How does corporate social

responsibility benefit firms?

Evidence from Australia
Jeremy Galbreath
Curtin University of Technology, Perth, Australia
Abstract
Purpose – There is a small but growing body of empirical research examining benefits of corporate
social responsibility (CSR) beyond traditional, accounting-based financial benefits. To extend this
body of research in contexts outside of Europe and the USA, the purpose of the present paper is to
empirically examine three potential benefits of demonstrating CSR: reduced employee turnover;
increased customer satisfaction; and improved reputation.
Design/methodology/approach – The paper collected data on latent constructs through a survey
of chief executive officers across a spectrum of industries in Australia. Confirmatory factor analysis
assessed psychometric properties of the constructs, while regression analysis was used to examine
posited hypotheses.
Findings – The findings suggest that firms engaging in CSR can benefit in ways beyond a pure
bottom-line outcome. First, due to exhibited fairness, socially responsive activities appear to be ameans
to
reduce employee turnover. Second, by meeting justice needs of customers, CSR is likely to increase
customer satisfaction. Lastly, CSR activities provide visible signals from which stakeholders infer various
positive characteristics of firms, thus creating an avenue to increase overall firm reputation.
Practical implications – Firms can choose to do nothing with respect to their social responsibilities
to doing much. While proactively engaging in CSR is not without opportunity cost, the results of this
paper suggest executives should not dismiss CSR altogether.
Originality/value – Value from this paper is derived in three ways: relying on non-financial
dependent variables, it supplements limited CSR research conducted in this stream; the data and
implications drawn come from Australia, thereby adding needed international insight into the benefits
of CSR; and the paper supplements financial-driven theories used in CSR research by focusing on
employee justice perceptions, equity, and signaling theories.
Keywords Australia, Corporate social responsibility, Customer satisfaction, Employee turnover,
Stakeholder analysis
Paper type Research paper
1. Introduction
Can firms benefit by engaging in corporate social responsibility (CSR)? According to
the literature, for over three decades scholars have studied the relationship between
CSR and firm performance (FP) to answer the question (Margolis and Walsh, 2003).
Although results are mixed, the trend seems to suggest a moderately positive CSR-FP
relationship (Griffin and Mahon, 1997; Stanwick and Stanwick, 1998; Orlitzky et al.,
2003). However, purported benefits of CSR are numerous and include those beyond the
“pure” financial, from maintaining the license to operate, to risk reduction, to efficiency
gains, and to tax advantages (Weber, 2008). Although vastly smaller in scope to
CSR-FP studies, a few scholars have dedicated effort to empirically test additional
benefits of CSR.
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/0955-534X.htm
How does CSR
benefit firms?
411
Received April 2009
Revised July 2009
Accepted July 2009
European Business Review
Vol. 22 No. 4, 2010
pp. 411-431
q Emerald Group Publishing Limited
0955-534X
DOI 10.1108/09555341011056186
In their study, Maignan et al. (1999) find that in a sample of American firms, CSR is
positively linked with employee commitment and customer loyalty. In a similar study,
Maignan and Ferrell (2001) find that CSR is positively linked with employee
commitment in a sample of French firms. Brown and Dacin (1997), Sen and
Bhattacharya (2001) and Scholder et al. (2006), in studying US firms, find that CSR
positively influences both consumers’ purchase intent and their perceptions of
companies’ products. Lastly, studying US firms from the Kinder, Lydenberg,
Domini & Co. database, Greening and Turban (2000) and Turban and Greening (1997)
find that demonstrating CSR is important for attracting prospective employees. While
each one of these studies offers important insight, they fall short of empirically testing
predicted benefits (Weber, 2008). Continued research is therefore necessary to further
untangle our understanding of how CSR benefits firms, given strong instrumental
undertones of the concept (Rowley and Berman, 2000; Mellahi and Wood, 2003).
Additional benefits that have seen little to no empirical study include employee
turnover, customer satisfaction, and firm reputation, especially in contexts outside of
the USA and Europe.
According to the literature, employee turnover, company reputation, and customer
satisfaction are highly important to scholarly study (Shaw et al., 1998; Mahon, 2002;
Homburg et al., 2005). Employee turnover is important because the loss of human capital
in firms can have dramatic effects on competitive advantage (Barney, 1991; Huselid,
1995). Reputation is important because it reflects how a given firm compares to its
competitors (Rao, 1994), while reflecting stakeholder impressions of the firm’s
disposition to behave in a certain manner (Clark and Montgomery, 1998). Each of these
can affect the ability to raise prices with consumers (Kihlstrom and Riordan, 1984),
provide a cushion to recover from crises or threats (Gregory, 1998; Peloza, 2006) and can
create mobility barriers within an industry (Wilson, 1985). Customer satisfaction has
long been studied in the literature and is seen as critical to firms’ profitability and an
overall mechanism by which a firm can achieve loyalty among the customer base
(Anderson et al., 1997). Further, the importance of reducing employee turnover,
building a strong reputation, and improving customer satisfaction continue to be among
the top priorities of corporate executives around the world (PricewaterhouseCoopers,
2007).
