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International Journal of Accounting & Business Management

www.ftms.edu.my/journals/index.php/journals/ijabm

Vol. 5 (No.2), November, 2017

ISSN: 2289-4519 DOI: 24924/ijabm/2017.11/v5.iss2/93.111

This work is licensed under a

Creative Commons Attribution 4.0 International License.

Research Paper

IMPACT OF COPORATE SOCIAL RESPONSIBILITY ON FIANNCIAL PERFORMANCE: A STUDY ON MANUFACTURING COMPANIES LISTED IN

LONDON STOCK EXCHANGE (LSE)-UK

Bikon Ghosh BSc(Hons) Accounting & Finance Graduate

Lords Ashcroft International Business School

Anglia Ruskin University, UK

catchbikon@gmail.com

Abdul Basit Lecturer

School of Accounting & Business Management

FTMS College, Malaysia

Abdulbasit@ftms.edu.my

Zubair Hassan Senior Lecturer

School of Accounting & Business Management

FTMS College, Malaysia

Zubai7@gmail.com

ABSTRACT The purpose of this study is to examine impact of Corporate Social Responsibility (CSR) on financial

performance. The research is carried out on 36 manufacturing and production companies listed in the

London Stock Exchange (LSE) within the period of 2011-2015, with the total observations of 180. The

subsectors considered are Aerospace and Automotive, Mining, Industrial Goods, Food, Beverage and

Tobacco, Domestic Goods, Industrial Machinery and Equipment, Healthcare and Paper Products.

The independent variable used in this research is Corporate Social Responsibility (CSR) broken into

4 constituent: Corporate giving, Employee safety, Greenhouse gas emission reduction and waste

reduction. The dependent variables used are Return on Assets (ROA) and Return on Equity (ROE).

Sampling technique used in this research is convenience sampling. The research paradigm adopted a

positivist approach and quantitative data was used. This study adopts an explanatory research design,

and secondary data is collected and analyzed using E-views software to generate the descriptive, and

regression statistics. Furthermore, the findings in this study show that Corporate giving, Employee

safety and waste reduction have no significant impact on financial performance. However,

Greenhouse gas emission reduction has significant but negative impact on financial performance. The

study concludes that reduction in greenhouse gas emission enhances returns on assets and

shareholders’ equity. It is recommended that other researchers use long-term financial performance

indicators such as Tobin Q or Stock return be used with a wider time frame to get a more solid

conclusion.

Key Terms: Corporate Social Responsibility, Financial Performance, Corporate giving, Employee

safety, Greenhouse Gas Emission Reduction, Waste Reduction, ROA, ROE, LSE and United Kingdom

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1. INTRODUCTION

The purpose of this study is to examine the impact of Corporate Social Responsibility

(CSR) on financial performance in manufacturing and production companies listed in the

London Stock Exchange (LSE). The United Kingdom is recognized as the ninth largest

manufacturer globally (ONS, 2017). The manufacturing sector contributed 25% to the United

Kingdoms’ Gross Domestic Product (GDP), and 10% to United Kingdoms’ Gross Value

Added (GVA), also the United Kingdom manufacturing sector accounted for 45% of total

exports in 2015 (ONS, 2017). The manufacture of motor vehicles, trailers and semi-trailers

saw the largest growth in the value of manufacturers’ sales in 2015, with an increase 2.6%

(ONS, 2017). These impressive figures show that the manufacturing and production sector is

a key contributor to the economy of the United Kingdom, thus the manufacturing and

production subsectors considered for this study include Aerospace and Automotive, Mining,

Industrial Goods, Food, Beverage and Tobacco, Domestic Goods, Industrial Machinery and

Equipments, Healthcare and Paper Products.

The concept of Corporate Social Responsibility (CSR) identifies the ability of a

business to look beyond fulfilling financial and legal obligations by voluntarily engaging in

socially responsible activities to ensure the growth and development of the environment in

which it operates (McGuire, 1963). Various theoretical approaches and models exist in the

context of Corporate Social Responsibility (CSR) which has been employed by numerous

researchers. The pyramid model of CSR introduced by Carroll (1979) has been applied by a

number of researchers (Ganescu&Gangone, 2013; Fadun, 2014). Triple Bottom Line

proposed by Elkington, (1998) have been used in a lot of studies as well (Boyd, 2006; Lee

and Ha-Brookshire, 2017). Also the Instrumental Stakeholder theory introduced by Jones,

(1995) which is a CSR practical framework of the Stakeholder theory originally proposed by

Freeman (1988) have been applied in numerous studies (Brammer and Millington, 2008;

Hillman &Keim, 2001). Additionally the Porter’s Competitive Advantage Theory proposed

by Micheal E. Porter (1990) has been used by some researchers (Waddock and Graves 1997).

Furthermore, Bitanga and Bridwell (2005) have applied the UN Global Compact principles

(UN, 1999).The pioneering researchers on the concept of Corporate Social Responsibility

(CSR) are Chester Barnard, J. M. Clark and Theodore Krepps, these researchers studied the

concept of CSR through the 30’s and 40’s respectively (Carroll, 1999). Through the 60’s and

the 70’s neoclassical economist Milton Friedman (1962, 1970) the progenitor of capitalism

debated on profit maximization being the only social responsibility of managers and

companies to the society. During the late 70’s, Archie B. Carroll (1979) made an

evolutionary contribution to the concept of CSR by proposing a four dimensional framework

that shows how companies should be responsible to the society. In the 80’s Freeman (1984)

contributed a great deal to the literature by arguing that firms must satisfy a variety of

constituents (stakeholders) that can influence their outcomes. In the early 90’s Elkington

John (1994) linked the concept of Corporate Social Responsibility with Sustainability by

integrating the economic, environmental and social performance of a business (Ghelli, 2013).

