Corporate Social Responsibility and Financial Performance: An Empirical Analysis of Indian Banks
Year: 2020

After financial crisis 1924, the corporate world was forced to restructure their relationship with stakeholders. Stakeholders contested for greater accountability and transparency from corporate management. The Corporate world can't succeed without taking cognizance of their immediate society. European Commission (2001) defined "CSR as a concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on the voluntary basis" CSR has broadened the domain of corporate sector from stockholders to stakeholder by assigning responsibility towards all those institutions which are affected by the company. Despite a substantial research on CSR, it still lacks conceptual clarity. Different scholars regressed to come up with an inclusive definition, which reflects basic CSR character. We have looked for a definition and basically, there isn't one (Jackson &amp; Hawker, 2001) The problem exists due to the social construction of definition which fickles across time and space. The comprehensive definition was proposed in 1983, by AB Carroll "corporate social responsibility involves the conduct of a business so that it is economically profitable, law abiding, ethical and socially supportive" Thus, CSR is a philosophy which defines the company stakeholders relationship.<br><br>The CSR is ever more on the agenda of business organization, due to its ability to enhance the competitiveness of a firm. This has motivated researchers to investigate what affect CSR exerts on bottom line of the business. In this perspective, prior work has presented divergent results. The dominant perspective believes that CSR provides a competitive edge, which finally enhances the financial strength of the business (Margolis et al. 2009) The underlying premise, which asserts that CSR enhances financial performance, is the stakeholder theory (Freeman, 1984) The theory emphasis that the success of a company depends on the enduring relationship with stakeholders and managing them have become an essential tool for value creation (Hammann et al. 2009) The other perspective is negative relationship between two constructs. According to this line of thinking, it consumes the scares resources of company without any substantial return (Friedman, 1970) In other words, social action involves a cost which affects profit negatively. For instance, cost incurred in different CSR activities, for instance, charity, eco friendly equipment, better working conditions, pollution control, will squeeze the profitability. As a blistering topic of debate, CSP CFP investigated worldwide, but lacks insights from an Indian perspective. Further, developing countries became a great receptive of CSR idea, which have become a hub of CSR, makes it imperative to assess its financial implications. Thus, the motive is to explore the nature and the course of association shared between the CSR and financial performance by Indian commercial banks.<br><br>Despite the plethora of research to exemplify the relationship between CSR and firm value, literature fails to provide conclusive evidence. Thus, this study provides some empirical evidence, which may help in explaining divergence in prior work. Using an improved and distinctive method, to verify the impact of CSR on both profitability and market returns in the Indian context. The study employed a panel data set of 28 Indian commercial banks for 10 years. Likewise, Size, risk, capital intensity and age were incorporated as control variables. The result shows CSR positively impacts profitability and stock returns. There by evincing that it pays to be socially responsible. It makes clear from the finding that CSR, as valuable and rear resource, can be exploited to create a competitive advantage for the firm The findings specifically validate the results of previous studies (e.g. Supriti Mishra, 2010; Cochran &amp; Wood, 1984 Simpson &amp; Kohers, 2002; Waddock &amp; Graves, 1997) Therefore, social responsibility initiatives can be considered as strategy creating legitimacy, reputation, and competitive advantages. An ideal CSR towards all the essential stakeholders creates a fleet of satisfied stakeholders who bring effectiveness and cost reduction through different means that ultimately enhance firm performance. Satisfied workers compensate the firm through productivity gains and lessened employing and training costs, satisfied clients enhance item deals through repeated purchase behavior, satisfied investors lend capital at a less expensive rate diminishing cost of capital; satisfied community decreases the advertising cost, ecological stewardship prompts favorable circumstances, and better suppliers reduce quality certification costs. Similarly, when firms enhance CSR towards their stakeholders, consumers not only like, respect, or admire the firms but also identify with it. Such identification turns out to be solid and persisting (Sen and Bhattacharya, 2001) hence those customers become brand diplomats of the firm with enduring loyalty (Gillentine, 2006) All these activities will create a competitive advantage for the firm (Porter &amp; Kramer, 2002) In summary, CSR can be linked with a number of bottom line benefits.<br><br>The results of this study have an important implication for strategic managers. First, considering the impact of CSR on firm's performance, companies should give adequate concern to their social responsibilities. CSR should not be treated as an optional activity rather it should be integrated with long term business strategy. When CSR is aptly integrated into the business operations, both social and financial target becomes easier and resulting in better financial performance. Therefore, managers of the companies that do not practice CSR must treat it as one of their core business functions for long term business performance. Second, the financial base of CSR gives it a strategic position in the corporate world. Yielding positive results, CSR will be taken as voluntary initiative rather than taken under legislative compulsions. In fact, forcing business organization does not actually signify that they will respond and go beyond legislation requirements. Therefore the underlying premises of financial outcome will be useful in the long run, to move business organizations beyond legislative compliance.<br><br>The results should be interpreted with certain limitations. First study does not consider the kind of CSR a firm takes. It is empirically affirmed, philanthropic and strategic CSR can have a different impact on financial performance. The collection of CSR into single score conceals its genuine effect. So future research, should consider the different kinds of CSR to establish a meaning full research. Second study focused on a particular industry, which could have done with more industries, as CSR vary across industries due to nature of their operations. Therefore future research should be conducted on the cross section of industries.