The Business Case for Corporate Social Responsibility Philipp Schreck The Business Case for Corporate Social Responsibility Understanding and Measuring Economic Impacts of Corporate Social Performance Physica-Verlag A Springer Company Dr. Philipp Schreck Institute of Production Management and Managerial Accounting Ludwig-Maximilians-University Munich(cid:13)(cid:10) Ludwigstr. 28 80539 Munich Germany [email protected] ISBN 978-3-7908-2117-8 e-ISBN 978-3-7908-2118-5 DOI: 10.1007/978-3-7908-2118-5 Contributions to Management Science ISSN 1431-1941 Library of Congress Control Number: 2008940118 D19 © 2009 Physica-Verlag Heidelberg This work is subject to copyright. All rights are reserved, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilm or in any other way, and storage in data banks. Duplication of this publication or parts thereof is permitted only under the provisions of the German Copyright Law of September 9, 1965, in its current version, and permissions for use must always be obtained from Physica-Verlag. Violations are liable for prosecution under the German Copyright Law. The use of general descriptive names, registered names, trademarks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. Cover design: SPi Publisher Services Printed on acid-free paper 9 8 7 6 5 4 3 2 1 springer.com Foreword Twenty years after the end of communism, problems of business ethics in capi- talism have become increasingly important. Consequently, business ethics and Corporate Social Responsibility (CSR) have developed into highly debated and well-researchedtopicsinGermanyaswellasinternationally.Muchofthisworkhas beenessentiallynormative.Morerecently,descriptiveandempiricalquestionshave gained increasing attention. In particular, researchers have sought empirical evi- denceforabusinesscaseforCSR,i.e.thenotionthatthereisapositiverelationship between corporatesocial and financialperformance.Previousempiricalinvestiga- tions have failed to find a clear answer to that question. Mr. Schreck adds to this veryexcitingfieldofresearchbypresentingandapplyinghisownapproachtosuch an empiricalinvestigation.Inparticular,at leastfourelementsofhis approachare worthmentioning: 1. The author shows why previous investigations found contradictory results by assumingadirectrelationshipbetweencorporatesocialperformanceandprofit. Incontrasttothat,hedevelopsabroaderframeofreferencewhichincludesdif- ferent and distinct components of CSR as well as several determinants of its relationtofinancialperformance. 2. Hisempiricalinvestigation’sresultsarebasedonanewdatabase.Dataaredrawn from oekom research AG, which have not been used for scientifically rigorous studiestillnow.Theworkbringsforwardargumentstoprovethatthesearemore suitablethanthoseofothercomparabledatabanks. 3. Coupledtoaconceptuallysoundstudy,theauthorusesawelldevelopedecono- metricapproach.Thisespeciallyappliestohiseffortstoaccountforthewidely neglected problem of endogeneity due to simultaneous causality between the socialandfinancialperformanceoffirms. 4. The empiricalinvestigationproducesseveralimportantresults. Evidenceis ad- ducedthatonecannotsupposeagenericpositiverelationbetweenCSRgenerally andprofits.ButthereisevidenceofsucharelationforCSR’sindividualcompo- nents.Forexample,considercorporategovernmentandbusinessethicsaswellas environmentalmanagement.Anotherfindingisthatincontrasttowhathasoften v vi Foreword been assumed from a neoclassical perspective, there is no significant negative relationbetweenCSRandprofit. Itislikelythatthediscussiononcapitalismandethicswillcontinue.Inmyview, thismustnotonlybedoneintermsofnormativearguments,butshouldbegrounded on empirical knowledge.Thereforethe results of this study are an importantbase forpracticeandfurtherresearch. Mu¨nchen Prof.Dr.Dr.h.c.Hans-UlrichKu¨pper 2008 Preface Criticisms of the notion that companies should live up to and act in accordance with their social responsibilities, are probably as old as the idea itself. For a long time, economists in particular have fiercely argued against the concept of Corpo- rate Social Responsibility (CSR) and warned that it would endangerthe capitalist marketsystem as a whole. Consideringthishostile stance taken bysome scholars in Germany as well as internationally, it is quite astonishing how business ethics in generaland CSR in particular have managed to enter mainstream management research. Compared to international developmentsin business ethics, the German discussionhasmainlyoccupieditselfwithnormativequestionssuchaswhetherand