CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Corporate social responsibility (CSR) is an important concept that is progressively being deliberated and adapted worldwide. Initial research by scholars focused on whether CSR should exist or not (Shimshack & Kitzmueller, 2010). Economically oriented scholars such as Friedman (1962) posited that the business should only focus on making profits as its only social responsibility provided it does so without engaging in fraud and while observing fair and open competition. Freeman (1984), on the other hand, argued that a firm could only succeed if it creates value for its stakeholders. Recent researchers acknowledge existence of CSR and now focus on why it is adopted and how it influences the organization. Mcguire and Schneeweis (1988) posit that firms invest in reputation through their active involvement in CSR. Kallio (2006) described corporate goodness as nothing other than naivety and can only be advanced as taboos.  Ponnu and Okoth (2009) provided empirical evidence that firms engaging in CSR activities seek to enhance their corporate image which can enable them improve their profits and revenue. Carroll and Shabana (2011) stated that CSR should be applied so as, to obtain reputational capital and maintain legitimacy within the society. Human beings relate a lot to what they see. With this knowledge, corporations of all sizes have taken advantage and increasingly engaged in CSR projects with an expectation that firms’ value and reputation will increase. 

Various stakeholders are demanding for incorporation of CSR activities in the organizations daily practices. Additionally, the current world of business management is full of dynamism and firms are using CSR as a strategic tool to compete aggressively. Friedman (1970) supports adoption of CSR activities by organizations if and only if it has a return or an economic advantage to the firm in the future. Carroll (1991) identified the four kinds of social responsibility firms can engage in which includes economic, legal, ethical and philanthropic responsibilities. Economic responsibilities involve production of valuable goods and services. Legal responsibility involves obeying the laws. Ethical responsibilities involve doing what is just fair and right. Humanitarian duties encompass being a moral corporate entity.

Investors and stakeholders alike have also increasingly pressured firms to disclose their CSR information (Hooghiemstra, 2000). Willing businesses have responded to the public concerns by disclosing CSR activities and social performance through the annual reports and websites (Ponnu & Okoth, 2009). Orliziky, Schmidt & Rynes (2003) note that disclosure of CSR information is a strategic tool meant to influence the company’s financial performance and market value. It can also enhance corporate reputation through gaining trust and support from stakeholders (Wood ward, 1996). However, Ferreira & Ding (2014) established that the major shortcoming of CSR information is lack of required assured disclosure on standardized measures that investors can turn on.

The notion of Corporate Social Responsibility (CSR) has been one of the fundamental issues in the areas of social sciences especially academics and management. To justify the reason for recent trends by banks and other corporate business engaging into such a venture, different theories have been utilized in recent years to that effect. While early works on this subject draws on single theoretical perspectives (Freeman, 1984; Friedman, 1980) more recent work seems to be explaining CSR behavior using multiple theories (Mellahi et al., 2016). Over the last two and a half decades, the theories that have become the most prominent in the literature that explains CSR behavior are: stakeholder theory, legitimacy theory, resource-based view (RBV), agency theory and resource dependency theory (RDT) (Mellahi et al, 2016; Frynas & Yamahaki, 2016).  According to Mellahi et al. (2016) these different theories can be classified as either related to explaining external drivers of CSR or related to internal drivers of CSR (see Figure 1). Stakeholder theory, legitimacy theory and RDT are considered as theories that explain external drivers of CSR since these theories focus on the nature of relations between the firm and the environment. RBV and agency theory are considered theories that explain internal drivers of CSR since these theories focus on the internal dynamics in addressing social and environmental concerns (Frynas & Yamahaki, 2016; Mellahi et al., 2016).

The conceptualization and practices of CSR is not similar among managers, professionals, and prospective students throughout the world. Many empirical studies have shown that United States and Europe, from where the CSR concept has emerged, have remarkable variations on the applications of CSR. The fact, of 53% of US company´s involvement in CSR activities as stated in their websites while that of French and Dutch companies limited to 25 and 29 percent respectively, ensures that U. S. corporations show more concerns on CSR than Europe (Maignan and Ralston, 2002). On the other hand, European companies are shifting recently from implicit to explicit CSR concerns. The managers in Europe are gradually becoming open in this regard also because of their national institutional standards (Matten and Moon, 2008).

