Corporate Social Responsibility (CSR)

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Literature Review

This chapter will offer insight into CSR definitions, CSR disclosure, and CSR in the banking industry. Furthermore, legislative movements in the field of CSR, and previous studies on CSR and the banking industry is presented. Lastly, the development of our hypotheses is described.

Corporate Social Responsibility (CSR)

CSR Definitions

The idea of corporate social responsibility (CSR) has been around for a long time, even before the term was publicly acknowledged. Carroll, Lipartito, Post, Werhane, and Goodpaster (2012) explained that there can be found evidence from hundreds of years ago of companies that conducted activities to improve the society. However, as mentioned, issues regarding e.g. pollution, resource depletion, waste, rights of workers, safety, and corporate scandals in the last 50-60 years have further highlighted the need for CSR (Carrol and Shabana, 2010).
In 1953, Howard R. Bowen published a book called “Social Responsibilities of the Businessman”, where the phrase Corporate Social Responsibility was introduced. Bowen further provided an initial definition of CSR where he defined it as “the obligation 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”. (Bowen, 1953)
Today, there exists many definitions of CSR. One of the most commonly used definitions is the one by Carroll (1979), who stated that “corporate social responsibility encompasses the economic, legal, ethical, and discretionary expectations that society has of organizations at a given point in time”. Later, also philanthropic expectations was added to this definition (Carroll, 1991). In a recent study, Carroll examined his now almost 40 years old model of CSR again, and concluded that this definition is still highly relevant (Carroll, 2016).
A somewhat newer definition was formulated by Sharma and Sharma (2011), who broadly defined CSR as “a form of corporate self-regulation integrated into a business model”. Rao and Kumari (2013) emphasized the importance of this self-regulation mechanism as a mean for organizations to monitor and ensure their compliance with e.g. the law, ethical standards, and international norms. Sukcharoensin (2012) argued that the self-regulation mechanism is most useful to big and profitable organizations that find themselves under political pressure and public scrutiny.
Furthermore, the European Commission (2018) defined CSR as “the responsibility of enterprises for their impact on society”. They also stated that to become socially responsible, companies shall follow the law, but also integrate concerns of social, environmental, ethical, consumer, and human rights matters into their operations. The European Commission argues that CSR is in interest of as well the society and the economy as the companies themselves. (European Commission, 2018)
This paper will use the definition mentioned above by Sharma and Sharma (2011). Apart from the fact that it is a more recent definition than the one by Carroll (1979), it puts emphasis on self-regulation and ties together well with our hypotheses regarding size and board structure of the banks. Additionally, Kiliç et al. (2015) use the definition, which as previously said has been the study that inspired this paper.

CSR Disclosures

CSR disclosures include information from companies about their activities, aspirations, and public image, regarding issues concerning the environment, the community, employees, and consumers (Gray et al., 2001). From such available disclosures, actors can distinguish what views companies have on CSR matters (Laine, 2010).
There are several reasons to why companies disclose information regarding these subjects. Branco and Rodrigues (2006) argue that one reason for companies is to legitimize their activities. According to both Williams and Pei (1999) and Siregar and Bachtiar (2010), another reason for companies is to enhance their public image and position. Cormier, Ledoux, and Magnan (2011) mentioned that one additional reason for disclosure is to promote relations with stakeholders, while disclosures also can reduce information asymmetry between the companies’ managers and their stakeholders. Furthermore, both Williams and Pei (1999) and Cormier et al., (2011) argued that disclosures can promote customer, community and government relations.
Alniacik, Alniacik, and Genc (2011) concluded that successful and positive CSR disclosures can enhance a company’s image by their stakeholders. However, they also concluded that negative CSR disclosures can adversely affect this image.
Brammer and Pavelin (2008) pointed out that even though there has been studies made on CSR disclosures, a number of them comes with some well-known limitations. They argued that there are difficulties both concerning the sampling and the measurement of the quality of the disclosures. Most often, the focus is on the largest companies, neglecting a large part of the business industry (i.e. smaller companies).
Both Patten (2012) and Boiral (2013) argued that some actions by certain companies are not aligned with what they say, which in turn results in disclosures that are vague and do not contain concrete plans and actions. Furthermore, in addition to being vague, there are concerns that CSR disclosures simply is executed as a marketing tool since it is expected of companies in order to be perceived as credible and legitimate in the eyes of the society. Kolk (2003) agrees and argues that disclosures expresses plans and intentions “without any real substance”.
According to Porter and Kramer (2006), CSR communication in the form of disclosures is regarded as superficial. Meanwhile, Cloud (2007) and Newell (2008) describes CSR disclosures as a tool that is used to counter any criticism and give false impressions that companies are legitimate and have nothing to hide. Jahdi and Acikdilli (2009) describes disclosures as a “corporate spin” that is used to gain legitimacy. In addition to companies using disclosures to legitimize themselves, Banerjee (2008) refer to the expressions of disclosures as nothing more than symbols that is “intended to consolidate the power” of large companies. Furthermore, some companies engage in CSR reporting mainly to protect their own skin and interests (Milne and Gray, 2012).

