Australian Journal of Management

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Do customer satisfaction and reputation mediate the CSR−FP link? Evidence from
Australia
Jeremy Galbreath and Paul Shum
Australian Journal of Management 2012 37: 211 originally published online 8 March 2012
DOI: 10.1177/0312896211432941

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Australian Journal of Management

37(2) 211­–229
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DOI: 10.1177/0312896211432941
link? Evidence from Australia aum.sagepub.com

Jeremy Galbreath
Curtin Graduate School of Business, Curtin University, Australia

Paul Shum
School of Accounting, Finance and Economics, Edith Cowen University, Australia

Abstract
Direct tests between corporate social responsibility (CSR) and firm performance (FP) have been argued
to be spurious. Following this line of argument, the present study tests a mediated model in understanding
the CSR–FP relationship. Specifically, we posit that reputation and customer satisfaction mediate fully the
CSR–FP relationship. Based on the results from a sample of 280 Australian firms, the findings suggest that
CSR is linked with FP. However, the effect is indirect: while CSR is linked to both reputation and customer
satisfaction, reputation alone mediates the CSR–FP relationship. The results are interesting, suggesting that
to reduce ambiguity surrounding the CSR–FP relationship scholars need to significantly expand studies that
address moderating and mediating variables. Discussion is given to these findings along with paths for future
research.

Keywords
Australia, corporate social responsibility, customer satisfaction, firm performance, mediation test, reputation

1. Introduction
Is the relationship between corporate social responsibility (CSR) and firm performance (FP)
straightforward? The supporting evidence may potentially be misleading. First, although negative
and neutral results have been found, overall, research demonstrates a modest positive relationship
(Margolis et al., 2008; Margolis and Walsh, 2003; Orlitzky et al., 2003; van Beurden and Gössling,
2008). However, second, many scholars question the results of much CSR–FP research because
most studies omit important intervening variables (Griffin and Mahon, 1997; Margolis et al., 2008;
Margolis and Walsh, 2003; Rowley and Berman, 2000; Wood and Jones, 1995). In a test of one
such intervening variable, Luo and Bhattacharya (2006) find that customer satisfaction mediates

Corresponding author:
Jeremy Galbreath, Curtin University Graduate School of Business, Perth, Western Australia, Australia.
Email: jeremy.galbreath@gsb.curtin.edu.au

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212 Australian Journal of Management 37(2)

fully the effect of CSR on market value (a measure of FP). This lends some support that the rela-
tionship between CSR and FP is likely more complex than most studies reveal, and that tests of
moderation and mediation are required (Margolis et al., 2008; Margolis and Walsh, 2003; Rowley
and Berman, 2000; Ullmann, 1985).
In an effort to advance research on the CSR–FP relationship, we expand the work of Luo and
Bhattacharya (2006) by asking the question, ‘Do customer satisfaction and reputation fully medi-
ate the CSR–FP relationship?’. This is important for two key reasons. First, CSR has a multiplica-
tive effect on business benefits. That is, CSR is argued to offer a number of business benefits,
including maintaining the license to operate, risk reduction, efficiency gains, and tax advantages
(Weber, 2008). However, with few exceptions (e.g. Greening and Turban, 2000; Turban and
Greening, 1997) direct financial benefits remain the interest of CSR research (Lee et al., 2009;
Margolis et al., 2008). By exploring additional benefits empirically, we not only offer some verifi-
cation of the many predicted outcomes of engaging in CSR, but also test a CSR–FP relationship
that is argued to be more complex than most studies reveal (Margolis et al., 2008; Margolis and
Walsh, 2003; Rowley and Berman, 2000). That is, we offer a test of mediation.
Second, while the evidence suggests that customer satisfaction is linked with FP (Anderson et al.,
1994, 1997), other studies find that higher levels of customer satisfaction also increase firm reputa-
tion (Walsh et al., 2006, 2009; Wang et al., 2003). At the same time, studies demonstrate that a good
reputation positively impacts on FP (e.g. Fombrun and Shanley, 1990; Kotha et al., 2001; Roberts
and Dowling, 2002; Shamsie, 2003). Based on the evidence, we argue that in studies of the CSR–FP
link, both customer satisfaction and reputation should be included, given both are predicted benefits
of CSR (Brammer and Pavelin, 2004; Gassenheimer et al., 1998; Weber, 2008; Wood, 2010) and
both have been found to have a positive relationship with FP. While building on the foundation of
Luo and Bhattacharya (2006), we argue that the relationship between CSR and FP is more complex
than their study reveals, particularly when customer satisfaction and reputation are built into the
model. CSR is indirectly linked to FP both through customer satisfaction and reputation, and taking
into account these relationships, we posit that reputation is the sole mediating factor.
Our research advances the understanding of the CSR–FP link in three ways. First, we respond
to calls from several scholars to study mediating mechanisms between CSR and FP given the rela-
tive paucity of currently available research; our study therefore explores those factors that might
explain whether and when particular firms may earn positive financial returns from CSR. Second,
we include two of the most important predicted benefits of CSR, namely, customer satisfaction and
reputation. We do this through expanding previous research by developing and testing a more
complex relationship. This is important because researchers are able to ‘draw measureable, testable
links from [CSR] to outcomes such as [customer satisfaction and reputation], and from there to FP’
(Wood, 2010: 60). According to Wood (2010), studies of mediation are necessary because they
drive research away from a theoretically untenable relationship (i.e. direct links between CSR and
FP). Lastly, to test our premise, a sample from Australia is used because such samples are underu-
tilized. For example, a recent study on CSR and FP by Australian researchers omitted the use of a
sample of local firms (Lee et al., 2009). Using a context-specific sample is important because
evidence suggests that engaging in CSR in Australia appears to receive mixed reviews amongst the
business community, and committing resources to socially responsible activities might be seen as
a cost rather than an investment. Therefore, an Australian sample is helpful given most studies on
the CSR–FP link use European or US data. Addressing posited questions will therefore allow
scholars to offer relevant advice on the likely outcomes of demonstrating CSR across international
contexts, and helps to more fully explore Matten and Moon’s (2008) proposition that CSR is
spreading globally from its US-based roots.

