Erasmus School of Economics
The influence of Corporate Social Responsibility reporting on reputation
Thesis: Accounting, Auditing and Control
Author Stephanie Termeulen
Student number 304834
Supervisor K.E.H. Maas
Date July 2011
Preface
Deze scriptie heb ik geschreven ter afronding van mijn Master opleiding, Accountancy, Auditing and Control aan de Erasmus Universiteit. Graag wil ik mijn begeleidster, Karen Maas bedanken voor haar kritische feedback op mijn scriptie.
De afgelopen jaren heb ik intens genoten van mijn studententijd aan de Erasmus Universiteit. Vooral mijn studietijd aan de Haskayne School of Business in Calagry was onvergetelijk. Deze mooie tijd had ik niet kunnen beleven zonder steun van mijn ouders, zussen, vriend en vrienden. Hen wil ik hiervoor graag bedanken.
Stephanie Termeulen
Oude Wetering, 15 juli 2011
Abstract
In this paper the impact of Corporate Social Responsibility (CSR) reporting on reputation is investigated. Disclosed CSR information is observed by stakeholders. By publishing a CSR report a company provides its stakeholders with more information about the company. When a CSR report is of higher quality, stakeholders are provided with more transparent information. The agency theory, information asymmetry, legitimacy theory and stakeholder theory suggest that due to a CSR report an impact on the reputation is expectable. In this paper it is to be expected that higher CSR reporting quality increases the reputation of a company.
CSR reporting quality is measured with the application level that is provided by the Global Reporting Initiative (GRI) Report List. The reputation index from Fortune 500 is used as proxy for the reputation. The CSR reporting of current year affects the reputation of the next year. The timeframe of this paper contains CSR reporting from 2005 till 2009. From this selected time period 85, 106, 138, 167 and 175 respectively data points are observed.
Unlike prior studies, this paper concludes that CSR reporting has no influence on reputation. The outcome of this paper indicates that other variables than CSR reporting has an influence on the reputation of a company.
Table of Contents
Chapter 1 Introduction 11
1.1 Research question and research method 12
1.2 Relevance 14
1.3 Structure 15
Chapter 2 Theoretical Background 16
2.1 Disclosures 16
2.1.1 Financial disclosure 16
2.1.2 Voluntary disclosure 17
2.1.4 Summary disclosures 17
2.2 Corporate Social Responsibility 18
2.2.1 Definition of Corporate Social Responsibility 18
2.2.2 Developments in Corporate Social Responsibility 20
2.2.3 Corporate Social Responsibility reporting 21
2.2.4 Corporate Social Responsibility reporting guidelines 21
2.2.5 Summary Corporate Social Responsibility 23
2.3 Positive Accounting Theory 23
2.3.1 Agency theory 24
2.3.2 Information asymmetry 26
2.3.3 Legitimacy theory 28
2.3.4 Stakeholder theory 30
2.3.5 Summary Voluntary Disclosures and Positive Accounting Theory 31
Chapter 3 Literature Review 32
3.1 Incentives of Corporate Social Responsibility strategy and reporting 32
3.1.1 Corporate Social Responsibility strategy and reporting incentives 32
3.1.2 Implementing Corporate Social Responsibility strategy and report 37
3.1.5 Summary incentives Corporate Social Responsibility strategy and report 39
3.2 Impacts of Corporate Social Responsibility Report 39
3.2.1Forecast accuracy 39
3.2.2 Public sentiment 42
3.2.3 Financial impacts 44
3.2.4 Summary impacts 48
Chapter 4 Hypotheses development 50
4.1 Development of the main hypothesis 50
4.2 Difference compared to previous studies 52
4.3 Development of sub hypotheses 54
4.4 Summary hypothesis development 57
Chapter 5 Methodology 58
5.1 Sample 58
5.1.1 Used databases 58
5.1.2 Development sample and time period 59
5.2 Methodology of statistical research 60
5.3 Data 61
Chapter 6 Analytical Results 64
6.1 Descriptive analysis 64
6.2 Statistical Results 67
6.2.1 Correlation 67
6.2.2 Regression 72
Chapter 7 Conclusion 80
7.1 Discussion 80
7.2 Implications 82
7.3 Limitations and further research 83
References 84
Appendix A: Companies included in sample 88
Appendix B: Distribution CSR report levels over all variables 98
Chapter 1 Introduction
The last decades environmental and social related impact of companies is under rising attention of the public. The ‘Deepwater Horizon Oil Split’ of April 2010 resulted in negative public attention of the oil company, British Petroleum (BP). During three months oil was continuously spilling into the Gulf of Mexico. The enormous environmental damage due to BP’s negligence was widely described in the worldwide media. Besides companies’ environmental issues, social consequences and social responsibility also face attention of the public. The public attention to social issues is reflected in the scandal of the British newspaper ‘News of the World’. The newspaper was suspected of illegally monitoring private phone calls. This scandal was widely described in the media. The associated negative attention about ‘News of the World’ made the owner of the newspaper decide to immediately abolish the newspaper.
