ACHIEVING ORGANISATIONAL EFFECTIVENESS THROUGH EFFECTIVE INDUSTRIAL RELATIONS
CHAPTER TWO
LITERATURE REVIEW
2.1 Introduction
In this chapter, a review of extant literature on the subject matter is carried out covering conceptual framework, theoretical literature and empirical literature.
2.2 Conceptual Framework
Figure 1 shows the conceptual framework of this study.
2.2.1 Corporate Social Responsibility
A key indicator to determine the true worth and value of modern organizations is their ability to give back to the society part of their income through some mutually beneficial initiatives otherwise often referred to as corporate social responsibility (Nkanbra & Okorite, 2007). The concept of CSR as a social obligation was first advocated by Carroll (1979). Carroll (1979) CSR pyramid is one of the best-known CSR concept which covers economic, legal, ethical and philanthropic expectations that a society has in relation to a company. According to Rendtorff and Mattson (2012), companies are perceived as human communities that use social practices in order to achieve common goals. These objectives are realized through bond of trust and authentic relationships with customers. The most important ethical principles that promote good life of customers are customer‘s autonomy, dignity, honesty, customer‘s vulnerability that represents basic presumption for decent access to customers.
Yeung (2011) defines key elements of CSR in the banking sector to include as understanding of financial services complexity, risk management, ethics in the banking business, strategy implementation for financial crisis, protection of customers‘ rights and channels settings for customer complaints. Macdonald and Rundle-Thiele (2008) examine a relationship between
CSR and customers‘ satisfaction in the bank. According to the conclusion of their study, customers‘ satisfaction is more affected by pro-client oriented events than CSR activities. And if
the bank decides to develop CSR activities, focus of these activities has to be properly chosen.
Robin (2008) states that society would like to have an economic system that creates opportunities for the growth of economic welfare and a happy life of people. The mission of ethics is to minimize the abuse of companies‘ power in the bilateral exchange relations and to reduce a negative impact on a people‘s daily live. A fundamental issue of business ethics is how to make capitalism more ethical. According to Sigurthorsson (2012), risk of CSR consists in the fact that it tends to become an excuse for soft law and corporate self-regulation. Icelandic banks implement their CSR concept through a financial support of charitable activities and they did not pay attention to a formation of socially responsible practices but reduced CSR tools only for public communication. Corporate social responsible practices should focus more on processes that make socially responsible profit and not on its distribution. Fassin and Gosselin (2011) also report that large institutions have a strong CSR and ethical culture.
CSR models present company‘s social obligations as comprising economic, legal, ethical and philanthropic responsibilities. Carroll (1991) notes that businesses were created as economic entities driven by a profit motive, thus economic performance undergirds the other three CSR components. Legal responsibility involves businesses complying with federal, state and local government laws and regulations (Carroll, 1991). This was followed by ethical responsibilities, those standards, norms and expectations that reflect a concern for what consumers, employees, shareholders and the community regard as fair, just and respectful of stakeholders‘ moral rights (Carroll, 1991). Finally, philanthropic responsibility was the expectation that businesses be good corporate citizens, actively engaging in programs to promote human welfare and goodwill (Carroll, 1991). A considerable amount of research effort has been directed towards identifying the positive impact of CSR initiatives on customers.
CSR as philanthropy in Nigeria could also be tied to some religious influences. Nigeria is a very theistic country. The belief in the supernatural or some spiritual realities is central to an average Nigerian (Adi, 2006). It can be argued, therefore, that since gifts and sacrifices are core to religion, the same beliefs could have easily found an outlet/expression in the Nigerians‘ understanding and practice of business society relations.
For many years, the concept of corporate social responsibility remained alien to the
Nigerian banking industry, as the overriding emphasis was profit and nothing else (Amaechi, 2009). As at the time in question, banks‘ management never bordered about the customer or the environment within which business is being operated, and that created a lot of problems for the various institutions. That was largely because the customer had little or no option, as the number of banks then was relatively small. Moreover, the literacy level and consciousness of the bank customers was quite low and so many things were taken for granted. Indeed times have changed a great deal and awareness about banks corporate social responsibility has continued to grow steadily ever since. It is no longer an issue to be toyed with in the policy making processes in the banks, as policies, products and services can only be introduced after evaluation and consideration of the responses, from the society and business environment. There have always been fears that without such considerations, organizations are bound to record product or service failure. Today, corporate social responsibility profile of banks is being used as marketing tool in a competitive industry.