In recent years, global issues such as Human Rights, Child Labour, Anti-Corruption and

Poverty have been added to the CSR literature by intergovernmental organizations like the

United Nation (UN) and the Organization for Economic Co-operation and Development

(OECD) (Ghelli, 2013). Recent studies have been conducted in developed also in developing

countries. Madorran and Garcia (2016) carried out their research focusing on Spanish

companies taken from the IBEX 35 stock market index. Madugba and Okafor (2016) carried

out a research in of listed banks in Nigeria. Ferrero-Ferrero, Fernández-Izquierdo, & Muñoz-

Torres (2016) carried out their research in listed companies of the EU-15 countries.

Gherghina and Vintilă (2016) carried out their study on listed companies in Romania.

PekanovStarčević, Mijoč&Mijoč, (2016) carried out their study on 158 Croatian companies

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listed on the Zagreb Stock Exchange. A number of related studies have been carried out in

the United Kingdom. Samy, Odemilin and Bampton (2010) carried out a research on 20

British companies. Liu, et al., (2016) carried out their study on 62 FTSE 100 companies in

the United Kingdom. Brammer, Brooks, &Pavelin, (2006) carried out their research by

measuring the stock returns of 451 UK quoted companies among the FTSE All share Index.

Singh (2014) carried out his study on Uk companies divided into 34 firms for the industry of

crude petroleum, 32 firms for mining metal and 38 firms for pharmaceutical industry from

the ORBIS Database. Gatsi and Ameyibor (2016) carried out their research on 43 companies

listed in the London Stock Exchange. Previous studies have shown inconsistency in

measuring Corporate Social Responsibility by using total number of words under in

Corporate Social Responsibility reports. However, this research focuses on measuring

outcomes, thus giving a solid representation on the impact of CSR on financial performance.

In the lenses of manufacturing companies are constantly criticized by stakeholders on how

current issues on social responsibilities, environmental responsibility and climate change are

being tackled. The current increasing pressure is not only articulated by customers, but also

by suppliers, employees, community groups, governments, as well as nongovernmental

organizations and local community groups (Brammer& Millington, 2008). Berman et al.,

(1999) adds that companies may be exposed to regulatory risk, legislative and fiscal action.

On the other hand, if companies can fulfill the expectations and interests of stakeholders’ it is

likely to be beneficial (Andriof, Waddock and Rahman, 2002). Hence, companies can

achieve their goals of enhancing profitability and increasing the shareholder value (Jensen,

2001). This research will be beneficial to the author by building a great magnitude of

understanding on the concept of CSR. This paper will also provide knowledge on how CSR

activities influence short-term financial performance in the UK manufacturing companies.

Furthermore, this research, will add substantially to the corporate world as longitudinal data

is used, hence the study will help the managers by building a timeline of events through 5

years, to indicate how the changes in the key variables adopted and the general effect of CSR

activities on the financial performance of the manufacturing and production industry.

Furthermore, this study will be beneficial to research students as it provides a range of

literature and in depth analysis on how CSR activities can affect profitability in

manufacturing companies in the United Kingdom.

Research Objectives

To examine the impact of corporate giving on financial performance (ROA and ROE)

To examine the impact of Employee Safety on financial performance (ROA and

ROE)

To examine the impact of Greenhouse Gas (GHG) Emission on financial performance

(ROA and ROE)

2. Literature Review

Bowen (1953) introduced the first formal definition, stating that the social

responsibilities of businessmen as the obligations of businessmen to pursue those policies, to

make those decisions, or to follow those lines of action which are desirable in terms of the

objectives and values of our society. Friedman (1970) states that the only social responsibility

of a business is to properly utilize it resources, maximize the wealth of the shareholders,

engage in the free market system and operate in a legal manner. Carroll (1979, p.500) states

that social responsibility of business encompasses the economic, legal, ethical, and

discretionary expectations that society has of an organization at a given point in time.

Furthermore, Holmes and Watts (2000) defines Corporate Social Responsibility as the

continuing commitment by business to contribute to economic development and behave

ethically while improving the quality of life of the workforce and their families as well as of

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the community and society at large. Different definitions have been assigned to corporate

giving. Adams & Hardwick (1998) defines corporate giving as the aggregate of charitable,

community and political contributions. Brammer& Millington (2006) describe corporate

giving as nonmonetary as well as monetary. Employee safety in the workplace is meant to

provide employees with work conditions that reduce or eliminate work-related diseases and

occupational injuries to enable a physical and psychological well-being (Lowe et al., 2003).