The Australian scenario also shows a positive attitude on CSR because manager´s and professional´s selection of the companies before joining. Employees prefer the companies that have well reputation on ethical and social responsibility issues (Cacioppe et. al., 2007). On the other hand, the insights of CSR on the managers of Russia, another noticeable economy, do not symmetrically associate with that of western and Australian managers. A study shows that the managers do not consider CSR as relevant topic of modern business and define CSR as unnecessary activity after abiding legal compliances (Kuznetsov et al., 2009).

The Asian region, with an increasing number of emerging economics, is also adopting the prevalent notion of positive influence of CSR on corporations. It is clear from the study of Cheung et al. (2009) that the association of CSR and market valuation is positive in Asian markets. 9 out of 10 Asian Emerging countries, including India that has many social and cultural similarities with Nepal, have shown that there is a significant improvement in CSR performance. Inversely, Nepal, one of the least developed South Asian countries in terms of industrialization and with low per capita income of $490 (World Bank report, 2011), has not satisfactory performance on CSR. Though CSR reports are not available yet in Nepal, other reports do not comprise information of performing reasonably. However, few companies carry out some philanthropic activities along with their marketing activities (Adhikari, 2012).

Over the last few decades there has been a growing public awareness of the role of corporations in society. Is profit the only concern of corporations? Or do other social and environmental concerns play a role as well? Not only these questions became commonplace at the business table and business press, but also vast body of academic literature emerged around these questions (Margolis & Walsh, 2003). Corporate social responsibility (CSR) refers to the concept whereby companies integrate such social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis (Reverte, 2009).  In recent years managers have increased their interest in CSR, which is shown by the increased attention and resources for responsible activities (UN Global Compact-Accenture, 2010). This increased attention is likely because of the interest different stakeholders are paying to a corporations’ behavior in today’s society and to the fact that corporations want to create and maintain a good reputation by the public. A number of scandals related to global firms have indicated that irresponsible behavior can have massive consequences for a firm’s reputation.

However, recent examples of responsible behavior have shown that doing good actually can in fact bring benefits for corporations as well. The attention that has been paid to the topic of CSR is mainly focused on the consequences that are associated with CSR activities. Especially the consequence on financial performance has gained much attention the last couple of years. However, despite the extensive amount of research done to this consequence, results of this work are still contradictory and ambiguous (Mellahi et al., 2016). And so, we could ask ourselves, if engaging in CSR activities does not lead to improved financial performances per se, what are the antecedents of CSR that drives corporations to engage in CSR activities? Finding determinants of engaging in CSR activities will contribute towards our understanding of why firms have different attitudes towards engaging in CSR activities. This study will focus on the determinants of engaging in CSR activities. It will do so by analyzing whether a number of firm and industry characteristics, are potential determinants of CSR by Dutch listed firms. CSR ratings are constructed on the basis of a content analysis and will be validated by the ratings from the Dutch Ministry of Economic affairs and the Transparency Benchmark. By using both, content analysis and the CSR ratings of the Dutch Ministry of Economic affairs, the CSR ratings will be more objective and robust. Furthermore, this study is focused on the Dutch setting for two reasons. First, most of the existing literature is based on the US and UK setting and evidence from another institutional context should be added. Second, not much research is done on CSR determinants of Dutch companies. Thereby, this study contributes to current CSR literature by identifying multiple determinants of CSR activities.

CSR is not as straightforward as it looks like beforehand, this is due to the fact that socially responsible behavior may mean different things in different places to different people and at different times (Campbell, 2007; Frynas & Stephens, 2015). And because of this, the increasing body of literature related to CSR is facing a problem of definition. However multiple definitions have been provided, finding one universal definition is considered difficult (Davis, 1973; Campbell, 2007; Matten & Moon, 2008; Aguinis & Glavas, 2012; Frynas & Stephens, 2015).  According to Davis (1973), CSR refers to the firm’s consideration of, and response to, issues beyond the narrow economic, technical, and legal requirements of the firm. Davis (1973) argues that it is the firm’s obligation to evaluate its decision-making process in such way that the effects of its decisions on the external social system will accomplish social benefits along with the traditional economic gains which the firm seeks.