CSR is part of the business ethics which accountants and management are concerned with because the interested in the factors that facts the profitability of the business. CSR can be defined as the economic, legal, ethical, and discretionary expectations that society has of organizations at a given point in time (Carroll & Buchholtz, 2003). CSR is a means of analyzing the inter-dependent relationships that exist between businesses and economic systems, and the communities within which they are based. CSR is a means of discussing the extent of any obligations a business has to its immediate society; a way of proposing policy ideas on how those obligations can be met; as well as a tool by which the benefits to a business for meeting those obligations can be identified (CSR Guide).
McWilliams and Siegel (2001) define CSR as actions that appear to further some social good, beyond the interests of the firm and that which is required by law. The concept of corporate social responsibility means that organizations have moral, ethical, and philanthropic responsibilities in addition to their responsibilities to earn a fair return for investors and comply with the law. A traditional view of the firm suggests that its primary, if not sole, responsibility is to its owners, or stockholders. However, CSR requires organizations to adopt a broader view of its responsibilities that includes not only stockholders, but many other constituencies as well, including employees, suppliers, customers, the local community, local, state, and federal governments, environmental groups, and other special interest groups. Collectively, the various groups affected by the actions of an organization are called stakeholders. Further, CSR challenges businesses to attend to, and interact with, the firms‘ stakeholders while they pursue economic goals. Consequently CSR is frequently linked to such constructs as business ethics, corporate citizenship, stakeholder engagement, sustainable development, corporate governance, sustainable finance and social responsible investment (Amaeshi & Adi, 2007).
Matten and Moon (2004) underline the centrality of the ethical and philanthropical areas of responsibility to the study of CSR because of the differentiation they allow to establish between voluntary corporate behaviour and mere compliance. The CSR debate has focused on the moral and philanthropic responsibilities, giving little attention to economic and legal responsibilities.
Schwartz and Carroll (2008) develop a three-domain approach, in which they propose the assumption of the philanthropic or discretionary component under the ethical and/or economic components. The reasons for such proposal are related, on the one hand, to the difficulty in distinguishing between philanthropic and ethical activities on both the theoretical and practical levels, and, on the other hand, to the observation that philanthropic activities are often explained by underlying economic interests.
According to Adeyanju (2012), economic responsibility is the bed rock of all responsibilities and the foundation of all CSR, which if not achieved other responsibility will not be attained. This responsibility emphasizes the reason for business establishment. Adeyanju
(2012) says that the company is to comply with established laws by government. The law reflects a view of codified ethics that embody basics notion of fairness established by the government. Such laws include payment of taxes, environmental protection and other. Ethical responsibility emphasizes the activities and practices expected by the society members, which includes complying with the norms in areas which they operate (Adeyanju, 2012).
Nickels, Williams and Nim (2002) suggest that CSR has several dimensions:
(i) Corporate philanthropy: This is the dimension of CSR that includes charitable donations.
(ii) Corporate Responsibility: Dimension of social responsibility that includes everything from hiring minority workers to making safe products.
(iii) Corporate Policy: This refers to the position a firm takes on social, politics and
political issues.
According to Friedman (2006), there is one and only one social responsibility of business- to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud. Friedman's statement that a business's social responsibility lies in making profit has shown a controversial point of view in modern business. Some people believe in Friedman's ideas while others do not. Is it possible that Friedman can be both right and wrong? In business, there are different situations that require different perspectives and methods of approach. On one hand, it is correct to say that the main focus of a business should be to make profit. Without profit, a business cannot survive. In a way, Friedman's theory does promote social responsibility to society. The increase of profits in a company benefits the economy which benefits the citizens of that economy.
Friedman believed that social responsibility should not be forced by the government. While most economists agree with this notion, many believe that he may have gone to an extreme by saying that it is the company's only social responsibility. Companies can still maintain their successful path while pursuing several different methods of social responsibility simultaneously. Responsibility to stakeholders can still be achieved while helping to strengthen the community. For example, companies can conduct research to provide a safer product to consumers.
