Impact of Paradigm Shift in Corporate Social Responsibility from
Voluntary to Mandatory on Corporate Financial Performance
PARVESH KUMAR ASPAL1, MANJIT SINGH2, SAYEEDUZZAFAR QAZI3*
1I. K. Gujral Punjab Technical University,
Jalandhar,
INDIA
2Department of Applied Management,
Punjabi University,
Patiala,
INDIA
3College of Business Administration,
University of Business and Technology,
Jeddah,
SAUDI ARABIA
*Corresponding Author
Abstract: - This study aimed to find out the impact of a paradigm shift in corporate social responsibility on
corporate financial performance. Developing an inclusive and prosperous society needs to reformulate the
business-society nexus concerning social responsibility. Corporations are supposed to not only on economic
priorities but on societal and environmental implications as well. In the present scenario business organizations
must divert the profits to social obligations like medical & and education facilities, hunger & and poverty
eradication, a pollution-free environment, and equality of gender. The government has been following constructive
initiatives to formalize corporate responsibility toward society from voluntary guidelines to legal obligations.
Keeping in view the historical legal reforms, the present study focuses on the empirical analysis of the association
between CSR disclosures and corporate financial performance among Indian companies after the enactment of the
amended Companies Act. The analyses highlight that companies' CSR disclosures have a significant impact on
their financial performances. The findings of the study are consistent with earlier research, where the CSR
disclosure and financial performance relationship is positive. Several companies are engrossed in social obligations
towards external and internal stakeholders, as spending on social responsibilities will ensure good financial health.
The current research imparts empirical support as well as theoretical support and motivation for the corporate
sector towards CSR initiatives.
Key-Words: - Corporate Social Responsibility, CSR disclosure, Corporate Financial Performance, Corporate
Sustainability, Community welfare.
Received: April 17, 2023. Revised: October 2, 2023. Accepted: October 13, 2023. Published: October 27, 2023.
1 Introduction
The corporate sector has been generating prosperity,
value, and wealth for investors for the last six
decades, but concurrently the nation is facing
concerns about unemployment, malnutrition, poverty,
illiteracy, etc. The business sector must acknowledge
its social responsibility for the well-being of society
at par with the Government development initiatives,
[1]. Corporations are now required to divert their
profits for the promotion of education, equality of
gender, and, poverty and hunger eradication as their
social obligation. The notion of corporate social
responsibility (CSR) is as old as business firms, as it
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is primarily a twentieth-century invention, [2].
Although the needs of societies were traditionally
considered as a part of state responsibility, now the
corporate sector has challenged and undermined this
custodianship, [3]. CSR encompasses ethical, legal,
economic, and discretionary responsibilities, which
corporations must have to fulfill for stakeholders”
interests, [4]. In developed nations, corporate houses
have replaced the business as a center of nationwide
interest and have substituted religion as novel places
of worship, [5]. The division of social responsibilities
among the state, communities, and the corporate
sector has awakened the corporations as the long-run
sustainability is directly correlated with the
prosperity and welfare of the community.
Consequently, the success of their economic
operations depends upon the development of the
communities in which they operate, [6]. India is one
of the leading economies around the globe that has
mandated CSR by amending corporate laws.
As a consequence, CSR initiatives have strategic
benefits to corporations by responding to societal
expectations and they will encourage sustainable
business practices by promoting accountability and
transparency, [7]. The administrations are
progressively following top-down CSR mechanisms
as a strategic tool to tackle environmental and
societal issues. Such CSR initiatives are a signal of
legal adherence for corporations to perform beyond
the economic sphere and boost their obligation
towards environmental and societal concerns.
Remarkable examples such as CSR regulations
implemented in China in the year 2006, [8], in
Indonesia, the corporate and investment laws have
been legalizing environmental and social
responsibilities since 2007, [9], the 2% of the profit
on CSR expenditure has been mandated and
introduced in Mauritius in 2009, [10], in Denmark
the National Action Plans for CSR has been
implemented in the year 2008 and 2012, [11], and in
India, CSR has been made mandated by making
historical amendment in the Companies Act. The
year 2013 is a witness of remarkable historical
development regarding the mandating of CSR
activities, [12].
