EFFECT OF CORPORATE SOCIAL RESPONSIBILITY ON FINANCIAL PERFORMANCE OF FIRMS IN THE CEMENT MANUFACTURING SUB SECTOR IN NIGERIA

JOHN INYONGUN IVARAVE
Department of Business Education,
College of Education,
Katsina-Ala, Benue State.

E-mail: [email protected]

ABSTRACT

The study sought to establish the relationship between corporate social responsibility(CSR) practice and financial performance of firms listed on the stock market in the cement manufacturing sub sector in Nigeria. Secondary data was obtained from the audited financial reports of the companies for the period 2014 to 2018. Corporate social responsibility score was obtained using content analysis of reports of the companies on various components of corporate social responsibility as reported in their audited financial reports. A multiple regression model was established to determine the relationship between the two variables. Control variables of manufacturing efficiency and capital intensity were also introduced in the regression model. The results indicated the existence of a positive and significant relationship between the independent variables (corporate social responsibility score, manufacturing efficiency and capital intensity) used in the model and the dependent variable firm performance (return on assets). Based on the finding, the study recommended among others that,CSR should now be considered as an investment not as expenditure therefore companies should invest in performing CSR because if firms do so they will get more financial benefits than what is invested in CSR and companies should not only invest on CSR but also disclose its spending on CSR to all stakeholders about, how, where and what amount they have invested in CSR.

Keywords: Corporate social responsibility; Financial performance; Manufacturing, Efficiency, Capital Intensity.

INTRODUCTION

Corporate Social Responsibility (CSR) concept emphasizes community participation by business enterprises. It proposes that a private firm has responsibilities to society that extend beyond making a profit. It is the obligation of the firm’s decision makers to make decisions and act in ways that recognize the relationship between the business and society. It is therefore important for a business to continue in its commitment to behave ethically and contribute to economic development while improving the quality of life of the work force and the surrounding community at large. This can be achieved through the various CSR activities that the business chooses to engage in for the benefit of its stakeholders (such as employees, suppliers, shareholders, government, community/society and customers). Cement manufacturing firms constitute a significant component of the manufacturing sector. Their activities have a tremendous impact on the environment and society at large. It is therefore important for such firms to ensure that, their activities and actions leave the environment and society better than they met it.

RESEARCH PROBLEM

Sustainability has become an important domain for business researchers in the current decade due to the imperative that businesses must create values for their stockholders while simultaneously meeting their social responsibility obligations in order to make a sustainable world (Jooh, 2017). The notion of engaging beyond compliance is ethically desirable, even if, it takes away resources from a firm’s immediate needs . The empirical analysis of the relationship between CSR and corporate financial performance was focused generally on firms in Nigeria. Suffice it to note that, firms in the various sub sectors have their peculiarities in terms of business environment which affects their performances. Itis in line with the above that this study is undertaken, to specifically investigate the effect of CSR and performance of cement manufacturing firms in Nigeria.

OBJECTIVES OF THE STUDY

The general objective of this study was to establish the relationship between the practice of corporate social responsibility and firm financial performance in the cement manufacturing sub sector in Nigeria. The specific objectives were:

1. To establish the type of CSR activities undertaken by the cement manufacturing companies.

2. To establish the effects of CSR activities on financial performance of cement manufacturing firms..

Research questions

i. What are the CSR activities undertaken by firms in the cement manufacturing sub sector?

ii. What is the effect of corporate social responsibility practice on performance of firms in the manufacturing sub sector ?

iii. How is the relationship between CSR and CFP affected by efficiency and capital intensity of the firm?

Research Hypothesis

 H_{; 0}There is no significant effect of corporate social responsibility on performance of listed cement manufacturing firms in Nigeria.

H_;A There is a significant effect of corporate social responsibility on performance of listed cement manufacturing firms in Nigeria.