According to Paula (2009), Friedman's perspectives represent the most famous and frequently cited opposition to Corporate Social Responsibility. He went further to say that Friedman opposition is termed the "economic" argument against CSR, who has argued that the primary responsibility of business is to make a profit for its owners, albeit while complying with the law. Sainthouse (2009) says that the "competitive" argument recognizes the fact that addressing social issues comes at a cost to business. To the extent that businesses internalize the costs of socially responsible actions, they hurt their competitive position relative to other businesses.
Gwynne (2009) argues that those in business are ill-equipped to address social problems. This "capability" argument suggests that business executives and managers are typically well trained in the ways of finance, marketing, and operations management, but not well versed in dealing with complex societal problems. Thus, they do not have the knowledge or skills needed to deal with social issues. This view suggests that corporate involvement in social issues may actually make the situation worse. Part of the capability argument also suggests that firms can best serve societal interests by sticking to what they do best, which is providing quality goods and services and selling them at an affordable price to people who desire them.
There are several arguments in favour of corporate social responsibility. One view held by critics of the corporate world, is that since large firms create many social problems, they should attempt to address and solve them (Robbins & Colter, 2007). They went further to suggest that firms can do a better job of producing quality, safe products, and in conducting their operations in an open and honest manner. Robbins and Colter (2007) also says that the "selfinterest" argument that suggests firms should conduct themselves in such a way in the present as to assure themselves of a favorable operating environment in the future. In this theory of the firm-based model, managers conduct a cost/benefit analysis to determine the level of resources to devote to CSR activities/attributes. Simply put, firms simultaneously assess the demand for CSR and the cost of satisfying this demand and then determine the optimal level of CSR to provide. Robbins and Colter (2007) explain that some suggestions that businesses should assume social responsibilities because they are among the few private entities that have the resources to do so. The corporate world has some of the brightest minds in the world, and it possesses tremendous financial resources.
2.2.2 Net Profit Margin
The net profit margin ratio is a profitability ratio. Essentially, it is the percentage of profit from business operations after deducting business operating expenses. Net profit margin is the percentage of revenue left after all expenses have been deducted from sales (turnover). The measurement reveals the amount of profit that a business can extract from its total revenue. Net profit margin is the ratio of net profits to revenues for a company or business segment. Typically expressed as a percentage, net profit margins show how much of each naira collected by a company as revenue translates into profit. The equation to calculate net profit margin is: net margin = net profit / revenue. Net profit margin indicates how well the company converts its sales into profits. It is both a measure of efficiency and of overall business health.
Companies that generate greater profit per naira of sales are more efficient. Companies with high net profit margin ratios are also better able to survive a product line that does not meet expectations or a period of economic contraction. Net Profit Margin Ratio is also a good timeseries analysis measure, whereby business owners can look at company data across different time periods to see how the business is trending. A comparative analysis points to profit areas that have deteriorated or of increased cost trends that are reducing net profit. Financial ratios like the net profit margin ratio become most meaningful when they are viewed over time. The usefulness of the ratio, like all business data, has some limitations. Since industries are so different, the net profit margin is not very good at comparing companies in different industries. It is better at comparing similar businesses, not only ones in the same industry, but ones of similar size, or with similar product lines or doing business in the same broad geographic area.
2.2.3 Return on Total Assets
The return on total assets ratio, often called the return on total assets, is a profitability ratio that measures the net income produced by total assets during a period by comparing net income to the average total assets. In other words, the return on total assets ratio or ROTA measures how efficiently a company can manage its assets to produce profits during a period.
Since company assets' sole purpose is to generate revenues and produce profits, this ratio helps both management and investors see how well the company can convert its investments in total assets into profits. ROTA is seen as a return on investment for the company since capital assets are often the biggest investment for most companies. In this case, the company invests money into capital assets and the return is measured in profits. Return on Total Assets (ROTA) is an indicator of how profitable a company is relative to its total assets. ROTA gives an idea as to how efficient management is at using its assets to generate earnings.
It is calculated by dividing a company's annual earnings by its total assets, ROTA is displayed as a percentage. The return on total assets (ROTA) ratio illustrates how well management is employing the company's total assets to make a profit. The higher the return, the more efficient management is in utilizing its asset base. The ROTA ratio is calculated by comparing net income to average total assets, and is expressed as a percentage. This ratio can also be represented as a product of the profit margin and the total asset turnover. Either formula can be used to calculate the return on total assets. When using the first formula, average total assets are usually used because asset totals can vary throughout the year. Simply add the beginning and ending assets together on the statement of financial position and divide by two to calculate the average assets for the year. The return on total assets ratio measures how effectively a company can earn a return on its investment in assets. In other words, ROTA shows how efficiently a company can convert the money used to purchase assets into net income or profits.