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Galbreath and Shum 213

2. Theory and hypotheses

2.1 Conceptualization of CSR
Despite a large and growing body of literature on CSR, the construct remains ‘ambiguous’
(Wood, 2010: 50) and has no precise definition (Scherer and Palazzo, 2007), which has led to
considerable difficulty in conducting and comparing empirical research results (Lozano, 2008;
Margolis et al., 2008; Orlitzky et al., 2011; van Beurden and Gössling, 2008). Multiple view-
points and definitions likely exist because CSR is internally complex, having relatively open
rules of application (Wood, 2010). Similarly, Van Marrewijk (2003) suggests that CSR means
something, but that its meaning is not always the same thing to everybody. Lastly, Carroll (1999)
demonstrates that CSR has been a dynamic phenomenon, changing through time. However, a
core, common theme does appear to exist.
The core theme with respect to CSR is that firms have responsibilities to society including, but
extending beyond, profit maximization (Brown and Dacin, 1997; Davis, 1973; Matten and Moon,
2008; Wood, 1991). Unfortunately, definitions of firms’ obligations to society beyond that of profit
maximization generally do little to describe what those specific responsibilities are, other than
‘practices’ of some kind reflecting responsibility for a broader ‘societal good’. On the other hand,
Carroll (1979, 1999, 2004) overcomes vague or general descriptions of firms’ societal responsibili-
ties by specifying that four such dimensions of CSR exist: (1) economic; (2) legal; (3) ethical; and
(4) discretionary.
First, firms have an institutional role of meeting consumptive needs via resource conversion and
to do so efficiently and effectively, which is part of the economic dimension of CSR. Second, firms
have a legal role to fulfill their economic mission within a legal framework, while complying with
all in-effect laws. Third, with respect to ethics, firms have an obligation to abide by moral rules
defining appropriate behaviors in society. Lastly, the discretionary dimension of CSR refers to
business activities that are not required by law or are not mandated, but are expected by stakehold-
ers as a demonstration of good citizenship. Examples include investing in local social enterprises
or providing training to employees.
According to Lozano (2008), Carroll’s work is the clearest conceptualization of CSR because it
identifies, or defines, all obligations of a firm towards society. There is some support for such an
argument: Carroll’s (1979, 2004) work continues to be popular and is a widely adopted conceptu-
alization of CSR amongst researchers because it systematically differentiates firms’ responsibili-
ties from merely profit making and from the social responsibilities of governments (Wood, 2010).
Further, Carroll’s (1979, 2004) conceptualization is particularly important to researchers, as it has
been used as the basis for a variety of empirical studies, many which have been published recently
(e.g. Galbreath, 2008; Sheth and Babiak, 2010; Shum and Yam, 2011). Lastly, CSR has been argued
to be a multidimensional construct (Jamali, 2008), and Carroll’s (1979, 2004) conceptualization
addresses four such dimensions.
In sum, this study adopts interpretations of CSR which consist of demonstrable actions and
outcomes reflecting business responsibility for societal good. Actions and outcomes include those
that respond to economic, legal, ethical, and discretionary dimensions of CSR. An assumption is
made that all firms have roles in meeting the dimensions of CSR as defined by Carroll (1979,
2004), and that they can address these dimensions by doing very little to doing much. Thus, in the
operationalization of CSR used in this study, we measure the degree to which a firm is demonstrat-
ing actions/outcomes that are directly related to its social responsibilities as defined by Carroll
(1979, 2004).

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214 Australian Journal of Management 37(2)

2.2 Hypotheses
Although evidence is mixed, studies do find a link between CSR and FP (Margolis et al., 2008;
Orlitzky et al., 2003; van Beurden and Gössling, 2008). For example, in recent meta-analysis
research of 167 CSR–FP studies, Margolis et al. (2008) find the effect, while modest, is positive.
Orlitzky et al. (2003) find similar results. They conduct a meta-analysis of 52 studies, finding an
overall positive relationship between CSR and FP. Lastly, van Beurden and Gössling (2008) exam-
ine 34 CSR–FP studies and find that 68 percent demonstrate a positive association. The majority
of cited studies use European or US samples. However, in Australia, the setting of this study, we
believe there is no reason that similar results will not be found. For example, recent evidence sug-
gests that Australian firms recognize the strategic benefits of, and are embracing the business case
for, CSR (Black et al., 2011). Australian firms are also demonstrating strong links between CSR
activity and positive organizational benefits (Galbreath, 2008). Hence, we expect that demonstra-
tion of CSR will offer financial rewards in the Australian context. However, our argument is based
on a theory that CSR’s impact on firm performance is one that is not direct, but rather is indirect.