Furthermore, he argues that social responsibility begins where the law ends. A firm is not being socially responsible if it merely complies with the minimum requirements of the law, because this is what any good citizen would do. Another and a more specific definitions of CSR is one made by Carrol (Crane, Matten, & Spence, 2008). Carrol (1979) explains business practice as a pyramid of responsibilities with economic responsibilities at the bottom, followed by legal, then ethical, and with philanthropic responsibilities at the top. Carrol (1979) argues that CSR is about taking responsibility for the pyramid’s top parts, as well as the economics and legal responsibilities of the firm. Carrol (1979) significantly points out that CSR includes philanthropic contributions, however is not limited to it. Carrol (1999) developed this reasoning and explains that these responsibilities are less important than the other three categories. This is because firms are not seen as irresponsible if they do not fulfill these responsibilities. To fulfill all responsibilities firms should be profitable, while operating within the boundaries of the law, be ethical, and be a good corporate citizen (Carrol, 1979). Another very popular definition often used in CSR research is a definition that includes a voluntary aspect (Amaeshi & Adi, 2007). McWilliams & Siegel (2001) describe CSR as ‘actions that appear to further some social good, beyond the interests of the firm and that which is required by law’.

Despite the fact that this definition is often used in CSR literature, this definition has its drawbacks since it suggests that CSR actions should go beyond the interest of the firm. It implicitly suggests that actions could not be in the interest of the firm and the social good at the same time. A different approach when defining CSR is Campbell’s approach, since he focuses on a minimum level of behavioral standard. Campbell (2007) argues that, corporations act in a socially responsible way if they do two things. First, they must not knowingly do anything that could harm their stakeholders, notably, their investors, employees, customers, suppliers, or the local community within which they operate. Second, if corporations do cause harm to their stakeholders, they must then rectify it whenever the harm is discovered and brought to their attention (Campbell, 2007). However, this definition has a different approach than other and focuses on a minimum level of responsible behavior, it also implies that there are no benefits for firms that engage socially responsible behavior. Campbell (2007) argues that firms are considered to be socially responsible as long as they do no harm to the world.

Therefore, this approach might be not fully comprehensive. As the field of CSR has evolved, the term CSR has sometimes been supplemented or supplanted by other terms (for a review, see Amaeshi & Adi, 2007), including corporate social performance (CSP) and more recently, organizational responsibility (Wood, 1991; Aguinis, 2011). Although theorists attempt to distinguish CSP from CSR, sometimes subsuming CSP under the umbrella of CSR and sometimes the reverse, the terms CSR and CSP are often used interchangeably in empirical studies (Margolis et al., 2007). According to Wood (1991), who elaborates on the definition of Wartick & Cochran (1985), CSP can be defined as an organization’s configuration of principles of social responsibility, processes of social responsiveness, and policies, programs, and observable outcomes as they relate to the firm’s societal relationships. In other words, CSP can be seen as a multidimensional construct, which includes the firms’ activities to meet the firm’s economic, legal, ethical and philanthropic responsibilities (Wood, 1991; Carrol, 1999).

 Another and a more recently developed term is organizational responsibility (Aguinis, 2011). Organizational responsibility refers to “context-specific organizational actions and policies that take into account stakeholders’ expectations and the triple bottom line of economic, social, and environmental performance”. It specifically uses the term organizational instead of the narrower term corporate to emphasize that responsibility refers to any type of organization and not only large corporations. According to Enderle (2004) organizational responsibility is not only possible but also necessary for startups, small, and medium-sized organizations if they want to be successful in today’s globalized and hypercompetitive economy. Furthermore, the broader term responsibility instead of the narrower phrase social responsibility is used to highlight that responsibility refers to several types of stakeholders, including employees and suppliers, and issues that subsume but also go beyond topics defined as being in the social realm (Aguinis, 2011).