Since all assets are either funded by equity or debt, some investors try to disregard the costs of acquiring the assets in the return calculation by adding back interest expense in the formula. It only makes sense that a higher ratio is more favourable to investors because it shows that the company is more effectively managing its assets to produce greater amounts of net income. A positive ROTA ratio usually indicates an upward profit trend as well. ROTA is most useful for comparing companies in the same industry as different industries use assets
differently.
2.2.4 Return on Equity
Return on equity (ROE) is a measure of profitability that calculates how many naira of profit a company generates with each naira of shareholders' equity. The formula for ROE is Net Income/Shareholders' Equity. ROE is sometimes called return on net worth. The return on equity ratio or ROE is a profitability ratio that measures the ability of a firm to generate profits from its shareholders investments in the company. In other words, the return on equity ratio shows how much profit each naira of common stockholders' equity generates. ROE is more than a measure of profit; it is a measure of efficiency. A rising ROE suggests that a company is increasing its ability to generate profit without needing as much capital. It also indicates how well a company's management is deploying the shareholders' capital.
In other words, the higher the ROE the better; falling ROE is usually a problem. However, it is important to note that if the value of the shareholders' equity goes down, ROE goes up. Thus, write-downs and share buybacks can artificially boost ROE. Likewise, a high level of debt can artificially boost ROE; after all, the more debt a company has, the less shareholders' equity it has (as a percentage of total assets), and the higher its ROE is. Banking industry tends to have higher returns on equity than others. As a result, comparisons of returns on equity are generally most meaningful among companies within the same industry, and the definition of a high or low ratio should be made within this context.
2.2.5 Firm Size
This study recognizes that it is not only CSR that affects profitability. Some firm characteristics are associated with profitability as well. These include size (Love & Rachinsky, 2007), growth rate, dividends, liquidity (Gurbuz et al., 2010) and sales (Forbes, 2002). The firms that have better growth rate can afford better machinery, and then gradually the assets and size of the firm will increase. Large firms attract better managers and workers who in turn contribute to the profitability of the firm. Majumdar (1997), Yahaya (2006), Gurbuz et al. (2010) and Abbasi and Malik (2015) find size as an important factor that affects firm profitability.
2.2.6 Leverage
Capital structure is also an important factor that determines the profitability of a firm. Capital structure refers to the ratio of debt and equity financing. In case if more debt financing the company has to face certain bankruptcy risk, but there are also some tax and monitoring benefits associated with debt financing (Su & Vo, 2010). It also mitigates the agency conflict by reducing the free cash flow of the firm. There should be an appropriate capital structure that generates the maximum profit for the organization, as too less equity financing increases the control of the owners to a large extent (Abu-Rub, 2012). In case of internally generated finances, it is said that these have the highest opportunity cost (Lewellen & Lewellen, 2004) for the firm because retaining profits can affect shareholder trust, because it would otherwise have been distributed as dividend. Dividend announcements have a significant impact on share prices (Akbar & Baig, 2010).
As far as external borrowings are concerned they are considered to be the cheapest source of financing because of the tax benefits. But they do still have certain costs like interest payments and it is widely accepted that the cost of external funds is directly proportional to the amount of these funds also while borrowing the capital structure policy of the firm has to be kept in mind. Another important factor which influences the generation of funds is the financial position of the corporation (Havemann & Webster, 1999). Firstly, to invest through retained earnings the corporation must generate enough profit that can satisfy its owners and fulfill the investment demands. Secondly, creditors like to invest in profitable corporations and projects (Amidu & Hinson, 2006); they tend to invest in corporations that can, to some extent, ensure the payment of their liability.
2.2.7 Interest Rate
Economic condition of the country can affect a firm‘s profitability on multiple fronts. Cost of borrowings can negatively influence the firm's capability to generate finances and invest in projects (Ntim, 2009). Prices of utilities, high costs associated with plant and machinery due to either deterioration of currency or import costs, high inflation rate and low income level of people can decrease the demand for industrial goods and hence negatively impact the firm's performance (Forbes, 2002). This study uses interest rate to proxy for the general business environment under which financial institutions operate in Nigeria.
