Corporate Social Responsibility, Financial Performance, and Market Performance: Evidence from Indonesian Consumer Goods Industry

Transcription

1 Corporate Social Responsibility, Financial Performance, and Market Performance: Evidence from Indonesian Consumer Goods Industry Evelyn Setiawan 1 and Tjiang, Gupita Janet 2 After more than ten years great deal of attention about corporate social responsibility, there still a fallacy that such social issue is only just additional cost that do not provide financial benefits for the company. The objective of this study is to give empirical findings about the relationship between corporate social responsibility, financial performance, and market performance. This study uses the sample of consumer goods companies in the Indonesian Stock Exchange during The analysis is completed by interviewing consumers, investors, and stock analysts from financial institution in Surabaya, Indonesia. Statistical results of this study show that corporate social responsibility leads increase of financial performance, but have no significant effect to market performance. Corporate social responsibility will build consumers trust about the products and will encourage them to be loyal consumers. However, investor and stock analyst state that corporate social responsibility is a long term social investment that does not have a significant effect to the investment decision. In addition, most of the companies in the Indonesian consumer goods industry have a good financial performance, so that the stock prices remain constant. Keyword: Corporate Social Responsibility, financial performance, market performance Field or Track of Research: Accounting Introduction A shift on society s level of social and environmental awareness created a demand for corporate social responsibility CSR (Elijido-Ten, 2004). Product safety becomes one of the important factors that determine consumer purchasing decisions. Employee welfare guarantee and good working conditions are considerations for high qualified employees in choosing their work place. Furthermore, market s opinions about the companies are depending on companies attitude toward its society. In other words, concurrently, companies are under increasing pressure to behave in socially responsible ways (Mohr et al., 2001). Nevertheless, the extent to which CSR can give a potential benefit to the company remains a matter of considerable debate. Many companies still argue that CSR strategies unnecessarily raise their costs, thus creating competitive disadvantage vis-àvis competitors (Jensen, 2002). Evelyn Setiawan 1 Lecturer, Department of Accounting, Pelita Harapan University of Surabaya evelyn.setiawan@yahoo.com Tjiang, Gupita Janet 2 Student, Department of Accounting, Pelita Harapan University of Surabaya janet.tjiang@hotmail.com

2 CSR investments are costly and moreover the potential financial benefits will be gained in the long term, if they occur at all (Henderson, 2002). The other suggested that employing valuable company resources for social activities results in significant managerial benefits rather than financial benefits to shareholders (Brammer and Millington, 2008). In this case, it is possible to have agency costs deriving from conflicts between managers and shareholder. Managers seem to have an incentive to increase investments in CSR because a favorable CSR rating can enhance their reputation (Barnea and Rubin, 2010). In contrary, a number of studies find that enhanced social performance may lead to better marketing of products and services (Fombrun, 1996), higher quality employees (Greening and Turban, 2000), the creation of unforeseen opportunities (Fombrun et al., 2000), and it may even lead to reduce the level of waste within productive processes (Konar and Cohen, 2001). Woodward et al. (2001) find CSR measures that help to improve the cost structure of an enterprise, but Welford (2003) argues that only some aspects of CSR strategies might reduce costs. Porter and Kramer (2006) state that CSR can be much more than a cost, a constraint or a charitable deed it can be a source of opportunity, innovation and competitive advantage. The objective of this study is to presents some empirical findings about the benefit of CSR implementation to financial and market performance of Indonesian Consumer Goods Industry. The analysis is based on descriptive statistics of the data and model regression. Therefore, this study is completed by interviewing stock analyst, investor, and consumer to understand their opinion about CSR. With all of these analyses, this paper will give more comprehensive view about the importance of CSR implementation and CSR disclosure in the company. The chosen industry for the objective of this paper is the Indonesian consumer goods industry. This sector is categorized as a high profile industry or industry with consumer visibility, a high level of political risk, or concentrated intense competition (Roberts, 1992). Companies in high profile industry are likely to disclose more CSR information and to employ strategies relating to changing public perceptions and expectations and deflecting attention (Cuganesan et al., 2007). The analysis is limited to the reaction of consumers and shareholder about company s CSR activities. The rest of the paper will be in the following order. Section two is a literature review. The third section describes about the model, data and methodology used in this paper. Section four provides details the analysis results. Finally, section five present the conclusion, originality and timeliness of this study. Literature Review Corporate Social Responsibility (CSR) may be described as an approach to decision making which encompasses both social and environmental factors (Uadiale and Fagbemi, 2011). CSR means that companies do not only have one objective, profitability, but that they also have objectives of adding environmental and social value