After this brief discussion of the concept, it has become clear that CSR means different things in different places to different people and at different times (Campbell, 2007; Frynas & Stephens, 2015). Therefore, it is appropriate to define CSR as an umbrella term for a variety of concepts and practices, all of which recognize that companies have a responsibility for their impact on society and the natural environment, often beyond legal compliance and the liability of individuals (Frynas & Stephens, 2015). However, the lack of a widely accepted CSR definition remains a significant challenge for theorizing CSR. To avoid confusion given the different conceptualizations available (Davis, 1973; Carrol, 1999; Mcwilliams & Siegel, 2001; Campbell, 2007; Wood, 1991, Aguinis, 2011) and to define CSR as an umbrella term, this study adopts the broader definition of Aguinis (2011) and defines CSR as “context-specific organizational actions and policies that take into account stakeholders’ expectations and the triple bottom line of economic, social, and environmental performance”.

1.2 Statement of the Research Problem

Financial crisis focused a public attention on the financial industry (San-Jose, Retolaza a Gutierrez-Goiria, 2011), because of the failure of commercial banks which has been transformed into a real economy. Also, the quality of hundreds of millions of people lives around the world decreased through an increase of unemployment and due to a reduction of global consumption. In this process, total lack of decency to customers and companies (Graafland and Van de Ven, 2011; Fassin and Gosselin, 2011) played an important role in the moral failure of the financial system (Chatterjee & Lefcovitch, 2009). Belas (2010) states that banking system is determined by factors that significantly affect the business of commercial banks such as the credibility of the banking sector; money as the business object and atypical structure of the balance sheet of commercial banks. These factors are a main reason for strict regulation of the banking sector. Mejstřík et al. (2008) presents a specific feature of banks within their safety net which includes state guarantees of banking business in the form of deposit insurance, function of central bank as a lender of last resort and doctrines such as “too big to fail”. It is paramount to understand these activities have existed in Cameroon but the level of implementation is still wanting which justifies why this research is being carried out using some selected banks in Bamenda Municipality of Cameroon.

If a submitted argument about specific position of financial institutions in the socio-economic system will be accepted, the issue of commercial banking in wider economic and social context has to be imperatively examined. Also, it may be naturally required a higher level of social responsibility for their business and a higher level of application of moral principles in a banking business. This is the fundamental motivation for carrying out this present study.

1.3 Research Questions

The research questions for this study are divided into two facets: main and specific research questions.

1.3.1 Main Research Question

What is the impact of corporate social responsibility of banks on their financial performance in Bamenda Municipality?

1.3.2 Specific Research Questions

The specific research questions for this study are as thus:

1. What is the impact of economic corporate social responsibility of banks on their financial performance in Bamenda Municipality
2. What is the impact of social corporate responsibility of banks on their financial performance in Bamenda Municipality?

• What is the impact of environmental social responsibility of banks on their financial performance in Bamenda Municipality?

1. What is the impact of philanthropic corporate responsibility of banks on their financial performance in Bamenda Municipality?

1.4 Research Objectives

1.4.1 Main Research Objective

To evaluate the impact of corporate social responsibility of banks on their financial performance in Bamenda Municipality.

1.4.2 Specific Research Objectives

The specific research objectives for this study are as thus:

1. To investigate the impact of economic corporate social responsibility of banks on their financial performance in Bamenda Municipality.
2. To evaluate the impact of social corporate responsibility of banks on their financial performance in Bamenda Municipality.

• To analyse the impact of environmental social responsibility of banks on their financial performance in Bamenda Municipality.

1. To investigate the impact of philanthropic social responsibility of banks on their financial performance in Bamenda municipality.

1.5 Research Hypotheses

The research hypothesis for this study are presented based on the objectives of the study and are presented in the null form as thus:

 H₀₁: Economic corporate social responsibility of banks does not significantly impact their financial performance in Bamenda Municipality.

 H₀₂: Social corporate responsibility of banks does not significantly impact their financial performance in Bamenda Municipality.

 H₀₃: Environmental social responsibility of banks does not significantly impact their financial performance in Bamenda Municipality.

H₀₄ : Philanthropic social responsibility of banks does not significantly impact their financial performance in Bamenda Municipality.