The rise of attention for environmental and social related impact is reflected in increasing attention for Corporate Social Responsibility (CSR). Besides the society, companies also became more aware of their environmental and social side. The increased awareness of environmental and social impact results in the implementation of CSR activities within a company. CSR activities are implemented to contribute to the economic performances of the company and to benefit society. In a CSR report the CSR performances are summarized, when the CSR report is disclosed stakeholders are provided with more transparency.
Since the early nineties a lot of research has been done on the topic of CSR. The impact of CSR is mainly examined on the financial performances of the company. The study of Margolis and Walsh (2003) analyzed the outcomes of 127 prior studies and found a positive relation between CSR performances and financial performances. Wood (2010) argued that the relation between CSR performances and financial performances is already well established and that CSR research should be more focused on society and stakeholders. Where the studies of Margolis et al. (2003) and Wood (2010) investigated the CSR performances, this paper investigates the CSR reporting. In this paper the impact of CSR reporting is examined, the quality of CSR performance is not taken into consideration, but the quality of the CSR report is.
The quality of a CSR report benefits the company’s stakeholders. When a CSR report is disclosed, stakeholders acquire CSR information of the company. If the CSR report is of high quality, stakeholders are provided with reliable CSR information. This reliable information increases the transparency. The stakeholders’ impression of the company changes due to the provided information. In this paper the impact of CSR reporting quality on the reputation is examined. This reputation is the impression of a company of all stakeholders together. The impression of stakeholders of a company is influenced by CSR information.
Existing studies used the term public sentiment, to investigate stakeholders’ impression of a company. In this paper reputation is used, to investigate stakeholders’ impression. Reputation is a more direct term to examine stakeholders’ impression about a company. In this paper no distinction is being made between public sentiment of existing studies and reputation of this paper.
1.1 Research question and research method
The research question of this paper is:
What is the impact of Corporate Social Responsibility reporting on reputation?
To answer the research question, different CSR related topics are investigated in advance. First the definition of CSR should be defined. Also the characteristics of CSR reporting should be investigated. The positive accounting theory provides theories which predicts and explains CSR. Description of the agency theory, information asymmetry, legitimacy theory and stakeholder theory are provided to investigate incentives of CSR and CSR reporting. To implement CSR into the company, the company should go through different stages, these different stages are described. Finally, the investigated influence of CSR reporting on reputation from prior research is described.
The research question is answered by empirical research. The impact of CSR reporting is measured with CSR reporting quality. The CSR report quality is observed from the CSR report level provided by the Global Reporting Initiative (GRI) Report List. This CSR report level indicates the degree of conformity with GRI reporting guidelines of the CSR report. The application level is determined for CSR reports which are voluntary submitted in the GRI report list. The used proxy for reputation is the reputation index. This index is based on nine components and is yearly compiled. The CSR report is disclosed after the reported year and influences the reputation of the year after the reported year. In the reputation index database, reputation indices from 2006 are available, therefore this paper uses the CSR reporting time period 2005 up till and including 2009. The research question is answered by the main hypothesis and sub hypotheses. These hypotheses are tested with a regression and a correlation. The hypotheses are:
Main hypothesis:
CSR reporting quality increases the reputation of a company.
Sub hypotheses:
The relationship between CSR reporting quality and the reputation is positively influenced by larger companies.
The relationship between CSR reporting quality and the reputation is positively influenced by better financial performances.
The relationship between CSR reporting quality and the reputation is positively influenced by higher general selling and administrative expenses to sales.
The relationship between CSR reporting quality and the reputation is influenced by regions of companies.
