Aligning People, CSR, and Finance: A Japan and world perspective

Does Corporate Social Responsibly have an effect on corporate financial performance?

Professors Hideo Suzuki and Hiroki Iwamoto of Keio University, assert that doing good outside the gates of business parks full of shiny glass and steel towers does not hurt corporate performance. Quite the opposite, in fact.

By CoBS Editor Guragam Singh. Related research: An empirical study on the relationship of corporate financial performance and human capital concerning corporate social responsibility: Applying SEM and Bayesian SEM by Hideo Suzuki and Hiroki Iwamoto.

The times they are a-changin’

Corporate Social Responsibility (CSR), in some form, has been around since at least the 1920s, when Oliver Sheldon, of the British Rowntree Company, wrote about it in The Philosophy of Management. The CSR of today also found its origins not much later, sometime in the early 1950s, with Howard R. Bowen’s Social Responsibilities of the Businessman. As such, according to the researchers, the original concept of CSR expected, as a social norm, companies not to have a negative effect on society.

The 21st century has seen a change in approach—’CSR has become an effective concept for business strategy to positively impact society’, says the scholars’ study. This strategy involves businesses targeting a selection of social issues, among the many, that they intend to solve.

This shift from social norm to business strategy has been seen under the lens of Corporate Social Performance, which is the result of CSR Activities (CSRA). Yet, corporate social performance does not help managers, who need to allocate limited resources to business activities (now including CSRA). It is here that analysing CSRA helps the manager, and in turn the company.

Hand of God

This is because CSRA is seen as an investment that companies make. But companies are made of people—or human capital—who are considered a key driver of CSR. After all, it is only when they are motivated that their skills, knowledge, experience, and abilities will be beneficial for a firm.

To better understand all this, Profs Suzuki and Iwamoto studied more than 200 Japanese companies with respect to indicators of human capital—intangible resources such as salary, average employee age, duration of service, employee retention, and permanent employee rate. Essential, given how developed countries are evolving today.

This evolution is marked by aging populations and a rapidly declining birth rate. Such social issues—related to human resources—say the researchers ‘are especially noticed in societies where the labour force is decreasing due to more pronounced levels of these demographic changes’.

The decrease in workforce increases the number of working hours each person has to put in, causing problems as employment frameworks struggle to keep up. It does not end here—such problems can then run deep in company culture, leading to corporate scandals such as the one with Kobe Steel, whose own report blamed lax management and overworked employees for a product-quality scandal that started decades earlier and that only came to light less than 5 years ago.

According to reports, it is sheer luck that there were no major accidents because of this cover-up, for over 500 companies were supplied products that did not meet the required specifications.

Going international

Japan is especially affected with more than one in five people in the population in the over-65 age group. The number of children under the age of 14 is also the lowest among developed countries. As a result, Japan has started work on employment reform and on quality control in companies. More so than Japan, China and South Korea are likely to face such social issues, given the rate at which their demographics are changing.

According to the researchers, individual measures are important to solve issues related to HR. Clarity is also needed on the influence of HR on corporate performance. This clearness will be helpful in responding to new issues as and when they occur—with trends such as those described before and those that haven’t—AI for instance.

Made to measure

This brings us back to the question of how to analyse CSRA. Theory says that CSRA must be made public knowledge—either reported by the firm on its own or by others—and ‘substantial enough to create a credible and reasonable declaration of unselfish intention’.

In order to bridge the gap between theory and practice, the researchers draw from the United Nation’s Principles for Responsible Investment. This is because these propose to measure and invest in CSRA based on Environmental, Social, and Corporate Governance (ESG) principles, each of which has a positive impact on corporate finance.

To measure this, corporate financial performance (the output of CSRA, profitability—measured through operating profit on sales—and growth, indicated by the change in and growth rate of the operating profit on sales, is used. The sales growth rate is also taken into account to see the extent to which customers accept a firm’s goods and services.

Being good for more than goodness’ sake

By using these indicators, the researchers show—using two methods—that in the short-term, human capital does indeed affect CSRA, which in turn affects the financial performance of the company. In the same time frame, the study also shows that human capital has no direct link with corporate financial performance—a little surprising perhaps, given how closely human capital and CSRA are related. Yet, there still exists a link between the two via CSRA.

In this way, the relationship among people, CSR, and finance—perhaps akin to the triple bottom line of people, planet, and profit—is defined, at least in Japan, which is facing societal changes at the frontlines.

As such, managers in societies facing changes similar to Japan’s and seeking to increase CSRA would do well to invest in improving human capital. Firms should also try to maintain and improve upon retention of their employees, who are increasingly those with shorter tenures.

Given how increasing CSRA affects corporate financial performance, firms who have not started engaging in CSR should do so, given the dovetail benefit to the company, and to society at large.

Aligning People, CSR, and Finance: A Japan and world perspective. Profs. Hideo Suzuki and Hiroki Iwamoto of Keio University, assert that doing good outside the gates of business parks full of shiny glass and steel towers does not hurt corporate performance. Quite the opposite, in fact.
Professor Hideo Suzuki

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