or
bad (Roberts and Dowling, 2002). CSR is expected to signal to stakeholders a positive
ideal of corporate behavior, thereby increasing reputation.
This study attempts to contribute to the literature in three ways. First,
organisations today have moved beyond equating success with accounting-based
financial results (Ittner and Larcker, 2003; Maltz et al., 2003; Kaplan and Norton, 2007).
Research on CSR has not kept pace in that the vast majority of studies examine
the CSR-FP link. Extending the realm of study is important because multiple theories How does CSR
predict different benefits, and assessing the value of CSR therefore requires multiple benefit firms?
approaches. Second, the Australian context is particularly relevant: although
institutions appear to be increasing pressure on firms to demonstrate more socially
responsible actions (Parliamentary Joint Committee on Corporations and Financial
Services, 2006), many executives in Australian corporations remain skeptical as to the
benefits of CSR (Birch, 2002). Positive results from this study will supplement the 413
research base, the majority of which come from the USA, and to a lesser extent, Europe.
Lastly, evidence from the research is significant for management researchers and
practitioners. Addressing posited questions will allow scholars to offer relevant advice
on the likely outcomes of demonstrating CSR across international contexts.
Carroll’s (1979) conceptualization suggests that although all firms have the same
responsibilities, not all firms demonstrate CSR equally (Birch, 2002). Firms can be
reactive and make minimal effort or do less than required by stakeholder standards for
social responsibility. Firms can also do nothing – in essence they reject or deny their
social responsibilities. However, firms that proactively demonstrate CSR and act
beyond minimal requirements would not only expect to contribute to the creation of
societal welfare, but also to improve their own success (Carroll, 1979). Thus, the
operationalization of CSR used in this study can be considered a demonstration of
social “performance,” in the sense that it measures the degree to which a firm is
demonstrating positive outcomes/activities that are directly related to its social
responsibilities. Of particular interest to this study is exploring the impact of CSR on
three aspects facing the success of any business firm:
EBR (1) employee turnover;
22,4 (2) customer satisfaction; and
(3) reputation.
Studying CSR with multiple theories is logical, as the concept is multidimensional and
is expected to impact stakeholders in different, yet equally positive, ways. Therefore,
multi-theoretical approaches are welcomed (Aguilera et al., 2007).
3.2 Measures
All constructs were measured using multi-item scales and the control variables were
measured using either single item indicators or categorical indicators. To avoid order
bias, the items used to measure the independent and dependent scales were placed
randomly in the final instrument whereas, the scales for the predictor and criterion
variables were placed as far apart from each other as possible.
CSR. This study was interested in exploring the extent to which firms were
demonstrating CSR activity across four dimensions prescribed by Carroll (1979). After
reviewing several studies (Aupperle et al., 1985; Pinkston and Carroll, 1994, 1996;
Quazi, 2003), the scales used in the studies of Maignan et al. were chosen. Maignan and
Ferrell (2000, 2001) and Maignan et al. (1999) after conducting an extensive literature
review, identified and developed various socially responsible activities that aligned
with Carroll’s (1979) conceptualization of CSR. Thus, the scales do not assess the
degree to which a firm believes it has social responsibilities or how they rank order
those responsibilities; rather, the scales assess actual CSR activity, making them idea
for this study.
Accordingly, measurement of CSR included four dimensions:
(1) economic;
(2) legal;
(3) ethical; and
(4) discretionary.
However, the conceptualization used in this study suggests that one dimension is not How does CSR
necessarily more important than the others (Maignan and Ferrell, 2000; Maignan et al., benefit firms?