The second section of the study introduces
research questions in light of the in-depth theoretical
underpinnings of CSR evolution. And, the objective
of the study is to explore the impact of CSR
initiatives on financial health, which may inspire
corporations to fulfill their commitments towards the
community. Hence, the present study is undertaken to
review the emergence of CSR in the Indian context
and to investigate the comprehended impact of CSR
disclosures on corporate profitability after the
implementation of the amended Company Act.
Further, it highlights the alliance between CSR
disclosures and corporate financial performance. The
third section introduces the database, research design,
and model econometric specification. Subsequently,
in the fourth section, the study presents the empirical
findings and discussion considering the relevant
research findings. The final section of the study
embodies the conclusion and managerial
implications.
2 Review of Literature
The CSR concept has remained under debate since it
was put forward. The antagonists opined that if
management spends shareholders” earnings on social
activities rather than profit maximization, it will
diminish its efficiency and would not achieve the
optimal utilization of resources, [13]. Conversely,
proponents of CSR favor that ethical practices-
oriented companies should take social citizens”
responsibility and donate some of their resources for
community betterment. Because it will improve the
corporate image, better social relationships, attract
talented employees, and long-run profits, [14]. The
stakeholder theory stemmed gradually in the 1960s
and has had rapid momentum since the 1980s. The
contributory work of, [15], scratched the formal
development of stakeholder theory and extended the
public awareness about CSR. These stakeholders take
care of company interests and consequently, the
company protects the interest of stakeholders
invisibly.
2.1 Theoretical Foundations: Paradigm Shift
of Corporate Social Responsibility
The government of India has been following
constructive initiatives to formalize corporate
responsibility toward society. At the outset, the
National Voluntary Guidelines are issued on
environmental economic, and social accountability of
business organizations and, subsequently, by
amending the Companies Act in the year 2013 and
consequent variants. Presently, CSR in India has
proceeded ahead merely with charities and donations,
now CSR has turned up as a vital element of the
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corporate strategy. The Phase-Wise CSR Emergence
in India is presented in Table 1.
Table 1. Phase-Wise CSR Emergence in India
Phase
Period
Year
1.
Pre – industrialization
1800
2.
Pre – industrialization
1801-1914
3.
Industrialization
1950-1980
4.
Post-Industrialization
1980-2013
5.
Post- Amendment to
Companies Act
2013-Present
Source: [16]
2.2 The Linkage between Corporate Social
Responsibility and Corporate Financial
Performance
The CSR disclosures and financial performance
association is still a long way from clarity, [17], as
various research investigations highlighted a
nebulous association between these two variables,
[18]. Moreover, when a positive relationship has
been found, [19], [20], it was not clear whether,
financially sound corporations merely spend more on
CSR to achieve a higher standard or have improved
functioning along with other CSR initiatives resulted
in enhanced economic performance, [17]. CSR
disclosure measurement is a multidimensional
construct based on a broad range of inputs, such as
philanthropic programs for the community,
environmental strategies, women empowerment, the
quality of products and services, after-sale services,
and customer relationship management. CSR
disclosure measures applied in the earlier studies
were forced-choice assessment techniques, [21], like
the reputation index, [19], 1988, case study
technique, [22], and the single-dimensional measure
of environment and pollution, [18]. Keeping in view
the above discussion a multidimensional measure of
CSR disclosure based on stakeholder theory, [22],
[23], is applied in the present study. The study has
considered all CSR disclosure dimensions in
relevance to social activities, employee issues,
environmental protection, energy conservation,
consumer satisfaction, and product and service
quality. Therefore, the targeted CSR disclosure
dimensions are categorized as employee relations,
consumer issues and products, community welfare
and development, and environment are extracted
from the study, [24]. Numerous empirical findings
and literature revealed the CSR disclosures and
financial performance relationship.
The earlier research studies provide divergent
inferences of negative, positive, and no or neutral
relationships among the variables. The positive
influence on profitability can lead the corporation to
undertake CSR initiatives since the corporation with
sound finances has more resources to resolve the
societal issue, [19]. Companies having a sound
relationship with their workforce and CSR reputation
can attract talented employees which in turn may
enhance efficiency and financial performance, [25].