Employee safety is a critical factor to take into account in order to achieve economic,

environmental and social objectives (Coats and Max, 2005). Greenhouse gases (GHGs) are

known as gases that absorb and re-emit energy that radiates upward from the sun to the

earth’s surface, adding heat to the lower atmosphere, causing the Earth’s surface to be

warmer hence changing the Earth’s climate(IPCC, 2017). The principal greenhouse gases that

are emitted into the atmosphere solely through human activities are carbon dioxide (CO2),

methane (CH4), nitrous oxide (N2O) and chlorofluorocarbons (CFCs) which are the key

drivers of global warming (IPCC, 2017). ROA is an accounting-based measure and an

indicator of the financial health of the firm (Selling and Stickney, 1989). ROA captures the

internal efficiency of the firm as it measures the firm’s use of capital and indicates the

profitability of investments in real assets (Selling and Stickney, 1989). ROE is a financial

ratio showing how much profit a company generates with the money invested by its

shareholders (Easton, 2004). It shows to the e tent company is utili ing its investments to

generate earnings growth. R E is measured dividing net income of the company by

shareholder e uity (Easton, 2004).

Carroll (1979) proposed a four dimensional conceptual framework of corporate

performance which identifies the economic, legal, ethical and philanthropic domains of CSR.

Carroll also believes that the four domains are not mutually exclusive, and the framework

suggests that economic responsibility is the foundation upon which other responsibilities are

realized and achieved (Carroll 1979). McGuire (1963) proposes that the concept of CSR

explains the need for businesses to achieve certain responsibilities extended beyond

economic and legal duties. Proponents of Carroll’s pyramid believe that by identifying and

distinguishing the ethical and philanthropic responsibilities, the framework explicitly

identifies the responsibilities that extend beyond economic and legal duties (Crane &Matten,

2004). However, Friedman (1970) view holds that the only social responsibility of the

management of a business is to maximize the wealth of shareholders and operate in a legally

acceptable manner. Friedman (1970) believes that social issues should be addressed by the

free market and the government. Maignan and Ferrell (2003) found that French and German

consumers tend to prioritize legal responsibilities over ethical and economic obligations

whereas American consumers prioritize economic obligations. Visser (2006) also found that

economic responsibilities are of primary importance among African consumers, followed by

philanthropic activities and then legal and ethical obligations. Hockertsand Morsing(2008)

argue that there is no need to represent CSR as a hierarchy. Freeman, Wicks &Parmar (2004)

adds that the model places profit making over legal and ethical responsibilities, highlighting

some world known case studies: Enron, WorldCom and Tyco International. Carroll’s

pyramid model lacks instrumental value, as recent trend integrates the social, economic and

environmental aspects of corporate responsibility (Elkington, 1994; Visser&Sunter, 2002).

The concept of 'the triple bottom line'( TBL) was introduced by the British consultancy firm

founder John Elkington in 1994 (Hindle, 2009). Elkington (1994) proposed the TBL

framework in an attempt to measure sustainability. Rogers and Hudson (2011) have referred

to the model as the practical` framework of sustainability. Triple Bottom Line is a framework

aimed at moving beyond the traditional reporting of profitability as corporate performance

and incorporating social and environmental measures (Alhaddi, 2015). Elkington (1994)

suggests the integration of three different bottom lines as the core of a business responsibility.

The bottom lines are called the three Ps; people, planet and profits. Each bottom line is

treated with the same degree of emphasis, giving the framework a more balanced and

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coherent construct (Elkington 1997). However critics have questioned the validity and

practical usefulness of the framework (Slaper& Hall, 2011; Norman and Macdonald, 2004).

Norman and Macdonald (2004) having tested the model believe that the framework is

inherently misleading with no literal meaning, and an unhelpful addition to the current trends

of CSR. Further arguments on the framework has to do with its complexity in measurement

(Slaper and Hall, 2011; Hindle, 2009). Slaper and Hall (2011) argues that the three bottom

lines of the framework don’t have a common unit of measurement. Hindle (2009) argues that

the social and environmental concerns of a business cannot be quantified in the same respect

as financial figures that specify cost or benefits (profit/loss). The framework focuses on the

integration of three bottom lines which are economic, social and environmental (Epstein,

2008). However, it lacks a universal practicability as it doesn’t indicate the interdependent

relationship between the three bottom lines (Archel et al. 2008). During the World Economic

Forum in January 1999, United Nations Secretary-General Kofi Annan introduced nine

principles to business leaders. The tenth principle which is against corruption was added in

2004 after lengthy consultations (UN Global Compact, 2010). The Global Compact is not

designed as a code of conduct, but rather a voluntary initiative aimed at stimulating

responsible acts from businesses and also brings about convergence around universally

shared values (UN Global Compact, 2010). Mckinsey and Company (2004) strongly believes

that the Compact promotes networking; also mutual learning is fostered among businesses,

public institutions and civil society organizations. The UN Global Compact principles can be

considered as both a practical framework for action, and a platform for proving commitment

and leadership (Bitanga and Bridwell, 2010). However, critics have questioned the

nonbinding character of membership, arguing that compliance is not monitored as there is no

structure for accountability (Sethi and Schepers 2014). The Global Compact sets a platform

for opportunistic corporations to prepare grandiose reports of corporate citizenship without

true accountability (Sethi and Schepers 2014). Some critics disagree with the positive impact

that Global Compact claims to have on developing countries, highlighting that most of the

signatories are from developed countries (Bitanga and Bridwell, 2010). The stakeholder

theory was originally proposed by Richard Edward Freeman in 1984. The theory asserts that

firms must satisfy variety of constituents that can influence their outcomes; the constituents

are regarded as stakeholders (Freeman, 1984). He established a stakeholder model to show

the stakeholders that can influence business outcomes (Freeman, 1984). The instrumental

stakeholder view is an important strand of the stakeholder theory that explains connection

between Corporate Social Responsibility and financial performance (Jones, 1995). According

to Donaldson & Preston, (1995) the fundamental assumption of the instrumental stakeholder

view holds that a business can improve profitability by creating a competitive advantage

through proper and effective management of key stakeholders relationships. However, critics

believe that the stakeholder view serves as a ground for managerial opportunism, where the

managers inappropriately use the shareholders’ funds to boost their social status (Brugha and