2.3 Theoretical Review
The two views of corporate social responsibility are the classical view and the socioeconomic view (Robbins & Coulter, 2007).
2.3.1 The Classical View
This view says that management‘s only social responsibility is to maximize profit. The most outspoken advocate of this approach is economist, Milton Friedman (1962 and 1970). He argues that managers‘ primary responsibility is to operate the business in the best interest of the stockholders. Friedman commented that stockholders have single concern: Financial return. He also argues that anytime managers decide to spend the organization resources for ―social good‖, they are adding to the cost of doing business. These costs have to be passed on to consumers either through higher prices or be absorbed by stockholders through a smaller profit return as dividends.
2.3.2 The Socioeconomic View
Robbins and Coulter (2007) further explains that the socioeconomic view is of the view that management‘s social responsibility goes beyond making profit to include protecting and improving social‘s welfare of its stakeholders and the environment that the firm carry out its operations. This position is based on the belief that firms are not independent entities responsible only to stockholders. They also have the responsibility to the society that allow their formation through various laws and regulations and support them through purchasing their products and services. One of the major advocates of this view is Archie Carroll (Zain, 2008).
Carroll and Friedman agree on the maximization of firms' values as a core responsibility. They also advocate that such responsibility remain in-line with legal standards and therefore firms are not to engage in illegal activities. Carroll takes a firm's responsibilities further by talking about social responsibility. Under social responsibility, he outlines ethical and discretionary responsibilities. These are affectionately known as the "Should-Do's" and "MightDo's" respectively (Zain, 2008).
Zain (2008) went further to explain that, Carroll foresees the importance of ethical standards as part of a firm's success in the long-run. By following beliefs of certain moral standards and pro-actively volunteering to search for charitable avenues, the social responsibility dimension will create a positive rapport between the firm and parties that are privy to its operations; this includes suppliers, clientele, employees and the surrounding community.
2.3.3 Theory of Maximized Profits for Shareholders
According to Wiedmann (2008), the conventional theory of CSR believes that companies, as a business setup, should take optimal profit making for shareholders as their most fundamental objective. The realization of the benefits of any other concerned interest parties who are under the influence of the company‘s behaviors should not be deemed as the corporate objective. And the management body of the company shall have the right to resort to any means to achieve the goal when making any decisions or taking any actions on behalf of the company.
2.3.4 Stakeholders Theory
According to Griffin and Mahon (1997), stakeholders‘ theory maintains that maximizing the interests of the shareholders of the company is the most important objective that a business organization should achieve. However, it should not be considered as the sole objective. As a business organization, a company is vitally interrelated with the overall social environment. When in business activities, a company should not only consider on the influence that the activities may have on shareholders, but also on the influence that they will have on the interests of the parties other than the shareholders, including employees, suppliers, customers, creditors and on the benefits of the government. When a company makes any decision, it has to take into account the benefits of these people. Otherwise, it should take liabilities against any harm or damages thus incurred to these people.
2.3.5 Good Corporate Citizens Theory
According to Caroll (1991), this theory maintains that companies, as business organizations, should take profit making as the corporate objectives. However, companies are also liable to offering help, i.e. companies shall have the obligation to help solve certain social problems. For instance, companies shall have the obligation of making donations to education or charity organizations.
2.3.6 Minimum Requirement of Morality Theory
The minimum requirement of morality theory according to Ojo (2010) believes that companies have the obligation to satisfying shareholders‘ interests rather than causing damages to other parties. By this theory, as long as companies have avoided causing or corrected the social harm caused due to their behavior during the process of business activities, the companies are deemed to have fulfilled their social responsibilities. The CSR theory of minimum requirement of morality is regarded by some scholars as conservative idealism, or in other words as the voluntary compliance with the law.
2.3.7 Theories of Corporate Social Disclosure
If theories of conventional accounting disclosures revolve around the need of decision makers for information on which to base their choices, then they seem unlikely to explain this, largely voluntary, activity (Gray, Owen & Maunders, 1987). Although Toms (2002) does suggest that environmental disclosure might serve as a conduit for signaling facts about environmental management and this might explain why a some companies might adopt such a strategy, theories which explain the increase in social disclosures, which include more than just environmental management issues, and the interest in social reporting generally, are likely to rest elsewhere. In their 1987 paper, Gray, Owen and Maunders review theories that might explain the phenomena, and argue that it is more likely that social and political theory studies will shed light on the practice. They go on to discuss in detail three sets of theories: theories of the stakeholder, theories of legitimacy, and theories of political economy.
