IMPACTS OF CORPORATE SOCIAL RESPONSIBILITY ON THE FINANCIAL PERFORMANCE OF THE FIRMS

IMPACTS OF CORPORATE SOCIAL RESPONSIBILITY ON THE
FINANCIAL PERFORMANCE OF THE FIRMS





BY
NGO THI LINH
ID: E0700042










Graduation Project Submitted to the Department of Business Studies,
HELP University College, in Partial Fulfilment of the Requirements for
the Degree of Bachelor of Business (Accounting) Hons





APRIL 2011

DECLARATION

I hereby declare that the graduation project is based on my original work except for
quotations and citations which have been duly acknowledged. I also declare that it has
not been previously or concurrently submitted for any other course/degree at HELP
University College or other institutions. The word count is 10,668 words.

















_____________________
NAME OF CANDIDATE
Date:
Acknowledgement
I would like to express gratitude towards Dr. Pham Duc Hieu and Dr. Le Van Lien and
to Ms Shumathi for their support and guidance. I would also like to some my friends for
their financial support for this project.

IMPACTS OF CORPORATE SOCIAL RESPONSIBILITY ON THE
FINANCIAL PERFORMANCE OF THE FIRMS

by
NGO THI LINH
April 2011

Supervisor: Dr. PHAM DUC HIEU

Abstract
Does CSR impact on firms' profits? CSR will lead to increase or decrease of financial
performance of the firms. Firms face complex market conditions, external effects and
asymmetric information which may lead to market failure and sub‐optimal profits. In the
literature, market failures could build the theoretical base for corporate social
responsibility (CSR) implementation by firms. In fact, firms in competitive markets
could use CSR as a management tool to gain more profits through diversification.
Further, the implementation of CSR requires the detection of future trends and
developments which makes the firms more stable to sudden events. Therefore, CSR may
offer firms the opportunity to gain higher profits than they would get without CSR.
Alternatively, CSR could lead to higher costs and thus to worse financial performance.
Many studies are taken in which the method of study is quantitative or using the KLD
data base. In this study, I will examine the relationship of CSR and financial
performance in a different view and different method. This study makes clear
relationship in the aspect of identifying the costs and benefits of CRS, how those costs
and benefits will affect the accounting earnings or profits of the firms. Those issues will
be improved by the case of Vedan and Unilever in Vietnam.





TABLE OF CONTENTS
Page
Declaration of Originality and word count ii
Acknowledgement iii
Abstract iv
Table of Content v

CHAPTER 1 INTRODUCTION 1

1.1 Background of study
1.2 Statement of purpose
1.3 Structure of study

Chapter 2 LITERATURE REVIEW 2
2.1 Definition of CSR
2.1.1 Historical definition of CSR
2.1.2 CSR in the 21
st
Century
2.2 Relevant theory on the relationship of CSR and financial performance
2.2.1 Relevant theory suggest a positive relationship
2.2.2 Relevant theory suggest a negative relationship
2.3 Experiential study of CSR and financial performance
2.4 Relevant literature about benefits and costs of CSR
2.4.1 Economic benefits of CSR
2.4.2 Economic costs of CSR
2.5 CSR and accounting performance
2.5.1 How economic benefits are reflected on accounting earnings
2.5.2 How economic costs are reflected on accounting earnings
2.5.3 Additional accounting issues and implication
2.6 How CSR can reduce the cost of the company
2.6.1 Reduce the financing cost
2.6.2 Reduce the cost of human resourches
2.6.3 Reduce the operating cost
Chapter 3 METHODOLOGY
3.1 Research objective
3.2 Research strategy
3.3 Measurement
3.3.1 Measurement of Corporate Social Performance

3.3.2 Measurement of financial performance
3.4 Case study
3.4.1 Vedan
3.4.2 Unilever
3.5 Limitations


Chapter 4 ANALYSIS
4.1 Vedan
4.2 Unilever

Chapter 5 CONCLUSION
5.1 Summury
5.2 Conclusion
5.3 Recommendation


REFERENCES/BIBLIOGRAPHY

Chapter 1: Introduction
1.1 Background of study
Nowadays, the importance of corporate social responsibility (CRS) has been more
considered by firms than ever. Most of the Fortune 1000 companies issue CSR reports,
they not only care for their responsibility but also they consider it as a key to business.
Many firms know that they can get benefits from their social actions. Some of the most
significant advantages of CSR are: improved company image and reputation, raised
ability to draw and keep employees, and potentially decreased regulatory mistake. The
study in economics and direction on the benefits and costs of CSR is growing very fast.
Marketing researches prove that ―70% of European consumers consider important a
firm‘s commitment to CSR when buying a product or service and, moreover, 1 in 5
consumers would be willing to pay more for products that are socially and
environmentally responsible‖. In 2003, many current studies disclosed that ―more than
eight in ten British consumers consider important that a firm shows a high degree of
social responsibility, when making their purchasing decisions‖. Also, most of customers
feel that firms do not pay attention and take action to their environment and social
concern. In a study of Mohr and Webb (2005) about the impact of CSR on price and
consumer responses, the results show that CSR has a positive impact on consumers‘
valuation of a company and on their buying habits. The study also discovers that a low
price does not emerge to recompense for a low level of CSR.
CSR is an important issue which concerns about the ethics, society, natural environment,
employees and also working environment as a whole in which how the firm behave. On
September 13, 1970, in the New York Times, Milton Friedman wrote: ―There is one and
only one social responsibility of business— to use its resources and engage in activities
designed to increase its profits so long as it stays within the rules of the game, which is