Varvasovszky, 2000). Some other critics have pointed out that the theory lacks a specific

theoretical logic that truly explains the relationships between stakeholders and the firm

(Fassin, 2009). Numerous studies have tested the theory on the grounds of the relationship

between Corporate Social Responsibility (CSR) and financial performance. Waddock and

Graves (1997) found Corporate Social Performance (CSP) which is a widely cited as a

measure for the stakeholder approach, to be positively correlated to past and future financial

performance.

In a study conducted by Asatryran and Brezinova (2014) on the link between

corporate social responsibility and financial performance in the Airline Industry, data was

collected from the annual reports of 20 randomly selected airline companies in Central and

Eastern Europe. Yuwita and Kalanjati (2017) investigated the association between Corporate

Social Responsibility (CSR) disclosure and financial performance within cigarette companies

listed on Indonesian Stock Exchange. Tsoutsoura (2004) sampled 13 different industries,

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which involved mining, food, textiles, transportation, hotels and more. The author was able to

compare the outcomes of different industries, hence providing a broader picture on how

Corporate Social Responsibility impacts Financial Performance in the chosen country.

Asatryran and Brezinova (2014) measured CSR using variables such as Community

Performance, Environment Management Systems and Employee Relations, these variables

give more reliable information on the sector and how Corporate Social Responsibility

impacts financial performance.

Conceptual Framework:

Figure 1: Conceptual Framework

Liang and Renneboog (2017) found that cash donations have a positive impact on

ROA, implying that cash donation serve as a signaling mechanism of future corporate

performance because of their transparency. Seifert et al., (2003) found that corporate giving

have no significant impact on ROA, suggesting that strategic benefits from philanthropic

activities may offset the costs on corporate giving. Kim (2013) found that corporate donations

have a positive impact on future R A performance, he’s result is contingent on the fact that

Koreans recognize cash donations as the most aggressive method in carrying out social

responsibilities and this would cause rapid growth in short term business performance.

H1a: There is a positive significant impact of corporate giving on Return on Assets (ROA)

Zulfiqar (2016) found that there is no significant impact on cash donations and ROE,

implying shareholders’ return remain unaffected by spending on the corporate philanthropy

due to the capacity and profitability of the sampled companies to pay shareholders.Seifert et

al., (2003) found that corporate giving has no significant impact on ROE, suggesting that the

insignificant impact might be contingent on the fact that there may be so many other more

important primary factors that influence stock valuation, cash donation is regarded as a

secondary factor.

H1b: There is a negative significant impact of corporate giving on Return on Equity (ROE)

Fan and Lo, (2012) found that occupational health and safety management in the

fashion and textile industries have a negative impact on ROA, suggesting that adoption and

compliances to ccupational Health and Safety ( HS) might cause a strain on a company’s

financial position. Asatryan and Bře inová, (2014) also found that employee relations (which

includes employee safety) has a positive yet insignificant impact on ROA, suggesting that

although there is a need for airline companies within Central Eastern Europe to undertake

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CSR activities to boost their reputation and in turn increase ROA, no casualty exists between

the variables. Uadiale and Fagbemi (2011) found that employees’ relation which has no

significant impact on R A, implying that employee relation doesn’t have any effect on R A.

H2a: There is a negative significant impact of Employee Safety on Return on Assets (ROA)

It has been claimed that while workplace safety might be a source of additional costs

for the firm, it has potential benefits. For example, investment in human capital might lead to

higher operational performance through increased employee motivation and possibly higher

worker productivity, thus enhance profitability (Becchetti et al., 2008). Asatryan and

Bře inová, (2014) found that employee relations (which includes employee safety) has a

positive significant impact on ROE. Uadiale and Fagbemi (2011) found that employee

relations have a significant relationship with ROE, implying that Corporate Social

Responsibility towards employees increases the returns on shareholders’ e uity among

Quoted Conglomerate Companies in Nigeria.

H2b: There is a positive significant impact of Employee Safety on Return on Equity (ROE).

Rokhmawati, Sathye and Sathye (2015) found that increased amount of GHG

emissions led to a relative increase in ROA, implying that there are low penalties for

increased amount of GHG emissions and there is a lack of reasonable financial incentives for

reduced GHG emissions among manufacturing companies in Indonesia. Some researchers

have found an insignificant relationship between variations in greenhouse gas (GHG)

emission and ROA, implying that a decrease or increase in GHG emission has no significant

effect on ROA (Busch and Hoffman, 2011; Gallego-Alvarez, Segura and Martínez-Ferrero,

2015).

H3a: There is a negative significant impact of Greenhouse Gas (GHG) Emission on Return on

Assets (ROA)

Iwata and Okada (2011) discovered that greenhouse gas emission reductions have no

statistical significant impact on ROE. This result may be attributed to the fact that ROE does

not include debt but reflects equity capital. A number of researchers have found that

greenhouse gas emission has no significant impact on ROE (Nyirenda, Ngwakwe and Ambe,

2011; Busch and Hoffman, 2011). Gallego-Alvarez, Segura and Martínez-Ferrero (2015)

found that reduction in greenhouse gas emission increases ROE; hence companies that are

more proactive towards environmental issues, such as GHG emission reductions, can achieve

competitive advantage and thus better financial performance.