howcompaniescouldbeexpectedtoadheretocertainethicalstandards,orwhether businessadministrationasanacademicdisciplineshouldconsidersuchquestionsat all.Conversely,descriptiveresearchquestionshavenotbeenthatpopularinthepast andhave onlyslowly started to forma legitimate partofbusiness ethicsand CSR researchinGermany. I have for a long time been very impressed by the sophisticated normative businessethicstheoriesdevelopedincontinuationofthelong-standingGermantra- dition of ethical reasoning in philosophy,economics and business administration. Nonetheless,descriptiveanalysisisveryimportantfornormativetheories,evenand especially in the case of ethics (without necessarily being instrumental): norma- tive theoryin certain casesneedsto knowhowthings actuallywork, beforeitcan determine how things ought to work. This doctoral thesis intends to contribute to anunderstandingofhowCSRworks.Itdoessobystartingoutwithaverysimple question(which,alas,doesnotstaythatsimple):IsthereabusinesscaseforCSR? Afterwritingthisbook,IwishIcouldsay:CSRsimplypays!Asonemightguess, itisnotthateasy.Ontheonehand,thisisbadnewsbecause,ifthestorywerethat simple,therewouldbenoreasontoworryascompanies,profit-seekingastheyare, would just act in line with societal expectations. On the other hand, this is good news,asitleavesroomformanymorebooksandarticleswithinthisveryexciting fieldofpositiveresearch. ThismonographwasacceptedasadoctoralthesisbytheMunichSchoolofMan- agementattheLudwig-Maximilians-University.Itcameintobeingduringmywork vii viii Preface asaresearchandteachingassistantattheInstituteofOperationsManagementand ManagerialAccounting(IPC).Ioweagreatdealtomanypeopleattheinstitutewho providedtheperfectenvironmentformetostart,advanceandcompletethisproject. Firstandforemost,Iwouldliketoexpressmydeepgratitudetoandrespectformy doctoralsupervisorProf.Dr.Dr.h.c.Hans-UlrichKu¨pper,whoguidedmethrough the sometimes very demanding process of overseeing a project such as this. He was always willing to discuss critically my thoughtsat any stage of development, without curtailing too much my freedom to follow my personal preferences. His enthusiasmforethicalreasoning,hisexperienceandhissupport,especiallyduring themorecriticalperiods,wereofimmensevaluetome.BeyondProf.Ku¨pper’spro- fessionalsupervision,hefamiliarisedmewithmanyacademicandpersonalvirtues, mostlythroughactionsratherthanwords.Thisalsoappliestoourresearchseminars (includingsome very fine skiing and hiking trips), which formedthe ideal setting forthediscussionofallourworkinprogress.Professionallyandpersonally,Ihave benefitedtremendouslyfrommyyearsattheIPC. I am also indebted to the many colleagues that I have had the chance to work with at the IPC. I would first like to thank Prof. Dr. Gunther Friedl and Prof. Dr. Burkhard Pedell for their various comments and words of advice, which were of real help to me. My countless professional, and often personal and controversial, discussionswithDr.KaiSandnerhelpedmemorethanoncetoadvancethisthesis. MatthiasNotzdeservesmanythanksforhisabilitytospreadenthusiasmattheIPC andforcountlesshelpfulconversations.SpecialthanksalsogotoWolfgangGo¨tzfor hisunequalledSimpsonsexpertise,andformanylegendarywritingsessionsinmy kitchen.Finally,I owemy colleaguesClaudia Gaier,MarionRittmann,Christiane Romeo and Dr. Christian Lohmann thanks for the special atmosphere at the IPC; thanksalsofortheladies’inexhaustiblecandystocks. I also wish to thankProf. Dr. Ralf Elsas, the secondrefereeof this thesis, who was always willing to provide me with very informed and helpful feedback and who repeatedlyprovedthat it onlytakes a few minutesto ask questionsthat keep onebusyformonths.Hiscommentsandideascontributedagreatdealtothisstudy. At Prof. Elsas’ Institute of Finance and Banking, I owe thanks to Nadine Hadder and Christoph Breig as well, for helping me in my countless attempts to access their many useful databases. Furthermore, this thesis could not have been com- pletedwithoutthegeneroussupportofMatthiasBo¨nning,headofresearchatoekom researchAG.Iowehimadebtofgratitudeforallowingmetheuseofthecompany’s core asset, its CSR ratings, and for being patientenoughto answer eventhe most detailed(andsometimeshair-splitting)questionsonthedata’sstructureandnature. My personal background has always formed the most important basis for my development,includingthatofmyprofessionalcareer;myfamilyandfriendsthere- foredeservemywarmestthanks.Thisfirstappliestomyparentsandtomybrother, Eric.ItisimpossibletoexpressthegratitudethatIfeeltowardsmymotherandfather who havealways lovedand supportedme in the pursuitof