2.3 The mediating effects of customer satisfaction and reputation

Major reviews of the CSR–FP relationship agree that despite the apparent favorable findings,
research has not produced a solution, but rather isolated islands of partial insight about an unseen
larger picture. As Rowley and Berman (2000: 405) remark on the state of CSR–FP studies,
‘Researchers have combined various mishmashes of uncorrelated variables, which render correla-
tion and ordinary least squares regression results indiscernible.’ Margolis and Walsh (2003) agree,
suggesting that scholars developing ever sophisticated empirics to test a direct CSR–FP relation-
ship have only led to obscuring the big picture. The big picture is that returns to CSR are contin-
gent, not universal (Ullmann, 1985; Wood, 2010), and that to more carefully assess conditions
under which CSR influences FP, omitted variables must be empirically examined. We argue that
customer satisfaction and reputation are two such variables.
Evidence exists in the literature demonstrating that reputation and customer satisfaction relate
positively to FP. In their study, Kotha et al. (2001) find that Internet firms with positive reputations
enjoy higher market value and sales growth. Roberts and Dowling (2002) find that firms with higher
reputations enjoy higher return on assets (ROA), and that these results are persistent over time.
Fombrun and Shanley’s (1990) and Shamsie’s (2003) results also support a positive relationship
between reputation and FP. Similarly, customer satisfaction has also been found to positively influ-
ence FP. For example, studies find that higher customer satisfaction levels lead to higher cash-flow
levels (Gruca and Rego, 2005). In other research, scholars find a positive link between customer
satisfaction and market value (Fornell et al., 2006). Factoring in this evidence, results suggest that
CSR, reputation, and customer satisfaction all have positive effects on FP. However, in the context
of this study, we argue that an underlying reason for the positive association of CSR with FP is due
to the effects of reputation and customer satisfaction. There are a few key points to our argument.
First, definitions of CSR show that firms need to demonstrate societal benefits that include, but
go beyond, economic outcomes. However, society needs to perceive that these benefits are of
value for a firm to be considered socially responsible. One way in which the benefits of socially
responsible actions are perceived by society as valuable is through a positive reputation (Brammer
and Pavelin, 2004). Signaling theory (Spence, 2002) argues that CSR has a positive impact on
reputation. This stems from the fact that as a firm demonstrates socially responsible behavior,
stakeholders’ judgments of that firm are positively influenced, which is the foundation of

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Galbreath and Shum 215

reputation (Fombrun and Shanley, 1990). Given that a firm’s reputation is a representation of
public opinion, and such opinions are dependent upon meeting stakeholder expectations, the abil-
ity to demonstrate a high level of CSR signals that the firm will behave in accordance with stake-
holders’ expectations (Brammer and Pavelin, 2006). When stakeholder expectations are met
through demonstration of CSR, a firm’s overall reputation is augmented.
The ability to build a positive reputation ensures the continued participation of stakeholders
(Brammer and Pavelin, 2006), which is critical to firm survival and performance (Clarkson, 1995).
CSR therefore improves FP by positively influencing stakeholder perceptions. In turn, positive
stakeholder perceptions gained through demonstration of CSR lead to a better reputation.
Development of a strong reputation creates a socially complex, time-dependent, and inimitable
resource. Such a resource leads to superior performance (Barney, 1991). Similarly, Jones (1995)
argues that firms who develop strong reputations create a high level of trust with their stakeholders.
Trust substitutes for expensive governance mechanisms because fewer protective devices are
needed if the firm has trustworthy agents and less time is spent in negotiation if initial claims are
truthful (Hosmer, 1995; Williamson, 1985). Thus, the development of a better reputation through
demonstration of CSR lowers transaction costs, which offers performance-related advantages
(Jones, 1995; Prahalad, 1997).
Second, engagement in CSR is a demonstration of equity or fairness (Aguilera et al., 2007).
Stemming from social exchange theory (Adams, 1965), equity theory focuses on fairness, right-
ness, or deservedness judgments individuals make in reference to what one party or another
receives (Oliver, 1997). The theory posits that in exchanges, if a party feels equitably treated, sat-
isfaction is the result (Oliver, 1997). Equity is best demonstrated with customers, as they are one
of the most important stakeholders and have significant interactions with firms on a regular basis.
Demonstration of equity to customers through CSR increases their satisfaction levels. To increase
satisfaction levels through CSR, firms can engage in socially responsible practices such as ethical
treatment of customers (Carroll, 2004; Taylor, 2003), employee training (which has downstream
implications for equitable treatment of customers) (Maignan et al., 1999), or through improve-
ments in product quality (Carroll, 1979, 2004). CSR therefore positively impacts on customer
satisfaction. When customer satisfaction is improved, firms benefit through more repeat business
and lower customer defection (Bhote, 1996; Galbreath, 2002). Repeat business and lower customer
defection increases FP by reducing costs, increasing returns, and generating more sales (Bhote,
1996; Galbreath, 2002).
Lastly, we cannot ignore the fact that a positive relationship has been found between customer
satisfaction and reputation (Walsh et al., 2006, 2009; Wang et al., 2003). There is a key reason for
this relationship. Reputation, at its core, is a result of past actions that demonstrate to stakeholders
information about how well a company meets its commitments and conforms to their expectations
(Brown and Logsdon, 1999). As such, when developed well, reputation becomes one of a firm’s
most strategic resources (Flanagan and O’Shaughnessy, 2005). However, a major determinant of a
positive reputation comes through customer positive word-of-mouth (Hennig-Thurau et al., 2002).
Positive word-of-mouth is a result of customers who are satisfied with their interactions with a
firm. Further, Nguyen and Leblanc (2001) argue that a positive reputation is one of the most reli-
able indicators of whether or not a firm’s customers are satisfied. Therefore, we posit that reputa-
tion is impacted by customer satisfaction, and that customer satisfaction’s impact on FP is mediated
by reputation. Hence, given the previous discussions:

H1: The CSR–FP relationship is one that is mediated rather than direct.
H2: In this mediated relationship, reputation acts as the sole mediating factor between CSR and
customer satisfaction and each of these construct’s relationship with FP.