to say, engages in open and free competition without deception or fraud.‖ According to
The Australian Government Corporations and Markets Advisory Committee, Corporate
Social Responsibility Discussion Paper (2005) emphasizes that ―as companies‘ play a
prominent role in contemporary society, the relationship that exists between a company
and society is an important community issue. Through the provision of goods and
services, companies have substantial power to impact society. Correspondingly, a firm‘s
CSR suggests whether this impact is positive or negative. Thus CSR is a particularly
relevant issue for evaluating firms from a community perspective.‖
The Economist Intelligence Unit (2005) global survey showed that in 2000, 54% of
company executives regarded CSR as ‗central‘ or ‗important‘ to their business decision-
making. In 2005 this response grew to 88%. This shows that companies are more and
more focusing on CSR. Thus it is essential to look whether investment in CSR is
connected to higher or lower financial performance.
The question of how CSR affects financial performance of the firms is still being
researched by many people besides many academic researches of this issue were taken
before. Although there are many preponderancy evidences showing the positive
relationship between CSR and financial performance, it still has some limitations of
conclusions and mixed results. Margolis and Walsh stated in a review of 95 empirical
studies conducted between 1972- 2001 that: ―When treated as an independent variable,
corporate social performance is found to have a positive relationship to financial
performance in 42 studies (53%), no relationship in 19 studies (24%), a negative
relationship in 4 studies (5%), and a mixed relationship in 15 studies 19%)‖. Moreover,
there is no literary deal with the relationship between CSR activities and accounting
earning performance; or the affect of the systems on financial performance and
accounting earning is not clear so far.
1.2 Statement of purpose
The purpose of this study is to figure out the impact of CSR on the company‘s financial
performance. The aim of this study does not answer why and how firms behave socially
responsible. The study is looking closely at how likely CSR impact the accounting
performance. This study is interested in economic benefit and cost of CSR. This study

tries to analyse the relationship between CSR and accounting performance. This study
also questions how CSR can increase the profit of a company. Furthermore, this study
will examine CSR among two companies in Viet Nam: Vedan and Unilever to see the
outcomes of adopted CSR.
The main question is what is the impact of CSR on the company‘s profitability? This
question is divided into three sub problems which must be answered throughout this
study:
 The economic benefit and cost of CSR.
- Economic benefits of CSR
- Economic costs of CSR
 CRS and accounting performance.
- How economic benefits are reflected in accounting earnings.
- How economic costs are reflected in accounting earnings.
- Additional accounting issues and implications
 How CSR can reduce the costs of a company
 The outcome of CSR adopted in Vedan and Unilever in Vietnam.
1.3 Structure of study
The thesis will be organized as follows: First, the literature review chapter (chapter 2)
will provide a basic understanding of the concept of CSR; the relevant theories describe
the relationship between CSR and financial performance as well as empirical studies of
CSR and financial performance. The relevant theories will be examined in two aspects
of positive and negative relationship. In chapter 2, study also includes the theoretical
framework which answers three problems of this study: benefits and costs of CSR, how
CSR reflects on accounting performance, and how CSR can increase profits (or reduce
the costs) of a firm. This will provide the framework for the subsequent analysis. A
methods chapter (chapter 3) will precede the analysis in chapter 4, in which the
relationship between CSR and financial performance of the firm will be presented and
analyzed according to the literature review. Chapter 4 shall also analysis the outcome of
CSR adopted by Vedan and Unilever in Vietnam. Study will complete with concluding
remarks in chapter 5.

