EXAMINING CORPORATE SOCIAL RESPONSIBILITY AS A RISK MANAGEMENT STRATEGY
CHAPTER TWO
LITERATURE REVIEW
2.1 Conceptual Framework
2.1.1 Risk
The thematic of risk management is not new, but it is recent and not very studied in logistic chain (or supply chain), the first work that explicitly addresses for the risk management in the supply chain dating from 2003. The risk is present in many activities including the logistic in which one consequence of the risk that it is increasing and affect around all the logistic networks, therefore the managers need to make a great deal of effort to identify and manage risks. The meaning of risk can be differ from one person to another depending on their point of views, attitudes and experience what makes the study of risk more and more complex.
Aven, proposed a basic risk theory based on brief selected review that over the last 15-20 years and he presented the evolution of risk concept in Oxford English Dictionary since 1679, we think that definition followed the environment
evolution. Veland and Ave, proposed the same based classification of risk given by Aven and they used theses definition to discuss how the risk perspectives influence the risk communication between the decision-makers, the risk analysts, experts and lay people. Indeed, for Karimiazari et al, engineers, designers and contactors view risk from the technological perspective, lenders and developers tend to view it from the economic and financial side. So, the question is: what is a risk? The first answer, the risk is the probability that an event or action may adversely affect the organization. For Mazouni, the risk is an intrinsic property of any decision, it is measured by a combination of several factors (severity, occurrence, exposure to, etc.), although it is generally limited to two factors: severity and frequency of occurrence of a potentially damaging accidents that incorporate some exposure factors. In the BS OHSAS 18001 (British Standard Occupational Health and Safety Assessment Series), the risk is a combination of the likelihood of an occurrence of a hazardous event or exposures to danger and the severity that may be caused by the event or exposure. In this context (BS OHSAS 18001), the concept of risk asks two oriented question:
- What is the probability that a particular hazardous event or exposure will actually occur in the future?
- How severe would the impact on health and safety be if the hazardous event or exposure actually occurred? The risk can be defined as an uncertain event or set of circumstance which, should it occur, will have an effect on achievement of one or more objectives. For Marhavilas et al, the risk has been considered as the chance that someone or something that is valuated will be adversely affected by the hazard, where the hazard is any unsafe condition or potential source of an undesirable event with potential for harm or damage. For Bakr et al, the word “risk” means that uncertainty can be expressed through probability. We can concluded that the risk is an probabilistic event that can exist and affect the activity of an organization positively (opportunity) or negatively.
2.2 Measurement of risk management
The concept of risk management in the supply chain has developed rapidly over the recent decades and has become very important, we can consider, if we refer on Lavaster et al, that the paper of Jutter et al in 2005 “Supply Chain Risk
Management: outlining an agenda for future research” was the first scientific
researcher in the Supply Chain Risk Management (SCRM), furthermore and
according to Fekete, risk management is an area with conflicting terms, and
there is a widely acknowledged need for a critical reflection of its definition, core
contents, principles and regulation. According to Lavaster et al, the first
definition of SCRM was given by Juttner 2005, “the SCRM is the identification
and management of risk for the supply chain, through a co-ordinate approach
amongst supply chain members, to reduce supply chain vulnerability as a whole”.
The SCRM plays a major role in successfully managing business processes in a
proactive manner.
The most popularly used performance measurement is the accounting based measurement. Returns On Assets (ROA), was widely used as was found in the following studies: Bello (2012), DiGiuli& Kostovetsky (2013), El Mosaid and Boutti (2012), Olayinka & Fagbemi (2012), Uadiale & Fagbemi (2011), Usman &Amran (2015). Returns on assets represent the profitability of the firm with respect to the total assets under the firms control (Hull & Rothenberg, 2008). Return on Equity (ROE) is another accounting measure used in measuring firms „risk management in previous studies such as the work of El Mosaid & Boutti (2012), Meijer & Schuyt (2005), Tsoutsoura (2004), and Uadiale & Fagbemi (2011),. Tobin‟s Q is another accounting measure of firms‟ risk management. It has ability to measure long-term investment and it is calculated by the sum of a firm‟s equity values and its total debt divided by the firm‟s total assets. Tobin‟s Qhas been used in the previous empirical studies such as the work of, Sanda, Mikailu & Garba (2005), Bhagat & Bolton (2008); Oba (2009) and Fodio, Abdissamad & Oba,(2013). Profit after tax (PAT) has been used in the works of Abdulraman (2014);Bolanle, Olarenwaju & Muyideen (2012), Gunu, (2008), Okafor & Oshodin, (2012) and Uwalomwa, Olubukunola & Anijesushola (2011).
