The Anatomy of a Socially Responsible Corporation

• Published date: 01 March 2017
• Author: Rajshree Prakash,Rahul Ravi,Rubin Zhao
• DOI: http://doi.org/10.1111/fima.12160
• Date: 01 March 2017

The Anatomy of a Socially Responsible

Corporation

Rajshree Prakash, Rahul Ravi, and Rubin Zhao∗

Prior researchtreats corporate social responsibility (CSR) as a unitary construct. Using principal

component analysis, we show that CSR activities can be divided into two types: responsive CSR

(RCSR), which includes initiatives that address specific concerns caused by firm activity, and

adaptive CSR (ACSR), which are initiatives that anticipate concerns before they arise. We find

that responsive motives are roughly three times more dominant than adaptive motives. Larger

firms, older firms, and more diversified firms invest more in RCSR while younger firms and more

focused firms tend to invest more in ACSR.

Corporate social responsibility (CSR) has gained importance in managerial practice over the

last several decades (Knox and Maklan, 2004). An increasing number of Fortune1000 companies

have issued CSR reports. The KPMG International Survey of Corporate Responsibility Reporting

(2011) found that 95% of the 250 largest companies in the world (G250) now report their

actions on CSR separately, an increase of 14% since 2008. Yet despite decades of research on

CSR and its impact on firms’ outcomes, the evidence on the benef its of CSR continues to be

inconclusive.1

In this paper, we argue that two reasons have contributed to the unclear relation between CSR

and firm performance: f irst, while there has been work on types of CSR initiatives, much of this

work has been done solely from the perspectiveof how stakeholders or consumers perceive these

initiatives (Wilson,1975; Car roll, 1979; Wartick and Cochran, 1985; Shimp, 1997; Wagner,Lutz,

and Weitz, 2009). The firm’s intent has remained mostly unexamined. The intent behind CSR is

important because it potentially enables a firm to use CSR initiatives as a strategic resource. The

core idea of examining CSR as a strategic resource comes from the resource-based view of the

firm (Barney and Clark, 2007) that suggests that f irms possess resources and utilize them in a way

that enables them to achieve positive firm outcomes. We argue that when viewed as a strategic

resource, CSR is utilized in specific ways by different kinds of firms based on their context.

The second reason is related to the first but focused more on the methodological approach of

treating all CSR initiatives as a unitary concept, that is, there is no difference between the types

of initiatives that firms take.

Wethank Raghavendra Rau (Editor) and an anonymous refereefor very helpful comments. Wealso thank Peter Jaskiewicz,

Imants Paeglis, Nilanjan Basu, and SandraBetton for useful comments on this paper. We remain solelyresponsible for

any remaining errors.

∗Rajshree Prakash is an Assistant Professorin the Department of Management at the John Molson School of Business

at Concordia University in Montreal,C anada.Rahul Ravi is an Associate Professor in the Department of Finance at the

John Molson School of Business at Concordia University in Montreal, Canada. Rubin Zhao is an M.Sc. student in the

Department of Finance at the John Molson School of Business at ConcordiaUniversity in Montreal, Canada.

1Margolis and Walsh (2003) review 109 studies where CSR is treated as the independent variable, predicting firm

performance. They conclude that out of these 109 studies, 54 show a positive relation, 20 showmixed results, 28 studies

report an insignificant relation, and 7 studies report a negative relation. The authors note that possible reasons for the

lack of consensus include drawbacks related to measurement issues and model misspecifications.

Financial Management •Spring 2017 •pages 33 – 58

34 Financial Management rSpring 2017

From the firm’s perspective,socially responsible initiatives have been classified into two broad

categories. They can be reactive, wherebycor porations deploy CSR initiatives after an incidence

of socially irresponsible behavior is revealed (Ricks, 2005). Alternatively, they can be proactive,

whereby the corporation tries to be a better corporate citizen by not knowingly doing anything

that could harm any of its stakeholders and by investing in socially responsible initiatives. Some

recent studies have suggested that consumers respond differently to proactive versus reactive

CSR (Becker-Olsen, Cudmore, and Hill, 2006; Wagner et al., 2009; Groza, Pronschinske, and

Walker, 2011; Kr¨

uger, 2015). They treat CSR initiatives as active tactics adopted by the firm to

manage a specific stakeholder group. Our paper complements this approach of examining CSR

as a strategic initiative by linking firm intent to firm characteristics. In addition, we empirically

derive two major types of CSR initiatives that are distinctly different in the way they are used by

firms.

Coming to the second problem, a contributing factor in the confusion between CSR and firm

outcomes has been the dominant methodology—the approach of aggregating CSR strengths and

weaknesses to create a single measure of CSR (Brammer and Millington, 2008). In this paper, we

propose a wayof measuring CSR types, which we term responsive and adaptive. Using the Kinder,

Lydenberg, and Domini (KLD) CSR database, we use principal component analysis (PCA) to

show that common factors exist across the 12 CSR categories. The first two principal factors,

which together account for more than one-third of the variability across the 12 CSR categories,

reveal several interesting characteristics.

The first principal component (PC1) loads positively on all CSR strengths and concerns

categories (with the exception of diversity concerns). Thus, PC1 captures the positivecor relation

between the firm’s CSR concerns and its CSR strengths. To interpret this relation, we draw

on Ricks (2005) who suggests that firms are reactive in their endeavors when they increase

philanthropic activity that is “designed to increase visibility or enhance image in response to

a negative event.” In light of the previous statement, a possible interpretation of this highly

significant commonality across the various concerns and strengths categories could be that a large

fraction of all CSR strengths undertaken by various corporations might simply be an attempt on

their part to offset the harm they might be inflicting (presently and/or in the near past) on society,

as measured by their respective CSR concerns. We refer to this type of CSR as responsive CSR

(RCSR) and proxy for it using the PC1. We call it responsive, instead of reactive (as termed by

Ricks, 2005), because the term reactive assumes that the firm automatically responds to every

concern without bias, which means that firms, instead of being actors with options to choose from,

are automatic reactors. Additionally,the ter m responsivealso builds on recent studies (Golob and

Bartlett, 2007; Capriotti and Moreno, 2007) that have highlighted the relationalapproach between

firms and their audience, especially when it comes to CSR. The relational approach suggests that

given resource restrictions, firms choose to relate to certain audiences or stakeholders more than

others, which by extension we see as a more “responsive” attitude rather than reactive.

While we find support for the PC1, it is also possible that this commonality might be driven

by coverage bias in the KLD database.2We attempt to ref ine this measure of RCSR byextracting

principal components from year-to-year changes in CSR, rather than the levelsof CSR. Arguably,

as the level of concerns generated by a firm changes, the level of RCSR from this firm must also

2Kr¨

uger (2015) points out that a lot of what goes into KLD scores (both strengthsand concerns) come from media ar ticles

and reports, which selectively coverlarge and more visible fir ms. Therefore, the list of concerns and strengthsidentif ied

in KLD might not be exhaustive, and instead,a f irm might has a higher first component simply because KLD researchers

happen to pick up more of its positive policies and controversiesthan some other less-covered fir ms.