LITERATURE REVIEW

Theoretical Framework

Bowen (2016) defines social responsibility of businessmen as to the obligation of businessmen to pursue those policies, to make decision or to follow those lines of action which are desirable to society. However, corporate social responsibility theories differ on whom the firm should be responsible to in the course of its business.

According to stakeholder theory, firms possess both explicit and implicit contracts with various constituents, and are responsible for honoring all contracts (Fauzi, 2016). As a result of honoring these contracts, a company develops a reputation that helps determine the terms of trade it can negotiate with various stakeholders. While explicit contracts legally define the relationship between a firm and its stakeholders, implicit contracts have no legal standing and are referred to in the economic literature as self-enforcing relational contracts, since implicit contracts can be breached at any time. Telser (2018) argues that, they (implicit contracts) become self-enforcing when the present value of a firm’s gains from maintaining its reputation (and, therefore, future terms of trade) is greater than the loss if the firm reneges on its implied contracts.

This theory, therefore predicts a positive relationship between CSR and corporate financial performance (CFP). However, stakeholder theory has acquired opponents from various areas including classical economists, industrial relations and management. Sternberg (2019) for example, argues that the principles of stakeholder theory undermine the property rights of the owners of the company, compromise the mechanism of the free market, destabilize the operations of governments and thus subvert the very nature of capitalism.

According to the social contracts theory, businesses must not just act in a responsible manner because it is in their commercial interest, but because it is how society expects the business to behave (Gray 2016). Managers are therefore expected to take decisions in an ethical manner. Donaldson and Dunfee (2016) developed an integrated social contracts theory as a way for managers to use their discretion to make decisions but to ensure their decisions do not have negative effects on others. Businesses are expected therefore, to provide some support to the community under given circumstances. Since the contract is not written, businesses only get to feel its consequences when they fail to do what is expected. Since the basic ideal of corporate social responsibility is about the responsibility of firms to the society, this study is predicated on the social contract theory.

Several studies have been carried out on the relationship between CSR and CFP resulting in different conclusions. Klassen and McLaughlin (2019) studied 14 manufacturing sector firms to conclude that environmental management can play a positive role in improving corporate financial performance. In exploring the linkages between environmental performance and financial performance with respect to the market value, Konar and Cohen (2001) argued that a firm with a better environmental performance has a significant positive impact on its market value. Fauzi (2016) did a research on firms listed on the New York Securities Exchange (NYSE) to determine the relationship between CSR and corporate financial performance. Using a sample of 101 companies listed at the NYSE and a regression model with financial performance as the dependent variable and CSR index as the independent variable, he found that CSR has no effect on CFP. He however found that leverage (a control variable in the model) has a moderating effect on the interaction between CFP and CSR. Cheruiyot (2017) carried out a research to establish the relationship between corporate social responsibility and financial performance of firms listed at the Nairobi stock exchange. This was a cross sectional study of all the 47 listed companies in the NSE’s main segment as at 31 December 2014. Using regression analysis he sought to establish the relationship between the CSR index and financial performance measured in terms of the Return on assets, return on equity and return on sales. His conclusion was that there was a statistically significant relationship between CSR and financial performance. Obusubiri (2016) in a study on CSR and portfolio performance also found a positive relationship between CSR and portfolio performance. He attributed this relationship to the good corporate image that comes with CSR making investors prefer such companies implying that good CSR behavior has a reputational benefit for the practicing firm.

RESEARCH METHODOLOGY

This study used a correlational descriptive survey research design. Descriptive designs explain phenomena as they exist and are often used to obtain information on the characteristics of a particular problem or issue while correlational studies establish relationships between various variables. The study population was made up of six (6) listed public companies( Ashaka cement plc, CCNN plc, Dangote cement plc, Bua cement plc, WAPCO plc and Niger cement plc) classified under the cement manufacturing sub sector listed on the Nigerian Stock Exchange as at 31 December 2018

