Corporate social responsibility plays a major role in the development of an organization. Companies have been seen to embrace the practice due to various reasons some being compliance with the law, to enhance a competitive advantage or simply because it is the right thing to do. With the organization’s main goal in business being growth and profit maximization, this project sought to establish the influence of CSR practices on financial performance of limited companies. The study will be guided by the research objectives examining influence of participation of limited companies in health programs, environmental preservation activities, and CSR programs on social activities to their financial performance.
The target population will be four major companies in Kenya that include; Equity bank limited, Safaricom Limited, East African Breweries Limited and Kenya Commercial Bank. A survey of the four limited companies will be used for the study. Secondary will be data obtained from institutions financial reports and publications. Investment on CSR will be measured using monetary spending on social activities. In this study financial performance will be the dependent variable and CSR activities the independent variables. Analyzation of ratios will be used to determine the relationship between the variables and examine the performance financially by analyzing the monetary spending by the limited companies for a five-year period between 2014 and 2018.
Corporate social responsibility (CSR) has become one of the most pressing issues for corporations worldwide. Operating a business is not only about making profits, but also being socially responsible. A socially responsible corporate reputation is becoming an important aspect of corporates that allows firms to differentiate the corporations and obtain a better position in the market. A recent development within the field is a new European Union regulation on mandatory CSR reporting among large companies, which was introduced in 2014 and puts further pressure on companies to engage in socially responsible activities (European Commission, 2015).
Background of Study
Corporate Social Responsibility
Corporate social responsibility (CSR) concept as initiated in 1924 by Sheldon has been subjected to many controversies worldwide. Many people argue that the only responsibility of a business is to make profits while others argue that apart from making profits as the only goal, businesses should be more ethical, responsible and transparent. In society the role of business has changed over time; an organization aims at profitability of business and contributions to the social well-being of the society. In order for the organizations to achieve a competitive edge and better financial returns, they may have to accept Corporate Social Responsibility (CSR) programs in their businesses.
McGuire (1963) states that, “the idea of social responsibility supposes that the corporation has not only legal obligations, but also certain responsibilities to society which extend beyond these obligations.” Naylor (1999) advanced the definition of Corporate Social Responsibility as “the obligation of managers to choose and act in ways that benefit both the interests of the organization and those of society as a whole.” Corporate Social Responsibility (CSR) involve the practice where corporate voluntarily engage in social activities in their business operations. A business is primarily established to maximize shareholders’ wealth.
The idea of CSR is one of ethical and moral consideration of the stakeholders. Social issues deserve moral consideration of their own and should lead managers to consider the social impacts of corporate activities in decision making regardless of any stakeholders’ pressures. Thus the core question is whether a company should engage in certain activities or avoid doing so because they are beneficial or harmful to society.
Cochran, (2007) argued that CSR can be used to promote the reputation of a company as a good corporate citizen who takes responsibility for its impact on society. Good reputation creates value of a firm by not only reducing negative rumors but also contribute indirectly to profitability by attracting more customers. Activities of CSR can contribute to better relationship with company stakeholders which in turn lead to increased capital from investors (Weber, 2008).
The term financial performance has different meanings depending on the various individuals. Managers believe that an organization is at its best if it is making profit. Shareholders and other aspiring investors on the other hand are interested in receiving dividends and wealth maximization while customers are in need of quality goods and services.
Financial performance refers to how well organizations are managed and satisfying the interest of all their stakeholders. It also involves determining how effectively an organization has applied its assets to generate revenue in its key kind of business (Harber and Reichel, 2005). It is important for firms to manage the limited resources within the company.
This will ensure efficiency and at the same time deliver quality goods and services required to achieve effectiveness. Firms are hence required to measure their financial performance to determine their financial well-being over a given period. There are many different ways to measure financial performance. Some of the indicators of financial performance are return on equity (ROE), return on assets (ROA), liquidity ratios, and asset management ratios.
