Corporate Social Responsibility A signal of Agency problem?

As corporation is treated as a separate legal entity in the eyes of law yet any course of its operations are under the stewardship of a management team. Similar to a trustee role, managers are employed by the board who owe a fiduciary duty to protect the shareholders (principal) investment. In order to ensure that best practices are adhered, it is important that the manager s action is always aligned with the shareholder interest.

Being an influential actor in the society, companies have begun to embrace Corporate Social Responsibility (CSR) to recognize the interdependent relationship with the community. As shareholder primacy is always been uphold under agency theory, thus all areas of business for a company should drive towards generate value for equity funders. Corporate social responsibility reporting has been viewed as violation of shareholder trust since there could be a potential disadvantages towards shareholders interests due to that CSR mandates the pursuit of social objectives in addition to profit.

There is no clear definition given to CSR. The doctrine of CSR requires corporate managers to go beyond bottom line reporting by taking into account social and environment impact their business had for the community, employees and suppliers. Examples including eco-friendly products, labor protection measures, carbon reduction policies as well as community development projects (McWilliams et. al.,2005 ; Lin,2010)

Since there is no legislation promulgated to disclose CSR actions, being a good corporate citizenship, CSR reporting could be viewed as a voluntary action to work towards the interest of stakeholders by engaging in best practice of sustainable development. As those firms who comply with Corporate Social Responsibility reporting are able to reap various benefits such as increase financial rewards and promote brand loyalty in addition to taking welfare of the environment aspect, yet there are no rules and regulations that have prescribed to what extent the company has exercise its socially responsible manner with right motives. Rather than altruistic commitment in behaving

at such socially responsible manner, CSR initiatives could be driven by financial motive or personal advantage. Is corporate social responsibility is just merely a feel good marketing initiative or are corporate managers really taking environmental quality, worker safety and public welfare into account when making decisions? Thus, it is important to lift the veil of accountability and explore the real intentions lies behind such morally behaviour.

Husted and De Jesus Salazar (2006) has provided a framework to capture the company s desire to engage in CSR and separate into three categories, comprising altruism , coerced egoism and strategic use . Altruism refers to those firms that have genuine motive to behave in a socially responsible manner regardless of potential disadvantages that might affect the bottom line due to impact of engaging in green activities. Coerced egoism depicts those firms that act in a socially responsible manner due to enforcement of law and regulations whereas the strategic use of CSR exists when those firms take up social responsibilities seriously as clear benefits closely linked to CSR activities, such as financial performance. Research has shown that CSR activities appear to be a powerful tool to achieve competitive advantage and boost stakeholder satisfaction. Positive correlation could be found between firm performance and strategic use of CSR reporting (Hillman & Keim, 2001). Two ways of interpretations could be made where shareholders are ignorance about the firms real intentions or disregard the various motives that lie behind. In fact, it is difficult to distinguish between selfinterest and public serving behaviour.

The agency problem not only limited to issues between shareholders and managers, but also covers a multilateral set of conflict of interest between managers and other stakeholders.

As agency problem is related to the morality of agents, human beings. Tracking down the root of humans actions, human actions by nature are affected by personal values as

values are defined by Hemingway (2005) as cognitive representation of one self that shapes towards one s mode of behaviour. One s personal values then play a role in determining the ethical dimension of an action in which also drivers towards CSR reporting. As values are always perceived as an individual basis, namely personal values, yet it could not be disregarded that a collectivistic sense of duty to society could exist. To be more precise, as CSR reporting is not just a reflection of the desire on a firm basis, but each employee in the firm could contribute towards a group-oriented values towards achieving corporate socially responsible manner. In an unsupportive

environment, each member personal values could leads towards a collectivistic sense that will align with CSR initiatives. In other words, even with organizational constraints where firms reporting CSR in profit-minded sense which is against the staff ethical motive, those employees with high ethical values could become potential whistleblower (Hemingway, 2005) and report any wrongdoing of those firms that are not acting in a genuine manner.

Despite that CSR could be perceived as good practice for promoting company image through price-differentiation strategy (McWilliams et. al.,2005), studies have also shown that CSR can be used as a good management tool to enhance shareholder value. Akpinar et. al (2008) argued that as CSR can serve as signal to stakeholders on the quality of management skills, it can help to reduce monitoring cost associated with information asymmetry embedded in stakeholder-agency relationship. In order to minimise any stakeholder misalignment problem, it is crucial that CSR is used strategically where stakeholders are prioritized.

On the premise that fostering good relationship with the community will generate long run profits, CSR can be viewed as a strategic requirement to ensure long term development rather than just merely window dressing (Lin, 2010 and Asmah, 2009).