Is there something inherent in CSR that might lead to benefits such as lower
employee turnover, higher reputation, and improved customer satisfaction? The
literature suggests that there is. For example, Aguilera et al. (2007) suggest that CSR
meets the justice needs of employees thereby leading to lower turnover rates. Similarly,
customers develop either positive or negative perceptions of firms through their
evaluation of the fairness they demonstrate through product use and service
interactions, for example, Fornell et al. (1996). CSR is expected to demonstrate equity or
fairness towards customers, leading to higher satisfaction. Lastly, reputation is a
general attribute of firms and reflects the extent to which a firm is perceived as good or
bad (Roberts and Dowling, 2002). CSR is expected to signal to stakeholders a positive
ideal of corporate behavior, thereby increasing reputation.
This study attempts to contribute to the literature in three ways. First,
organisations today have moved beyond equating success with accounting-based
financial results (Ittner and Larcker, 2003; Maltz et al., 2003; Kaplan and Norton, 2007).
Research on CSR has not kept pace in that the vast majority of studies examine
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the CSR-FP link. Extending the realm of study is important because multiple theories
predict different benefits, and assessing the value of CSR therefore requires multiple
approaches. Second, the Australian context is particularly relevant: although
institutions appear to be increasing pressure on firms to demonstrate more socially
responsible actions (Parliamentary Joint Committee on Corporations and Financial
Services, 2006), many executives in Australian corporations remain skeptical as to the
benefits of CSR (Birch, 2002). Positive results from this study will supplement the
research base, the majority of which come from the USA, and to a lesser extent, Europe.
Lastly, evidence from the research is significant for management researchers and
practitioners. Addressing posited questions will allow scholars to offer relevant advice
on the likely outcomes of demonstrating CSR across international contexts.
2. Theory and hypotheses
2.1 What is CSR?
While there is no universally accepted definition (Silberhorn andWarren, 2007; Weber,
2008), CSR generally refers to a firm’s activities, organisational processes, and status in
relation to its perceived societal or stakeholder obligations (Davis, 1973; Wartick and
Cochran, 1985; Wood, 1991; Sen and Bhattacharya, 2001). Much has been written on
what constitutes CSR and although many viewpoints exist, Carroll’s (1979)
conceptualization of the responsibilities of firms has remained a consistently accepted
approach, particularly with respect to empirical study. Carroll’s (1979) conceptualization
includes four social responsibilities, namely:
(1) the economic responsibility to generate profits, provide jobs, and create
products that consumers want;
(2) the legal responsibility to comply with local, state, federal, and relevant
international laws;
(3) the ethical responsibility to meet other social expectations, not written as law
(e.g. avoiding harm or social injury, respecting people’s moral rights, doing
what is right and just); and
(4) the discretionary responsibility to meet additional behaviors and activities that
society finds desirable (e.g. contributing resources to various kinds of social or
cultural enterprises; providing employee benefits such as training and improved
salaries).
Carroll’s (1979) conceptualization suggests that although all firms have the same
responsibilities, not all firms demonstrate CSR equally (Birch, 2002). Firms can be
reactive and make minimal effort or do less than required by stakeholder standards for
social responsibility. Firms can also do nothing – in essence they reject or deny their
social responsibilities. However, firms that proactively demonstrate CSR and act
beyond minimal requirements would not only expect to contribute to the creation of
societal welfare, but also to improve their own success (Carroll, 1979). Thus, the
operationalization of CSR used in this study can be considered a demonstration of
social “performance,” in the sense that it measures the degree to which a firm is
demonstrating positive outcomes/activities that are directly related to its social
responsibilities. Of particular interest to this study is exploring the impact of CSR on
three aspects facing the success of any business firm:
How does CSR
benefit firms?
413
(1) employee turnover;
(2) customer satisfaction; and
(3) reputation.
In exploring relationships between CSR and employee turnover, customer satisfaction,
and reputation, this paper draws upon three theoretical frameworks; namely:
(1) employee justice perceptions theory;
(2) equity theory; and
(3) signaling theory.
Studying CSR with multiple theories is logical, as the concept is multidimensional and
is expected to impact stakeholders in different, yet equally positive, ways. Therefore,
multi-theoretical approaches are welcomed (Aguilera et al., 2007).
2.2 CSR and employee turnover
Executives continue to suggest that employees are their most valuable asset and that
a firm’s ability to retain employees is a hallmark and signal of organisational success
(PricewaterhouseCoopers, 2007). The ability to retain employees not only demonstrates
that a given firm is a valued place to work (which can elicit positive corporate
associations from the public), but several scholars also find that retaining employees
has positive consequences for firms’ financial performance and productivity (Huselid,
1995; Guthrie, 2001). Of particular concern to firms then, are the mechanisms and
activities that can enable them to diminish employee turnover. Relying on employee
justice perceptions theory, firms that are proactively demonstrating CSR are posited to
diminish employee turnover.
Employee justice perceptions theory (Cropanzano et al., 2001a, b) posits that
employees derive general justice perceptions of firms based on the level of fairness that
company demonstrates. Research has shown that in work environments that are
perceived to be fair, employee well-being is positively affected, such as in the areas of
job satisfaction and stress (Colquitt et al., 2001). Research also shows that work
environments that are perceived as being fair have positive effects on organisational
outcomes as well, by means such as lower employee absenteeism and higher levels of
employee commitment (Colquitt et al., 2001). Just the opposite, work environments that
are perceived as being unjust lead to lower employee performance and even vengeful
behaviors on the part of employees (Aquino et al., 2001; Ambrose et al., 2002). CSR,
arguably, conveys to employees essential information on which they judge the fairness
of a firm.
