Assessing CSR's Impact on Profitability: Article Review

Introduction

“Social responsibility of business is to increase its profits as long as it stays within the rules of the game” (Friedman 1962). This quote represents the view of renowned economist Milton Friedman. It can be said that this view is only limited to one side of the story. In more recent times, however the International Journal of Development and Economic Sustainability published a research paper in its second volume, entitled The Impact of Corporate Social Responsibility (CSR) on Profitability of Firms. The published article which aired in October 2014 on pages 70-79, conducted by professor Abdul Awan and his associate Naveed Akhtar supported Friedman’s statement. They believed that Corporate Social Responsibility (CSR) was a powerful tool that had benefits for both companies and society on a whole. The findings of the research revealed that CSR had in fact played a pivotal role in the enhancement of brand, image and profitability in the target companies. This review examines the article with the intention of evaluating the extent to which the Awan and Akhtar presented their claims in a formidable way.

Theoretical Frameworks and CSR Activities

The researchers begin by examining what they described as CSR activities. They state that previous research has often used activities such as differentiation, diversification, turnaround, concentration and globalization as grounds to measure CSR and profitability. They expounded on these activities using theoretical frameworks from a variety of researchers, some of whom are: Woods (2010), Adams and Frost (2006), Porter and Kramer (2002) and Burton et. Al (2000). Since this type of research and practise has dominated the western worlds including America and Britain, Awan and Akhtar wanted to explore the effect of this particular issue on lower income and developing countries. Therefore, the aim of the research was to measure the impact of Corporate Social Responsibility on profitability of business firms in one of those countries. The research was guided by one major research question which was well defined and quoted as follows: “To investigate how Pakistani companies in the fertilizer and cement sector are implementing CSR and what is its impact on their performance of profitability”. The researchers also intended to observe the extent, or the conditions under which Corporate Social Responsibility existed in Pakistan and how the concept was being implemented. Finally, Awan and Akhtar ultimately aimed to discover whether or not the companies that did implement CSR were in fact gaining benefits in terms of better performance, better profitability and improvement in the market and consumer community.

The main theory used throughout the study was the Corporate Social Responsibility theory. This term was addressed and discussed satisfactorily at length in the Literature Review. CSR was defined using Visser et al (2010) definition where it states that CSR is widespread view held by a “raising number of citizens that modern businesses have obligations to society that extends beyond their responsibilities to the stockholders or investors of the firm”. The researchers also went further to incorporate a few other definitions of CSR to give a compare and contrast analysis of the term, including Carroll’s 4-point construct and Dahlsrud’s 5 dimensions of CSR. The Literature review also commendably provides a summarizing background on the evolution of CSR from the 1960’s to the time when the research was conducted. Awan and Akhtar made noteworthy mentions of Bowen, Friedman, Carrol and Levitt to bring their points across.

Depth of Explanation in Literature Review

The researchers provided a valuable depth of explanation for the given theory and terms. Citations spanned from as early as the 1960’s, with the most recent being in 2010. They provided amicable support for the given problem which was highlighted as the poor conditions that existed in the third world country of Pakistan. It now becomes an interesting point of discovery to determine if CSR was only a successful ideology in countries with a considerably stable economy.

In order to get to the roots of this problem, Awan and Akhtar decided to explore the non-traditional option of using a mixed method approach. They incorporated both qualitative and quantitative methods of research to gather the pertinent information needed to supplement the purpose of this study, which was to identify how CSR influenced Pakistan’s companies and it’s culture and to what extent. However, the methodology presents the strongest weakness identified in this research. Neither data collection tools were presented, identified nor described. There was no evidence to support whether or not the mixed method approach was definitively used nor was there an indication that the omission of the data collection tools was on the part of the publisher.

The researchers made use of random sampling, having defined the nature of the research as exploratory. Their focus was placed on companies in the fertilizer and cement industry. This highlighted another weakness, as information on the target group was mostly non-existent. There was no background information, group size, or target employees mentioned for example, accountants or CEO’s. The variables used in the methodology seemed to reflect those of Dahlsrud’s five dimensions of CSR. A total of five variables were used, which Awan and Akhtar defined them as being a mixture of both dependent and independent variables. These are: (1) Human Rights, (2) Environment, (3) Labour Standards, (4) Corporate Governance, and (5) Organization’s Interest.

Analysis and Findings: CSR and Profitability

In order to analyse the data received, the researchers used both the Delphi and Multiple regression methods. The Delphi method or the three stage method analyses data in three stages: (1) development of conceptual framework, (2) analysis of literature review and (3) selection of business firms on the basis of their relations with people, customers, employees and environmental activities. The Multiple regression method measures independent variables using dependent variables through Ordinary Least Square (OLS) and other methods. Based on these methods of analysis, it was determined that the research yielded both “significant and positive results”. The relationship between CSR and companies produced higher human Rights, higher environmental effects, higher labour standards, higher corporate governance, and higher levels of corporate interest resulting in higher profitability. The research provided no limitations to the study, however the conclusion to study was a simple statement recommending that all organizations should aim for the improvement of the society and the country on a whole. They implore companies that they should ensure that not only organizations grow in terms of profit, but the communities around them.

Conclusion

To conclude, this study The Impact of Corporate Social Responsibility (CSR) on Profitability of Firms was conducted by Abdul Awan and Naveed Akhtar. Their aim was to determine the extent to which CSR was being used in third world countries more specifically Pakistan and how it affect profitability. The research was of an exploratory nature, hence the omission of a hypothesis. The problem was presented along the lines of differences in the economy of first world and third world countries. The research made use of a mixed method approach using both qualitative and quantitative methods, however the data collection instruments were not described. The data was analysed using the Delphi and the Multiple regression methods, the results of which were identified to be significant and positive in terms of CSR’s effect on profitability.

References

1. Akhtar N., Awan A. (2014). The Impact of Corporate Social Responsibility (CSR) on Profitability of Firms. The International Journal of Development and Economic Sustainability, Vol. 2, 70-79
2. Friedman, M. (1962). Capitalism and freedom. Chicago: University of Chicago Press.