Data collected was edited, coded and classified into different components to facilitate a better and efficient analysis. CSR practice has different components and for the purpose of this study, components for environmental concerns, community involvement, employee concerns, product/customer concerns and others were used to analyze CSR practice. Others constitute all those other activities of CSR which cannot be attributed to any of the identified categories. Content analysis was used to determine the score for CSR based on the number of activities dedicated to each component of CSR in the company’s annual report. The total CSR score was obtained by adding the scores for the five components of CSR. Regression analysis was then used to test the relationship between CSR practice and CFP. CSR was the independent variable while CFP was the dependent variable. Other independent variables considered in the model include efficiency (Cost of sales/Total sales) and capital intensity (Total assets/Total sales) which were used as control variables.

The relationship was explained by the following regression model;

FP_it = A₀+ β₁CSR_it+β₂EF_it+β₃CI_it+ ε_it…………………………(1)

Where: FP- Financial performance (as measured by Return on Asset (ROA)A₀+=constant, β₁CSR_it= CSR score, β₂EF_it= efficiency, β₃CI_it= capital intensity and ε_it-= the error term The Statistical Package for Social Sciences (SPSS) version 18 was used to analyze the data collected. The coefficient of determination, R squared, measure was used to test the significance of the regression model in explaining the relationship between CSR practices and CFP. R squared is a measure of goodness of fit and shows the percentage variance in the dependent variable that is explained by the independent variable(s). The higher the R squared the better the model. The P-Value and the t-test were used to test the individual significance of the predictor variables used in the study.

RESULTS OF RESEARCH AND DISCUSSIONS

The study used regression and correlation as a tool of analysis to determine the existence of the relationship between the practice of corporate social responsibility and corporate financial performance

Type of CSR Activities Undertaken by the Firms

Firms listed under the cement manufacturing sub sector of the NSE are involved in different components of CSR activities and also at different levels. Overall however, most CSR activities undertaken by these firms are targeted at community welfare, followed by staff welfare and environmental concerns, as shown in table 1The least undertaken activities are those targeted at the products and consumers

Table 1 Summary of type of CSR activities undertaken by the Firms

Source : Researcher

Return on Assets (Net Income/Total Assets)

The ROA for each company was computed and the results presented in Table 2 below. From this table its evident that ROA for companies in this sector fluctuates significantly ranging from as low as – 3% to a high of 54.3%. Niger cement plc with an average ROA of 62.6% seems to be one of the best performers over the five year period while Wapcoplc with an average ROA of 21.1% has the worst performance.

Table 2: Return on Assets (Net Income/Total

Source: Researcher

Corporate Social Responsibility (CSR) Score

CSR score content analysis was used to determine the score for CSR based on the number of sentences dedicated to each component of CSR in the company’s annual report. The total CSR score was obtained by adding the scores for the five components of CSR. Table 3 below is a summary of these scores. From this table its apparent that Wapco Cement plc had the highest average score of 109 followed Bua a score of 88. Niger cement plc had the lowest score of 34.

 Table 3 Corporate Social Responsibility (CSR) Score Content Analysis Summaries.

Source: Researcher

REGRESSION ANALYSIS

The regression equation established was as follows: Firm Financial performance = 0.435 +( 0.001)+(– 0.439)+( – 0.030). Both efficiency and capital intensity were inversely related with firm financial performance while CSR had a direct relationship with firm financial performance. The regression coefficients shows that αo (the value of firm financial performance when capital intensity, CSR score and efficiency were all rated zero) is equal to 0.435. The model also shows that, for every one unit increase in CSR, firm financial performance increases by 0.001 units (?1= 0.001). For every one unit decrease in efficiency, firm financial performance increases by 0.439 units (?2= -0.439) and for every one unit decrease in capital intensity, firm financial performance increases by 0.030 units (?3= -0.030). Since efficiency was computed as Cost of Sales/Total Sales then a high ratio would mean that the company is being inefficient and therefore the inverse relationship found in this study is expected and justifiable. Using P-Values to test on the individual significance; a predictor variable is said to be linearly related with the response variable if it’s P-Value < 0.05 (5% significance level). The findings in table 4 show that only efficiency has a significant linear relationship with firm financial performance. The implication of this study would be that firms in the cement manufacturing sub sector would have to put more emphasis on reducing the ratio of cost of sales to sales (efficiency) in order to increase financial performance.