3 to society (Mirfazli, 2008). The three dimensions (economic, environmental and social aspects) are usually called the triple bottom line. CSR is an application of several classical economics theories. The stakeholder theory state that effective management of stakeholder relationships, the fundamental blocks of CSR, may also result in better financial performance (Ioannou and Serafeim, 2010). A number of studies within the resource-based view of the companies argue for the mechanisms through which socially responsible behavior may lead to competitive advantage (debakker and Nijhof, 2002; Hockerts, 2003; Branco and Rodrigues, 2006). CSR may function in similar ways as advertising does, by increasing overall demand for products and services and/or by reducing consumer price sensitivity (Sen and Bhattacharya, 2004). CSR branding can draw consumers away from competitors and thereby improve profitability (Brine et al, 2007). CSR can also attract socially conscious consumers (Hillman and Keim, 2001). In addition, CSR strategies may also lead to better company s performance by protecting and enhancing company reputation (Fombrun, 2005; Freeman et al., 2007). Tuppen (2004) show that CSR related issues are important drivers of corporate image and reputation, which are major determinants of consumer satisfaction. Longo et al. (2005) report that the Italian surveyed expected consumer loyalty to be a positive result of their CSR engagement. The competitive advantages of CSR from the consumer perspective will evolve as consumer demand evolves. Positive reputations and consumer satisfaction often linked to positive financial returns (Uadiale and Fagbemi, 2011). Satisfied consumer tends to have intensive purchase behavior and also continue in future in shape of consumer retention (Ali et al., 2010). This is the important key for gaining sustainable sales revenues and business profits. There are a number of studies that examine the relationship between CSR and company s financial performance. These studies adopt different methodologies for measuring CSR and financial performance, and present quite different results. Meijer and Schuyt (2005) analyze the behavior of Dutch consumers and find that the corporate social performance of producers does not motivate consumers to buy a product. The same result is obtained from the study in cellular industry of Pakistan (Ali et al, 2010). There is no significant relationship between awareness of CSR activities, consumer satisfaction, purchase intention and consumer retention. Brine et al., 2007 examines the relationship between the adoption of CSR and the financial performance across the top 300 Australian listed companies for the 2005 financial year. The study use return on assets, return on equity and return on sales to evaluate the financial performance of each company. The preliminary results revealed no statistically significant relationship between CSR and financial performance. Saleh et al. (2007) found positive relationship between CSR actions disclosure and company performance in the short run. Uadiale and Fagbemi (2011) examine the impact of CSR activities on financial performance measured with Return on Equity (ROE) and Return on Assets (ROA) in Nigerian companies. The results show that CSR has a positive and significant relationship with the financial performance measures.