Based on the stakeholder theory examined the CSR
disclosures and the profitability performance
relationship among Chinese companies and found an
improved financial position. Similarly, researchers,
[26], explored the investigations on the CSR
disclosure and financial performance relationship and
observed a positive association. Researchers, [27],
summarized the findings of 62 investigations on the
financial performance and CSR relationship and
highlighted that 33 studies supported the positive
relationship, whereas, 20 studies revealed the
negative relationship, and only nine studies found no
relationship. Similarly, [28], summarized the
empirical results of 46 research papers and 51
research studies and revealed that 63% of the
research studies supported the positive association,
whereas, 10% of studies supported the negative
relationship, while, 27% of studies failed to express
any outcome. Whereas, [29], recapitulated the
findings of earlier studies and revealed that 50% of
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research studies supported a positive relationship,
whereas, 25% of studies supported a negative
relationship, while, 20% of studies supported a mixed
relationship and only 5% of studies supported no
relationship.
In an empirical study, [30], reviewed the
alternative operationalization and measurement
techniques for the CSR and corporate financial
performance association. The findings revealed that
all techniques employed in earlier literature suffered
with limitations which may have an impact on such
association. A study of Indian banks, [31], found that
CSR has a positive influence on financial
performance. The study also provides insight into
integrating CSR with strategic decisions and
refurbishing the traditional profit-oriented approach
to societal development approach. Similarly, [32],
found the financial performance of CSR-performing
corporations has increased in comparison to non-
CSR-performing corporations. The study provided
significant implications for policy developers,
investors, managers, and stakeholders. Whereas, [33]
expressed that after the implementation of mandatory
CSR regulation, companies investing in CSR
initiatives experienced a negative linkage between
CSR expenses and profitability, signifying that heavy
investment did not result in profits. A study, [34],
investigated the association between CSR
performance and corporate profitability and found
that only social contribution has a positive impact on
profitability. Similarly, the study revealed a positive
association among the total assets growth rate,
societal contribution, and corporate soundness. A
study, [35], indicated that environmental risk has a
moderate linkage between global reporting initiatives
and financial reporting, moreover, the corporations
having higher risk have a significant linkage between
global reporting initiatives and financial
performance. Furthermore, [36], explored the short-
run impact of CSR-relevant news on the corporation
value and shareholder value of Austrian Traded
Index firms. The outcomes of the study reflected that
CSR-relevant news has a considerable influence on
the firm stock price and firm value. In an
investigation, [37], expressed that better financial
performance may improve the corporate social
performance which in turn may enhance the financial
profitability. A study regarding the linkage between
CSR and corporate profitability, [38], concluded a
positive influence of CSR on financial performance
with profitability, value-added, and growth
management, indicating that CSR investments will
enhance shareholders’ wealth and profitability.
Regarding the linkage between CSR and financial
performance, [39], revealed a positively significant
connection between financial performance and CSR,
as corporate stability augments the function of CSR
in endorsing corporate profitability.
3 The Rationale of Study and Research
Question
The literature on CSR is generally dominated by
experimental and empirical research in Australia, the
USA, and other European developed nations as
compared to developing nations, [40]. As far as CSR
in the Indian business environment is concerned,
both companies and society are less mindful of their
privileges and duties. In a study, [41], highlighted
that there is an imperative need to make
consciousness of long-standing advantages of CSR
both for society as well as companies. Moreover,
CSR has not so far been satisfactorily contemplated
in the Indian context; consequently, companies are
still viewing CSR as an obligation rather than an
opportunity for long-standing benefits for
corporations and society. Therefore, there is a need to
conduct a study that reflects the impact of CSR
initiatives on the financial position, which may
inspire the companies to think about their
responsibilities and commitments towards the
community. Hence, the present study is undertaken to
review the emergence of CSR in the Indian context
and to investigate the impact of CSR disclosures on
corporate profitability after the implementation of the
amended Company Act.
4 Research Methodology
4.1 Data Collection and Period of the Study
The data regarding the financial aspects of the
companies is extracted from the Prowess database.