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216 Australian Journal of Management 37(2)

3. Methods
Populasi
3.1 Sample and data collection
Kinder, Lyndenberg and Domini (KLD) ratings, Fortune’s Most Admired Companies, and even
annual reports have become widely used for both sample selection and measurement of CSR and
other constructs such as reputation (Waddock, 2003). However, studies using such datasets – espe-
cially KLD and Fortune’s Most Admired Companies – are dominated by US samples. Further,
secondary datasets such as KLD or annual reports have their own critics, and are vulnerable to vari-
ous types of biases (Brown and Perry, 1994; Entine, 2003; Fryxell and Wang, 1994; Huse et al.,
2011, Jarvis et al., 2003). In our case, we were interested in an Australian sample. Further, we
wanted as large a sample as possible to maximize generalizeability. Unfortunately, readily and
publicly available equivalents on large sample sizes such as the KLD database or Fortune’s Most
Admired Companies in the US do not exist in Australia, nor are reliable and extensive firm-level
data available from the government on the constructs under study.
In the absence of available data on our constructs across a large sample, following accepted
practice, tested survey measurement items were used wherever possible and new items were
developed from theoretical insights in the literature when necessary. The survey approach was
considered appropriate for collecting data, particularly to tap into latent constructs where second-
ary sources were unavailable. We developed a survey in three stages. First, after an extensive lit-
erature review across a number of studies, an initial, theory-based instrument was developed.
Second, a pilot study was conducted with 20 executives not included in the final sample to assess
content validity. Third, based on feedback, minor changes were made and a final version of the
survey was constructed.
As for sample selection, Dunn and Bradstreet, a company database service provider, was con-
tacted to draw a sample of firms operating in Australia. To obtain a heterogeneous mix, 3000 firms
falling into manufacturing and services classifications were randomly selected. Other organiza-
tions, such as public administration and community service entities, were excluded due to their
lack of relevance to this study. Companies were a wide range of sizes, although those with less than
50 employees were not included because we wanted to ensure that adequate resources were avail-
able to address social responsibilities.
Managing directors were the targeted respondents for this study as they have breadth of knowl-
edge of firm operations and performance, and probably the best insight about the issues in this
study. However, as noted, like secondary data sources, survey studies have the potential to intro-
duce various biases (Huse et al., 2011); namely, common method, social desirability, and order
bias. To reduce such biases, some procedural techniques were used. In order to reduce the extent of
common method variance, we undertook the following. First, we sought to minimize the effect of
such variance in our data by building the following suggestions from Spector and Brannick (1995)
into our survey instrument. To do this, we: random-ordered the sequence of scale items; reverse-
coded certain items; did not imply any preferred response in our statements; paid close attention to
time wording; kept the research instrument as short as possible; and provided succinct instructions
for survey completion. Second, a cover letter guaranteed anonymity to moderate respondents’ ten-
dency to make socially desirable responses. Lastly, to reduce order bias, dependent and independ-
ent variables were placed far apart from each other in the survey.
After an initial mailing and two follow-up letters, the overall response rate was 10 percent.
Although the response rate yielded may prima facie appear low, the rate is similar to other studies
on CSR and various studies surveying top managers, which demonstrate response rates as low as
six percent (e.g. Maignan and Ferrell, 2001; Simons et al., 1999). Further, direct mail surveys have

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Galbreath and Shum 217

Estimate S.E. C.R. P

Customer satisfaction <--- CSR 0.542 0.091 5.976 ***
Reputation <--- CSR 0.373 0.082 4.568 ***
Reputation <--- Customer satisfaction 0.496 0.055 8.940 ***
Discretionary <--- CSR 1
Ethical <--- CSR 1.196 0.136 8.793 ***
Legal <--- CSR 0.918 0.106 8.688 ***
Economic <--- CSR 0.782 0.103 7.573 ***
Firm performance <--- Reputation 0.619 0.131 4.737 ***
Firm performance <--- Customer satisfaction -0.060 0.127 -0.467 0.64
Firm performance <--- CSR -0.013 0.164 -0.078 0.94
*** P<0.001

r3 .23

1
Customer
.21
1 Satisfaction
.20
c1 Economic .54 -.06
.13 .78 r5
1 .50
1
c2 Legal .92
-.01
.18
1.20 CSR Firm Performance
1
c3 Ethical 1
.62
.36 1.00 .37
1
c4 Discretionary r1 .74

Reputation
1

r4 .17
χ2 = 55.694, d.f . = 11; CFI = 0.918; GFI = 0.946; RMR = 0.029
 

Figure 1.  Main effects test

Sampel

a typical response rate of 5–10 percent, suggesting our response rate was adequate in a country
suffering from severe survey fatigue (Galbreath and Galvin, 2008). After eliminating unusable
surveys, 280 firms were included in the analysis.
To test for non-response bias, early versus late respondents were compared on all variables used
in the study. The rationale behind such an analysis is that late respondents (i.e. sample firms who
respond late) are more similar to the general population than the early respondents (we also note
that while non-response may lead to a finding of higher levels of the constructs in Figure 1, there
is no prima facie reason why it should lead to a bias in the relationship between them). Independent
samples t-tests revealed no significant differences between any of the variables. Thus, non-response
bias does not appear to be a problem.

