The CSR field presents a number of different theories and approaches that are complex and in some cases contradictory. Various scholars have reviewed the main theories of CSR and classified them into four major groups (Chand and Fraser 2006). These include instrumental theories, in which the corporation is observed as only an instrument for wealth creation, and its social activities are only a means to achieve economic results; political theories, which concern themselves with the power of corporations in society and the responsible use of this power in the political arena; integrative theories, in which the corporation is focused on the satisfaction of social demands and ethical theories, based on ethical responsibilities of corporations to society (Garriga and Melé 2004; Chand and Fraser 2006). These theories are conceptualised based on the role of business in society (Clarke 1998; Lantos 2001).
The role of business in society has been identified by Branco and Rodrigues (2007) as a stakeholder–shareholder debate. The theoretical perspectives of the present study are based on this debate, from the stakeholder–shareholder perspective. Clarke (1998) and Lantos (2001) presented these two viewpoints regarding the role of the business in society claiming that the two theoretical perspectives are the classical view and stakeholder view. These two perspectives are included the present study in the analyses of the relationship between CSR and CP.
5.2.1 The classical view
The classical view has two perspectives. The first is pure profit making, and the second is constrained profit making. From the first perspective a business has no social responsibility. However, from the second perspective, businesses should maximise shareholder wealth, obey the law and behave ethically (i.e., the business has social responsibility) (Friedman 1984). The idea behind the shareholder perspective is that the only responsibility of managers is to serve the interest of shareholders in the best possible way. Using company resources, the company should increase the wealth of the shareholders by seeking profits (Garriga and Melé 2004; Friedman 2007). McWilliams and Siegel (2001) stated that adequate investment in philanthropy and social activities is
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also acceptable for the sake of profits. Further, several authors have suggested that while shareholder value maximisation is the one objective function common to all companies, this does not necessarily oppose social responsibility actions by companies (Sternberg 1997; Jensen 2001; Coelho et al. 2003; Sundaram and Inkpen 2004). A number of studies have investigated the relationship between the CSR and CP and tried to identify a positive relationship that maximises the shareholders‘ interests. The shareholder expectations are related to the ethical responsibilities of the organisations (Carroll 1979). As previously mentioned, these expectations come from various societal groups such as educations, and health, ―the implied levels of ethical performance suggested by a consideration of the great ethical principles of moral philosophy‖ (p.41). For the purposes of development of the hypotheses, the present study used the stakeholder approach.
5.2.2 The stakeholder view
This view implies that the interests of other parties, in addition to shareholders are considered in the actions and decisions of companies. The other interested parties include ―groups and individuals who benefit from or are harmed by, and whose rights are violated or respected by, corporate actions‖ (Freeman 1998, p. 174). The term ‗stakeholders‘ includes shareholders, creditors, employees, customers, suppliers and the wider community. Freeman (1984) asserted that companies have a social responsibility that requires them to consider the interests of all parties affected by their actions. Donaldson and Preston (1995) suggested that when stakeholder theory is used to ‗identify the connections, or lack of connections, between stakeholder management and the achievement of traditional corporate objectives (e.g., profitability, growth)‘ (p. 71) this is the instrumental approach of stakeholder theory.
An instrumental approach to stakeholder theory views stakeholders‘ interests as factors to be taken into account and managed while the company is engaged in maximisation of shareholders wealth. The underlying argument is that stakeholders‘ interests are considered means for achieving higher-level goals, such as profit maximisation, survival and growth (Donaldson and Preston 1995). Moir (2001) stated that CSR covers a wide range of issues such as employee relations, human rights, corporate ethics, community relations and the environment. Indeed the reporting guidelines for CSR in
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Europe, Moir (2001) examined the following areas: workplace (employees), marketplace (customers, suppliers), environment, community, ethics and human rights. In addition, in a study of executive attitudes to social responsibility, Holmes (1976) found that the strongest response was that ―in addition to making a profit, business should help to solve social problems whether or not business helps to create those problems even if there is probably no short-run or long-run profit potential‖ (p. 37). The above studies concluded that CSR covers different issues relating to stakeholders and this has led to the stakeholder theory. Based on the strength of these studies, the present study will apply stakeholder theory to an investigation of CSR in Sri Lanka.
5.2.3 Stakeholder theory
Stakeholder theory can be directly adapted to CSR (Freeman 1984). It has engaged many stakeholders, such as suppliers, customers, stockholders, employees, the media, political action groups, communities and governments; the contention is that companies should integrate sustainable economic development concerns into business operations and in their interactions with stakeholders. The stakeholder model shows all the stakeholders contribute as inputs and try to obtain benefits as output.
In addition to the above-mentioned stakeholders, the government, NGOs and suppliers can be identified as internal and external stakeholders. However, the results of the pilot study for this research suggested that organisations are most interested in working with employees, customers, shareholders, communities and environmental activities to enhance sustainable development in Sri Lanka. Therefore, the present study assumes the main CSR elements include employees, shareholders, communities, the environment, education, health and customers, and have influenced the implementation of the current CSR in their organisations.
In this study, however, the development of the CSR framework used primary stakeholders who are related to the CSR activities of the organisations investigated. Stakeholder satisfaction depends on the expectations of companies, while companies aim to maximise their profit for the stakeholders. This win-win situation was highlighted by Freeman (1984) in his stakeholder theory. The profit of the organisation shows a company‘s financial performance. The present study assesses CP using ROE,
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ROS and ROA as indicators. The organisations that were investigated are involved with a variety of social activities that engage their stakeholder groups. The hypotheses of this study are based on the propositions that good CSR practices directly affect CP in Sri Lanka. The practices of CSR were based on the stakeholders of the firms and stakeholder relations (economic, environmental and societal) were tested with the CP of the companies. The literature has reviewed different social measures. Clarkson (1995) and Moore (2001) used six measures as employees, customers, shareholders, environment, suppliers and community and the several researchers used one CSR dimension such as pollution control for CSR measures (Freedman & Jaggi 1986).
Therefore, the hypotheses of the present study have been developed under six stakeholder relationships employees, environment, educational, health, societal, and customers; in addition, three CP indicators such as return on equity, return on assets and return on sales, which indicates the companies‘ financial performances were investigated.