Chapter 2: Literature review
The impact of CSR on the financial performance will be found on the relationship
between CSR and accounting performance. In order to answer this question, it will be
divided into three issues: the economic benefit and cost of CSR, the relationship
between CSR and accounting performance, how CSR can reduce the cost or increase
profits of a firm. This literature review will include three parts of analyzing and
evaluating based on those issues.
2.1 Definition of CSR
Since Bowen (1953) defined CSR as a method employed by corporations to pursue
policies, decisions, and actions for the social purpose and value, many researchers have
defined CSR in a number of different ways. Such definitions have typically been based
on two representative theories: agency theory and social contract theory. CSR
researchers following agency theory have suggested that corporations are responsible
only to stockholders because stockholders authorize the management to operate
corporations (Friedman, 1970; Jensen, 2000). On the other hand, those researchers
following social contract theory have suggested that corporations have an implied
contract with society and that this contract necessitates them to be faithful to their roles
to develop the society under the contract (Davis, 1967; Donaldson & Dunfee, 1999).
Carroll (1979, 1991) provides a notable definition of CSR: ―corporate social
responsibility involves the conduct of a business so that it is economically profitable,
law abiding, ethical and socially supportive.‖ Carroll also developed a CSR pyramid
composed of economic, legal, ethical, and philanthropic responsibilities. The present
study is based on Carroll‘s definition and analysis of CSR.
There are various definitions of CSR from many organizations. But those definitions
also have a common ground. McWilliams and Siegel (2001) stated CSR as ―actions that
appear to further some social good, beyond the interest of the firm and that which is
required by law.‖ It means that CSR is not only obeying the law. According to Business
for Social Responsibility (BSR), CSR is defined as ―achieving commercial success in
ways that honor ethical values and respect people, communities, and the natural
environment.‖ On the other hand, Frooman (1997) represent the definition of CSR

should be: ―An action by a firm, which the firm chooses to take, that substantially affects
an identifiable social takeholder‘s welfare.‖

2.1.1 Historical definition of CSR
Although the name CSR appear to be new to the business world, the concept of CSR has
taken over a number of decades through out many literatures. The fact that the
terminology of CSR has modified over this time, and the meaning attribute to concepts
of CSR will also continue to grow with the development of business, political and social.
Because of the rapid influence of globalization and mass communication, the meaning
and awareness of CSR will not only reflect local situation, but will be also strongly
impacted by global development and changes in international law such as consolidation
of law among countries.
CSR in the 1980s
The 1980s have been knows in which had ―a more responsible approach to corporate
strategy‖. The 1980s also had some famous events such as R Edward Freeman working
on the rising Stakeholder Theory. Freeman observed ―meeting shareholders needs as
only one element in a value-adding process‖, he also defined a variety of stakeholders
who were related to the organization‘s operations. In 1984, the paper of Freeman
continues to be recognized as the ―dominant paradigm‖ in CSR.
According to Carroll, in the 1980s, ―the focus on developing new or refined definitions
of CSR gave way to research on CSR and a splintering of writings into alternative
concepts and themes such as corporate social responsiveness, CSP, public policy,
business ethics, and stakeholder theory/management‖. Carroll also figured out many
studies of other authors such as Tuzzolino and Armandi who ―sought to develop a better
mechanism for assessing CSR by proposing a need-hierarchy framework patterned after
Maslow‘s‖, and Jones who ―posited that CSR ought to be seen not as a set of outcomes
but as a process‖. The authors created a conceptual tool which called organizational
hierarchy to evaluate socially responsible performance of the firm.
One of the most emerged events in the 1980s was the global debate on sustainable
development. The interdependence of protection and development was stated on The

World Conservation Strategy which was published in 1980, this was also the first
concept of ―sustainable development‖. The World Commission on Environment and
Development (WCED) issued the Brundtland Report in 1987 which was named ―Our
Common Future‖. This report showed that ―Sustainable development seeks to meet the
needs and aspirations of the present without compromising the ability to meet those of
the future‖. This definition of sustainable development is usually used in many studies
and literature. However, one of the interesting perspectives of CSR debate was not seem
to use that stated in the report: ―Far from requiring the cessation of economic growth, it
recognizes that the problems of poverty and underdevelopment cannot be solved unless
we have a new era of growth in which developing countries play a large role and reap
large benefits.‖
The report which connected the relationship between sustainable development and
economic growth set the way for future discussion on this problem. While there were
many examples of earlier studies which subjected to solve the problem of CSR and
financial profit, Carroll considered the 1980s as the time when ―scholars were becoming
interested in the question of whether socially responsible firms were also profitable
firms. If it could be demonstrated that they were, this would be an added argument in
support of the CSR movement‖. The study of Carroll, Aupperle and Hatfield in 1985
which researched the link between CSR and profitability suggested the priorities of four
components of CSR earlier found out by Carroll, as ―economic, legal, ethical, and
discretionary‖
CSR in the 1990s
In the 1990s, the meaning of CSR was not expanded wider, but according to Carroll the
concept of CSR used ―as the base point, building block, or point-of-departure for other
related concepts and themes, many of which embraced CSR-thinking and were quite
compatible with it. CSP, stakeholder-theory, business ethics theory, and corporate
citizenship were the major themes that took center stage in the 1990s‖.
When Wood repeated the CSP model and ―placed CSR into a broader context than just a
stand-alone definition. An important emphasis in her model was on outcomes or
performance‖, Wood was made a key part of the literature.