4 H1: CSR activities will effect on company s financial performance The impact of CSR on capital market performance and shareholder wealth reveals contrasted results. Since stock prices are an indicator for the general economic performance of corporations, they should, under the assumption of efficient capital markets, also reflect the discounted value of CSR practices. The investment community is increasingly viewing CSR as akin to long-term risk management and good governance practices (Brine et al., 2007). Higher company s sales revenue and profit or for instance company financial performance will lead to better market response and higher stock price. Therefore, other opinion says that CSR seems to be more related to accounting measures of financial performance than capital markets measures (Cellier and Chollet, 2010). Babalola (2012) predicts three possible relations between CSR and company financial profitability. The first is neutral impact (such as Schröder, 2007). All companies, CSR complying as well as non- CSR complying, have the same rate of expected return and face the same cost of equity capital. This reasoning is in line with risk-return paradigm where only risk factors are priced in the market. The second is positive impact (such as Ziegler et al., 2007). If the risk associated to CSR compliance is correctly priced by the market, the same risk-return paradigm would imply a negative relation between CSR performance and financial performance. Companies which actively account for the CSR risk factor are seen as less risky investments relative to the companies that ignore it. The third view is negative impact (such as Wright and Ferris, 1997). The compliance with CSR principles is not efficiently priced by market participants. A positive (negative) relation follows depending on the sign of the inefficiency. Size and risk have a fundamental role in the relation between company performance and CSR (Brine et al., 2007). There is some evidence that smaller companies are less committed in socially responsible behaviors. Besides, the management s risk tolerance or attitude influences the decisions in terms of CSR activities, due to the effects that they can produce on the management reputation. The company debt level is usually considered as a proxy of management s risk tolerance. Risk is also an important element influencing the stock price (Fiori et al, 2007). Leverage represents an enterprise risk that could affect the company s financial performance in the future (Rahmawati and Dianita, 2011). Fiori et al. (2007) investigate the impact of voluntary disclosure about CSR on stock prices of Italian listed companies over a period of The results show that the disclosure about some CSR policies (especially those referred to employees) leads to higher stock prices because of the prevalence of a good perception of the market. Ioannou and Serafeim (2010) investigate the impact of CSR strategies on security analysts recommendations, and find that CSR strategies can affect value creation in public equity markets through analyst recommendations. Orlitzky et al. (2003) find that the link between CSR and financial performance is positive but small, and in any case is not negative. Margolis et al. (2007) conclude that financial markets react positively to CSR disclosures, although link is not strong.

5 H2 : CSR activities will effect on market performance METHODOLOGY AND RESEARCH DESIGN This study examines the relationship between company s financial performance, market performance and CSR across the consumer goods companies listed in the Indonesian Stock Exchange (IDX) in A total of 12 companies remained in the sample after companies with missing data are eliminated. Regression analysis, utilizing the ordinary least squares method, are use to test the first and second hypothesizes. The independent variable is CSR. The dependent variable for the first hypotheses is financial performance (ROI), and for the second hypotheses is market performance (stock return) controlling for size and leverage. CSR measurement is based on the voluntary disclosure index constructed using the annual report of the sampled companies. Content analysis technique is used to trace of sentences of each component of the CSR disclosed in annual reports of companies in the sample. The regression model is represented as follows: ROI = α + β 1 CSR + e RET = α + β 1 CSR + β 2 SIZE + β 3 LEV + e Where : ROI = Return on investment CSR = Voluntary disclosure index RET = Company stock return SIZE = Company size, measured by Ln(Total Sales) LEV = Leverage, measured by ratio Total debt to Total Equity e = error term In the second stage of data collection, interviews with investor, stock analyst, and consumer are conducted. This method is useful to assess their opinion about CSR implementation in Consumer Goods industry. The discussion proceeds in three main sections. The first section refers to their understanding about CSR. The second section examines factors that affecting their investing behavior. The third section considers how CSR can affect their investing decision. DISCUSSION OF FINDINGS Table 1 summarizes the descriptive statistics of variables used in this study. Table 2, table 3, and table 4 show the descriptive statistics of each dependent and independent variables. There are 48 data (N), which minimum value, maximum value, means, and standard deviations as mention on the tables. CSR variable is relatively constant, and tend to increase. ROI variable show an increasing value from year to year. In contrast, RET variable seem to be unstable and tend to decrease.