The information regarding CSR disclosure is drawn
from corporate sustainability, annual, and
environmental reports. The time frame for the present
study is of three years i.e. from the year 2014 to the
year 2016. This particular period is chosen because in
the year 2013, a historical amendment in the
Companies Act was made to discharge the social
responsibility, mandatory for the companies. 81
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corporations registered on the Indian Bombay Stock
Exchange are selected as a sample based on industry
classification, such as (1) Automobile (2)
Pharmaceuticals (3) Energy, (4) Chemical, Paint &
Pesticides, (5) Oil & Gas, (6) Communication &
computer software, (7), Textile (8) Mineral & Metal
(9) Infrastructure, and (10) FMCG. The sample is
drawn from the diverse segments of the economy
having a relevant effect on the community and
environment, [42].
4.2 Research Design
The framework of many empirical research studies
revealed that CSR disclosure, indices, principles, and
measurement techniques are formulated mainly in
developed countries, however, such frameworks may
not be applied in developing nations, [43], [44].
Consequently, the CSR disclosure framework based
on a CSR checklist containing thirty disclosing
statements is derived from the earlier studies of, [45],
[46], [47], to explore the nature and degree of CSR
disclosures. Such disclosing statements are further
categorized into four main dimensions i.e.
community development & and welfare, employee
relations, environment, and customer issues and
products based on stakeholder theory. The content
analysis technique, [24], [48], is used to extract
information from the sustainability, annual, and
environment reports of companies. The panel data
regression technique is applied to examine the CSR
disclosures and company financial performance
relationships.
4.3 Model Specification
4.3.1 Financial Performance Indicator
The study on association between CSR disclosures
and financial performance is an interesting and
valuable task, [17], and various researchers
highlighted a nebulous association between these two
variables. On reviewing the literature, the two basic
financial indicators; return on equity (ROE), and
return on assets (ROA), are employed as dependent
variables. The use of ROE and ROA as a financial
performance indicator is consistent with several
earlier studies, [49]. Consequently, the present study
has employed two financial performance indicators;
ROE and ROA. It is believed that profitability
measurement indicator (ROA), is extensively applied
and it has provided more valuable results in
comparison to other measures, [21]. Numerous
researchers, [50], [51], [52], have applied ROA as a
financial performance indicator in several types of
research. Return on equity is another considerable
indicator of profitability, which reveals how well the
shareholder's funds are used to maximize
stockholders” wealth. Several researchers have used
ROE to evaluate the economic strength, [52], [53].
4.3.2 Variable Description
Corporate social responsibility disclosure is the sole
independent variable in this study. The disclosed
CSR items are assigned values under three kinds of
categories such as non-disclosure, quantitative
disclosure, and qualitative disclosure, [24], [54], [55],
[56]. The literature review further advocates that
numerous other variables may influence this
association. However, in the present study, the size of
the company and leverage are applied as control
variables.
4.3.3 Econometric Specification
To investigate the desired relationship in the sampled
Indian companies, the panel data regression
equations are estimated as follows:
ROE it = α0 + β1CSRit + β2SISEit + β3LEVit + eit (1)
ROA it = α0 + β1CSRit + β2SISEit + β3LEVit + eit (2)
Here, ROE and ROA are the dependent variables,
whereas CSR is the proxy of CSR disclosure
activities carried out by the corporations. The control
variables are leverage (LEV), and the size of the
company (SIZE).
5 Empirical Findings
The validity of different assumptions of regression
and specification tests is also examined.
5.1 Descriptive Statistics
Descriptive statistics are analyzed to assess the mean
and dispersion among variables for all sample
companies. The Descriptive Statistics (N=243) are
presented in Table 2.