The CSP structure created by Wood and the hierarchy of responsibilities created by
Carroll which has economic responsibilities at the bottom and charity at the top, are
used in many literature such as Windsor (2001). According to Swanson (1995), there
were three key types of incentive for CSR:
i. The practical perspective (an tool to complete performance objectives);
ii. The negative duty approach (force to approve socially responsible initiatives to
propitiate stakeholders); and
iii. The positive duty approach (business self-motivated in spite of social
pressures).
Beside that, Wood also defined three major types of processes which can be used by a
company to apply CSR motivational principles: environmental management, issues
management and stakeholder management. According to Wood in Maignam and Ralston
―Once implemented throughout the organization, these processes help the firm to keep
abreast of and to address successfully, stakeholder demands‖. However, this view of
CSR and the relationship with stakeholders may be simple. In 1990s, this view was
occurring in following years on the debate of the theory of stakeholder. According to
Nahan in Ryan in 2002 discussed whether ―the first priority of a corporation is to its
shareholders‖ or whether policy makers should build up ―a flexible multi stakeholder
approach to promoting CSR‖.
O‘Rourke also explained the group that called primary stakeholder who is the
shareholders as ―the boundary zone of CSR is currently being negotiated‘ with the firms.
O‘Rourke stated that: ―A trend also noteworthy in the late 1990s was that of shareholder
activists linking their environmental or social issue to financial performance and/or risks
faced by the company. By claiming that environmental and social issues have a direct
effect on shareholder value, shareholder activists are moving the rhetoric of their
activism out of the realm of ―ethics‖ or good versus bad behavior, and into that of
traditional issues of profitability, risk and shareholder value‖
The establishment of group BHP Shareholders for Social Responsibility in 1994 which
is the result of shareholder worry about environmental damage made by the firm in
Papua New Guinea is a special example of shareholder activism. This group takes care

about environmental, social and economic issues. Beside that, this group has also
actively connected BHP Billiton management about its focuses. There are some similar
supported groups for shareholders of Boral Green, PaperlinX, Gunns which have been
established in Australia. In 1990s, the CSR continued to influence in global as the
function of business while the influences of government continued to haze. In 1997,
Solomon wrote in Joyner and Payne that ―now that businesses are often the most
powerful institutions in the world, the expanse of social responsibility has enlarged to
include areas formerly considered the domain of governments…The more powerful
business becomes in the world, the more responsibility for the well-being of the world it
will be expected to bear‖.
In 1999, Carroll defined a new millennium approached which stated that ―the CSR
concept will remain as an essential part of the business language and practice, because it
is a vital underpinning to many of the other theories and is continually consistent with
what the public expects of the business community today‖
2.1.2 CSR in the 21
st
Century
After the collapse of Enron and the scandal of James Hardie in Australia, the problem of
CSR became to public prominence. The question is how these concerns of CSR can be
solved in the literature of the 21
st
Century? Many writers continued the discussions about
the position of CSR in the global economy, for example Sherer ans Smid who talk about
Solomon‘s view that multinational companies ―should take responsibility for the
improvement of world-wide social and environmental conditions‖. By examining
examples of Western oil production plans which have operated in some country where
war is happening, and poor countries of African where the human rights abuse and
corruption is very seriously. According to James Buckee – COE of one of these
organizations said that ―it is socially responsible for a corporation to invest in certain
places that some elements of popular opinion find objectionable‖. This idea exemplifies

exactly the conclusion of Windsor that ―There are fundamental differences of opinions
and values in the global economy‖. The argument of Oketch is that ―there is need to
ensure that the global market operates according to a certain set of rules and institutions
that a majority of people see as being legitimate‖ increase more problems than it
answers.
Follow with the fast moving of global business, many recent literatures are being moved
away from debates in US to other countries in over the world. There are many authors as
Maignan and Ralston stated ―CSR in France, the Netherlands and the UK‖, Aaronson in
UK in 2003, Lucas in Australia, Perroni in Italia have expanded the discussion to across
border. Moreover, they also compared the differences of perspective in different
countries and the function of business in society. In March 2000, the new appointment
of a United Kingdom Minster for CSR has strong influenced on the movement of CSR‘s
debate. Beside that, the establishment of the United Nations Global Compact, Promoting
a European Framework for Corporate Social Responsibility and the European
Commission‘s Green Paper which concern about human right, the environment, society
and labor also have impact on this movement. Many literatures in which the relationship
between government and CSR in has been investigated also reflected those
developments.
2.2 Relevant theory on relationship between CSR and financial
performance
There are many studies figure out the relationship between CSR and financial
performance of the firm that are based on a number of theories relevant to this issue.
Those theories are divided into three aspects: theories suggest the positive relationship,
the other describe this relationship as a negative impact, and beside that some theory
state a neutral relationship between CSR and financial performance. But this study only
focuses on theories which describe the positive and the negative relationship.
2.2.1 Relevant theory suggest the positive relationship
- Stakeholder theory: After publication of A Stakeholder Approach (1984) of Edward
Freeman‘s Strategic Management, stakeholder management, stakeholder theory, and
other variation of stakeholder study have taken a big deal of management research.