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218 Australian Journal of Management 37(2)

Of the 280 valid responses, the most prominent industries include industrial manufacturing
(28.9 percent), business services (17 percent), consumer products manufacturing (10.5 percent),
financial services (6.5 percent), and other services (22.7 percent). The majority of firms were clus-
tered into two sales revenue categories, with 41.9 percent of firms generating between
AUD$10,000,001 and AUD$50,000,000, and 21.7 percent over AUD$200,000,000. Respondents’
average age was 50 years old, while the majority had an undergraduate degree or higher (72.9
percent). Lastly, the mean number of employees was 630.

3.2 Independent variables

A universally accepted conceptualization or measurement of CSR is neither available nor possible
(Montiel, 2008; O’Shaughnessy et al., 2007). However, in the absence of readily available second-
ary data, a forced-choice instrument, based on Carroll’s (1979) conceptualization, has been fre-
quently used to measure CSR for empirical study (e.g. Aupperle et al., 1985; Pinkston and Carroll,
1994, 1996). The main drawback is that the instrument is largely used to determine firms’ CSR
orientation. That is, the instrument assesses the degree to which firms give importance, or rank
order, economic, legal, ethical, and discretionary dimensions of CSR; the instrument does not
adequately assess CSR activities/outcomes for each of the dimensions. Because this study was
interested in assessing CSR activities and outcomes, the use of the forced-choice instrument was
considered inappropriate.
After reviewing several studies for an appropriate scale, the measurement of CSR used in the
research of Maignan and colleagues was chosen for our study. Maignan and colleagues (Maignan
et al., 1999; Maignan and Ferrell, 2000, 2001) identified and developed various socially respon-
sible activities that aligned with Carroll’s (1979) conceptualization of CSR, the conceptualization
we use in this study. Thus, the scale does not assess the degree to which a firm believes it has
social responsibilities or how they rank order those responsibilities; rather, the scales assesses
CSR activity, making it ideal for this study. For measurement, a 29-item CSR scale was used
(Appendix). The scale has undergone rigorous development in previous studies and has been
tested using multiple industries and countries. Further, in a test of six competing measurement
models, Maignan and Ferrell (2000) found that the model that incorporated four correlated factors
(economic, legal, ethical, discretionary dimensions of CSR) provided the best overall fit. Hence,
following Maignan and colleagues (1999; Maignan and Ferrell, 2001), equal weights were applied
to each dimension and a firm’s CSR level was computed as the simple averages of the sums of the
scores of the responses across the four dimensions. Respondents were asked to provide their per-
ceptions of each dimension of CSR for their firm, where each scale was measured with a 5-point
Likert scale, where ‘1 = strongly disagree’ and ‘5 = strongly agree’.
This study relied on the reputation scale developed by Weiss et al. (1999). Weiss and colleagues
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 asks respondents
to measure how customers perceive their company’s overall reputation. This is consistent with
theoretical treatments of reputation. The scale contained five items rated on a Likert scale, where
‘1 = strongly disagree’ and ‘5 = strongly agree’. Following Weiss et al. (1999), the scale items
include: ‘Our firm is viewed by customers as one that is successful’, ‘We are seen by customers as
being a very professional organization’, ‘Customers view our firm as one that is stable’, ‘Our
firm’s reputation is highly regarded’, and ‘Our firm is viewed as well-established by customers’.
Customer satisfaction indicators should address an overall evaluation of interactions with a
firm; therefore, aligned with Ping’s (1993) proposal that the relationship between customer and

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Galbreath and Shum 219

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 (e.g. Oliver and
Swan, 1989). To gauge customer satisfaction then, the scale contained seven items designed to
measure perceptions of satisfaction levels of customers. Scale items include: ‘Compared to com-
petitors, 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/services’, ‘Our customers find that the products/services we offer exceed
their expectations’, ‘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’, and
‘The ability to achieve high levels of customer satisfaction is a major strength of our firm’. Each
item was rated on a Likert scale, where ‘1 = strongly disagree’ and ‘5 = strongly agree’.

3.3 Dependent variable

FP was gauged with four items, including return on investment (ROI), ROA, sales growth, and
profit growth. Items were drawn from Spanos and Lioukas (2001). For each performance indicator,
respondents were asked to rate their performance, relative to competitors in their industry, on a
5-point Likert scale where ‘1 = much worse’ and ‘5 = much better’ (Vorhies and Harker, 2000).
Although objective performance data would have been helpful, prior research has shown that sur-
vey respondents prefer perceptual performance measures because objective measures are seen as
confidential, especially among private companies (Spanos and Lioukas, 2001). Use of perceptual
performance items also facilitates comparisons across firms and contexts, such as across industries,
time horizons, and economic conditions. Prior research of subjective performance measures has
also shown them to be a reasonable substitute for objective measures of performance and to have
a significant correlation with objective measures of performance (Dawes, 1999; Spanos and
Lioukas, 2001). Thus, following the accepted design of previous research (e.g. Dawes, 2002;
Spanos and Lioukas, 2001; Vorhies and Harker, 2000), subjective measures of performance were
considered appropriate for this study.