 Table 4 Summary of regression analysis.

Source: SPSS output

TEST OF MULTI-COLLINEARITY

A correlation matrix was used to check on the concept of multi-collinearity, that is if there is a strong correlation between two predictor variables (correlation coefficient > 0.8). In a situation where two predictor variables have a correlation coefficient greater than 0.8, then one of them must be dropped from the model. As shown in table 5, none of the variables is strongly correlated with each other. Thus a model of three predictor variables (Capital intensity, CSR score, and efficiency) could be used in forecasting of financial performance among cement manufacturingsub sector firms listed at the NSE during the period 2014-2018.

Table 5 Summary of Test of Multi-Collinearity

Source: SPSS output

GOODNESS OF FIT TEST

The study further used correlation coefficient (r) to check on the magnitude and the direction of the relationship between the independent and dependent variable in table 6. Coefficient of determination (the percentage variation in the dependent variable being explained by the changes in the independent variables) and P- value were used to check on the overall significance of the model. Correlation coefficient of 0.890 indicates a strong positive correlation between the dependent and independent variables. On the other hand coefficient of determination (R2) of 0.768 shows that 76.8% of the variation in the firm performance (ROA) is explained by the changes in Capital intensity, CSR score, and efficiency, leaving only 23.2% unexplained. The regression model obtained for this study can therefore be used to forecast financial performance fairly. The adjusted R square of 64.6% also shows that the model is a fair estimate of the relationship between the variables. The P-Value of 0.029 is less than 0.05, which shows that there is a significant relationship between the dependent and independent variables used in the study.

Table 6 Summary of Goodness of Fit Test

Source: SPSS output

ANOVA Test

Analysis of Variance (ANOVA) in table 7 consists of calculations that provide information about levels of variability within a regression model and form a basis for tests of significance. It provides a statistic for testing the hypothesis thatH ₀ (there is a significant relationship between the response and predictor variables), against the null hypothesis that H _I (there is no significant relationship between the response and predictor variables). Correlation exist between the response and predictor variables if P-value < 0.05. As shown in table 7, P-Value = 0.029< 0.05 indicated that there is enough evidence to support the alternative hypothesis, that there is a significant linear relationship between financial performance and Capital intensity, CSR score and Efficiency.

Table 7 Summary of ANOVA test

Source: SPSS output

CONCLUSION

The study used regression analysis to establish the relationship between financial performance and CSR practice of firms listed in the cement manufacturing sub sector of the NSE. Efficiency and capital intensity of the firms were also included as control variables in the model. One major finding of the study is that there is a strong relationship between the independent variables (CSR practice, efficiency and capital intensity) used in the model and the dependent variable (ROA).

Based on the conclusions the followings are the recommendations;

1.This study indicates that, CSR is now considered as an investment not as expenditure therefore companies should invest in performing CSR because if firms do so they will get more financial benefits than what is invested in CSR.          

 2. Companies should not only invest on CSR but also disclose its spending on CSR to all stakeholders about, how, where and what amount they have invested in CSR.

3. Companies invest a lot of money on advertisement to create a good image in the mind of customers but if they also invest a little portion of this amount on CSR it can also build up its good image.

 4. Corporate social responsibility manages reputation by creating trust in the mind of customers, suppliers etc. This is because, Stakeholders think that when a company is fulfilling its social responsibility it will be unlikely for it to do anything bad for them, so their trust will be enhanced. Stakeholders trust will impact on company’s profitability and success.

5, The relevant authorities should insist that companies conform substantially to the provisions of the law with regards to issues of CSR, and offenders should be made to face the full weight of the law.

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