Freeman said that business relationships should comprise all people who can ―affect or
be affected by‖ a firm. Many studies in stakeholder theory have required analytically
dealing with the problem of which stakeholders merit or requiring management concern
such as study of Wood. Methods to solve this problem have focused on relationships
between firms and stakeholders based on trade transactions, authority dependencies,
legitimacy claims, or other claims. Researchers have attempted to mix stakeholder
theory with other management perspectives, mostly theories of governance and agency.
Stakeholder theory is helpful as both an instrumental and normative frame. Normative
stakeholder arguments have emerged declaring firms have a moral obligation to uphold
the interests of all corporate stakeholders (Wicks, Gilbert, and Freeman, 1994; Evans
and Freeman, 1983). According to Donaldson and Preston, Instrumental stakeholder
theory recommends managers ―must induce constructive contributions from their
stakeholders‖ to attain goals of company efficiently. If a cross point between normative
and instrumental stakeholder theory retains CSR is not stand on moral values or not
actual, it will not effect on financial performance gains (Jones, 1995; Frank 1988).
- Competitive advantage theory Harrison, Bosse and Phillips (2007) develop on the
definition of competitive advantage representing that companies must perform more
than build a competitive advantage which is attractive to customers. In order to build a
right competitive advantage, Harrison state that: ―Competitive advantage implies more
than merely creating value. Rather, the key is to create more value than competitors are
able to create. A firm is said to have a competitive advantage if it creates and
appropriates more value than the least efficient rival capable of breaking even. Simply
extending the prior logic, this occurs when the firm drives a wedge between the
willingness to pay it generates among buyers and the costs it incurs and then collects
returns in excess of its own opportunity costs‖. Socially complex resources or
capabilities that are not easily copied are necessary to retain a company‘s competitive
advantage. CSR helps firms develop internal resources making a firm more prepared
and able to adapt to the fast moving of demands and crises. CSR also expands external
reputation benefits, increasing its attractiveness to customers and potential employees,
investors and bankers.

2.2.1 Relevant theory suggest the negative relationship
-Trade-off theory assumes a negative relationship between CSR and financial
performance. Stand on Friedman (1970), this theory analysis investment as trade offs
between stakeholders leading toward to tradeoffs between profit maximization and
socially responsive purposes. Therefore, corporate social performance (CSP) might
lower than financial performance of the firms because CSR funds use the resources that
could be used in a more profit-maximizing way.
- Managerial Opportunism Theory Managers may avoid CSR investment that would
improve firm value because of recompense packages linked with short-term company
revenue and stock price behavior. Alternatively, managers may engage in CSR
initiatives or show preference towards certain initiatives to maximize their personal
reputation or utility.
2.3 Experiential studies of CSR and financial performance
According to Margolis and Walsh (2002), there are one hundred twenty-two published
researches from 1971 to 2001 empirically investigated the relationship between
corporate social responsibility and financial performance. Narver is a person who
publish the first his study in 1971.
The first type is using the event study methodology to analysis the short run financial
impact (abnormal returns) in the whether of the firm carry on either socially responsible
or irresponsible action. The outcomes of these studies have been combined. Welch and
Wazzan (1999) discovered that there is no relationship between CSR and financial
performance, while Wright and Ferris (1997) found a negative relationship; Posnikoff
(1997) stated a positive relationship. Studies of McWilliams and Siegel (1997) are in the
same way of inconsistent concerning the relationship between CSR and short run
financial impact.
The second type is the examining of the relation between measurement of corporate
social performance (CSP) and measurement of long term financial performance. This
type uses financial measures or accounting of profitability to study the relation ship
between social responsibility and accounting based performance. The results are also
mixed up. Waddock and Graves (1997) found a major positive relationship between an

index of CSP and performance measures, example is ROA in the following year. Beside
that, after managing the time of assets, Cochran and Wood (1984) suggested a positive
correlation between social responsibility and accounting performance. While Aupperle,
Carroll, and Hatfield (1985) detected no major relation between CSP and a firm‘s risk
adjusted return on assets. In the other hand, studies which use measures of return on the
stock market also give various results. Vance (1975) refutes Moskowitz‘s research by
expanding the time period for examine from 6 months to 3 years, thus results are differ
with Moskowitz and show a negative CSP/CFP relationship. But Alexander and
Buchholz (1978) improved on Vance‘s examination by assess stock market performance
of an equal group of stocks on a risk adjusted basis, yielding an uncertain result.
The effects of CSR on financial performance are continued to be concerned in the
literature. Windsor lines the resulting of Verschoor, that ―among the 500 largest US
public corporations, the 26.8% committing in annual reports to ethical behavior toward
stakeholders or compliance with corporate code of conduct have higher financial
performance measures than other firms that do not‖. However, this result dose not
permit for the real that companies as Enron can take on charity while being guilty of
moral misconduct and the result also is very narrow measurement of CSR. Windsor also
stated that ―The Enron collapse is a reminder that such deviation between responsibility
and wealth is never far away in the increasingly competitive landscape of global
business operations‖. Windsor thinks that there has ―A marked tendency in the relevant
literature…to examine alternatives – such as citizenship or stakeholder management –
precisely because of the difficulties inherent in the responsibility construct‖.
In a study of Orlitzky, he shows a positive correlation which CSP really decreases
financial risk between corporate social performance (CSP) and corporate financial
performance in which organizations may gain benefits financially from social activities.
Hopkins show in an argument about the business case for CSR that an in benefit-cost
analysis of CSR by the Cooperative Bank of the UK ―declared that between 15 and 18%
of its pre-tax profits could be directly attributed to its ethical stance‖, while it is difficult
to prove a fundamental link between CSR activities and financial indicators (Hopkins
2003). Beside that, Hopkins also has well known about the study of the top UK