2.3 Concept of Corporate Social Responsibility
Corporate Social Responsibility has been a subject of intense controversy and interest in the academic world over recent decades, and scholars have devoted great attention to this issue. The first standpoint on CSR was offered by Bowen (1953) in his Social Responsibilities of the Businessman. Bowen defined CSR as an obligation to pursue appropriate policies, to make appropriate decisions, and to follow those lines of action which are desirable in terms of the objectives and values of our society.
In the 1960s, CSR was increasingly discussed in the managerial context. Davis (1960) asserted that socially responsible business decisions could be justified by a long, complicated process of reasoning as offering an opportunity to bring the company long-run economic gain, thus repaying it for its responsible outlook (Carroll, 1999).However, this viewpoint also aroused criticism. Among other scholars, Friedman, (1970), argued that the only social responsibility of a corporation was to increase its profits. Furthermore, Friedman asserted that the resources allocated to CSR are better spent on increasing company efficiency from a social perspective as well. Although Friedman‟s viewpoint on CSR prevailed in the 1970s, scholars increasingly started to shed light on the multiplicity of responsible business practices. First, Johnson & Greening, (1999) identified specific interest groups with a variety of different needs, stating that “social responsibility in business is the pursuit of socioeconomic goals through the elaboration of social norms in prescribed business roles”. Furthermore, Steiner (1971) acknowledged the interrelationship between business and society at large, referring to social responsibility as a “social contract”. Basically, a social contract can be seen as a set of rights and obligations related to corporate impacts on the welfare of society. According to Wartick and Cochran (1985) a social contract is a binding element between business behavior and society‟s objectives. When the surrounding societal conditions change, the specifics of the social contract may also change.
2.3.1 Environmental Management
In recent times, arguments about the importance of environmental responsibility have been laudable in relation to corporate performance (Deegan, 2002). Firms that undertake Environmental activities can create additional costs and benefits that can ultimately affect a company‟s risk management. The costs include those related to compliance, insurance, on-site waste management, pollution control and future liability. Benefits can be increased revenues from contributing to the resources of firms that later bring competitive advantages and enhance company image (Russo & Fouts, 1997). According to Linde and Porter (1995), when firms follow properly designed environmental standards, these can trigger innovation that may partially or more than fully offset the costs of complying with them. Such innovation can also enhance competitiveness and create advantages over firms in other countries that are not subjected to similar environmental standard. Environment responsibility involves implementing environmental management system, accounting for environmental risk or management of supply chain compliance to so called standard. The supply and development of „green‟ or socially responsible financial product is another means by which a firm can signal its commitment to sustainable development (Scholten, 2009). Samy, Odemilin and Bampton (2010) Posited that the UK companies placed greater importance on environmental activities, waste disposal gas-emission and other related environmental issues through CSR.
2.3.2 Community Development
Corporate Social Responsibility emphasizes community participation by business enterprises. It proposes that both public and private firms have responsibilities to society that extend beyond making profit. It is the obligation of the firm‟s decision makers to make decisions and act in ways that recognize the relationship between the business and the society. It is therefore important for a business to continue in its commitment to behave ethically and contribute to economic development while improving the quality of life of its work force and the surrounding community which can be achieved through the various CSR activities that the business chooses to engage in for the benefit of its stakeholders.
Community development is part of the CSR activities engaged by firms or organizations. Which involve those activities, strategies and how firms conduct their business in a way that is ethical, society friendly and beneficial to communities in terms of development (Roja & Sherina, 2015).Community development responsibility is one of the elements of social responsibility when assessing CSR of an organization. Nejati and Ghasemi (2012) pointed that disclosure of community development points are different ways in which companies can contribute to the betterment of society by integrating societal norms and values in the firm‟s corporate strategy.
Community development initiatives ranges from charity and donations, support for education voluntary programs, support recreational activities and Arts exhibition, support for skill acquisition training to community, support to medical health care services and support for water supply in their business decision (Branco& Rodrigues, 2006).Firms can also obtain legal cost reduction by managing their relationship with the community and with the government.
Therefore, improving firm‟s reputation by increasing CSR can create good relationship and improve external perceptions (Aguilera,Rupp,Williams & Ganapath,2007). When firms engage in socially responsible activities, it has a reciprocal benefit as firms again improve reputation and the society gains from the projects implemented (Achua, 2008 &David, 2012). Chakraborty (2010) defined CSR as commitment to improve community well-being through discretionary business practices and contributions of corporate resources. According to Achua(2008) as cited by Terungwa & Achua (2011), firms need to be socially responsible to earn their reputational capital, which enables them to attract high quality employees, charge higher fees, negotiate better deals, expand their market base, attract more investors and win the public.