2.3.8 Social Accounting and General Systems Theory
Social reporting, at a theoretical level, is concerned with how commercial activity links into other social systems, and presents an alternative ontological approach to how one views the role of corporations. Indeed, understanding systems thinking is important in understanding the metatheoretical assumptions of social and environmental accounting. In short, as explained by Gray, Owen & Maunders (1987), it is an approach designed to reverse the tendency in scientific thought towards reductionist reasoning. Systems theory has its origins in the natural sciences and is explained in the following terms: an attempt to study a part without understanding the whole from which the part comes (reductionism) was bound to lead to misunderstandings. The part can only be understood in its context; understanding tends to be directed by and limited to one‘s own discipline. Natural phenomena are complex and cannot be successfully studied by artificially bounded modes of thought (Gray, Owen & Maunders, 1987).The essence of systems thinking therefore demands that we think about all our commercial (and leisure) activities in the context of how they affect other life systems.
2.3.9 Legitimacy Theory
Other reasons for companies choosing to disclose information relate to issues of legitimacy. In the same way that it was suggested that companies require the support of stakeholders to survive, legitimacy theory in the words of Ojo (2010) implies that a corporation‘s activities must be legitimate in the eyes of society to allow it to continue; in the doomsday scenario, if the company loses its legitimacy, then it will cease to exist. This notion may well have seemed somewhat theoretical, in itself, prior to the Enron scandal, but applied to Arthur Andersen, it can be seen to have some basis. It is not difficult to argue that, as the accounting irregularities became apparent, so the business world turned its back on Andersen, and its legitimacy was compromised to such an extent that it could not continue, and folded in a spectacularly short time.
This theory suggests that company disclosures may be a reaction to the perception that companies have of how they are viewed by different stakeholder groups within society. The theory itself is based on the notion that companies have an implicit approval from society to allow them to operate, in return for performing actions beneficial to society. The position this theory takes in relation to company disclosures is outlined by Lindblom (1993), who suggests that companies might adopt one of four strategies in an effort to keep society informed and sympathetic to the companies aims. She outlines these approaches in what might be seen as strategies of escalating manipulative persuasion, i.e. that company activity might not alter, but that the message it wishes to convey is designed to fulfill one or more of these strategies. She suggests that, while the information disclosed may be the same, the purpose behind the disclosure may have four distinctly different purposes.
2.3.10 Political Economy Theories
Broadly speaking, political economy theories of accounting, within which stakeholder and legitimacy theories also lie, consist of theories which derive from the social, political and organizational context within which accounting operates. However, political economy theories have two strands. Firstly, those that are constructed through the utilitarian lens of J. S Mill and which tend to focus on the interaction of competing groups within society, which itself is viewed as pluralistic. This is regarded as the bourgeois viewpoint, where the issues under examination are not regarded by Marxists as of significant importance where the important issues (for them) are largely ignored.
Fundamentally, this view ignores the very focus of the classical Marxian analysis, which sees inherent conflict within society and which challenges the inbuilt structural inequalities of power and influence (Cooper & Sherer, 1984, Gray, Owen & Maunders, 1987). These issues of structural inequality are also the focus of critical accounting researchers who see accounting as an essential part of the structure of capitalism which serves to maintain the unjust and structurally divisive status quo (Tinker, 1984, 1985, Hines, 1991, Hines, 1992, Tinker, 1991).
Critical accounting researchers are interested in a different ideology surrounding the possibilities and responsibilities accounting has in a societal context, which Marxian and critical theorists believe go far beyond those which inhabit the domain of the mainstream researcher. Indeed, insofar as the rudiments of ideology for Marx were founded firstly, on idealism (where it is contrasted with materialism), and secondly on the structural inequality of power and resources within society, so common ground is explored by critical researchers in accounting. It should also be acknowledged that social and environmental accounting researchers stand accused by those on the critical left of being part of a project which is, itself, bourgeois (Puxty, 1986, Tinker et al., 1991), despite their own criticisms of mainstream accounting research.