companies, analyzing the correlation between their CSR and their stock market
performance. Hopkins stated that ―the public‘s purchasing of shares was still not greatly
affected by the companies‘ level of social responsibility [but]…that CSR standing does
not necessarily badly affect a company‘s share price‖. Certainly, share market price is
only one of various measure of profitability, and the problem of Hopkin‘s study supports
his argument that, ―Definition, measurement and data problems exist for assessing both
social responsibility and financial performance‖.
In other study of McWilliams and Siegel about corporate financial investment in CSR
which is stated that ―there is some level of CSR that will maximize profits while
satisfying the demand for CSR from multiple stakeholders. The ideal level of CSR can
be determined by cost-benefit analyses.‖
In the other term of investment in CSR which uses financial implications, Brammer and
Pavelin defined as ―insurance-motivated social investment‖, a risk-management strategy
focus on decreasing reputation or firm‘s image and financial losses which are caused by
negative stakeholder response to negative events. Brammer and Pavelin showed that
―Social investment, by establishing a positive reputation in the eyes of stakeholder
groups, helps to mitigate the impact of those negative events by reducing the likelihood
that stakeholders attribute blame to the company concerned‖.
2.4 Relevant literature about benefit and cost of CSR.
2.4.1 Economic benefits of CSR.
Based on prior research, there are three major economic benefits to firms engaging in
CSR. Firstly, firms avoid or mitigate impacts to financial performance arising from
negative events and externalities. Environmental economic theory, organizational
legitimacy, political cost theory, and stakeholder management theory all predict CSR
reduces negative effects to economic earnings when corporate goals and
social/environmental goals are not aligned. Williams and Barrett (2000) find that while a
firm‘s reputation is diminished by Occupational Safety and Health Administration
(OSHA) and EPA violations, the extent of the decline is reduced by charitable giving. In
studies involving the Bhopal disaster (Blacconiere and Patten, 1994) and the 3-Mile
Island accident (Bowen, Castanias, and Daley, 1983), there is evidence consistent with a

mitigated negative impact to financial performance for firms that would be considered
more socially responsible, relative to industry peers that would be considered less
socially responsible.
Secondly, firms create goodwill and other intangible assets, favorably impacting
financial performance. As early as 1966, Johnson links corporate giving with
competitiveness in the industry including arguments on when differentiation is
worthwhile. Such theory grounds some management and marketing literature arguing
firms use CSR to attract customers that want to buy products from socially responsible
corporations. Marketing statistics support such an argument5 as does analytical research
(Lutz et al., 1998; Arora and Gangopadhyay, 1995). Fombrun and Shanley (1990),
Neheilson (1994), Brammer and Millington (2005) provide arguments and evidence
linking corporate giving, reputational benefits (goodwill), and financial performance.
Each paper maintains these benefits provide a way of differentiating the firm from its
industry peers.
Finally, firms gain efficiencies, reducing costs and improving financial performance.
Smart (1992), Porter and Van der Linde (1995), Boyd (1998) and Heal (2005) provide
case study and anecdotal evidence showing costs savings for more socially responsible
firms, relative to their less socially responsible industry peers. King and Lennox (2002)
provide empirical support to such arguments showing waste prevention is associated
with higher Tobin‘s q and ROA, whereas other methods of dealing with waste (waste
transfer or on-site waste management) do not have the same effect.
2.4.2 Economic costs of CSR.
The economic costs of CSR which also like economic benefits are not straightly visible.
The specific CSR initiatives differ by industry based on the potential social and
corporate conflicts (potential externalities). Firstly, the incremental costs from operating
in CSR will effects economic earnings negatively as they require cash outflows. Firms
which are environmentally responsible may have upper R&D costs (to search for more
efficient, cleaner production processes) and greater investment in plant, property, and
equipment (for environmentally friendly equipment), however the incremental costs
which are caused by CSR are quite difficult traceable.