According to Aguilera et al. (2007), CSR is an activity that demonstrates concern for
both internal and external stakeholders and that through socially responsible
activities, firms exhibit fairness in their actions. This demonstration of fairness is
likely to impact on employee turnover levels. For example, Tyler (1987) argues that
individuals have a psychological need for control. This need for control is based on a
self-serving concern for justice and from an employee perspective, justice (or injustice)
demonstrated by firms provides information that can be used to foretell an
organisation’s actions. Thus, when CSR is demonstrated proactively and consistently,
employees can gauge the extent to which they will be fairly treated, meeting their
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concern for justice. In turn, this creates an organisation that can position itself for
higher retention rates.
Building on justice perceptions, employees also have ethical frameworks which
guide their decision making and responses (Cropanzano et al., 2003). Since most
individuals have basic respect for human dignity and worth, firms that are unfair
violate morality-based concerns for justice. More specifically, firms that do not
demonstrate behavior that is consistent with employees’ moral or ethical frameworks
are likely to suffer negative consequences. Following employee justice perceptions
theory, if irresponsible behavior is demonstrated by a firm, employees may view this
behavior as unjust or unfair, which could potentially lead to higher turnover (Colquitt
et al., 2001). However, if a firm’s actions demonstrate good citizenship, employees
assess the firm as one that is just and fair, which is likely to lead to less turnover as
individual and organisational goals converge. Consequently:
H1. CSR will diminish employee turnover.
2.3 CSR and customer satisfaction
Customer satisfaction is a cumulative, global evaluation based on experiences with
firms over time and is a fundamental indicator of past, current, and future performance
(Anderson et al., 1994). As such, achieving high levels of customer satisfaction has
become one of the most essential goals of firms and is an important focus of corporate
strategy (Homburg et al., 2005). To explore the CSR-customer satisfaction link, equity
theory is used (Oliver and Swan, 1989a, b; Oliver, 1997).
Stemming from social exchange theory (Homans, 1961; Adams, 1965), equity theory
focuses on fairness, rightness, or deservedness judgments individuals make in
reference to what one party or an other receives (Oliver, 1997). The theory posits that in
exchanges, if customers feel equitably treated – namely their input to the exchange is
in balance with the output of the exchange – satisfaction is the result (Goodwin and
Ross, 1992; Oliver, 1997). Hence, customers incur certain costs (inputs) in exchanges for
a certain level of output from firms. According to Oliver and Swan (1989a, b) and
Bolton and Lemon (1999), equity is the customer’s reaction to these ratios of inputs to
outputs – or fairness. Equity, in turn, affects a customer’s overall evaluation of the
firm. With respect to this study, there are several ways CSR is expected to demonstrate
equity towards customers and lift their satisfaction levels.
First, firms attempt to increase customer satisfaction by focusing on internal
processes (Kaplan and Norton, 2007). In a classic example, the retail giant Sears,
Roebuck and Company, in an effort to turn around their fortunes after several
tumultuous years and declining customer satisfaction, developed and implemented the
employee-customer-profit chain model (Rucci et al., 1998). At the core of the model was
improving employee learning and competencies through heavy investments in training
and other actions (Rucci et al., 1998; Westbrook, 2000). Sears was eventually able to
improve the quality of exchanges between employees and customers, thereby lifting
their perceived treatment, and ultimately its customer satisfaction and financial
success. Maignan et al. (1999) point out that firms are not legally required to offer the
type of training or make the investments in employees such as Sears made; rather,
training and investments in employees suggests a firm is demonstrating social
responsibility (de la Cruz De´niz-De´niz and De Saa´-Pe´rez, 2003), particularly by
engaging the discretionary dimension of CSR (Carroll, 1979).
How does CSR
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Second, customers seek value in the purchases they make (Zeithaml, 1988).
Following equity theory, perceived value is one way in which customers assess the
fairness or equitable treatment given by a firm in exchanges. In the case of Volvo
Cars, in the mid-1990s, the company embarked on a strategy to improve its customer
satisfaction. Rather than focus on customer service like Sears, Volvo’s main emphasis
was on improving product quality (Dahlsten, 2003). After a series of quality
initiatives leading to new model development and enhanced features across a number
of existing models, Volvo was able to consistently lift its customer satisfaction
results by demonstrating value for money (Dahlsten, 2003). According to Carroll
(1979) and Maignan et al. (1999), delivering quality products that meet customer
needs is consistent with CSR, particularly with respect to their economic
responsibility.
Lastly, evidence suggests that ethical status impacts on customer perceptions of
equity demonstrated by firms (Maignan, 2001). By example, when founded, a core
value of Enterprise Rent-A-Car was to deliver high levels of customer satisfaction by
being honest, fair, and going the extra mile (Taylor, 2003), characteristics that define an
ethical commitment. Although the firm consistently delivered positive financial
results, by the early 1990s, customer satisfaction levels had slipped. After taking action
to address the problem through initiatives such as standardized practices in customer
service and reengineering processes, Enterprise Rent-A-Car was able to consistently
improve customer satisfaction ratings. However, a key factor to the firm’s success was
re-orientating itself to the core values of honesty, fairness, and integrity in dealing with
customers (Taylor, 2003). When honesty and fairness are demonstrated, customers feel
equitably treated. The issue of honesty, fairness, and integrity is intrinsically tied to
the ethical dimension of a firm’s social responsibilities and as such, reflects CSR
activity (Carroll, 1979).