6 Table 1 Descriptive Statistics for All Variables Variable N Minimum Maximum Mean Std. Deviation CSR R O I RET LEV SIZE Table 2 Descriptive Statistics for CSR Variables Year N Minimum Maximum Mean Std. Deviation Table 3 Descriptive Statistics for ROI Variables Year N Minimum Maximum Mean Std. Deviation Table 4 Descriptive Statistics for RET Variables Year N Minimum Maximum Mean Std. Deviation Table 5 and table 6 shows the test results of assumption of classical linear regression model. Since the probability associated with the test of normality is more than the level of significance (p-value = 0.05), it is conclude that all of the data is normally distributed. VIF (Variance Inflation Factor) is used by this study to detect multicollinearity problems. VIF for each of variable is smaller than 5, indicating that multicollinearity problems do not exist. The empirical analysis has also indicated that autocorrelation problems do not exist. Heteroscedasticity is tested using Scatterplot diagram and indicating that no heteroscedasticity problem in all the data sample. Table 5 Assumptions of Classical Linear Regression Test Results For Hipotheses 1 Variabel Normality Multicollinearity Autocorrelation K-S Tolerance VIF D-W ROI CSR Res Sig 0.902

7 Table 6 Assumptions of Classical Linear Regression Test Results For Hipotheses 2 Variabel Normality Multicollinearity Autocorrelation K-S Tolerance VIF D-W RET CSR LEV SIZE Res Sig Table 7 presents summary of regression model result. The value of R 2 for both model are and respectively. The R 2 indicates the explanatory power of the independent variables. This means that 15.2% of the variation in ROI is explained by the CSR variables, and 10.1% of the variation in RET is explained by the CSR, LEV, and SIZE variables. The R 2 value as revealed by the result is quite low which means that more than 80% of the variation in the dependent variable is unexplained by the model, denoting a weak relationship between the dependent and independent variable. The F-ratio for both model are significant. Model 1 is significant at p < 0.005, and model 2 is significant at p < This means that there is significant evidence to infer that at least one of the explanatory variables is linearly related to dependent variable and the model seems to have some validity (Uadiale and Fagbemi, 2011). CSR variable in model 1 is significant at p-value < 0.05, but in model 2 is not. The control variable, SIZE and LEV, are also significant at p-values < It can be deduced from the results that CSR have a significant effect to the company s financial performance but have no significant effect to the market performance. Both of the control variable, size and leverage, have a significant effect to the market performance. Table 7 The Empirical Results Model Variable Sig Sig Adj t test F test R 2 ROI = CSR + e CSR 0.004** 0.004** RET = CSR SIZE LEV + e CSR 0.338** 0.054** SIZE 0.048** LEV 0.017** ** significant at α = 5% ** significant at α = 10% There is a positive relationship between a company s CSR actions and consumers reactions to the companies and their product (Bhattacharya and Sen, 2004). Companies with good social responsibility will deliver a good quality product at a fair price to their consumers (Lantos, 2001; Netterstrom, 2009). In the consumer side, they will perceive companies that actively support CSR as honest, more reliable and produce high-quality products (McWilliams and Siegel, 2001). A 1994 study by Walker Research and Analysis found that 88% of consumers claimed that they are much or somewhat more likely to buy from a company which is socially responsible and a good corporate citizen if quality, service, and price are all comparable to those of competitors, while 92% say they will be much or somewhat less likely to buy from a company that lacks social responsibility (Smith, 2001, p. 155). Similarly,