Turning on the flip side of the coin, CSR can be misused to some extent. CSR has been used as an entrenchment mechanism (Prior, Surroca & Tribo, 2008; Barnea & Rubin, 2006) as managers who engage in earnings management practice will have the tendency to engage in CSR activities as a way to disguise the deliberate managerial discretion and obtain support from the all other stakeholders (which can satisfy their specific interests). High level of CSR will not only hamper the flexibility of decision-taking process, but also lead to cost overruns which is expected to constitute detrimental impact on financial performance (Prior, Surroca & Tribo, 2008). In fact if CSR activities is not being

scrutinized effectively, CSR practices can be used by managers as a hedging strategy to ward against the disciplinary actions from shareholders, this could signal an alarm towards negative payoffs, thus give rise to agency cost.

However, CSR activities will be less likely to be over

invested when there are

insignificant costs ties to the management. To mitigate against entrenchment risk, two main management structure consisting of high level of ownership and high level of debt funding could be employed. Notably, Barnea & Rubin (2006) research has established a negative relationship between insider ownership and over-investment in CSR in which as insider ownership level exceed 25%, there is less likely to be agency problems since higher significant cost incorporated in CSR expenses will be bear by insiders, namely managers. Moreover, when firms have more control to pursue a CSR agenda, higher leverage level in a firm will act as a barrier for managers from over-investment in CSR for private benefits since high interest payments limit the financial capability of the firm.

Apart from that, if companies use CSR initiatives as a weapon to disadvantage competitors by lobbying standard (Devinney, 2009), such CSR initiatives have been misused. Likewise, companies could engage in CSR activities to portray good image by exploiting those cheap labor and taking advantage of tax evasion by shifting the company operations to third world countries. Despite this potential series of exploitation, CSR can be used as a legitimate strategy to foster a global involvement in

such socially responsible activities. Take for example, CSR initiatives can be wisely used as a strategy to induce multinational firms to improve the quality of living in China (Lin, 2010) when those companies have direct operations in China. To mitigate any conflict of interest, China has taken the initiatives to counterbalance where the media will condemn those foreign based companies for any unethical production process. Regulation can serve as an effective tool to reduce any agency problem since it will act as compliance mechanism for foreign and domestic competitors to meet with more stringent standard (Devinney, 2009).

To judge the value dimension that could derive from CSR practices, it is vital that consumer perceptions should be taken into account since they are the ultimate users of any company. The answer to what extent the customers will make the purchasing decision based on socially responsible reputation in a company still remained skeptical. Boulstridge & Carrigan (2000) have argued that there is no correlation between consumers purchasing behaviours and corporate reputation. However, a negative piece of information relating to corporate behaviour is likely to impact of shareholder value as it will lead to reduction of sales. For instance, Starbuck has been well known of its sustainability support to the community where they engage in all sort of socially responsible activities such as providing loans for coffee growers, promoting useable cup as well as using ethically sourced coffee beans to promote a better future. Even so, to what extent coffee lovers will consider all the coverage of CSR practices undertaken by Starbuck before making a purchase still in doubt. Rather consumers will still assess the quality and the taste of the coffee to determine their purchasing behaviour.

To better gauge the real value that CSR reporting could bring, there are still limitations of the measurement on costs and benefits of CSR activities. Up to date, there is no a particular format that should be adhered to (Crowther & Rayman-Bacchus, 2004). Unlike the force of law produces annual report, socially environment reporting is based on voluntary basis. Comparable evaluation will be difficult to undertake due to the lack

of standard in terms of the disclosure of non-financial performance reporting format. It also possess difficulties on auditors to evaluate CSR report in an objective manner. In a way, it might reduce the potential usefulness of the CSR report.

Corporate social responsibility is a double-edge sword, it could be used as a hinder lens to cover devious practices for personal advantage yet it could serve as a communication tool to bridge the asymmetry information gap between managers and shareholders. Yet, it is important that CSR are not exploited for purely competitive advantage, rather companies should upheld genuine causes into the business. Values remain to be gatekeepers to human behaviours that shall not be compromised. However, that is not to imply that companies should behave socially responsible to the expense of profitmaking.

Rather ending up like white elephant such as those eco-stadiums, it is crucial that managers have the right mindset and take the responsibility to foster an internal culture that will gear towards achieving long terms benefits which in turn simultaneously bring advantages to the business and the community as a whole. By using CSR in a legitimate way, this could act as an effective tool to attract and retain workers, thus improving shareholder value. A recent research by Snyder (2008) has shown 97% of MBA graduates are willing to forego 14% of their salaries in order to work for a socially responsible entity. This infers that potential employees do take an interest in CSR policies in the potential employer.

To avoid any potential abuse by managers, those challenges that facing CSR reporting should be addressed properly. Perhaps a universal measurement framework should be established to enable better facilitation by all stakeholders as well as to ensure proper monitoring and also to reduce any subjective evaluations by evaluators.

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