Firms continue to search for ways to improve customer satisfaction. Given that CSR
appears to demonstrate equity towards customers, the expectation is that:
H2. CSR is positively associated with customer satisfaction.
2.4 CSR and reputation
A positive reputation indicates that a firm is highly esteemed or well regarded
(Weiss et al., 1999). According to Brown and Logsdon (1999, p. 169), reputation is
defined as “outsiders’ assessments about what the organisation is, how well it meets
its commitments and conforms to stakeholders’ expectations, and how effectively its
overall performance fits with its socio-political environment.” Thus, reputation is a
general attribute of firms and reflects the extent to which “stakeholders see firms as
‘good’ or not ‘bad’” (Roberts and Dowling, 2002, p. 1078).
From a scholarly perspective, although the link with firm financial performance is
of primary interest (Roberts and Dowling, 2002), reputation is also a measure of
success, a dependent variable (Dollinger et al., 1997). Further, several scholars
(Dierickx and Cool, 1989; Srivastava et al., 2001) argue that a positive reputation is a
key strategic asset, one that helps firms build and sustain competitive advantage.
Given that reputation is a strategic asset of firms and a measure of organisational
success, much research has been interested in studying reputation-building activities
(Winters, 1986; Varadarajan and Menon, 1988; Drumwright, 1996; Brown and Dacin,
1997). However, underlying theory suggests that reputation formation can be broadly
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understood as a signaling process in which firms’ strategic choices and activities
send signals to stakeholders (Weigelt and Camerer, 1988); stakeholders in turn use
these signals to form impressions or associations of these firms. CSR is increasingly
relevant to strategic choices and strategic activities (Porter and Kramer, 2006) and is
part of firms’ signaling processes. There are two principle means by which CSR is
expected to positively shape stakeholders’ assessment of firms, and therefore, a
perceived “good” reputation: substantive signaling actions and symbolic signaling
actions.
Substantive signaling actions with respect to CSR are actions that are tangible,
measurable and/or reflect visible expenditure of resources (Mahon, 2002). For example,
firms in Australia, the USA, and other industrialized countries seek to differentiate
themselves from competitors through expending resources in support of social causes
or in capital projects that advance the goals of communities within which they operate
(Birch, 2002; Cone et al., 2003). Firms taking this approach are using the discretionary
dimension of CSR (Carroll, 1979) to send signals to stakeholders that they are socially
responsible; in turn, reputation is expected to be bolstered. Firms also seek to
differentiate themselves by developing products that appeal to consumers in particular
markets. They can do this by targeting highly visible social issues, for example, using
hybrid vehicles to appeal to educated and environmentally aware people in the
automobile market (McWilliams et al., 2006). Here, firms signal to the market their
sensitivity to stakeholder concerns over an issue such as climate change, by focusing
on their economic responsibility (Carroll, 1979). In doing so, a firm that exercises its
economic responsibility, to respond to a social issue such as climate change, is
engaging in reputation building activities.
Symbolic signaling actions with respect to CSR are perhaps less obvious and
easy to identify. Symbolic signaling actions are actions where little to no resource
commitments are made by firms. For example, at one point in the history of Gerber
baby foods, allegations were made that glass was found in its products, which posed a
serious danger to infants (Nash, 1993). Gerber immediately recalled the product and
investigated the problem. The findings suggested that extremely small traces of glass
were found in the product but was a result of handling in transit and posed no danger
whatsoever. Some time later, similar allegations were made. However, this time, Gerber
did not recall the product and cited the extensive research and findings of the first
study. Customers, the media, and other stakeholders found Gerber’s argument
acceptable, in part, due to the findings in the previous recall (Nash, 1993), which
follows Peloza’s (2006) concept of “reputation insurance” that can protect a firm’s
image in times of crisis or threat. Here, Gerber did not expend resources but rather
acted in a symbolic fashion, signaling to the market their moral credibility as a socially
responsible company. They achieved this by highlighting past actions in a crisis
situation while demonstrating their ethical commitment. Following Carroll (1979),
ethical responsibility is a key dimension of CSR and signals to stakeholders that a firm
is seeking to avoid harm or social injury, respects people’s moral rights, and is serious
about doing what is right and just.
To summarize, CSR activities provide visible signals from which stakeholders infer
various positive characteristics of firms. CSR is, therefore, predicted to be a key
mechanism by which a firm can build its reputation. Hence:
H3. CSR is positively associated with firm reputation.
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3. Methods
3.1 Sample and data collection procedures
A sample of Australian firms was selected for this study. The sample’s parameters
included only firms with manufacturing or services classifications. Given that the focus
of this study was on business firms, other organisations, such as public administration
and community service entities, were excluded.
To obtain the sample, firms were randomly selected from The Business Who’s Who
of Australia database provided by Dunn and Bradstreet. A total sample size of 3,000
firms was selected, containing 1,500 firms each from manufacturing and services
industries. The chief executive officer (CEO) was the targeted informant for this study
as they are the prime strategist and have breadth of knowledge of firm operations and
its success.