3.4 Control variables

Several variables were accounted for to control for confounding effects. These include 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.
Because industry type impacts a firm’s competitiveness, categorical variables measuring eight
different industries was used. Lastly, for sales revenue, categorical variables measuring six cat-
egories, from less than AU$1,000,000 per year to a category of AU$200,000,000 per year or
over, were used.

4. Analysis and results

Means, standard deviations, and correlations are presented in Table 1. To assess the psychometric
properties of the constructs, this study conducts confirmatory factor analysis (CFA). After scale
purification, CSR, reputation, and customer satisfaction met acceptable levels of the major fit indi-
ces (Bentler, 1990), exceeding the 0.9 critical level of the comparative fit index (CFI), goodness-
of-fit index (GFI), and less than 0.05 value of the root mean square error (RMR) (Table 2). The

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 220

Table 1.  Descriptive statistics and correlations for continuous variables

Correlationsa

Variable Mean SD 1 2 3 4 5 6 7 8 9 10 11 12
 1. Firm size 630.35 1852.61 1.00  
 2. Firm age 42.42 40.91 0.09 1.00  
  3. Economic dimension of CSR 3.99 0.58 0.03 0.13 1.00  
  4. Legal dimension of CSR 4.39 0.55 0.10 0.07 0.41 1.00  
  5. Ethical dimension of CSR 4.07 0.68 0.12 0.08 0.46 0.62 1.00  
  6. Discretionary dimension of CSR 3.59 0.74 0.07 −0.06 0.32 0.43 0.49 1.00  
 7. Reputation 4.38 0.55 0.05 0.02 0.42 0.39 0.31 0.34 1.00  
 8. Customer satisfaction 4.09 0.54 −0.04 −0.01 0.41 0.37 0.22 0.27 0.60 1.00  
  9.  Return on investment 3.57 0.94 0.11 −0.09 0.32 0.15 0.14 0.14 0.35 0.32 1.00  
10. Return on assets 3.56 0.92 0.12 −0.07 0.31 0.17 0.13 0.15 0.36 0.30 0.89 1.00  
11. Sales growth 3.50 0.96 0.12 −0.07 0.17 0.12 0.02 0.17 0.23 0.23 0.40 0.41 1.00  
12. Profit growth 3.49 0.99 0.08 −0.01 0.32 0.17 0.10 0.16 0.26 0.23 0.54 0.58 0.57 1.00
Correlation coefficients .12 or greater are significant at p < .05.

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Australian Journal of Management 37(2)
Galbreath and Shum 221

Table 2.  Results of confirmatory factor analysis

Model/variable Mean SD Internal Cronbach’s GFI CFI RMR SRMR

consistency alpha
CSR 0.94 0.92 0.04 0.06
 Economic 3.99 0.58 0.73 0.71  
 Legal 4.39 0.55 0.82 0.79  
 Ethical 4.07 0.68 0.83 0.78  
 Discretionary 3.59 0.74 0.82 0.80  
Reputation 4.38 0.55 0.89 0.89 0.98 0.99 0.01 0.02
Customer satisfaction 4.09 0.54 0.86 0.87 0.97 0.97 0.01 0.01

standardized factor loadings of all the measurement items on their respective constructs were sig-
nificant (p < 0.05), indicating support for convergent validity. Furthermore, discriminant validity
is also supported for CSR, reputation, and customer satisfaction. The square root of the average
variance extracted (AVE) exceeds the correlation between factors and the AVE exceeds the 0.5
benchmark (Fornell and Larcker, 1981). Finally, all constructs demonstrated sufficient reliability,
exceeding the common benchmark of 0.70.
Regarding FP, CFA suggests the construct is not a first-order model. To explore the psychomet-
ric properties further, Principal Components Analysis using SPSS was conducted. A factor analysis
test demonstrated that ROA explained nearly 70 percent of the variation. A decision was therefore
made to include ROA as the single indicator of FP in the study. We believe this is justified, as ROA
is one of the most widely used performance variables in strategy research.
Prior to hypotheses testing, the control variables were assessed to determine their impact on the
models. A multi-group method of analysis was used and the results suggest that adding the control
variables does little to improve the overall fit of the models, which confirms at least some previous
findings on lack of influence of variables such as firm size in studies of CSR (Lee et al., 2009;
Orlitzky, 2001; Webb, 2004). Thus, to test the hypotheses and to assess the presence of mediating
variables, we followed the procedure outlined by Baron and Kenny (1986). Structural equation
modeling (SEM) using AMOS is employed, with the maximum likelihood estimation method as
the analysis technique. According to Rowley and Berman (2000), SEM is more appropriate than
regression analysis in CSR research as SEM not only simultaneously examines the measurement
model – the relationship between each (latent) CSR dimension and each item used to capture it –
but the relationships among each latent variable, including dependent variables such as FP.
Following Baron and Kenny (1986), initially, only the relationship between CSR and FP is
tested. The results of this first model indicate a good fit to the data (χ2 = 27.024, d.f. = 5; CFI =
0.928; GFI = 0.962; RMR = 0.034), demonstrating a significantly positive relationship between
CSR and FP. In the second model, we sought to test mediation effects. The model was run with all
paths estimated as specified in our hypotheses and for mediation tests. The data demonstrates a
good fit to the model (χ2 = 55.694, d.f. = 11; CFI = 0.918; GFI = 0.946; RMR = 0.029). The results
of the second model (Figure 1) indicate that the previously significant relationship between CSR
and FP becomes insignificant, demonstrating existence of full mediation (Baron and Kenny, 1986).
The second model therefore suggests that CSR is associated with higher FP; however, the effect is
indirect. This supports hypothesis one. CSR is positively associated with both customer satisfac-
tion and reputation, which fully mediate the FP relationship. As predicted, the association of cus-
tomer satisfaction with FP is through reputation, rather than through a direct link. This supports