1999); hence, equal weights were applied to each of them. Therefore, a firm’s CSR level
was computed as the simple averages of the sums of the scores of the responses
across the four dimensions. To measure CSR, informants were asked to rate each item,
where “1 – strongly disagree” and “5 – strongly agree.” The Appendix displays items
for CSR. 419
Customer satisfaction. Andreassen and Lindestad (1998) suggest that customer
satisfaction indicators should tap into the construct by addressing an overall
evaluation of consumption experiences with a firm. Following Ping’s (1993) proposal
that the relationship between customer and firm reflects overall satisfaction, four
items were developed relating to customers’ expectations and the relationship
between customers and the firm. In addition, three items were adopted that are
commonly used in customer satisfaction research as indicators of the construct (Oliver
and Swan, 1989a). Thus, the scale contained seven items designed to gauge firms’
perceptions of the satisfaction of their customers. Informants rated each item on a
five-point Likert scale, where “1 – strongly disagree” and “5 – strongly agree” (see the
Appendix).
Employee turnover. In their studies of CSR, Maignan and Ferrell (2001) and Maignan
et al. (1999) measured employee commitment as the degree to which employees felt
connected and committed to a firm. However, their measurement did not assess actual
turnover levels and thus a different measurement is required. Thus, to assess turnover
levels, following Huselid (1995) and Guthrie (2001), a single question was used in this
study, asking informants to list what the average annual employee turnover
percentage was for their firm.
Reputation. A widely used measure of reputation is the Fortune Most Admired
Company index of US firms (Mahon, 2002). However, the Fortune index has been criticized
to the point of some scholars arguing that the measurement should not be used as a proxy
for reputation (Fryxell and Wang, 1994; Mahon, 2002). Further, in Australia, a comparable
index does not exist. Thus, this study relied on the reputation scale developed by
Weiss et al. (1999). Weiss et al., following the unidimensional perspective (Yoon et al., 1993),
developed a scale that assesses a firm’s general perception of their reputation.
The scale does not assess reputation for anything specific (e.g. product innovation);
rather, the scale measures a firm’s assessment of how customers perceive their overall
reputation. This is consistent with theoretical treatments of reputation (Brown and
Logsdon, 1999; Roberts and Dowling, 2002). The scale contained five items and informants
were asked to rate each item on a five-point Likert scale, where “1 – strongly disagree” and
“5 – strongly agree” (see the Appendix).
Control variables. Several measures were used as control variables in this study.
These included firm size, firm age, industry type, and sales revenue. Firm size was
measured with a single item, number of full-time employees. Firm age was measured
with a single item, number of years in business. Industry type was a categorical
variable measuring six different industries. Since industry impacts a firm’s
competitiveness, dummy variables for the six industry types were included to
control for possible affects on the dependent variables. For sales revenue, dummy
variables were created for six categories, from less than $1,000,000 to a category of over
$200,000,000 per year.
EBR 4. Analysis and results
22,4 4.1 Analysis
Means, standard deviations, and correlations are presented in Table I. To assess the
psychometric properties of the constructs, EQS version 6 (Bentler, 2006) was used to
conduct confirmatory factor analysis (CFA). To assess the constructs, four fit indices
were used:
420 (1) comparative fit index (CFI);
(2) goodness-of-fit index (GFI);
(3) root mean squared (RMR); and
(4) standardized root mean squared (SRMR).
These four indices are widely used as key fit indicators in CFA and the results are
presented in Table II. According to the findings, after scale purification (see the
Appendix), all constructs met thresholds for goodness-of-fit indicators in CFA (Bentler,
1990). Moreover, since the standardized factor loadings of all the measurement items
on their respective constructs were significant ( p , 0.05) and none of the confidence
intervals of the f values contained a value of one, the conclusion was made that the
constructs exhibited convergent and discriminant validity (Montoy-Weiss et al., 2001).
Finally, all constructs demonstrated sufficient reliability, exceeding the common
benchmark of 0.70 (Table II).