After accounting for undeliverables, the response rate was belowthe anticipated rate of
15 percent; specifically, the response rate was 10 percent. Although the response rate
yielded may prima facie appear low, the rate is similar to other studies surveying “elite
personnel,” where response rates range from 6 to 13 percent (Lewin et al., 1995;
Schlegelmich and Robertson, 1995; Agle et al., 1999).Atotal of 20 surveyswere eliminated
due to missing data; therefore, 280 useable surveys were included for final analysis.
The mean firm size was 630 employees while the mean firm age was 42 years old.
Firms in manufacturing sectors comprised 39 percent of the sample, with the rest of
firms in services sectors. Most of the firms were clustered into two sales revenue
categories, with 42 percent of firms generating between $10,000,001 and $50,000,000,
and 22 percent over $200,000,000. Lastly, the average respondent age was 50 years old,
with 92 percent being male.
3.2 Measures
All constructs were measured using multi-item scales and the control variables were
measured using either single item indicators or categorical indicators. To avoid order
bias, the items used to measure the independent and dependent scales were placed
randomly in the final instrument whereas, the scales for the predictor and criterion
variables were placed as far apart from each other as possible.
CSR. This study was interested in exploring the extent to which firms were
demonstrating CSR activity across four dimensions prescribed by Carroll (1979). After
reviewing several studies (Aupperle et al., 1985; Pinkston and Carroll, 1994, 1996;
Quazi, 2003), the scales used in the studies of Maignan et al. were chosen. Maignan and
Ferrell (2000, 2001) and Maignan et al. (1999) after conducting an extensive literature
review, identified and developed various socially responsible activities that aligned
with Carroll’s (1979) conceptualization of CSR. Thus, the scales do not assess the
degree to which a firm believes it has social responsibilities or how they rank order
those responsibilities; rather, the scales assess actual CSR activity, making them idea
for this study.
Accordingly, measurement of CSR included four dimensions:
(1) economic;
(2) legal;
(3) ethical; and
(4) discretionary.
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However, the conceptualization used in this study suggests that one dimension is not
necessarily more important than the others (Maignan and Ferrell, 2000; Maignan et al.,
1999); hence, equal weights were applied to each of them. Therefore, a firm’s CSR level
was computed as the simple averages of the sums of the scores of the responses
across the four dimensions. To measure CSR, informants were asked to rate each item,
where “1 – strongly disagree” and “5 – strongly agree.” The Appendix displays items
for CSR.
Customer satisfaction. Andreassen and Lindestad (1998) suggest that customer
satisfaction indicators should tap into the construct by addressing an overall
evaluation of consumption experiences with a firm. Following Ping’s (1993) proposal
that the relationship between customer and firm reflects overall satisfaction, four
items were developed relating to customers’ expectations and the relationship
between customers and the firm. In addition, three items were adopted that are
commonly used in customer satisfaction research as indicators of the construct (Oliver
and Swan, 1989a). Thus, the scale contained seven items designed to gauge firms’
perceptions of the satisfaction of their customers. Informants rated each item on a
five-point Likert scale, where “1 – strongly disagree” and “5 – strongly agree” (see the
Appendix).
Employee turnover. In their studies of CSR, Maignan and Ferrell (2001) and Maignan
et al. (1999) measured employee commitment as the degree to which employees felt
connected and committed to a firm. However, their measurement did not assess actual
turnover levels and thus a different measurement is required. Thus, to assess turnover
levels, following Huselid (1995) and Guthrie (2001), a single question was used in this
study, asking informants to list what the average annual employee turnover
percentage was for their firm.
Reputation. A widely used measure of reputation is the Fortune Most Admired
Company index ofUSfirms(Mahon, 2002).However, the Fortune index has been criticized
to the point of some scholars arguing that the measurement should not be used as a proxy
for reputation (Fryxell andWang, 1994; Mahon, 2002). Further, inAustralia, a comparable
index does not exist. Thus, this study relied on the reputation scale developed by
Weiss et al. (1999).Weiss et al., following the unidimensional perspective (Yoon et al., 1993),
developed a scale that assesses a firm’s general perception of their reputation.
The scale does not assess reputation for anything specific (e.g. product innovation);
rather, the scale measures a firm’s assessment of how customers perceive their overall
reputation. This is consistent with theoretical treatments of reputation (Brown and
Logsdon, 1999;Roberts andDowling, 2002).The scale contained five itemsand informants
were asked to rate each itemon a five-point Likert scale,where “1 – strongly disagree” and
“5 – strongly agree” (see the Appendix).
Control variables. Several measures were used as control variables in this study.
These included firm size, firm age, industry type, and sales revenue. Firm size was
measured with a single item, number of full-time employees. Firm age was measured
with a single item, number of years in business. Industry type was a categorical
variable measuring six different industries. Since industry impacts a firm’s
competitiveness, dummy variables for the six industry types were included to
control for possible affects on the dependent variables. For sales revenue, dummy
variables were created for six categories, from less than $1,000,000 to a category of over
$200,000,000 per year.
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4. Analysis and results
4.1 Analysis
Means, standard deviations, and correlations are presented in Table I. To assess the
psychometric properties of the constructs, EQS version 6 (Bentler, 2006) was used to
conduct confirmatory factor analysis (CFA). To assess the constructs, four fit indices
were used:
(1) comparative fit index (CFI);
(2) goodness-of-fit index (GFI);
(3) root mean squared (RMR); and
(4) standardized root mean squared (SRMR).