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222 Australian Journal of Management 37(2)

hypothesis two. Given the findings, CSR contributes to higher FP, via the resulting better reputa-
tion and higher customer satisfaction.

5. Discussion and implications

Both of the hypotheses were confirmed in this study. The findings are significant in that they help
to clarify some of the ambiguity surrounding whether or not CSR can be associated with FP and
when the association can be positive, rather than neutral or negative. More specially, despite the
literature’s assertion for a business case, there is no reason to assume the existence of a direct rela-
tionship between CSR and financial performance per se. Hence, rather than look for a universal
link between CSR and financial indicators, it is necessary to apply a contingency approach (Rowley
and Berman, 2000). In this way, including mediators and/or moderators into analysis can help
determine under which conditions CSR could come along with financial benefits, or, on the con-
trary, with financial losses (Branco and Rodriguez, 2006). In the case of our study, the results sug-
gest that contingencies might determine how and why CSR can positively influence FP. Engagement
in CSR appears to forge a better reputation and an increase in customer satisfaction. In turn, reputa-
tion and customer satisfaction reduce transaction costs, deliver more repeat business, and lower
customer defection (Bhote, 1996; Galbreath, 2002; Jones, 1995; Prahalad, 1997), all of which offer
performance-related advantages.
Our study also offers alternative explanations to the Luo and Bhattacharya (2006) study.
While they find that the CSR–FP relationship is mediated by customer satisfaction, they omit
reputation in the study. This could be problematic. Firms inevitably seek to build (if not main-
tain) positive reputations, while at the same time interact with and serve customers in such as
way to ensure they are satisfied. According to Basdeo et al. (2006), attempts to build a good
reputation (or enhance customer satisfaction for that matter) are ‘market actions’ that stakehold-
ers can assess to make inferences about a given company. We argue that engagement in CSR
shapes stakeholder inferences of a firm positively, and the subsequent benefit is both a better
reputation and improved customer satisfaction. Thus, the benefits of CSR cannot be constrained
to a single intangible benefit such as customer satisfaction, but rather can provide potentially
many benefits (Weber, 2008, Wood, 2010). Not including reputation in mediation tests in the
CSR–FP relationship is likely to skew or overinflate results, particularly where customer satis-
faction is used as a variable.
Lastly, some evidence suggests that engagement in CSR in Australia is not universally accepted
by the business community (Birch, 2002). Further, the ISO standard for CSR (ISO 26000) was
recently ratified by 66 out of 71 countries involved in the voting. Significantly, Australia abstained
from voting, casting further concerns as to the importance of CSR as a part of business practice in
the country. However, the results of our study suggest that engaging in CSR is not necessarily
detrimental to Australian businesses. This finding offers confirmation of the positive effects of
CSR found in the bulk of research mainly conducted in Europe and the US. The findings also offer
some level of support of Matten and Moon’s (2008) work which posits that CSR, as a practice, is
diffusing from its US-based roots around the world.
In sum, this study points to a few key implications. First, recent analysis of the CSR–FP
relationship has brought much criticism. Rowley and Berman (2000), for example, have criti-
cized CSR–FP research because it appears to be more of an attempt to legitimate the business
case for CSR rather than to engage in serious theoretical development. Similarly, Wood (2010:
59) argues that findings on the CSR–FP link ‘are wishy-washy at best – “doing good” does not
seem to hurt companies most of the time, and “causing harm” sometimes does hurt – but these

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Galbreath and Shum 223

results do not point to a need for more research on the question, but for an abandonment of
the…question in favor of more theoretically sound and powerful ones.’ CSR cannot universally
produce a favorable impact on FP for all firms all the time, so favorable findings will never be
replicable across all datasets. For researchers, an implication of our study therefore suggests far
more attention and effort needs to be spent on determining the mechanisms by which CSR
increases revenue or reduces costs. Hence, researchers need to carefully select contingent vari-
ables, theorize logical connections between CSR and these contingent variables, and then for-
mulate testable links to firm performance. According to Wood (2010), this is the ‘missing link’
in most CSR–FP research to date.
Our results have practical implications as well. Firms throughout the world are challenged
to demonstrate responsible corporate behavior. However, demonstrating responsible corporate
behavior is not without opportunity costs, and executives remain skeptical of engaging in CSR
(McKinsey & Company, 2006). The findings of this study suggest that CSR appears to be a
good strategy. Executives should see CSR as a means to build intangible assets such as cus-
tomer satisfaction and reputation, both of which are critical objectives of most companies.
Thus, companies should consider that engaging in CSR activities might represent a robust
strategy, particularly in an environment where stakeholders have increased social concerns. In
fact, Porter and Kramer (2006) argue that CSR may well be the new battleground for competi-
tive advantage.