2.4 Review of Empirical Studies on CSR and risk management
The search for a link between CSR and risk management is a quest that was begun many years ago and is not yet concluded. During the past years, dozens of studies have examined this relationship. Academics who had previously reviewed the literature exploring the relationship between CSR and risk management had found the studies to be inconclusive: no link between CSR and risk management could be proved or disproved (Orlitzky et al, 2003). According to Barnett and Solomon (2003), despite the intensity of studies directed at it, the relationship between CSR and risk management remains in dispute. Waddock and Graves (1997) found significant positive relationship between an index of CSR as measured by the Kinder Lydenderg and Domini database and performance measures such as ROA (Return on assets). They suggest that the reason why a virtuous circle would exist is because positive stakeholder relationship can reduce the likelihood of difficulty when dealing with groups such as employees, customers, and the community in addition, good social performance and good managerial practice may be related, so this in turn may lead to strong risk management.
Prior research has shown that there is a reverse- causality concern between CSR and risk management. In this regard, it is believed that a firm‟s CSR affects its future performance and a firm‟s history of risk management contributes to its current CSR involvement. McGuire, Sundgren, and Schneewies (1989) find that prior year‟s stock returns and accounting based performance measures are related to current measures of CSR, but that a past record of good social performance does not affect the current risk management of a firm. This sounds incredible and seems a reversal of cause but however finds defense and strong support in the works of (Cho and Pucik (2005) and Xueming and Bhattacharya (2006). However Xueming and Bhattacharya as well as Cho and Pucik (2005) accommodate this reverse causality concern by using ratings of CSR from fortune magazine with a one year lag and as such rendered the reverse-causality bias no longer a concern.
2.5 Theoretical Framework
Different theories have been used by previous researchers to underpin studies in this area. The theories include stakeholder theory, legitimacy theory, strategic theory, agency theory and stewardship theory.
2.5.1 Stakeholder Theory
Stakeholder theory concentrates and focused on particular stakeholders groups. It explains how an organization interacts with these particular groups. The theory holds that business organization must play an active social role in the society in which it operates. Freeman (1984) one of the advocates of stakeholder theory, presented a more positive view of manager‟s support of CSR. He asserts that managers must satisfy a variety of constituents (e.g. investors and shareholders, employees, customers, suppliers, government and local community organizations) who can influence firm outcomes. According to this view, it is not sufficient for managers to focus exclusively on the needs of stockholders, or the owners of the corporation. Stakeholder theory implies that it can be beneficial for the firm to engage in certain CSR activities that non- financial stakeholders perceive to be important, otherwise, these groups might withdraw their support. Stakeholder´s groups vary from firm to firm, as well as the importance of each of them. CSR should begin with identification of stakeholders and follow by finding the strategy how to satisfy and harmonize their expectations.
The Stakeholder theory has two important parts. First, an ethical (normative) part and second managerial (positive) part (Deegan & Unerman 2006). The ethical part as described by Deegan et al. (2006) stated that companies should treat all their stakeholders fairly, regardless of their power. This part deals with the reasons for promoting stakeholder interests even in the absence of any obvious benefit. All groups have intrinsic rights, including the right to information. For example stakeholders have some rights like safe working conditions and fair pay. The managerial part describes that companies are more interested to satisfy the powerful stakeholders (Deegan & Unerman 2006). The demands of the different stakeholders will have an influence on the company disclosures and operations. The managerial branch of the Stakeholder theory explains that companies will rather satisfy the demands of those powerful stakeholders that are essential for their survival.
2.5.2 Legitimacy theory.
Stakeholder theory concentrates and focused on particular stakeholders groups. Legitimacy theory discusses expectations of society in general. Legitimacy theory is one of the most important theories in explaining corporate social reporting (Campbell, 2007). This theory rests on the concept that organizations have a social contract with society (Cormier and Gordon, 2001) and that fulfilling this social contract would provide them legitimacy to operate. One way in which companies can obtain legitimacy is through communicating to their various constituencies. In his research, Campbell (2007) described the evolution of corporate social reporting – measured by the number of pages and the number of words spent on corporate social disclosures in the annual report – within one specific company, namely Marks and Spencer Plc, over a period of 28 years. The author concluded that legitimacy theory can explain only partially, not completely, the evolution of these corporate social disclosures. Due to the fact that the key switching points in the volume of corporate social reporting matched the points of succession of the different chairmen, Campbell (2000) assumed that the company‟s chairmen had an important influence on the volume of this voluntary reporting. However, the influence of the chairman could not be explained by legitimacy theory. Several other studies also tested whether legitimacy theory (Wilmshurst and Frost, 2000; Cormier et al. 2004)or other theories, such as agency theory and stakeholder theory could provide a theoretical framework.