2.3.11 Rationality Theory of Corporate Social Responsibility
CSR is an important business strategy because, wherever possible, consumers want to buy products from companies they trust; suppliers want to form business partnerships with companies they can rely on; employees want to work for companies they respect; and NGOs, increasingly, want to work together with companies seeking feasible solutions and innovations in areas of common concern. Satisfying each of these stakeholder groups allows companies to maximize their commitment to another important stakeholder group—their investors, who benefit most when the needs of these other stakeholder groups are being met.
The businesses most likely to succeed in the globalized world will be those best able to combine the often conflicting interests of its multiple stakeholders, and incorporate a wider spectrum of opinions and values within the decision-making process and objectives of the organization. Lifestyle brand firms, in particular, need to live the ideals they convey to their consumers: The 21st century will be the century of the social sector organization. The more economy, money, and information become global, the more community will matter, Drucker (1999)
Given the aforementioned theories, this study will be guided by the good corporate citizen theory which maintains that companies, as business organizations, should take profit making as the corporate objectives. However, companies are also liable to offering help, i.e. companies shall have the obligation to help solve certain social problems. For instance, companies shall have the obligation of making donations to education or charity organizations.
2.4 Empirical Literature Review
A large volume of empirical studies have been conducted to establish the existence or otherwise of correlation between and or effect of CSR on profitability. For instance, Margolis and Walsh (2007) in a survey of 95 empirical studies conducted between 1972-2001 report that when treated as an independent variable, corporate social responsibility has a positive relationship with profitability in 57 studies, no relationship in 19 studies, a negative relationship in 4 studies and a mixed relationship in 15 studies.
2.4.1 Corporate Social Responsibility and Net Profit Margin
Carlsson and Akerstom (2008) use the sample of Ohrlings Pricewaterhouse Cooper for the period (2000-2007). The study uses cross-case analysis and uses net profit margin to proxy for profitability. The study finds a positive link between corporate social responsibility and profitability. Ojo (2010) uses data of 40 limited liabilities companies quoted on the Nigerian
Stock Exchange. Data collected were analyzed using correlation analysis, regression analysis and Analysis of Variance (ANOVA). The results of the study reveal that there is a positive link between corporate social responsibility and profitability, which was measured by net profit margin and return on assets.
Also, Soana (2011) examines a correlation between social and profitability of banks. This study uses net profit margin to proxy for firm profitability. The analysis shows that Italian banks do not show any significant correlation between corporate social responsibility and profitability. Akindele (2011) uses a survey design to collect data from four banks in Nigeria and examines the extent of relationship between corporate social responsibility and profitability. In this study, profitability was measured by both net profit margin and return on assets. The study finds that there is a significant relationship between bank profitability and CSR.
Also, Uadiale and Fagbemi (2012) use quantitative research method to examine the relationship between corporate social responsibility and profitability. The study obtained data on variables which were believed to have relationship with CSR and profitability. These variables include net profit margin, return on earnings, return on asset, community performance, employee relations and environmental management system. The result shows that CSR has a positive and significant relationship with the profitability measures. Abiodun (2012) examines the relationship between corporate social responsibility and firms' profitability in Nigeria with the use of secondary data, sourced from ten (10) randomly selected firms' annual report and financial summary between 1999 and 2008. The study uses ordinary least square for the analysis of collected data. Findings from the analysis show that the sample firms invested less than ten percent of their annual profit to social responsibility. The co-efficient of determination of the result shows that the explanatory variable account for changes or variations in selected firms performance (net profit margin, profit after tax) are caused by changes in corporate social responsibility (CSR) in Nigeria.
In a study entitled, impact of corporate social responsibility on the profitability of Nigerian banks, Amole, Adebiyi and Awolaja (2012) use ordinary least square (OLS) regression model in testing the relationship between CSR and profitability. The study uses data on corporate social responsibility expenditure and net profit margin for the period of 2001-2010. It adopts model on the causal relationship between CSR and firms profitability. The results of the regression analysis reveal that there is a positive relationship between CSR and profitability. The adjusted R2 was 0.893, which shows that CSR accounted for 89.3% of the variation in the
profitability of the bank.