H3b: There is a negative significant impact of Greenhouse Gas (GHG) Emission on Return on

Equity (ROE)

Iwata and Okada (2010) found that waste emission has a negative significant impact

on ROA in dirty industries among Japanese manufacturing companies, relating the outcome

to the fact that dirty industries are faced with higher cost as in regards to more severe

environmental sanctions and higher risks due to failure to comply with the laws and

regulations, and lawsuits. King and Lenox (2001) found a significant, positive impact of

waste prevention and future ROA, implying that environmental proactive firms that prevent

waste generation through recycling and innovative technologies experience a lagged increase

in ROA.

H4a: There is positive significant impact for waste on Return on Assets (ROA)

A number of studies have been carried out to find out the relationship between waste

management and ROE. Iwata and Okada (2011) discovered that waste emissions do not have

significant impacts on ROE, stating that exhaustive measures have been carried out by

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Japanese environmental regulators; hence the influence of waste emissions may be restricted

to the relatively narrow range of stakeholders. Obara et al., (2017) found that expenditure on

waste reduction among Oil and Gas companies in Nigeria has a high positive and significant

influence on ROE, stating if waste emissions are to increase, environmental oriented

shareholders’ may decide to pull out of the business hampering the ability of the business to

continue in operation and reducing the overall income of the business which will

automatically reduce the return on equity.

H4b: There is positive significant impact for waste on Return on Equity (ROE)

3. RESEARCH DESIGN AND METHODOLOGY

The positivist approach is adopted for this research as data on the key variables

constructed from aforementioned empirical theories, are collected in a quantifiable form and

measured precisely in order to verify or falsify the predetermined hypotheses of this research

(Smith, Thorpe and Jackson, 2013). This research is approached using quantitative data as

measurable data for the key variables are obtained from annual, sustainability, environmental

and corporate social responsibility reports of the sampled companies, tracked over a specific

period of time using statistical analysis in order to nullify and validate hypothesis that capture

the trends and facts on how CSR impacts financial performance in the UK manufacturing and

production sector (Quinlan, 2015). The quantitative approach is beneficial to this study as

data collection process in unstructured, enabling the researcher to identify the precise

specification for the key variables thus achieving high levels of data reliability (Hair et al.,

2006). This study adopts mixed research designs which include explanatory and descriptive.

Descriptive design is adopted as it helps describe the basic relationship between the key

variables and the sample through time, whereas explanatory design helps to provide answers

to the research questions by identifying the reason behind the impact of the independent

variables on the dependent variable (Smith, Thorpe and Jackson, 2013). Explanatory research

design is used as the entire aim of this study is to identify and explain the reason behind the

impact of corporate giving, employee safety, greenhouse gas emission reduction and waste

reduction on ROA and ROE (Collin and Hussey, 2013). Exploratory research design is not

suitable for this study as it is only applicable when there is limited knowledge or high level of

uncertainty on a topic (Zikmund et al., 2010).This study adopts a longitudinal research design

as measurable data collected from sampled firms are tracked over the time-span of five years,

within 2011-2015 (Walliman, 2011). Cross-sectional describes relationship between

variables at a single time (Zikmund et al., 2010). Longitudinal design is the most appropriate

for this study as the research questions and hypotheses are affected by how the key variables

change over the chosen time span of 5 years (Hair et al., 2006).

Data Collection Method

This research is conducted using secondary data as it enables the researcher have easy

and quick access to data, it is more cost saving than primary data in the context of this

research (Stevens, et al., 2006). Also the quantitative data required for this research is made

available in the annual, sustainability, environmental and corporate social responsibility

reports of the sampled companies (Smith, Thorpe and Jackson, 2013).

Population and Sample

In this research, the target population is 244 listed manufacturing companies in the

London Stock Exchange under the following subsectors; aerospace and automotive, mining,

industrial goods, foods, beverage and tobacco, domestic goods, Healthcare, paper products

and industrial equipment. Szklo (1998) have described sample size as a subset or a small part

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of an entire population. For this study, 50 companies were considered as the sample size,

however 36 companies were chosen due to limited data for key variables in corporate reports.

Table1: illustration of sample size

Sector Total Population Sample Size

Aerospace and Automotive 12 4

Mining 73 7

Industrial Goods 30 5

Foods and Beverage 33 11

Domestic Goods 17 3

Healthcare 42 3

Paper Products 2 1

Industrial machinery 35 2

Total 244 36

Most manufacturing companies listed in the London Stock Exchange recently started

reporting their environmental performance, and the European Union (EU) made CSR

reporting mandatory in 2014, and data was taken for 2011 to 2015. ). In this study, the sample

size and technique was chosen due to data availability and time restraint.

Accessibility & Ethical Issues

Accessibility can be understood as the extent at which statistical information required

is available and accessible for a research purposes (OECD, 2006). It has been empirically

observed that corporations are constantly adapting to trends and developing their websites in

order to interact with the public about financial and non-financial performances (Walliman,

2011). Based on this study, data gathered on key variables are extracted from annual,

sustainability, corporate social responsibility and environmental reports of the sampled

companies which are made available on their corporate websites.