CSR in the Banking Industry

The research conducted on CSR is extensive, however, the banking industry is often excluded from the studies (Cormier and Gordon, 2001; Monteiro and Aibar-Guzmán, 2010; Siregar and Bachtiar, 2010). Both Khan, Islam, Fatima, and Ahmed (2011), and Kiliç et al. (2015) argued that the gap is a consequence of the general perception that the banks have limited contribution to various environmental and social issues (e.g. pollution or product safety).
Contrary to this general perception, banks do have an important role to play since they finance other companies with activities that affects the overall environment and the society. Banks both indirectly foster other companies’ negative impact on the environment by granting them finance (Simpson and Kohers, 2002), and directly by e.g. utilizing energy and producing waste (Branco and Rodrigues, 2006). According to Achua (2008), banks also have a crucial role in socio-economic development of countries. Wu and Shen (2013) claimed that banks have an essential importance amid a financial crisis.
As a result, nowadays most banks tend to include information regarding mentioned aspects in their CSR disclosures. For instance, information regarding the banks’ efforts in energy conservation and waste policies are common features in the banks’ CSR reports (Branco and Rodrigues, 2006). According to Khan (2010) banks often disclose actions to e.g. restrain poverty and unemployment, as well as their overall contributions to the society, in an attempt to legitimize their existence.
Barako and Brown (2008) claim that the perception of banks as not contributing to social and environmental issues has now changed. Because of this, most banks are now presenting information regarding their impact and actions regarding CSR. Common platforms for these disclosures are annual reports and sustainability reports. (Scholtens, 2009)

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 Laws and Regulation

In 2014, the European Union passed through the new European Directive 2014/95/EU. The directive outlines the rules on how large companies shall disclose their non-financial and diversity information (Directive 2014/95/EU of the European Parliament and of the Council). The Directive is part of a bigger movement from the EU regarding CSR. The ambition is to meet the Europe 2020 objectives (regarding employment, climate change and energy, education, poverty and social exclusion), as well as to help relevant stakeholders in their assessment of companies non-financial performance. The European Commission identified the need for a legislative proposal to raise the level of undertakings in disclosure of social and environmental information. The Directive categorizes large companies as public interest entities with 500 or more employees. (Directive 2014/95/EU of the European Parliament and of the Council)
In Sweden, the government adopted the Directive effectively from 1st of December 2016, thus, making it mandatory for the concerning companies to apply the law from the financial year after the 31st of December 2016 (Prop. 2015/16:193). One notable change that the Swedish Government decided to implement differently than from the EU Directive was that instead of 500 or more employees, the Swedish law will count for all companies with 250 or more employees, which will affect 1600 Swedish companies (Dagens Industri, 2018). Furthermore, in addition to the requirement of 250 employees, companies that fulfill the requirement of either that the Balance Sheet Total has exceeded SEK 175 million for each of the last two fiscal years, or that Net Sales for each of the last two fiscal years have exceeded SEK 350 million has to comply with the law (Prop. 2015/16:193).
There has been criticism against the Swedish Government, specifically with regards to the lowering of employee requirement. The change has been deemed to significantly increase costs and limit the free will of companies (i.e. companies should themselves be able to determine how they will conduct their business), and concerns have been raised of that the positive effect for the society and stakeholders from the mandatory reporting are speculative. (Svenskt Näringsliv, 2015)
Certain Swedish Sustainability experts hope that in the long term, the new law will change how the companies disclose and report regarding their sustainability actions. As of now, there is criticism that many companies disclose vague statements instead of focusing on actions and plans (Dagens Industri, 2018).