Listed Companies in Kenya
The dominant listed companies include Equity bank limited, Safaricom Limited, Kenya Commercial Bank and East African Breweries limited. The main objectives of these companies are to offer a wide variety of services to individual and business customers, and to collect payments including fees, charges, and to offer products and services provided to customers for the purpose of generating profits for shareholders.
The main aim why organizations engage in corporate social responsibility is to build a corporate name, mitigating risks of deviating from existing laws and attracting more customers which in the return increases sales and profitability of the companies. Companies implement corporate social responsibility differently depending on company’s size, the particular industry involved, the firm’s business culture and stakeholder demands.
According to Turban and Greening (1997) listed companies as perceived to have a strong corporate social responsibility commitment often have an increased ability to attract and retain employees which leads to reduced turnover, recruitment, and training costs. Employees, too, often evaluate their company’s corporate social responsibility performance to determine if their personal values conflict with those of the businesses at which they work.
Corporate Social Responsibility and Financial Performance
Some researchers have argued that CSR can improve the competitiveness of a company in the long run, implying a positive relationship between the CSR involvement of a company and its financial success (Weber, 2008). While studies suggest a mild positive relationship (Orlizky, 2003), this connection has not been fully established and the mechanisms through which firm’s financial performance can be enhanced through CSR is not well understood (Jawahar and Mcloughlin, 2001.
Theoretically, CSR is expected to improve a firm’s financial performance in the long run. Barnett (2007) argues that the impact of CSR varies from one firm to the other. Okwoma (2012) seems to provide support as he tested on effect of CSR on Financial Performance of listed companies in Kenya. Results indicated that CSR is good for the financial health of large and medium sized companies but not small companies. Flammer (2013) tested whether CSR led to superior performance. The results indicated a positive relationship but the influence is less strong when companies engage in higher CSR levels. This advocated for the notion that CSR has decreasing positive effects when the levels of CSR increase.
Statement of the Problem
In the traditional view of the firm only the shareholders of the company are important, and a firm has a binding financial obligation to put their needs first, to increase value for them. There are other important parties involved, including employees, customers, suppliers, financiers, communities, governmental bodies, political groups, trade associations, trade unions and even competitors – their status being derived from their capacity to affect the firm and its stakeholders (Petersen & Kumar, 2010). The stakeholder theory suggests that the purpose of a business is to create as much value as possible for the various stakeholders. These institutions have been involved in corporate social responsibility programs in the area of education and training, health, sustainable environment, sports and improving the livelihoods of vulnerable groups in society.
Previous studies have been conducted on the effects of CSR on the financial performance of firms and have yielded different results. Companies have become more involved in CSR projects both financially and otherwise because superior firm performance is linked with the success of CSR Projects. Porter (2010) argues that CSR programs focus mostly on reputation and have only limited connection to the business, making them hard to justify and maintain over the long run. Sustainable competitive advantage can be achieved when the firm implements a value creating strategy that is not simultaneously being implemented by potential competitors. This translates to the view that sustained competitive advantage results from strategic assets.
Studies in Kenya have proved that there is a link between CSR and firm profitability. Okoth (2012), during his study on effect of CSR on financial performance of commercial banks in Kenya, realized that CSR has an effect on ROA and ROE. Gichana (2004) realized that all firms listed at NSE had incorporated CSR in their mission statements. This was during a study on a survey of CSR practices by Kenya companies listed at NSE. Mutuku (2005) established that there is no relationship between CSR and financial performance.
Institutions that have remained competitive and that have experienced steady growth have been embracing CSR activities for a long time. This has enabled them to flourish in competitive markets where sellers sell similar goods at similar prices. This demonstrates that CSR plays a critical role in a firm’s financial success. However, these studies have failed to quantify the influence that CSR has on a firm’s financial performance; hence there exists a niche. This study therefore aims at filling this niche by asking: “What is the relationship between corporate social responsibility and financial performance of listed companies in Kenya?”