It is essential for researchers to take note of possible ethical issues that interfere with

reliability during research process (Smith, Thorpe and Jackson, 2013). These ethical issues

include data manipulation and copyright issues (Kamat, 2006). It is the duty of the researcher

to ensure that the research process is carried out in a professional manner. For this research,

secondary research is adopted thus no major ethical issues was encountered by the researcher.

Data Analysis

For this study, E-views software is used to generate statistical information from data

analysed. E-view is regarded as the most effective software tool used for forecasting

(Weathington, Cunningham, and Pittenger, 2012). In order to undertake statistical analysis on

the quantitative data gathered, E-views is used to generate descriptive, correlation and

regression statistics. The results gathered are further used to conclude research. In this

research, descriptive statistics was used to show the casual link between the variables, the

sampled companies and the period investigated (Collin and Hussey, 2013). ). Multiple

regression analysis is the most applicable for this research in order to measure the effectof

multiple independent variables; corporate giving, employee safety, greenhouse emission

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reduction and waste reduction on the dependent variables; return on assets (ROA) and return

on earnings (ROE) (Kleinbaum et al., 2013).

4. RESULT AND DISCUSSION

Descriptive Analysis

Table 2: Descriptive Means

Variables Mean Standard Deviation

Corporate giving 0.002715 0.007102

Employee Safety -0.06366 0.305366

GHG Emission reduction 0.014225 0.16299

Waste reduction -0.01351 0.272091

ROA 0.097083 0.116632

ROE 0.258276 0.481755

The results in Table 2 shows that among the independent variables, employee safety

has the highest influence on the sampled companies with an average mean value of -0.0636

and a standard deviation of 0.3053. This implies that workplace injury dropped by 6% among

the sampled companies during the period investigated. The average workplace injury in

manufacturing companies in the UK is at its lowest which is 2%, and the rate of workplace

injury have dropped by 40% since 2002 (ONS, 2017).It is also indicated in the table that the

average mean for greenhouse gas (GHG) emission is 0.014 and the corresponding standard

deviation is 0.305. This implies that the average greenhouse gas emitted by the sampled

companies increased by 1.4% during the period investigated. Increase may reflect increased

output among the sampled companies. The table also shows that corporate giving attained an

average mean of 0.0027 and a corresponding standard deviation of 0.007. This implies that

0.2% of the revenue generated among the sampled companies was for corporate giving

during the period investigated. The results show that corporate giving may be of minimal

importance among the sampled companies. It is highlighted in the table above that the

independent variable waste has a mean value of -0.013 and a standard deviation of 0.272,

hence the overall amount of waste generated among the sampled companies during the

investigated period dropped by 1.3%. This result may be driven by innovation among the

sample companies.

Regression Analysis

Return on Assets (ROA) - Model 1

Table 3: Summary of ROA Model r2 Adjusted

r2

F-statistic Probability

(F-statistic)

Durbin-Watson

Statistic

1 0.540167 0.393857 3.691929 0.000 1.838912

According to Table 3 model 1 shows that r2 equals 0.540, indicating that only 54% of

the dependent variable (ROA) can be predicted by the independent variables (corporate

giving, employee safety, greenhouse gas emission reduction and waste reduction). The

Adjusted r2

shows a value of 0.394 indicating that the model is a poor fit for this study as the

figure is less than 0.6 (Faraway, 2002). The f-statistic value shown in the table is 3.692,

ISSN: 2289-4519 Page 103

indicating the value of the relationship between the independent variables and the dependent

variable. Also the f-statistic probability value shown is 0.000 indicating the overall

significance of the model. Lastly the value shown in the table above for the Durbin-Watson

statistic is 1.839, and it falls within the range of 1.5 to 2.5, indicating that there is no

autocorrelation among the sampled companies used in this research (Dufour and Dagenais,

1985).

Table 4: Beta Coefficient Variables Coefficient Std. Error t-statistic Probability

Corporate giving -2.2939 2.101369 -1.09162 0.277

Employee Safety 0.029301 0.024663 1.188079 0.2369

GHG Emission Reduction -0.1274 0.049695 -2.5636 0.0115

Waste Reduction 0.023039 0.029463 0.781942 0.4356

According to Table 4, the beta coefficient value for corporate giving is -2.294 with a

probability significance value of 0.277 (p>0.05) (Hair et al., 2006). Thus, indicating that

corporate giving has a negative insignificant impact on ROA. This implies that corporate

giving have no statistical impact on ROA. This result is in line with that of Seifert et al.,

(2003), however Zulfiqar (2016) who found a positive impact on ROA. Also the beta

coefficient value for employee safety is 0.029 with a probability significance value of 0.237

(p>0.05) (Hair et al., 2006), hence employee safety has a positive insignificant impact on

ROA. This implies that reductions in workplace injuries have no statistical significant impact

on ROA. These results are in line with that Asatryran and Brezinova (2014) and different

from that of Fan and Lo, (2012) who found a negative significant impact. Greenhouse gas

emission reduction has a beta coefficient value of -0.127 with a probability significance value

of 0.011 (p<0.05) (Hair, 2006), indicating that greenhouse gas has a negative significant

impact on ROA. This indicates that a reduction in greenhouse gas emission leads to an

increase in ROA. Gallego-Alvarez, Segura and Martínez-Ferrero (2015) and Hart and Ahuja

(1996) had similar findings while Iwata and Okada (2011) found no statistical relationship.