 Previous Studies

Siregar and Bachtiar (2010) conducted a study to investigate how different factors such as board size, foreign ownership and firm size affects CSR reporting. Their sample was collected from Indonesian companies, and they could conclude that a number of the investigated factors did indeed have effects on CSR reporting.
The above mentioned authors could conclude that board size had a positive relationship with CSR reporting. However, they noted that too large boards rather will have adversely impact, since they were found to make the monitoring process ineffective. A non-linear positive relationship was thus reported. Furthermore, firm size was found to be positively correlated to CSR reporting. A reason to this was, according to the authors, that larger companies have more resources to devote on CSR and social activities. Those companies also experience more pressure to disclose on CSR than smaller companies. Moreover, the effects of profitability on CSR reporting was investigated. However, no correlation was found in this aspect. (Siregar and Bachtiar, 2010) Kiliç et al. conducted a similar study as the above mentioned, however, they chose to focus explicitly on banks. They investigated the level of CSR reporting by Turkish banks throughout the years 2008-2012, and they continued to investigate the effects that ownership and board structure had on the level of CSR reporting. They classified and divided CSR disclosure into five different subthemes; Environment (ENVTOTAL), Energy (ENRTOTAL), Human Resources (HRTOTAL), Products and Customers (PCTOTAL), and Community Involvement (CITOTAL). (Kiliç et al., 2015)
In their study, the overall mean of criterions reported on was close to 40%. Regarding the level of CSR reporting over time, Kiliç et al. (2015) could generally see a significant improvement of the disclosures. The CSR reporting level did increase in all mentioned subthemes. PCTOTAL was most extensively reported on, both in 2008 and 2012. It increased from an average of around 65% of the criterions reported on to slightly over 70%. CITOTAL and HRTOTAL were both reported on to an average of around 40% in 2008, and both subthemes had increased to almost 55% in 2012. ENVTOTAL was in 2012 reported on to an average of slightly under 20%, which in 2012 had increased to around 35%. ENRTOTAL was the least thoroughly reported subtheme in 2008, and so was the case in 2012. It can though be noted that this is also the subtheme where biggest improvement was realized, as the average of criterions reported on was in 2012 over 20% (the corresponding number was around 5% in 2008). (Kiliç et al., 2015)
Moving on to the effects of ownership and board structure on the level of CSR reporting, Kiliç et al. (2015) could conclude some significantly relevant relationships between the said variables and CSR. They found that bank size had a significant positive effect on CSR. A weak positive effect of females on the board of directors on CSR was found. Board size was another parameter which they investigated. Here, no linear relationship was found, but a non-linear positive relationship between board size and CSR was found. (Kiliç et al., 2015)
Furthermore, some additional studies have touched on the subject of CSR disclosures and banks. Branco and Rodrigues (2008) found that bigger banks with greater visibility put greater emphasis on CSR disclosures than smaller banks with less visibility. Coupland (2006) analyzed CSR disclosures from five banks and concluded that as the attention and disclosures are increasing, the language in the reports is becoming increasingly important in order to convey the CSR message. Carnevale, Mazzuca, and Venturini, (2012) analyzed the impact and relationship between CSR and the value of European banks. They found that there was no significant correlation between the publication of a CSR report and the stock price. Wu and Shen (2013), on the other hand, found that CSR has a positive effect on various financial performance measurements such as return on assets, return on equity, net interest income, and non-interest income.

2Theoretical Framework
2.1Legitimacy Theory
2.2Stakeholder Theory
3Literature Review
3.1Corporate Social Responsibility (CSR)
3.1.1CSR Definitions
3.1.2CSR Disclosures
3.2CSR in the Banking Industry
3.3Laws and Regulation
3.4Previous Studies
3.5.1Bank Size
3.5.2Board Size
3.5.3Board Diversity
4.2.1Sample Selection
4.2.2Data Collection
4.2.3Data Analysis and Interpretation
5Empirical Findings
5.1Descriptive Statistics
5.2CSR Disclosure Indexes
5.3Pearson Correlation Analysis
5.4Linear Regression Analysis
6.1Hypotheses Validation & Discussion
6.1.1Bank Size
6.1.2Board Size
6.1.3Board Diversity
6.2CSR Over Time

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