6. Limitations, directions for future research, and conclusions

There are limitations to this research. First, secondary sources that adequately capture the key
constructs in this study were not readily available for an adequate sample size in Australia. In
this absence, following accepted practice, a survey was used for data collection, although this
technique is not without limitations. Data that are collected from a single informant using sur-
vey techniques may be particularly susceptible to common method variance and social desira-
bility biases.
To check for common method variance, we relied on the post-hoc Harman’s single-factor test
(Podsakoff and Organ, 1986). The factor analysis test revealed the absence of a single general fac-
tor accounting for most of the observed covariance in the variables. Hence, common method bias
did not appear to a problem with this dataset. Following Spector and Brannick (1995), social desir-
ability bias was addressed by using a self-administered survey, ensuring complete anonymity for
all respondents, and survey questions addressing dependent and independent variables being
placed far apart from each other in the survey. According to Nederhof (1985), self-administered
surveys may reduce social desirability bias over other data collection methods because they reduce
the salience of social cues by isolating the subject. In fact, studies find that the use of self-admin-
istered surveys is generally found to be less influenced by social desirability bias than telephone or
face-to-face interviews (Nederhof, 1984; Wiseman, 1972). Hence, while not always eliminating
social desirability bias, indications suggest that anonymous self-administration of mail surveys
gives rise to less distortion than other methods (Nederhof, 1985).
Second, the sample was drawn from Australian business firms. While we do acknowledge that
the results might not generalize to other countries, the findings do extend empirical evidence
beyond the US, where much CSR research takes place. Third, conceptualization and measurement
of CSR is identified as problematic in the literature (Orlitzky et al., 2011; Van Oosterhout and
Heugens, 2008). Thus, we made a choice to leverage a widely recognized and tested CSR con-
struct; namely, Carroll’s (1979) construct. The use of Carroll’s (1979) work could therefore be a

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224 Australian Journal of Management 37(2)

limitation; however, given that our interest was in expanding mediation tests of the CSR–FP rela-
tionship, we did not seek to break new ground in conceptualizing or measuring CSR but rather
relied on a scale previously used in the literature that demonstrated sufficient validity and reliabil-
ity. Finally, this study is cross-sectional. Clearly, the relationships proposed in this paper need to be
studied over time. Addressing this limitation is an opportunity for future research.
Other future research opportunities exist as well. For example, studies could assess if certain
conditions impact on firms’ ability to maintain high levels of CSR activity and whether consist-
ently high CSR activity helps or hinders organizational success, financial or otherwise. Lastly, an
important focus of recent theoretical treatments expresses interest in the antecedents of CSR (e.g.
Aguilera et al., 2007). To advance the field, future research could empirically explore more closely
the internal and external drivers of CSR, such as employees’ relational needs or differences in
institutional drivers across countries.
In summary, we believe that the associations tested in our model provide one explanation for
how CSR might be linked with FP, and why the association might be positive. In so doing, our
findings overcome some of the ambiguity surrounding the CSR–FP relationship and provide
insights for future research. From a more pragmatic perspective, this study further confirms that
actively engaging in CSR is likely to have positive benefits for firms in Australia. The present
results suggest that firms proactively engaging in CSR appear to be able to enhance reputation
while improving customer satisfaction, with an indirect benefit of improved FP.

Funding
This research was supported by funding from Curtin University.

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Date of acceptance of final transcript: 27 October 2011.

Accepted by Associate Editor, John Roberts (Marketing).

Appendix
Corporate social responsibilitya
Economic dimension

1. Our business has a procedure in place to respond to every customer complaint.

2. We continually improve the quality of our products.
3. We use customer satisfaction as an indicator of our business performance.b
4. We have been successful at maximizing our profits.b
5. We strive to lower our operating costs.
6. We closely monitor employees’ productivity.
7. Top management establishes long-term strategies for our business.b

Legal dimension

1. Managers are informed about relevant environmental laws.

2. All our products meet legal standards.
3. Our contractual obligations are always honored.

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Galbreath and Shum 229

4. The managers of this organization try to comply with the law.

5. Our company seeks to comply with all laws regarding hiring and employee benefits.b
6. We have programs that encourage diversity of our workforce (in terms of age, gender,
or race).b
7. Internal policies prevent discrimination in employees’ compensation and promotion.b

Ethical dimension

1. Our business has a comprehensive code of conduct.

2. Members of our organization follow professional standards.b
3. Top managers monitor the potential negative impacts of our activities on our community.
4. We are recognized as a trustworthy company.
5. Fairness toward coworkers and business partners is an integral part of our employee evalu-
ation process.
6. A confidential procedure is in place for employees to report any misconduct at work (such
as stealing or sexual harassment).
7. Our salespersons and employees are required to provide full and accurate information to all
customers.

Discretionary dimension

1. The salaries offered by our company are higher than industry averages.
2. Our business supports employees who acquire additional education.b
3. Our business encourages employees to join civic organizations that support our community.
4. Flexible company policies enable employees to better coordinate work and personal life.
5. Our business gives adequate contributions to charities.
6. A program is in place to reduce the amount of energy and materials wasted in our
business.
7. We encourage partnerships with local businesses and schools.b
8. Our business supports local sports and cultural activities.

a5-point scale ranging from strongly disagree to strongly agree.

bItem eliminated based on refinement procedure.

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