Lastly, waste reduction shows a beta coefficient value of 0.023 with a probability

significance value of 0.436 (p>0.05 (Hair et al., 2006), showing that waste reduction has a

negative insignificant impact on ROA. This implies that waste reduction has no statistical

significant impact on the returns on assets. The findings in this study match that of González-

Benito and González-Benito (2005) and different from that of Chukwuma et al., (2017).

Return on Equity (ROE) - Model 2

Table 5: Model Summary of ROE Model r2 Adjusted

r2

F-statistic Probability

(F-statistic)

Durbin-Watson Statistic

2 0.721 0.633 8.130 0.000 2.225

According to Table 5, model 2 shows that r2 equals 0.721, indicating that 72.1% of

the dependent variable (ROE) can be predicted by the independent variables (corporate

giving, employee safety, greenhouse gas emission and waste generation). The Adjusted r2

shows a value of 0.633 indicating that the model is a good fit for this study as the value

indicated is less than 0.6 (Faraway, 2002). The f-statistic value shown in the table is 8.130,

indicating the value of the relationship between the independent variables and the dependent

variable. Also the f-statistic probability value shown is 0.000 indicating the overall

significance of the model. Lastly the value shown in the table above for the Durbin-Watson

statistic is 2.225, and it falls within the range of 1.5 to 2.5, indicating that there is no

autocorrelation among the sampled companies used in this research (Dufour and Dagenais,

1985).

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Table 6: Beta Coefficient of ROE

Variables Coefficient Std. Error t-statistic Probability

Corporate giving -7.94164 6.758584 -1.17505 0.2421

Employee Safety 0.018541 0.079321 0.233747 0.8155

GHG Emission reduction -0.4409

0.159831

-2.75854

0.0066

Waste reduction 0.056473 0.094762 0.595941 0.5522

According to Table 6, the coefficient value for corporate giving is -7.942 with a

probability significance value of 0.242 (p>0.05)( Hair, 2006). Thus, indicating that corporate

giving has a negative insignificant impact on ROE. This implies that corporate giving have

no statistical significant impact on returns on shareholders’ e uity. This result is similar with

that of Zulfiqar (2016) and Kim (2013), but different from that of Kwaning et al., (2014) who

found a positive impact. Also the coefficient value for employee safety is 0.019 with a

probability significance value of 0.814 (p>0.05) (Hair et al., 2006), hence employee safety

has a positive insignificant impact on ROE. This implies that reduction in workplace injuries

have so statistical significant impact on returns on shareholders’ e uity. This result is in line

with that of Uadiale and Fagbemi (2011). Greenhouse gas emission has a coefficient value of

-0.441 with a probability significance value of 0.007 (p<0.05) (Hair et al., 2006), indicating

that greenhouse gas emission has a negative significant impact on ROE. This implies that a

reduction in greenhouse gas emission leads to an increase the returns on shareholders’ e uity.

The result is in line with that of Hart and Ahuja (1996), but contradicts that of Delmas, Nairn-

Birch and Lim (2015) and Rokhmawati, Sathye and Sathye (2015).

Lastly, waste shows acoefficient value of 0.056 with a probability significance value

of 0.552 (p>0.05) (Hair et al., 2006), showing that waste reduction has a positive

insignificant impact on ROE. This implies that waste reduction has no statistical significant

impact on the returns on shareholders’ e uity. The result is in line with that of Iwata and

Okada (2011) but different from that of Obara et al., (2017) who found a positive impact.

The results for ROA show a coefficient value for corporate giving is -2.294 with a probability

significance value of 0.277. The results show that corporate giving has a negative

insignificant impact on ROA, implying that corporate giving have no statistical impact on

ROA. Also, the results for ROE show a coefficient value for corporate giving is -7.942 with a

probability significance value of 0.242. The results show that corporate giving has a negative

insignificant impact on ROE, implying that corporate giving have no statistical significant

impact on returns on shareholders’ e uity. This shows that corporate giving have no

statistical significant impact on financial performance.

The results for ROA show a coefficient value for employee safety is 0.029 with a

probability significance value of 0.237. The results mean that employee safety has a positive

insignificant impact on ROA, implying that reductions in workplace injuries have no

statistical significant impact on ROA. The result for ROE shows a coefficient value for

employee safety is 0.019 with a probability significance value of 0.814. The results mean that

employee safety has a positive insignificant impact on ROE, implying that reduction in

workplace injuries have so statistical significant impact on returns on shareholders’

equity.This shows that reductions in workplace injuries have no statistical significant impact

on financial performance. The results for ROA show a beta coefficient value of -0.127 with a

probability significance value of 0.011. The results mean that greenhouse gas has a negative

significant impact on ROA, implying that a reduction in greenhouse gas emission leads to an

increase in ROA.The results for ROE show a coefficient value of -0.441 with a probability

significance value of 0.007. This means that greenhouse gas emission reduction has a

negative significant impact on ROE. This implies that a reduction in greenhouse gas emission

leads to an increase the returns on shareholders’ e uity. This shows that reductions in

ISSN: 2289-4519 Page 105

greenhouse gas emission have a negative significant impact on financial performance. This

indicates that reduction in greenhouse gas emission adds financial value to the returns on

shareholders’ e uity and firms’ assets. Lastly, waste reduction shows a coefficient value of

0.023 with a probability significance value of 0.436. This shows that waste reduction has a

negative insignificant impact on ROA, implying that waste reduction has no statistical

significant impact on the returns on assets.The results also show that waste reduction shows a

beta coefficient value of 0.056 with a probability significance value of 0.552. This shows that

waste reduction has a positive insignificant impact on ROE, implying that waste reduction

has no statistical significant impact on the returns on shareholders’ e uity. This implies that

waste reduction adds no financial value to the returns on shareholders’ e uity and returns on

firms’ assets.