whateveridea came to mymind.Ialsowishtoexpressmygratitudetomygrandmother,VeraSchreck,for her continuous support and interest, and to my grandfather, Ludovic Farcas, who sadly passed away this year but had always been an example to me through his Preface ix happiness, confidence and love of life. Very special thanksgo to my best friends, ofwhomIcannameonlyafewbutwhoallhelpedmesomuchthroughoutthelast fewyears,mostlywithoutrealisingit.IoweagreatdealtoJensforhisintellectual inputandourmanysharedexperiences,aswellascountlessandinvaluableadvice andnargila-sessions;MaxforRock‘n’Rollandforbeingatrulyexceptionalfriend; Miki for her unrivalled talent to unite chaos and clear thought;and Oliver for the longestandmostcontinuousfriendshipIpossess. Last butnotleast I wish to expressmydeepgratitudeto my girlfriend,Ursula, not only for her editorial contribution but most especially for her notoriously good humour, which formed an important counterpoint to many rather challeng- ingmoments,especiallyintheclosingstagesofthisthesis.Iwilldomybesttobe ofequalhelptoyouinthecomingmonths. Mu¨nchen PhilippSchreck 2008 Contents 1 TheEconomicImpactofCorporateSocialResponsibility........... 1 1.1 RelevanceofMeasuringtheImpactofCSR..................... 1 1.2 ResearchAimandStructureoftheThesis ...................... 2 2 AFrameworkforAnalysingEconomicImpactsofCorporateSocial Performance................................................... 5 2.1 ConceptsofCorporateSocialIssues:FromCSRtoCSP .......... 5 2.1.1 ResponsibilityasaMulti-RelationalConcept............. 6 2.1.2 TheObjectofResponsibility:WhatareCompaniesHeld Responsiblefor?..................................... 7 2.1.3 The Authority of Responsibility: By whom are CorporationsHeldResponsible?........................ 15 2.1.4 ResultsforFurtherAnalysis ........................... 16 2.2 Measuring Economic Impacts: Empirical Studies ontheCSP/CFP-Link ....................................... 17 2.2.1 CorporateSocialPerformance:Remarks onRelatedTerms .................................... 17 2.2.2 The Empirical Investigationof the CSP/CFP-Link asanImportantTopicinManagementResearch........... 18 2.2.3 EmpiricalStudies on the CSP/CFP-Link: Different MeasuresofCSP .................................... 19 2.3 AFrameworkforanEmpiricalAnalysisofCSP................. 25 2.3.1 DecomposingtheConstructofCSP..................... 25 2.3.2 ExplainingCSP:WhencanSuperiorSocialPerformance beExpected?........................................ 27 2.3.3 InteractionEffects:UnderWhatConditionsShouldaLink toFinancialPerformanceExist?........................ 28 2.3.4 MediatingEffects:WhyShouldaCSP/CFP-LinkExist? ... 31 xi xii Contents 3 AnEmpiricalStudyonCorporateSocialPerformance ............. 33 3.1 SampleDescription......................................... 34 3.1.1 DataonCorporateSocialPerformance .................. 34 3.1.2 FinancialPerformance:Tobin’sQ ...................... 46 3.1.3 ControlVariablesandReturnonEquity ................. 47 3.2 DeterminantsofCorporateSocialPerformance.................. 49 3.2.1 ModelSpecificationandHypotheses.................... 49 3.2.2 BivariateAnalysis ................................... 53 3.2.3 ProbitRegression:ResultsandDiscussion ............... 54 3.3 EmpiricalEvidenceforaDifferentiatedCSP/CFP-Link........... 56 3.3.1 Hypotheses ......................................... 56 3.3.2 Cross-SectionalRegressionAnalysis.................... 68 3.3.3 RobustnessoftheModel .............................. 74 3.3.4 Conclusions......................................... 85 3.4 AnAnalysisofChangesinCSPandCFP ...................... 86 3.4.1 MotivationandMethodofAnalysis..................... 86 3.4.2 TestResultsfortheAnalysisofChangesinCSPandCFP .. 88 3.4.3 SignificanceoftheResults ............................ 90 3.5 TestingtheHypothesisofDecreasingMarginalEffectsofCSP .... 91 3.5.1 TheHypothesisofDecreasingMarginalEffectsofCSR Investments......................................... 91 3.5.2 EmpiricalTest....................................... 93 3.5.3 TestResultsandDiscussion ........................... 95 4 ConclusionsConcerningEmpiricalEvidencefortheBusinessCase forCorporateSocialResponsibility .............................. 99 4.1 ConclusionsandLimitationstotheStudy ...................... 99 4.2 FurtherResearchandImplicationsforManagementandInvestors..101 Appendix..........................................................103 References.........................................................105 Index .............................................................123