4.2 Results
To test for statistical significance between the independent and dependent variables,
regression analysis was used. For each equation, all variables were entered into a single
Variable Mean SD 1 2 3 4 5 6
Internal Cronbach’s
Model/variable Mean SD consistency alpha CFI GFI RMR SRMR
Dependent variables
Independent variables Employee turnover Customer satisfaction Reputation
reputation, economic CSR (b ¼ 0.24; t ¼ 3.71; p ¼ 0.000), legal CSR (b ¼ 0.23; t ¼ 3.42;
p ¼ 0.001), and discretionary CSR (b ¼ 0.25; t ¼ 3.91; p ¼ 0.000) were all significantly
and positively associated with the construct. Ethical CSR was not significantly
associated with any of the dependent variables.
5. Discussion
All three of the hypotheses were supported by the findings in this study. As a result,
this study offers some level of confirmation for scholars who have theorized that CSR is
a value creating activity important to firms beyond direct financial benefits, such as
those measured by traditional accounting-based measures. For example, the work of
Aguilera et al. (2007) suggests that meeting employees’ justice needs through CSR
should have the effect of lowering turnover rates. This study finds that CSR does
appear to reduce employee turnover. On the other hand, customer satisfaction is a
cumulative, global evaluation of product or service use based on experience with firms
over time and is a fundamental indicator of past, current, and future performance
(Anderson et al., 1994). This paper argued that, based on equity theory, firms can
improve their consumption experiences with customers by demonstrating CSR.
The results indicate that CSR is positively linked to customer satisfaction. Lastly,
Neville et al. (2005) argue that reputation is the overall evaluation received by an
organisation from its stakeholders concerning the credibility of the organisation’s
identity claims. The case was made, based on signaling theory, that CSR sends signals
to stakeholders that generates positive impressions or associations which, in turn,
affect reputation. The findings from this study confirm that CSR is positively linked to
reputation.
6. Implications How does CSR
Taken together, the findings of this study have two important theoretical implications. benefit firms?
First, the findings supplement a small research base of studies empirically examining
benefits of CSR beyond those that rely purely on financial-based dependent variables.
For example, while Greening and Turban (2000) find that CSR acts as a means to attract
new employees, the present study finds that CSR reduces employee turnover, suggesting
that CSR might create a symbiotic relationship between acquiring and retaining 423
employees. By expanding studies beyond the USA and Europe, the findings of this study
are particularly important as scholars have called for researchers to further study how
and under what conditions CSR benefits firms (Rowley and Berman, 2000). This requires
an international body of research and the results here should give scholars additional
confidence in predicting whether or not – and how – CSR benefits firms.
Second, there is debate among scholars as to which dimensions of CSR are most
important (Rowley and Berman, 2000). According to Carroll (1979), firms have four
responsibilities; however, do firms necessarily need to demonstrate responsibility
across all dimensions equally to be considered a socially responsible company?
By separately evaluating the four dimensions of CSR as an additional component to the
main tests, the results of this study suggest that some individual dimensions of CSR
might be more important than others. In the case of reducing employee turnover, legal,
and discretionary dimensions had the biggest impact. One explanation might be that
firms who meet or exceed legal requirements or offer outstanding care for employees or
communities may be in the best position to diminish turnover due to employees’
positive justice perceptions. On the other hand, economic, legal, and discretionary
dimensions of CSR were positively associated with customer satisfaction. The finding
suggests that, for example, firms who are demonstrating strong commitment to their
economic responsibility (e.g. through offering highly valued products), ensuring
customers are not harmed in any way by meeting legal standards (legal CSR), or who
are treating employees well through benefits and high salaries (discretionary CSR)
might ultimately be reaping the rewards of higher customer satisfaction.
Most surprising, perhaps, was that the ethical dimension of CSR was not
significantly associated with any of the dependent variables. This does seem at odds
with previous studies that have found firms’ ethical practices to impact on organisation
outcomes (Choi and Jung, 2008). An implication of the finding suggests that all CSR
activities do not necessarily have equal impact on organisational outcomes. For
example, in their study, Maignan and Ferrell (2001) found that only the economic and
discretionary dimensions of CSR were significantly associated with outcomes such as
employee commitment and financial performance. However, further research would
need to investigate why and under what conditions the ethical dimension of CSR is less
important to organisational success relative to the other three dimensions.