The relationship between CSR reporting quality and the reputation is influenced by industries of companies.
Companies for which all relevant data were available are included in the sample. For the year 2005 up till and including 2009; 85, 106, 138, 167 and 175 respectively data points were available. The years are individually tested, otherwise the results will be biased. The influence of CSR reporting quality on reputation is tested by the correlation and the regression of the reputation index and the CSR report level.
1.2 Relevance
The investigated relation between CSR reporting quality and reputation provides benefits for the scientific world, companies and society. Below the relevance for scientific world, companies and society is explained. In the study of Clarkson, Hua Fang, Li and Richardson (2010) a positive relation is found between CSR reporting and public sentiment. But in this study, public sentiment is measured with the Janis Fadner coefficient. This coefficient is based on the amount of negative and positive environmentally and socially related articles. The Janis Fadner coefficient is not the most reliable measurement to investigate the public sentiment. This coefficient suggests that companies with equal amounts of negative and positive articles have the same public sentiment. The study of Clarkson et al. (2010) takes the influence of CSR reporting into consideration but the studies of Brown and Dacin (1997) and Ittner et al. (1998) take the influence of CSR on public sentiment into consideration. These studies investigate the relation between CSR and public sentiment with a field study. The field study evaluates products based on the customer satisfaction. Product evaluations by (potential) customers’ satisfaction levels are no exact measurements to investigate the public sentiment. It is hard to accurately evaluate services of companies. Some companies producing more than one product, when one product is evaluated not a right representation is provided of the company.
The scientific world also benefits from the investigated relation between CSR quality reporting and reputation because of the lack of CSR research which is focused on stakeholder and society. From this paper, society benefits afford, there is investigated if CSR reporting influence the reputation. An investigation is performed, where the reputation is dependent on. When no relationship is found, society does not observe the CSR reporting quality. This paper is also of relevance for companies because it researches if CSR reporting quality leads to an improvement of a company’s reputation. If evidence is found for a positive relation, companies benefit from providing high quality CSR reports. If no evidence is found, companies can change their way of CSR reporting to achieve better results with their CSR disclosure. Investigating the relation between CSR reporting quality and reputation is therefore beneficial for society.
1.3 Structure
This paper is outlined as follows, in the second chapter the theoretical background of CSR reporting is discussed. Disclosures in general, the definition of CSR and the relation of CSR with the positive accounting theory are described. In the third chapter the literature review is provided. Also the incentives and impacts of CSR and CSR reporting are presented. The hypotheses are introduced in chapter four. The methodology, which is used to test the hypotheses, is described in chapter five. Methodology, statistical research and data are part of chapter five. In chapter six the analytical results are presented, these results are composed of the descriptive and statistical results. Finally in chapter seven, the conclusion is stated.
Chapter 2 Theoretical Background
To provide a complete understanding of CSR reporting, in this chapter a theoretical background is given about communication information. This chapter starts with describing, different types of communicating information, financial disclosures and voluntary disclosures are introduced. Thereafter CSR and CSR reporting are discussed. The definition of CSR is explained, the CSR report and the guidelines for providing a CSR report are discussed. The final part of this chapter explains the positive accounting theory and the relation with CSR reporting.
2.1 Disclosures
A disclosure communicates company’s information, the disclosure is provided by the company. Rules and regulation exist to provide all obligated information. Companies should make required information publically available. The financial disclosure is a well known mandatory disclosure. Also voluntary disclosures exist, in voluntary disclosures information is provided which is, next to mandatory disclosure, not obligated to communicate. First, a short description is given of the financial disclosures, followed with a description of voluntary disclosures. This description gives a background for understanding the CSR report disclosures.
2.1.1 Financial disclosure
Companies communicate information in different ways, these announcements are called disclosures. The most common known disclosure is the financial annual report. In these disclosures, information is provided about past financial performances and the current financial position of the company. In the financial report the profit and loss account, balance sheet and cash flow statement are included. Also other important information for users should be incorporated in a financial report. Financial disclosures provide useful information to investors and other stakeholders, based on the disclosed information investors and stakeholders make decisions. Financial reports are valuable for investors, this associated in the studies of Kothari (2001), Louhichi (2008) and Su (2003). In these studies evidence is found that financial reports affect stock price reactions. The reaction of investors can be observed due to the changes in stock prices.