5. CONCLUSION

This research was conducted to examine the impacts of the Corporate Social

Responsibility (CSR) on manufacturing companies listed in the London Stock Exchange

(LSE). The research conveniently focused on 36 listed manufacturing companies in the

following subsectors; Aerospace and Automotive, Mining, Industrial Goods, Food, Beverage

and Tobacco, Domestic Goods, Industrial Machinery and Equipments, Healthcare and Paper

Products. In this research, regression analysis method was used to measure the impact of the

independent variables (Corporate Social Responsibility: Corporate giving, Employee Safety,

Greenhouse Gas Emission reduction and Waste reduction) on dependent variables (ROA and

ROE). E-views was used to generate the descriptive, correlation and regression statistics used

in this research. The following sections will discuss the extent at which the research

objectives are achieved. The results indicate that corporate giving has a negative insignificant

impact on ROA, implying that spending on corporate giving has no statistical impact on

ROA. Also, the results indicate that corporate giving has a negative insignificant impact on

ROE. The results show that corporate giving have no statistical significant impact on

financial performance. Judging from the corporate reports of the sampled companies,

financial motive is not the driving force for their corporate giving but their moral obligation

to the society they operate. However, some past evidence suggests a negative impact on

Corporate Social Responsibility towards the community and financial performance (Berman

et al., 1999; Kwaning et al., 2014.). The results show that employee safety has a positive

insignificant impact on ROA. This implies that reductions in workplace injuries have no

statistical significant impact on ROA. The results show that employee safety has a positive

insignificant impact on ROE. This implies that reduction in workplace injuries have no

statistical significant impact on returns on shareholders’ e uity and returns on total asset.The

lack of a statistical significant impact on financial performance, as indicated in this study,

shows that the UK market does not respond to reduction of workplace injuries, also a safer

workplace can’t serve as a strong marketing tool to attract customers. Similar results were

realized by Uadiale and Fagbemi (2011). The result shows that greenhouse gas emission

reduction has a negative significant impact on ROA. This indicates that a reduction in

greenhouse gas emission leads to an increase in ROA. The results also show that greenhouse

gas emission has a negative significant impact on ROE. This indicates that reduction in

greenhouse gas emission adds financial value to the returns on shareholders’ e uity and

firms’ assets. Considering the current attention given to global warming, Kyoto Protocol

issue environmental sanctions to defaulters which create additional costs, hence a competitive

disadvantage (Porter and Van Der Linde 1995). This may have caused manufacturing

companies in the United Kingdom to switch to reducing GHG emissions by using renewable

energy during production or buying emission points from companies that emit greenhouse

gases under the benchmark, hence boosting reputation, creating a competitive advantage and

in turn enhancing profitability (Porter and Van Der Linde 1995; United Change 2017).

ISSN: 2289-4519 Page 106

Lastly, the results show that waste reduction has a negative insignificant impact on ROA.

This implies that waste reduction has no statistical significant impact on the returns on

assets.The results also show that waste reduction has a positive insignificant impact on ROE.

This implies that waste reduction has no statistical significant impact on the returns on

shareholders’ e uity.

Recommendations

It is highly recommended that future researchers employ other variables that were not

considered in this research such as Tobin’s Qand cost of capital in order to capture long-term

financial performance. Also, the time span considered for this research was 5 years (2011-

2015); future researchers should endeavor to consider a wider time span to provide an

extensive representation of the impact of CSR on financial performance through time. It is

also recommended that future researcher should consider conducting research on a larger

sample size to provide a more in-depth analysis. Furthermore, it is highly recommended to

managers that they spend on the community in order to benefit from tax savings. Furthermore

it is advised that managers create a safe environment for their employees on the basis of

motivation. It is further recommended that manufacturing companies use renewable energy

and innovation so as to protect the environment in which they operate. Businesses are

recommended to invest in the communities where they operate to boost the economy they

depend on.

Limitations & Future Research Direction

For this research, a sample size of 36 manufacturing companies listed in the London

Stock Exchange (LSE) was chosen. However the entire population for the subsectors

conveniently chosen for this research amounted to 247 manufacturing companies. The entire

population could not be used as the sample size due to time restraint on the side of the

researcher and unavailability of complete data in corporate reports on the side of the 50

companies considered. However the reason for unlimited data is contingent on the fact that

the concept of CSR have evolved rapidly as recent trends have sprung up new dimensions

that goes beyond the basic vagueness of the concept. Hence some companies are not familiar

with reporting on the key variables proposed for this research in their corporate reports.

This research focused mainly on the manufacturing sector, future researchers are advised to examine the impact of CSR on financial performance in other sectors such construction or mining. In order to represent a global comprehensive understanding on the topic, future researchers are advised to conduct research on developing countries, and can further carry out a comparative study between developing and developed countries. Furthermore, future researchers are advised to study the impact of CSR on financial performance in other Stock Exchange in the UK such as FTSE.

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