8 Edelman (2004) show that quality products and services is the most important factor on stakeholders perspective of nine Asia-pacific countries. The interviewees of this study also cited similar opinion. They say that as consumer, CSR program is one of their considerations to choose a product or service. Even some of them say that they be willing to pay more for socially responsible products. They believe the company will provide products according to safety standards and regulations. In addition, they reported that if the price and quality of two products are the same, they will buy from a company that has a socially responsible reputation. CSR influences their perception about the company and their product. It has advertising and branding function will effect purchasing decision. Consumer trust leads to consumer satisfaction (Peloza, 2009) and consumer loyalty (Vlachos, 2009). Consumer will show their support to company s social program with buy the product repeatedly. Consumer trust also enhances company s reputation (Lantos, 2001). These all benefits will lead to improvement in business sales, which can be translated into a financial value, such as return on investment. In other word, it can be said that better company s financial performance is the result of higher CSR. A good CSR disclosure and the increasing of company financial performance are positively related to the increase of stock prices (Fiori et al., 2007; Hillman and Keim, 2001). CSR is such a social investment that delivers benefits to the company. Nevertheless, the benefits of this investment may not immediately show up on a company s financial statements (Lantos, 2001). In short-run, CSR actions may be view as expense but in fact it is an investment which will yield additional cash flows for the corporations in the long term perspective (Ali et al, 2010). The investors and stock analyst interviewed in this study state that CSR is not a consideration for their investment decision. They argue that CSR will have no effect on their investment, especially in the short term. The most important things to be considered are company s financial performance and price per earnings ratio. As Sahoo (2011) says, stockholders only have one gain that is to maximize their financial gain. If the managers involvements in socially responsible actions reduce the return to shareholders, that is not CSR, rather it is socially irresponsible business. The period of this study is four years, which can be considered as a short term period. Therefore, CSR have no effect to company s market performance in this case, stock return. Furthermore, most of the companies in the consumer goods industry have a good financial performance. So investors tend to hold their stock in these companies, and make the stock prices remain constant. CONCLUSION The study has analyzed the effect of CSR activities to company s financial and market performance. This study is conducted in consumer goods industry of Indonesia, which is categorized as a high profile industry, for period The statistical result shows that CSR have a positively significant effect to company financial performance. It means that CSR activities lead to better consumers perception about company s product, hence increase consumers satisfaction and consumers loyalty. This condition will improve sales and company s financial performance. On the contrary, the regression analysis does not reveal any statistically significant relationship between the adoption of CSR and market performance. CSR is a long term

9 social investment that does not have a significant effect to the investment decision. In addition, most of the companies in the consumer goods industry have a good financial performance, so that the stock prices remain constant. The findings of this study are become a useful input for companies in the consumer goods industry to formulate strategies which can better fit consumer needs in Indonesia. For investor and stock analyst, the result of this study can be used as a recommendation to make an investment decision. The study will also contribute towards literature on CSR, stakeholder theories and financial fields. Essentially, this study estimate how CSR strategies are being perceived and evaluated by one of the companies most important stakeholders, the consumers. The main limitation of this analysis is the small number of companies in the sample due to few CSR reports available. Nevertheless, along with greater attention to CSR issues, the sample can be enlarged soon. The further study can be conducted in another industry sector, especially in the industry which has unique characteristics toward its social responsibilities. Some of the results are not in the predicted direction. The further study may use other variables influencing companies stock price in order to improve the regression model. Based on the theory and this study result, the further study can also use companies financial performance variable (such as ROI) as intervening variable in the CSR and market performance relationship. REFERENCES Ali, I., Rehman, K.U., Yilmaz, A.K., Nazir, S., and Ali, J.F., Effects of Corporate Social Responsibility on Consumer Retention in Cellular industry of Pakistan, African Journal of Business Management, vol. 4(4), pp Babalola, Y.A., The Impact of Corporate Social Responsibility on Firms Profitability in Nigeria, European Journal of Economics, Finance and Administrative Sciences Issue 45. Barnea A. and Rubin A., 2010 Corporate Social Responsibility As A Conflict Between Shareholders, Journal of Business Ethics, vol. 97, pp Bhattacharya, C.B. and Sen, S., Doing Better At Doing Good: When, Why, and How Consumers Respond to Corporate Social initiatives, California Management Review, vol. 47, no. 1, pp Brammer, S. and Millington, A., Does It Pay to Be Different? An Analysis of The Relationship Between Corporate Social and Financial Performance, Strategic Management Journal, 29(12): Branco, M.C. and Rodrigues, L.L., Corporate Social Responsibility and Resource Based Perspectives, Journal of Business Ethics, 69(2): Brine, M., Brown, R. and Hackett, G., Corporate Social Responsibility and Financial Performance in the Australian Context, Economic Round-up, pp Cellier, A. and Chollet, P., The Impact of Corporate Social Responsibility on Stock Prices: An Event Study of Vigeo Rating Announcement, Working Paper. Universite Paris-Est. Cuganesan, S., Ward, L. and Guthrie, J., 2007, Legitimacy Theory: A Story of Reporting Social and Environmental Matters within the Australian Food and Beverage Industry Presented to the 5th Asian Pacific Interdisciplinary Research

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