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Table 2. Descriptive Statistics (N=243)
Mean
SD
CV
ROA
ROE
CSR
LEV
SIZE
ROA
11.81
7.97
67.52
1
--
0.040
-0.481*
0.246*
ROE
22.55
15.38
68.24
--
1
-0.025
-0.334*
0.148*
CSR
74.58
10.61
14.23
0.040
-0.025
1
-0.031
0.358*
LEV
0.29
0.44
149.52
-0.481*
-0.334*
-0.031
1
-0.074
SIZE
12.53
1.02
8.13
0.246*
0.148*
0.358*
-0.074
1
*Correlation is significant at the 0.05 level
The descriptive statistics highlight that the mean
ROE and ROA are approximately 22.55 11.81 and
22.55% respectively. In the case of the control
variable leverage, the mean leverage is 0.29% and
the mean company size is 12.53. Similarly, in the
case of the CSR disclosure, the coefficient of
variation is 14.23%. The mean leverage of sample
companies is approximately 0.30 times indicating
that the total liabilities constitute an insignificant
percentage of the capital structure.
The average CSR disclosure of 74.58% indicates
that the selected companies in India have highly
disclosed their CSR initiatives. The Pearson
correlations among the pair of variables highlight that
the correlation coefficient between ROA and
leverage is 0.48. Likewise, the correlation between
the variables, ROE and ROA with the independent
variable CSR disclosure is 0.025 and 0.040
respectively, which is much lower as compared to the
standard of 0.80, expressing that the problem of
multicollinearity does not exist.
5.2 Diagnostic Tests
Various fundamental regression diagnostic checks
are being used to detect the presence of
multicollinearity, homoscedasticity, autocorrelation,
and stationarity. The average VIF scores (1.16) and
the Pearson correlation coefficient values reveal that
there is no problem
with multicollinearity. The diagnostic check also
confirms the homoscedasticity of the data. Regarding
ROA and ROE the Durbin Watson (DW) statistic is
2.39 and 2.27 respectively, reflecting that there is no
autocorrelation among the variables. In addition to
this, the Augmented Dickey-Fuller test confirms the
stationary of the data.
5.3 Specification Tests
The Redundant fixed effect test is applied to
choosing a suitable model between the pooled OLS
regressions &
and panel data regressions
.
In the case
of dependent variable ROE, the statistical values (χ2
value 556.064, p-value = 0.000), and regarding ROA,
the statistical values (χ2 value 530.932, p-value
=.000), signifies that the panel data regression
technique is more
suitable in comparison to
the
pooled OLS technique. Likewise, the Hausman test
chooses the best suitable model between the REM
and FEM. In the case of dependent variable ROE, the
the statistical values (χ2 = 6.07, p-value = 0.10), and
regarding ROA, the the statistical values (χ2 = 10.11,
p-value = 0.017), signify the choice of the FEM as
compared to REM.
5.4 Analysis of Regression Results
The specification tests confirm the fixed effect
model (FEM), is an appropriate method for
regression analyses. Research on CSR disclosures
and financial performance association have revealed
positive and mixed findings, [57], [58], and
negative, [59], whereas, few studies have revealed a
neutral relationship, [60], [61]. On the same pattern,
various research works found a positive relation
between CSR disclosures and long-term
profitability, [62], [63]. The following Table 3
below depicts the findings of regression analyses of
relationships among variables.
The comparative study of the results reveals that
regression coefficients are statistically significant
in the FEM model. A significant and positive
linkage is observed between CSR disclosures and
financial performances. Table 3 depicts that in the
case of ROE, the regression coefficient CSR is
statistically significant; moreover, the regression
coefficients of leverage and size have also passed
the significance test. It implies that the control
variables have a significant effect on CSR and
financial performance association. Further, the high
value of the adjusted R - R-square (86.63%), and F-
statistics (p = 0.0000), reflect the overall fit of the
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fixed-effects model. In this study, the findings of the
CSR and profitability relationship are in line with
the earlier research investigations such as, [26],
[50], [64]. Better financial performance may boost
corporate social performance which in turn may
enhance financial health.
Table 3. Panel Data Regression Results
Dependent Variable
Return on Equity
Panel (FEM)
Return on Assets
Panel (FEM)
Independent
Variable
Coefficient
t-Statistic
Prob.
Coefficient
t-Statistic
Prob.