Secondly, the economic cost of CSR is that they are more probable to engage major
upfront cash outflows. Investing in better monitoring of overseas manufacturing
facilities will involve significant upfront cash outflows when getting started. Investing in
more environmentally friendly PPE will likely require greater upfront costs.
Incorporating social and environmental information into resource allocation decisions
may first require updating accounting information systems to capture the required
information. Putting together the first annual CSR report to stakeholders will likely
involve higher upfront costs relative to the costs of continuing such an activity. The
timing of the cash outflows is more likely to be upfront
2.5 CRS and accounting performance.
2.5.1 How economic benefits are reflected in accounting earnings
This section integrates prior research to delineate specific economic benefits and costs of
CSR. It draws on prior empirical and theoretical research across literature streams and
across disciplines to find commonalities. The goal is to look at the prior literature more
broadly, acknowledging that no one theory adequately describes the underlying
relationship between CSR and financial performance. Delineating economic benefits
allows for integration among theories, providing a more comprehensive understanding
A key purpose of this study is a better understanding of the accounting issues involved
with economic costs and benefits of CSR. Based on prior research, there are three major
economic benefits to engaging in CSR. First, firms avoid or mitigate the economic
impact of negative events and/or externalities. This implies CSR reduces the probability
of compliance and regulatory costs in future periods. In addition, one would expect firms
that are more environmentally responsible to have a lower probability of industrial
accidents. This would reduce the probability of expenses related to remediation,
litigation, etc. They also avoid the lost sales from reputation damage. Ignoring, for the
moment, the costs of being more socially responsible, one would expect higher
accounting earnings for such firms, over time, all other things being equal. Levels of
accounting earnings would be higher. Moreover, Firms that are more socially
responsible engage in behaviors that seek to reduce conflicts and seek to align corporate
and social goals. Less socially responsible firms ignore some environmental and social

impacts of their operating activities. Some of these conflicts are likely to be realized in
future periods in the form of lawsuits, political or social conflicts in foreign operations,
penalties, or significant revenue fluctuations in response to negative social or
environmental events
The second economic benefit of generating goodwill and other intangible assets
positively impacts economic earnings. From a strategic perspective, internally generated
competencies and reputation benefits are major categories by which CSR contributes to
firm differentiation. From an accounting standpoint, many of the intangible assets
created through CSR (external reputation benefits and internally generated
competencies) are not represented on the balance sheet. Relying on the Feltham and
Ohlson (1995) framework, the value of the firm is come to the book value of net assets
plus goodwill, where goodwill represents the present value of abnormal operating
earnings. Differentiation allows a firm to have a sustainable competitive advantage. This
particular benefit of CSR is not recognized when the economic benefit occurs, but rather
is recognized over future periods in the form of higher revenues.
Finally, efficiency gains impact economic earnings by reducing operating cash outflows.
CSR gains include more efficient production processes that may reduce the amount of
resources required (raw materials, energy, and labor) and reduce waste. Additionally
more socially responsible firms potentially gain from higher quality, more productive
employees. Again, temporarily ignoring economic costs, the overall impact to
accounting earnings should be reduced operating expenses.
2.5.2 How economic costs are reflected in accounting earnings.
One of the economic benefits described above is the goodwill created from being more
socially responsible. The cost associated with this goodwill might include charitable
contributions, costs associated with employee volunteer programs, and costs associated
with consumer recycling programs. While such costs may be contributing to reputation
benefits that positively impact future sales, GAAP requires immediate expensing of such
items.
Some economic costs of CSR, however, are not immediately expensed. For example, a
more socially responsible manufacturer may pay higher costs for labor, raw materials,

and factory overhead relative to a less socially responsible industry peer. These costs
will be matched with the revenues in the period the goods are sold. A more socially
responsible firm may purchase more energy efficient buildings and equipment, or update
facilities to use less energy and water. Many of these costs do fall within capitalization
criteria and the related depreciation expense will be matched with revenues during the
assets‘ useful lives.
2.5.3 Additional accounting issues and implications
CSR not only theoretically affects levels of accounting earnings; it has potential to affect
other aspects of accounting earnings. Each of the three economic benefits (mitigating
negative impacts, creating intangible assets, and increased efficiency) has implications
on future operating cash flows.
The timing of when such benefits will be recognized in accounting earnings, however, is
unclear. Assuming costs are relatively stable after some initial period, it follows that
CSR leads to less volatile earnings. In fact, political cost theory and environmental
economic theory would seem to predict less volatile earnings as the primary economic
benefit with potential to affect levels of earnings as a secondary benefit.
In addition, earnings response coefficients provide another possible means through
which the relationship between CSR and financial performance may be observed.
Earnings response coefficients measure the amount to which a firm‘s stock price reacts
to unexpected earnings. Earnings response coefficients measure the amount to which a
firm‘s stock price reacts to unexpected earnings. Relying on Heal (2005), firms that are
more socially responsible engage in behaviors to reduce conflicts and seek to realign
corporate and social goals. Resources are allocated to addressing operational issues with
social and environmental impacts proactively, reducing the likelihood of negative
externalities being realized.
Bae and Sami (2005) use similar logic when examining environmental performance and
ERCs. They theorize that potentially responsible parties for hazardous sites have greater
potential future environmental liabilities. This adds noise to current earnings signals
resulting in lower ERCs. Firms without such potential liabilities have more precise
earnings resulting in higher ERCs. They find higher (lower) ERCS for better (worse)