These four indices are widely used as key fit indicators in CFA and the results are
presented in Table II. According to the findings, after scale purification (see the
Appendix), all constructs met thresholds for goodness-of-fit indicators in CFA (Bentler,
1990). Moreover, since the standardized factor loadings of all the measurement items
on their respective constructs were significant ( p , 0.05) and none of the confidence
intervals of the f values contained a value of one, the conclusion was made that the
constructs exhibited convergent and discriminant validity (Montoy-Weiss et al., 2001).
Finally, all constructs demonstrated sufficient reliability, exceeding the common
benchmark of 0.70 (Table II).
4.2 Results
To test for statistical significance between the independent and dependent variables,
regression analysis was used. For each equation, all variables were entered into a single
Variable Mean SD 1 2 3 4 5 6
1. Firm size 630.35 1,852.61 1.00
2. Firm age 42.42 40.91 0.09 1.00
3. CSR 4.05 0.46 0.12 * 0.06 1.00
4. Employee turnover 12.65 10.18 0.12 * 20.07 20.14 * 1.00
5. Customer satisfaction 4.09 0.54 20.04 20.04 0.45 * * 20.22 * * 1.00
6. Reputation 4.38 0.55 0.04 20.03 0.49 * * 20.14 * 0.62 * * 1.00
Notes: *p , 0.05; * *p , 0.01
Table I.
Descriptives and
correlations
Model/variable Mean SD
Internal
consistency
Cronbach’s
alpha CFI GFI RMR SRMR
CSR 0.94 0.92 0.04 0.06
Economic 3.94 0.55 0.73 0.72
Legal 4.50 0.42 0.82 0.81
Ethical 4.25 0.59 0.83 0.79
Discretionary 3.51 0.71 0.82 0.79
Customer
satisfaction 4.09 0.54 0.86 0.85 0.97 0.97 0.01 0.02
Reputation 4.38 0.55 0.89 0.88 0.99 0.99 0.01 0.01
Table II.
Results of CFA
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block. Prior to hypotheses testing, multicollinearity was tested using variance inflation
factors (VIF) and tolerance values. Since VIFwere no higher than 2 and tolerance values no
lower than 0.780, collinearity among the variables did not seemto be a problem(Hair et al.,
1995).The statistics for the regression analysis are presented in Table III.
The results indicated that CSR does appear to reduce employee turnover. CSR was
significantly and negatively associated with employee turnover (b ¼ 20.16;
t ¼ 22.81; p ¼ 0.001), which was the expected direction, suggesting that firms
demonstrating proactive CSR are reducing their turnover levels. Thus, H1 was
supported by the finding. With respect to H2, CSR was significantly and positively
associated with customer satisfaction, resulting in a beta of 0.50 (t ¼ 9.02; p ¼ 0.000).
Given the findings, H2 was confirmed. Regarding reputation, CSR was significantly
and positively associated with the construct (b ¼ 0.53; t ¼ 9.49; p ¼ 0.000). Hence, H3
was also supported. Lastly, as for the control variables, the consumer products
industry dummy was negatively linked with employee turnover, suggesting
employees were not leaving their jobs at a rate of others industries. The three
highest sales revenue dummies were positively associated with customer satisfaction
and reputation, suggesting firms with higher income might be in a better position to
commit resources to improve customer relations while bolstering reputation.
4.3 Additional analysis
There is precedent in the literature for examining the individual dimensions of CSR in
exploring potential benefits (Maignan and Ferrell, 2001). Thus, to extend the research
findings, dependent variables were regressed on each of the individual dimensions of
CSR (Table IV). With respect to employee turnover, both legal CSR (b ¼ 20.28;
t ¼ 23.51; p ¼ 0.001) and discretionary CSR (b ¼ 20.15; t ¼ 22.04; p ¼ 0.042) were
significant with a corresponding negative sign. For customer satisfaction, economic
CSR (b ¼ 0.29; t ¼ 4.48; p ¼ 0.000), legal CSR (b ¼ 0.26; t ¼ 3.74; p ¼ 0.000), and
discretionary CSR (b ¼ 0.23; t ¼ 3.72; p ¼ 0.000) were significant and positive. As for
Dependent variables
Independent variables Employee turnover Customer satisfaction Reputation
Firm size (number of employees) 0.09 0.01 0.03
Firm age (number of years in business) 20.09 20.03 20.03
Revenue dummy ($1.001M to $10M)
Revenue dummy ($10.001M to $50M) 20.03 0.09 20.06
Revenue dummy ($50,001M to $100M) 20.09 0.23 * * * 0.15 *
Revenue dummy ($100.001M to $200M) 0.08 0.21 * * * 0.12 *
Revenue dummy (over $200M) 20.03 0.24 * * * 0.13 *
Industry dummy (consumer products) 20.22 * * * 0.06 0.01
Industry dummy (financial services) 20.07 0.08 20.05
Industry dummy (insurance) 0.09 0.00 20.08
Industry dummy (personal services) 0.01 0.09 0.01
Industry dummy (business services) 20.02 0.04 20.04
CSR 20.16 * 0.50 * * * 0.53 * * *
R 2 0.12 0.29 0.30
F 2.81 * * * 9.02 * * * 9.49 * * *
Notes: *p , 0.05, * *p , 0.01, * * *p , 0.001; overall assessment
Table III.