2.4.2 Corporate Social Responsibility and Return on Assets and Equity
Uadiale and Fagbemi (2012) examine the impact of corporate social responsibility activities on financial performance measured with Return on Equity (ROE) and Return on Assets (ROA). The results show that CSR has a positive and significant relationship with the financial performance measures. These results reinforce the accumulating body of empirical support for the positive impact of CSR on financial performance. Uwaloma and Egbide (2012) use sample of 41 listed companies in Nigerian stock exchange for the period of 2008. Multiple regression analysis was employed to analyze the data. The study reveals that there is a significant negative relationship between firm‘s financial leverage and the level of corporate social responsibility disclosures.
Adeboye and Olawale (2012) use a set of purposive sample of 200 executives and employees in banks using student t-test to test the difference between financial performance and ethical standard of doing business. The result of the study shows that there is no significant difference between financial performance and ethical standard of doing business. Adeyanju (2012) uses data of 40 limited liabilities companies quoted in Nigerian stock exchange. Data collected were analyzed using correlation regression and Analysis of variance (ANOVA). The result of the study reveals that companies examined contributed infinitesimal amount of their gross earnings to social responsibility. Bessong and Tapang (2012) examine the influence of social responsibility cost on the profitability of Nigerian banks. The study uses exploratory research design and data were collected from five Nigerian banks through secondary sources and analyzed using the Ordinary Least Square (OLS) method. The study reveals that there is a negative influence between social and pollution cost on profitability.
Abdulrahman (2013) examines the influence of corporate social responsibility on profit after tax of some selected deposit money banks in Nigeria. The study uses secondary source of data from annual reports of some selected banks, and through fact books of Nigerian Stock
Exchange (NSE) for the period of the study (2006-2010) by means of content analysis. The study uses regression and correlational analysis in interpreting the result of the formulated hypothesis. The result shows that there is weak positive relationship between CSR and PAT.
Odetayo, Adeyemi and Sajuyigbe (2014) empirically investigate the nexus between corporate social responsibility and profitability of Nigerian banks. Data were collected from annual reports of sampled six banks, for the period of 10 years (2003–2012). Simple regression analysis was employed as a statistical technique to analyze data collected using STATA 11. The regression results reveal that there is a significant relationship between expenditure on corporate social responsibility and profitability of Nigerian banks.
Also, Folajin, Ibitoye and Dunsin (2014) investigate the impact of corporate social responsibility on bank profitability with particular reference to United Bank for Africa (UBA) Plc. The study uses annual reports of United Bank for Africa (UBA) Plc. Data used include corporate social responsibility expenditure and profit after tax for the period of 2006-2012. The data was used to construct ordinary least square (OLS) regression model, which was analyzed using SPSS. Result shows that corporate social responsibility spending has short term inverse effect on Net Profit but in the long run it will provide better returns.
Maisaje (2015) examines the impact of corporate social responsibility on the financial performance of financial institutions in Nigeria. The study uses panel data from financial institutions over a period of 10 years covering 2005 – 2014. Two measures of financial performance were used: return on asset and net profit margin and three measures of corporate social responsibility were used: community CSR, human resource management and charitable contributions. The study finds positive relationship between CSR and financial performance.
While the two measures of financial performance adopted by the study are consistent with extant literature, the three measures of CSR adopted by the study call for further investigation of literature that support them.
Iya, Magaji and Bawuro (2015) examine the impact of corporate social responsibility expenditure on the performance of First Bank Nigeria Plc covering 2001 to 2014. Data for the study was sourced secondarily, through first bank pamphlets and annual reports. Ordinary Least Square Technique (OLS), Augmented Dickey Fuller Technique (ADF), Breusch-Godfrey serial correlation LM test and Breusch-Pagan-Godfrey Heteroskedasticity test and Pairwise Granger Causality test were employed in the analysis of the data. The results of OLS reveal that increase in corporate social responsibility expenditure raises the performance of First Bank Nigeria Plc. The coefficient of corporate social responsibility expenditure is statistically significant and consistent with the theoretical expectation. The F-statistics value of the study indicates that all the parameters of the model are jointly and statistically significant. The ADF unit root result reveals that all the variables of the model are stationary at 1 per cent and at first difference. The Granger causality result shows that CSR causes the performance of First Bank Nigeria Plc. The serial correlation and heteroskedasticity results reveal that there is no serial correlation and no heteroskedasticity in the data.