environmental performing firms. Prior literature suggests the affects of CSR on expected
future cash flows accrue to firms facing environmental and/or social conflicts, not just
environmental conflicts examined in the Bae and Sami (2005).
2.6 How CSR can reduce the cost of the company
2.6.1 Reduce the financing costs
The firm carries out its responsibility by some action for investors can make the firm
obtains funding from the investor continuously, as a result the firm's financing cost
decreased and the firm value increased. The investor of the enterprise includes
shareholders and creditors, so the responsibility for the investors mainly includes
distribute the dividends, principal and interest fully and timely. If the firm does perform
like that, the investors prefer to put money into the firm, not only reduce the financial
risks, but also cut down the financial cost, therefore the firm value is increased.
2.6.2 Reduce the cost of human resources
The firm carries out its responsibility by some action for the employees can help firm
improves the employees‘ loyalty, make them work more effectiveness and decrease the
cost of human resources, thus as to increase the firm value. The responsibilities include
providing full salary on time and follow-up education, stimulating the employees in
accordance with the characteristics of wisdom and design the career planning for the
employees, etc. If the firm performs this responsibility, not only can mobilize the
enthusiasm of employees, improve work efficiency, but also can improve the loyalty of
employees of firm, to avoid the ―job-hopping‖, disclose the confidentiality of the firm,
all those above can improve the firm value.
2.6.3 Reduce operating costs
The action that the firm performs its responsibility for suppliers can make full use of the
commercial credit; decease the cost of management, so as to improve the organization
value. Firm‘s responsibility for the suppliers mainly refers to do not violate the
commercial contract, return the accounts payable timely, etc. If the firm performs
responsibility for suppliers, it can attract more suppliers. on one hand, the fact that the
suppliers compete intensely reduce the cost of raw materials, on the other hand, the
supplier can accept more advantageous credit conditions to the enterprise, improve the

efficiency of funds, and thus enhance the firm value.

Chapter 3: Methodology
This part of the paper will explain the methods used in carrying out the study.
3.1 research objective:
This study tries to figure out the impact of CSR on financial performance, especially on
accounting performance of the firms. This impact will examine on three issues which are
the benefits and costs of CSR, how CSR reflect on accounting performance of the firms,
and how CSR reduce the cost of the firms. More over, this study also try to show the
outcome of adopted CSR between Vedan and Unilever in Vietnam in order to improve
the impact of CSR on the accounting earning of two company.
3.2 Research strategy:
This study will use the secondary data source in order to find out the problem, and the
research method of this study is qualitative method.
- Data source: secondary data
- Research method: qualitative
Secondary data is data for a research project that were initially collected for some other
purpose. It is often collected under conditions not known by the user. The types of
secondary data include internal secondary data and external secondary data. Internal
secondary data is the secondary information acquired within the organization where
research is being carried out. External secondary data is obtained from outside sources.
There are some advantages of secondary data. Firstly, secondary data may have fewer
resource requirements. For many research questions and objectives the main advantage
of using secondary data is the enormous saving in resources, in particular time and
money. In general, it is much less expensive to use secondary data than to collect the
data yourself. Consequently, researcher may be able to analyze far larger data sets and
also have more time to think about theoretical aims and substantive issues. Secondly,
secondary data is unobtrusive. If the researcher needs data quickly, the secondary data
may be the only viable alternative. In additional, they are highly to be higher quality data
than could be obtained by collecting your own. Thirdly, longitudinal studies may be

feasible. For many research projects time constraints mean that secondary data provide
the only possibility of undertaking longitudinal studies. This is possible either by
creating your own or by using an existing multiple source data set. Comparative research
may also be possible if comparable data are available. Additionally, secondary data can
provide comparative and contextual data. Often it can be useful to compare data that
researcher have collected with secondary data. This means that researcher can place own
findings within a more general alternatively. Moreover, secondary data can result in
unforeseen discoveries. Re analyzing secondary data can also lead to unexpected new
discoveries. Finally, unlike data that researcher collect by himself, secondary data
generally provide a source of data that is both permanent and available in form that may
be checked relatively easily by others.
Beside many advantages, secondary data also has some limitations. Secondary data may
be collected for a purpose that does not match the need. Secondary data have been
collected for a specific purpose that differs from researcher‘s study objectives and
questions, therefore, researcher need to find an alternative source or collect the other
data, and combine secondary data and primary data. Secondly, where data have been
collected for commercial reasons, gaining access may be difficult or costly. If the data
are not available in library, they can rarely be accessed free of charge via the Internet or
borrowed on inter-library loan and the researcher need to identify and visit the library
that holds that collection. Moreover, there is no real control over data quality. The
reasonable care must be taken and data sources must be evaluated carefully. Finally,
when using data that are presented as part of the study the researcher also need to be