Benefits of CSR
How does CSR
benefit firms?
421
reputation, economic CSR (b ¼ 0.24; t ¼ 3.71; p ¼ 0.000), legal CSR (b ¼ 0.23; t ¼ 3.42;
p ¼ 0.001), and discretionary CSR (b ¼ 0.25; t ¼ 3.91; p ¼ 0.000) were all significantly
and positively associated with the construct. Ethical CSR was not significantly
associated with any of the dependent variables.
5. Discussion
All three of the hypotheses were supported by the findings in this study. As a result,
this study offers some level of confirmation for scholars who have theorized that CSR is
a value creating activity important to firms beyond direct financial benefits, such as
those measured by traditional accounting-based measures. For example, the work of
Aguilera et al. (2007) suggests that meeting employees’ justice needs through CSR
should have the effect of lowering turnover rates. This study finds that CSR does
appear to reduce employee turnover. On the other hand, customer satisfaction is a
cumulative, global evaluation of product or service use based on experience with firms
over time and is a fundamental indicator of past, current, and future performance
(Anderson et al., 1994). This paper argued that, based on equity theory, firms can
improve their consumption experiences with customers by demonstrating CSR.
The results indicate that CSR is positively linked to customer satisfaction. Lastly,
Neville et al. (2005) argue that reputation is the overall evaluation received by an
organisation from its stakeholders concerning the credibility of the organisation’s
identity claims. The case was made, based on signaling theory, that CSR sends signals
to stakeholders that generates positive impressions or associations which, in turn,
affect reputation. The findings from this study confirm that CSR is positively linked to
reputation.
Dependent variables
Independent variables Employee turnover Customer satisfaction Reputation
Firm size (number of employees) 0.10 0.02 0.03
Firm age (number of years in business) 20.10 20.03 20.02
Revenue dummy ($1.001M to $10M)
Revenue dummy ($10.001M to $50M) 20.06 0.12 * 0.03
Revenue dummy ($50,001M to $100M) 20.11 0.26 * * * 0.19 * *
Revenue dummy ($100.001M to $200M) 0.05 0.21 * * * 0.13 *
Revenue dummy (over $200M) 20.05 0.22 * * * 0.12 *
Industry dummy (consumer products) 20.20 * * * 20.01 20.05
Industry dummy (financial services) 20.07 0.01 20.10 *
Industry dummy (insurance) 0.07 0.04 20.04
Industry dummy (personal services) 20.01 0.10 * 0.02
Industry dummy (business services) 20.01 0.04 20.03
Economic CSR 0.06 0.29 * * * 0.24 * * *
Legal CSR 20.28 * * * 0.26 * * * 0.23 * * *
Ethical CSR 0.13 20.10 20.01
Discretionary CSR 20.15 * 0.23 * * * 0.25 * * *
R 2 0.17 0.34 0.34
F 3.38 * * * 9.06 * * * 8.94 * * *
Notes: *p , 0.05, * *p , 0.01, * * *p , 0.001; assessment by individual component
Table IV.
Benefits of CSR
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6. Implications
Taken together, the findings of this study have two important theoretical implications.
First, the findings supplement a small research base of studies empirically examining
benefits of CSR beyond those that rely purely on financial-based dependent variables.
For example, while Greening and Turban (2000) find that CSR acts as a means to attract
new employees, the present study finds that CSR reduces employee turnover, suggesting
that CSR might create a symbiotic relationship between acquiring and retaining
employees. By expanding studies beyond theUSAand Europe, the findings of this study
are particularly important as scholars have called for researchers to further study how
and under what conditions CSR benefits firms (Rowley and Berman, 2000).This requires
an international body of research and the results here should give scholars additional
confidence in predicting whether or not – and how – CSR benefits firms.
Second, there is debate among scholars as to which dimensions of CSR are most
important (Rowley and Berman, 2000). According to Carroll (1979), firms have four
responsibilities; however, do firms necessarily need to demonstrate responsibility
across all dimensions equally to be considered a socially responsible company?
By separately evaluating the four dimensions of CSR as an additional component to the
main tests, the results of this study suggest that some individual dimensions of CSR
might be more important than others. In the case of reducing employee turnover, legal,
and discretionary dimensions had the biggest impact. One explanation might be that
firms who meet or exceed legal requirements or offer outstanding care for employees or
communities may be in the best position to diminish turnover due to employees’
positive justice perceptions. On the other hand, economic, legal, and discretionary
dimensions of CSR were positively associated with customer satisfaction. The finding
suggests that, for example, firms who are demonstrating strong commitment to their
economic responsibility (e.g. through offering highly valued products), ensuring
customers are not harmed in any way by meeting legal standards (legal CSR), or who
are treating employees well through benefits and high salaries (discretionary CSR)
might ultimately be reaping the rewards of higher customer satisfaction.
Most surprising, perhaps, was that the ethical dimension of CSR was not
significantly associated with any of the dependent variables. This does seem at odds
with previous studies that have found firms’ ethical practices to impact on organisation
outcomes (Choi and Jung, 2008). An implication of the finding suggests that all CSR
activities do not necessarily have equal impact on organisational outcomes. For
example, in their study, Maignan and Ferrell (2001) found that only the economic and
discretionary dimensions of CSR were significantly associated with outcomes such as
employee commitment and financial performance. However, further research would
need to investigate why and under what conditions the ethical dimension of CSR is less
important to organisational success relative to the other three dimensions.
