Corporate social responsibility and financial performance - Integrated ...

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Research Article

ISSN 2229 – 3795

Corporate social responsibility and financial performance: Evidence from Nigerian manufacturing sector Enahoro John. A1, Akinyomi Oladele John2, Olutoye Adedayo E3 1- Accounting Department, Babcock Business School, Babcock University, Ogun State, Nigeria 2- Department of Financial Studies, Redeemer’s University, Ogun State, Nigeria 3- Department of Banking and Finance, Afe Babalola University, Ado-Ekiti, Ekiti State, Nigeria [email protected]

ABSTRACT The study examined the relationship between CSR and firms’ financial performance with focus on the Nigerian manufacturing sector. It employed descriptive research design and selected a sample of 20 firms-years during 2002-2011. The population of the study comprises of manufacturing companies that are listed in the Nigerian Stock Exchange; samples were selected using simple random sampling method. Data were collected from the audited financial statements of the selected companies for a period of ten years. Using profit before tax and annual turnover as proxies for financial performance, correlation and regression analysis were conducted. The results revealed a significant relationship between CSR and profit before tax on one hand; and CSR and turnover on the other hand. The main recommendation is for the firms to increase their investments in CSR as this would boost their financial performance in the long run. Keywords: Corporate Social Responsibility, Manufacturing Sector, Performance. JEL Classification: D21, G21, L21, Z12 1. Introduction Corporate Social Responsibility (CSR hereafter) as a concept has attracted worldwide attention and acquired a new significance in the global economy (Akinyomi, 2013). Keen interest in CSR in recent years has stemmed from the introduction of globalization and international trade, which have reflected in increased business complexity and new demands for enhanced transparency and corporate citizenship (Jamali and Mirshak, 2007). Moreover, while governments have traditionally assumed sole responsibility for the improvement of the living conditions of the population, society’s needs have exceeded the capabilities of governments to fulfill. In this context, the spotlight is increasingly turning to focus on the role of business in society and progressive companies are seeking to differentiate themselves through engagement in CSR. Promoters of CSR have argue that organizations should integrate economic, social and environmental concerns into their business strategies, their management tools and their activities, going beyond compliance and investing more on human, social and environmental

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Corporate social responsibility and financial performance: Evidence from Nigerian manufacturing sector Enahoro John. A, Akinyomi Oladele John, Olutoye Adedayo E

capital (Belal and Momin, 2009; Perrini, 2006 ). However, previous studies have observed that although the concept of CSR has been recognized as an important ingredient for business success, the relationship between CSR and companies’ financial performance has been inconclusive, controversial and open to further research (Lee and Park, 2010; Wijesinghe and Senaratne, 2011). 2. Review of literature In his view Ademosu, (2008) expresses CSR as what an organization does to contribute to the social, economic, political or educational development of the community where it is located, but which it is not compelled to do by any law. Similarly, Aaronson (2003) defines CSR as “Business decision making linked to ethical values, compliance with legal requirements, and respect for people, communities, and the environment around the world” (p. 310). According to Van Marrewijk (2003), the concept of CSR covers three dimensions of corporate action: economic, social and environmental management. Garriga and Mele (2004) grouped theories of CSR into four: instrumental, political, integral and ethical theories. A compelling argument behind the motivation of firms to invest in CSR programs comes from the domain of stakeholder theory (Post, 2003). Stakeholder theory suggests that organizational survival and success is contingent on satisfying both its economic (e.g., profit maximization) and non-economic (e.g., corporate social performance) objectives by meeting the needs of the company's various stakeholders (Pirsch et al., 2007). Early research in the area of stakeholder management defines a stakeholder in an organization as any group or individual who can affect or is affected by the achievement of the organization's objectives (Freeman, 1984 cited in Rahim, Jalaludin and Tajuddin, 2011). Primary stakeholder groups consist of shareholders and investors, employees, customers, suppliers, public entities such as governments or other public organizations that set laws and govern economic, commerce and trade associations and environmental groups (Rahim, et al., 2011). According to Rahim, et al., (2011), secondary stakeholders are diverse and include those who are not directly engaged in the organization economic activities but are able to exert influence or are affected by the organization. Stakeholder theory suggests that firms are motivated to broaden their objectives to include other goals in addition to profit maximization. Based on this theory, many companies embrace a CSR program as a way to promote socially responsible actions and policies and to effectively respond to stakeholder demands (Maignan and Farrell, 2004). Motivation for satisfying stakeholder demands stems from the fact that addressing stakeholder needs can be correlated with a firm's survival, economic well-being, competitive advantages, and the development of trust and loyalty among its targeted customers (Rahim, et al., 2011). Jamali and Mirshak (2006) observed that CSR is still a fairly new concept in Africa and is viewed most commonly in the context of philanthropy rather than good business practice which supports the bottom-line. Even though all the companies surveyed in the study adhered to a discretionary concept of CSR; there remains a lack of a systematic, focused and institutionalized approach to corporate sustainability in the developing country context. Lee and Park (2010) carried out a study on socially responsible activities of airline companies. The study primarily examined the impact of CSR in three different forms (i.e., linear, quadratic and cubic) on the financial performance of airline companies as represented by two measurements: value and accounting performance. Data were obtained from secondary sources especially the audited annual reports of the selected companies. The results of the ASIAN JOURNAL OF MANAGEMENT RESEARCH Volume 4 Issue 1, 2013