CSR
0.1280
2.088
0.0384*
0.0941
3.0815
0.0024*
Leverage
-5.8507
-1.6947
0.0921**
-3.2058
-1.8641
0.0641**
Sise
6.6397
1.7436
0.0832**
3.9728
2.0944
0.0378*
Observations
243
243
R-squared
0.9121
0.9188
Adjusted R-squared
0.8663
0.8765
F-statistic
19.8993
21.704
Prob. (F-statistic),
0.0000*
0.0000*
Redundant Fixed Effect Test
Chi-Square Statistic
556.064
530.932
Prob.
0.000
0.0000
Hausman Test
Chi-Sq. Statistic
6.071
10.1155
Prob.
0.100
0.0176
* 5% level of significance
** 10% level of significance
Further, Table 3 reflects that in the case of
ROA, the regression coefficient CSR is statistically
significant; moreover, the regression coefficients of
leverage and size have also passed the significance
test. Further, a high value of R-square (87.65%),
reflects the best fit of the Fixed Effects model. This
is further substantiated by the F-statistics (p=0.000).
It is further revealed that CSR is positively
associated with profitability i.e. ROA. The present
findings are inconsistent with the earlier research
works of, [26], [65].
The CSR disclosure score is computed based on
stakeholder theory by covering community
development, employee welfare, environment, and
customer issues. In the context of the present study,
[28], summarized the empirical findings of 46
research papers and 51 research studies and found
that 63% of the research studies supported the
positive association.
6 Conclusion
The present study has endeavored to address the
perennial question of CSR disclosures and
profitability relationships. The study has observed
that corporate financial performance does depend on
CSR disclosure with a sign of a positive relationship.
Thus, it can be emphasized that the results expressed
by the present study agree with the empirical
literature and this reflects that corporate involvement
in CSR practices is consistent with the claims of
stakeholder theory. Many companies around the
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world are anxious and hesitant to undertake CSR
initiatives, as there is always an apprehension that
implementation of CSR activities would not yield
better results. The present research signifies the
positive linkage between CSR disclosures and
corporate profitability after mandatory adherence to
CSR. It is evident that now many Indian companies
are interested and engrossed in social responsibilities
for internal and external stakeholders, as they are
thinking that spending and implementing social
responsibilities will ensure good financial results.
The financial performance of the next years can
also be predicted through involvement in various
appropriate CSR initiatives and satisfying the
stakeholders. Consequently, internal stakeholders
will contribute dedicatedly to the company as well
and the external stakeholders will refurbish a good
reputation for the company. In the meantime, a good
reputation would certainly gain the companies more
business opportunities; therefore spawning improved
growth and returns. Accordingly, corporations with a
sound financial position are more ready to undertake
CSR initiatives, which will develop positive
relationships between investors and companies.
Moreover, the positive effect on profitability may
improve companies” reputations, employee morale,
and investor relations, and avoid penalties for
environmental issues. If CSR activities are put under
robust guidelines and control regulations, the
corporations would incorporate CSR as a part of a
strategic plan into their business models for their
operations and gain profits. Last but not least,
companies should keep in mind that no business runs
in isolation, CSR must ensure that the interaction
with stakeholder groups is to generate constructive
influence on the community as well as on the
environment, whilst earning profits.
CSR became mandatory for corporations after
the amendment to the Company Act, so the present
study investigated the linkage between profitability
and CSR from shareholders’ and companies’
viewpoints. The measurement of CSR is complex
due to the lack of a globally accepted unanimous
definition. Because of the limited scope of universal
measurements and cannot be directly applicable in
developing nations, content analysis is applied to
assess the corporations’ CSR reporting. More
significantly, the present findings support the
legitimacy and stakeholder theories that have
implications for researchers and practitioners. As
CSR scheme hinges upon the interdependence
between community and business, which,
consequently, accentuates the integration of
environmental, social, and economic issues.
Practically, this study is vital for administrators and
investors to evaluate the conformity of CSR
disclosure practices under the corporate governance
code. The study emphasizes the legitimate
responsibility of leaders and boards of directors on
social concerns to bring new facets to the CSR
literature. The present study covered only ROE and
ROA as two financial performance gauges. In the
future, studies could include other market-based and
accounting-based financial indicators, like EPS,
ROS, Tobin’s Q, and Net Profit.
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