As for practical implications, firms throughout the world are challenged to
demonstrate responsible corporate behavior. However, demonstrating responsible
corporate behavior is not without opportunity costs. On the plus side, evidence is
mounting to suggest that proactive CSR is directly related to financial performance
indicators. The findings of this demonstrate that CSR also appears to reduce staff
turnover, while increasing both customer satisfaction and reputation levels. This is
important as some executives in Australia (Birch, 2002), and around the world
(McKinsey & Company, 2006), continue to believe that CSR is an activity to avoid,
How does CSR
benefit firms?
423
other than their economic responsibility. Thus, companies should realize that CSR
activities can represent a robust strategy, particularly in an environment where
stakeholders, such as customers, employees, and the government, have increased
social concerns (Davis and Stephenson, 2006). In fact, Porter and Kramer (2006)
suggest that CSR may become the new battleground for competitive advantage.
7. Limitations and conclusion
There are limitations to this study. First, as with much data used in organisational
science, the data are cross-sectional. As a result, the research did not assess the degree
to which employee turnover, customer satisfaction, or reputation changed over time;
nor did it measure the extent to which changes in CSR affect these variables over time.
Clearly, longitudinal research is needed to develop richer insight. Second, all of the data
were self-reported by the participating firms. While CEOs were expected to be in a good
position to assess the variables used in this study, common method bias is a concern.
However, a Harman’s ex post one-factor test (Podsakoff et al., 2003) revealed that
a single factor solution did not emerge, nor did any factor account for a majority of
the variance. Hence, common method bias appears to be minimal. Lastly, the
generalizability of the study is limited by the sampling frame.While the firms sampled
do represent a wide range of industries and sizes, they are limited to the Australian
context. Replicated studies in other countries are required to validate the findings in
this research.
In conclusion, CSR has long been a controversial topic in discussions on business
firms, mainly with respect to diverting corporate attention – and capital – from
maximizing shareholder value. Thus, to legitimize the field, empirical research has
mainly concentrated on testing the relationship between CSR and financial performance;
results increasingly demonstrate a positive link (Griffin and Mahon, 1997; Orlitzky et al.,
2003). While studies of the CSR-financial performance relationship are numerous and
mainly conducted in the USA, they leave a gap in empirical tests of the benefits of CSR.
To extend the research stream, this study explored the relationship between CSR and
employee turnover, customer satisfaction, and firm reputation in the Australian context.
The findings suggest that CSR is linked to all three dimensions. Thus, extending
previous research, this paper demonstrates that CSR appears to offer valuable benefits;
namely, benefits beyond those that are associated with traditional, financial-based
outcomes.
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benefit firms?
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Appendix
Corporate social responsibilitya
Economic:
. Our business has a procedure in place to respond to every customer complaint.
. We continually improve the quality of our products.
. We use customer satisfaction as an indicator of our business performanceb.
. We have been successful at maximizing our profits.
. We strive to lower our operating costs.
. We closely monitor employees’ productivity.
. Top management establishes long-term strategies for our businessb.
Legal:
. Managers are informed about relevant environmental laws.
. All our products meet legal standards.
. Our contractual obligations are always honored.
. The managers of this organisation try to comply with the law.
. Our company seeks to comply with all laws regarding hiring and employee benefitsb.
. We have programs that encourage diversity of our workforce (in terms of age, gender,
or race)b.
. Internal policies prevent discrimination in employees’ compensation and promotionb.
Ethical:
. Our business has a comprehensive code of conduct.
. Members of our organisation follow professional standardsb.
. Top managers monitor the potential negative impacts of our activities on our community.
. We are recognized as a trustworthy company.
. Fairness toward coworkers and business partners is an integral part of our employee
evaluation process.
. A confidential procedure is in place for employees to report any misconduct at work
(such as stealing or sexual harassment).
. Our salespersons and employees are required to provide full and accurate information to
all customers.
Discretionary:
. The salaries offered by our company are higher than industry averages.
. Our business supports employees who acquire additional educationb.
. Our business encourages employees to join civic organisations that support our community.
EBR
22,4
430
. Flexible company policies enable employees to better coordinate work and personal life.
. Our business gives adequate contributions to charities.
. A program is in place to reduce the amount of energy and materials wasted in our
business.
. We encourage partnerships with local businesses and schoolsb.
. Our business supports local sports and cultural activities.
Customer satisfactiona:
. Compared to competitors, our customers find that our products/services are much better.
. Our customers are very satisfied with the products/services we offer.
. Our customers are very satisfied with the value for price of our products/servicesb.
. Our customers find that the products/services we offer exceed their expectationsb.
. The likelihood that our customers will recommend our products/services to others is high.
. Our customers are very satisfied with the quality of our products/services.
. The ability to achieve high levels of customer satisfaction is a major strength of our firm.
Reputationa:
. Our firm is viewed by customers as one that is successful.
. We are seen by customers as being a very professional organisation.
. Customers view our firm as one that is stable.
. Our firm’s reputation with customers is highly regarded.
. Our firm is viewed as well-established by customers.
Notes: aFive-point scale ranging from strongly disagree to strongly agree; bitem eliminated based
on refinement procedure.
Corresponding author
Jeremy Galbreath can be contacted at: [email protected]
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benefit firms?
431
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