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regression analysis between CSR and performance revealed that CSR has a statistically significant and positive relationship with value performance; but no impact of CSR on accounting performance in the selected firms. Choi et al., (2010) investigated the relationship between CSR and corporate financial performance in Korea using a sample of 1222 firm-years during 2002–2008. The study measured corporate social responsibility by both an equal-weighted CSR index and a stakeholder-weighted index. Corporate financial performance was measured by return on assets, return on equity and Tobin’s Q. Using cross-sectional regression analysis; the study reported a positive and significant relationship CSR and stakeholder-weighted index, but not the equal-weighted CSR index. Babalola (2012) conducted a study on listed firms in the Nigerian Stock Exchange using secondary data. The result of the study revealed that the amount expended on corporate social responsibility vary from one firm to another; and that in the whole, the firms invested less than ten percent of their annual profit on corporate social responsibility. The study also reported a negative relationship between CSR investment and profit after tax of the firms. Similarly, Mutasim and Salah (2012) conducted their study on the effect of CSR on the profitability of the industrial companies in Jordan. Primary data were obtained through the administration of questionnaire to fifty respondents in the industrial companies. The result of the study revealed a positive relationship between CSR activities and profitability of the selected industrial companies. Amole et al., (2012) carried out their investigation on the causal relationship between CSR and profitability of banks in Nigeria using First Bank Nigeria Plc as a case study. Secondary data were obtained from documentary sources particularly the audited annual reports of the bank for the various years. The outcome of the regression analysis carried out revealed a positive relationship between CSR investments and the profitability of the bank. Arias and Petterson (2009) investigated the relationship between CSR’s promotion and corporate performance in the multinational corporations. The study employed a critical review of scholarly and peer-reviewed literature in an exploratory fashion. The result of the study revealed that multinational corporations continue their investment in CSR activities because it promotes improved reputation and facilitates customer loyalty. They concluded their study by reporting that in most cases, investment in CSR activities would enhance profitability of corporations. Iqbal et al., (2012) examined the impact of corporate social responsibility on financial performance of corporations in Pakistan. Secondary data were obtained from audited annual reports of 156 listed companies on Karachi Stock Exchange. Using return on assets and return on equity as proxies for financial performance on one hand; and corporate governance, business ethical principles, environmental compliance, social compliance, disclosure environmental and social report, product integrity, corporate giving and community investment as proxies for corporate social responsibility on the other hand; the data analysis was carried out using correlation and regression analysis. The result of the analysis revealed that CSR has no effect on financial performance. 3. Research Objectives and Hypotheses In the light of perennial and inconclusive debate on the relationship between CSR and Corporate Financial Performance (CFP), the present study seeks to examine what effect CSR ASIAN JOURNAL OF MANAGEMENT RESEARCH Volume 4 Issue 1, 2013

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has on financial performance in Nigerian beverages manufacturing firms and to garner support for CSR best practices. However, the specific objectives of the study are: 1. To identify the relationship between CSR and Profit before Tax in Nigeria beverages manufacturing firms. 2. To determine the relationship between CSR and Turnover in Nigeria beverages manufacturing firms. Furthermore, the following research hypotheses have been formulated in an attempt to provide empirical evidence on the existence of relationship between the variables of the study: Hoi: There is no significant relationship between CSR and Profit before Tax in Nigeria beverages manufacturing firms. Hoii: There is no significant relationship between CSR and Turnover in Nigeria beverages manufacturing firms. 4. Research methodology The study adopts correlational research design to investigate the relationship between CSR and profitability of manufacturing firms in Nigeria. The population of the study comprises the eight (8) beverages manufacturing companies that are listed in the Nigerian Stock Exchange. Two (2) sample companies were randomly selected from the population of study. Secondary data were obtained from the audited annual reports of the relevant years. The analysis was carried out using Pearson Product Moment Correlation co-efficent and regression. The regression models are as follows: PBT = β1 + β2CSR + ε………………………………………………………………… (1) TURN = β1 + β2CSR + ε……………………………………………………………… (2) 5. Analysis and interpretation The data collected for this study are analyzed in the following section. Table 1: Nigerian breweries plc data Year 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

CSR (N’000) 19,700 26,425 32,570 60,133 25,322 44,942 27,633 100,517 67,124 40,400

Investment PBT (N’000) 6,178,500 8,242,810 9,143,139 12,897,746 16,436,255 27,876,336 37,519,114 41,399,796 44,880,248 57,118,042

CTURN (N’000) 58,345,786 66,257,645 73,594,134 80,130,968 86,322,075 111,748,297 145,462,000 164,207,000 185,862,785 226,228,791

Source: Audited Financial Report for the various years

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Table 1 is the presentation of the financial data as obtained from the published auditor annual reports of Nigerian Breweries Plc between 2002 and 2011 financial years. Table 2: Correlations CSR PBT CSR Pearson Correlation 1 .480 Sig. (2-tailed) .160 N 10 10 PBT Pearson Correlation .480 1 Sig. (2-tailed) .160 N 10 10 CTURN Pearson Correlation .475 .992** Sig. (2-tailed) .165 .000 N 10 10 **. Correlation is significant at the 0.01 level (2-tailed).

CTURN .475 .165 10 .992** .000 10 1 10

Table 2 reports the result of the correlation between CSR and profit before tax of Nigerian Breweries for the period of 10 years is 0.480; meanwhile that between CSR and turnover of the same company for the same period is 0.475. This means that there is a positive relationship between CSR and profit before tax on one hand; and CSR and turnover on the other hand. Table 3: Model Summaryb Std. Change Statistics Error Adjuste of the R d R Estima R Square F Model R Square Square te Change Change df1 df2 a 1 .480 .231 .134 1.6853 .231 2.397 1 8 9 a. Predictors: (Constant), CSR, b. Dependent Variable: PBT

Sig. F DurbinChange Watson .160 .746

The results of the ordinary least square regression analysis as shown in table 3 reveals the impact of CSR expenditure on profit before tax to be (Beta= 0.480, p