As for practical implications, firms throughout the world are challenged to
demonstrate responsible corporate behavior. However, demonstrating responsible
corporate behavior is not without opportunity costs. On the plus side, evidence is
mounting to suggest that proactive CSR is directly related to financial performance
indicators. The findings of this demonstrate that CSR also appears to reduce staff
turnover, while increasing both customer satisfaction and reputation levels. This is
important as some executives in Australia (Birch, 2002), and around the world
(McKinsey & Company, 2006), continue to believe that CSR is an activity to avoid,
EBR other than their economic responsibility. Thus, companies should realize that CSR
22,4 activities can represent a robust strategy, particularly in an environment where
stakeholders, such as customers, employees, and the government, have increased
social concerns (Davis and Stephenson, 2006). In fact, Porter and Kramer (2006)
suggest that CSR may become the new battleground for competitive advantage.
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430
Appendix
Corporate social responsibilitya
Economic:
. Our business has a procedure in place to respond to every customer complaint.
.
We continually improve the quality of our products.
.
We use customer satisfaction as an indicator of our business performanceb.
.
We have been successful at maximizing our profits.
.
We strive to lower our operating costs.
.
We closely monitor employees’ productivity.
.
Top management establishes long-term strategies for our businessb.
Legal:
.
Managers are informed about relevant environmental laws.
.
All our products meet legal standards.
.
Our contractual obligations are always honored.
.
The managers of this organisation try to comply with the law.
.
Our company seeks to comply with all laws regarding hiring and employee benefitsb.
.
We have programs that encourage diversity of our workforce (in terms of age, gender,
or race)b.
.
Internal policies prevent discrimination in employees’ compensation and promotionb.
Ethical:
.
Our business has a comprehensive code of conduct.
.
Members of our organisation follow professional standardsb.
.
Top managers monitor the potential negative impacts of our activities on our community.
.
We are recognized as a trustworthy company.
.
Fairness toward coworkers and business partners is an integral part of our employee
evaluation process.
.
A confidential procedure is in place for employees to report any misconduct at work
(such as stealing or sexual harassment).
.
Our salespersons and employees are required to provide full and accurate information to
all customers.
Discretionary:
.
The salaries offered by our company are higher than industry averages.
.
Our business supports employees who acquire additional educationb.
.
Our business encourages employees to join civic organisations that support our community.
.
Flexible company policies enable employees to better coordinate work and personal life. How does CSR
.
Our business gives adequate contributions to charities. benefit firms?
.
A program is in place to reduce the amount of energy and materials wasted in our
business.
.
We encourage partnerships with local businesses and schoolsb.
.
Our business supports local sports and cultural activities.
431
Customer satisfactiona:
.
Compared to competitors, our customers find that our products/services are much better.
.
Our customers are very satisfied with the products/services we offer.
.
Our customers are very satisfied with the value for price of our products/servicesb.
.
Our customers find that the products/services we offer exceed their expectationsb.
.
The likelihood that our customers will recommend our products/services to others is high.
.
Our customers are very satisfied with the quality of our products/services.
.
The ability to achieve high levels of customer satisfaction is a major strength of our firm.
Reputationa:
.
Our firm is viewed by customers as one that is successful.
.
We are seen by customers as being a very professional organisation.
.
Customers view our firm as one that is stable.
.
Our firm’s reputation with customers is highly regarded.
.
Our firm is viewed as well-established by customers.
Notes: aFive-point scale ranging from strongly disagree to strongly agree; bitem eliminated based
on refinement procedure.
Corresponding author
Jeremy Galbreath can be contacted at: jeremy.galbreath@gsb.curtin.edu.au