Mobile Edition
Print
Get the Mag
Weekly UpdatesA study of thirty publicly traded restaurant companies finds that corporate social responsibility activities engender no improvement in those companies' value performance (measured as total shareholder return) and only long-term growth in return on equity (ROE). With regard to the accounting measure of ROE, the study finds a curvilinear, U-shaped relationship. An initial drop in ROE from social responsibility activities is followed by a gradual rise. To gauge the extent of the companies' social responsibility activities, the study uses a rating developed by KLD Associates, which uses more than 113 screens to assess a company's level of responsibility. Given the U-shaped relationship of ROE with social responsibility activities, one possible recommendation from the study is that these restaurant companies should take a long-term view of their activities, ensure that they are integral to the company's core concept, and educate consumers and other stakeholders about those activities.
This study empirically examines the effects of publicly traded U.S. restaurant companies' social responsibility activities on the following two financial performance measures: accounting performance (return on equity) and value performance (total shareholder return). Results show that responsibility activities have a U-shaped effect on accounting performance, whereas they have no impact on a firm's value performance. Those results imply that restaurant companies in the United States may increase their investment in socially responsible activities to improve their accounting performance over the long term. While the study did not investigate communication mechanisms, it may be that restaurant companies should promote their social responsibility activities to consumers (and the financial market) as a means of enhancing the effects of those activities on their value performance.
Keywords: corporate social responsibility (CSR); restaurant companies; financial performance; accounting performance; value performance
**********
The concept of "doing well by doing good" is a contemporary cliche, summarizing the appealing proposition that companies that do good things for society should consequently do well as business entities. Companies can "do good" by ethically producing quality products and services that consumers want and need, selling them at a reasonable profit, and effectively managing the supply chain while they also undertake philanthropic activities (e.g., donating money or other resources for social causes). The definition of "doing well" usually relates to companies' achieving financial goals (e.g., making a profit) or improving their stock price. Despite what seems like rising contemporary interest in this topic, it is not a new impulse. In this journal in 1982, for instance, the publisher wrote, "The very notion of corporate responsibility implies that a hotel or restaurant firm is more than an economic entity. But efforts to address our social responsibilities ... may ultimately pay off on the bottom line" (Clark 1982). Following up on this conjecture, and given the publicity surrounding corporate social responsibility, this study aims to empirically examine the potential effect of restaurant companies' social responsibility activities on their financial performance.
The outcomes posited for companies' good deeds, which fall under the umbrella of corporate social responsibility (CSR), are building and enhancing a company's brand image, product acceptance, employee morale, and relationship with its community and local government (Solomon and Hanson 1985; Tsoutsoura 2004; Turban and Greening 1997). Although we have yet to find a unified definition of CSR, the concept has evolved and expanded in the past decade (Carroll 1999; McWilliams, Siegel, and Wright 2006). As we apply it in this study, the term generally refers to companies' activities (that is, policies and programs) that make them good citizens by contributing to society's welfare beyond their self-interest and legal requirements (Carroll 1999; Engardio 2007; McWilliams and Siegel 2001; Holmes and Watts 2000; Tsoutsoura 2004). The problem with CSR, however, is that the favorable financial expectations seem to be just that--expectations. Despite the beliefs regarding a positive relationship between CSR and financial performance, the results of empirical studies have been mixed. Furthermore, researchers (Benergee, Iyer, and Kahyap 2003; Henriques and Sadorsky 1996; Lankoski 2000; Salzmann, Ionescu-somers, and Steger 2005) have found financial outcomes to vary across industries.
Corporate Social Responsibility in the Hospitality Industry
The idea that companies have a social responsibility is not particularly new, but the definition of social responsibility seems to be evolving. We believe that CSR is becoming a more prominent issue and is expanding in scope. The 1982 commentary that we quoted at the beginning of this article is just one example of a CSR perspective. The American Hotel and Motel Association's Code of Operating Practices in 1972 specified responsible conduct that focused mostly on operations, particularly toward guests and ethical business deeds (e.g., honest advertising, honoring confirmed reservations). Since Lane's (1982) discussion in the Cornell Quarterly (under the rubric "corporate conscience"), the notion of CSR has grown from the labor or customer service realms to include concerns for the environment, remedies for social ills, and philanthropy. This expanded notion of CSR seems particularly apparent in developed countries such as the United States and members of the European Community. For example, in the United States, the International Hotel & Restaurant Association formed a global council on CSR in 2003 to guide industry practices (see International Hotel & Restaurant Association n.d.). A nonprofit organization, the Green Restaurant Association (http:// www.dinegreen.com), founded in 1990 with the goal of making the restaurant industry environmentally sustainable, has 144 certified members (e.g., restaurants, cafes, bakeries) throughout the United States. In Europe, the European Federation of Food, Agriculture, and Tourism Trade Unions and the hotels, restaurants, and cafes agreed to collaborate on CSR in 2004. However, the extent to which restaurant companies' CSR activities influence their financial performance has yet to be known.
CSR Rewards: A Mixed Picture
As mentioned earlier, findings on the relationship between CSR and financial performance have been mixed. Some researchers have found a positive relationship, some negative, and others no relationship at all. The studies that have found positive effects used diverse measures of financial performance, including return on equity (Bragdon and Marlin 1972; Moskowitz 1972); profitability, measured as net income, net income as a percentage of sales, net income as a percentage of stockholders' equity, and earnings per share (Parket and Eilbirt 1975); return on assets (Rodriguez and Cruz 2007; Tsoutsoura 2004); and return on sales (Tsoutsoura 2004).
In the hospitality context, one study by Rodriguez and Cruz (2007) found a positive relationship between the CSR of hotels in Spain and their financial performance in terms of return on assets. Although this study offers a rare empirical analysis of the hospitality industry, the CSR concept applied by this study and the measurement of CSR it uses can be subject to debate and various interpretation. Those researchers defined CSR as follows: "The company behaves ethically and participates in resolving social problems" (p. 830). In addition to the vague definition, the measurement involved hotel managers' perceptions of their competitors' activities. Instead of asking hotel managers about their own activities or using empirical measurements, the questionnaire asked whether the managers thought their competitors "have policies and carry out strategies of environmental protection ... and behave ethically." (p. 180)
On the other hand, other studies found negative effects of CSR on financial performance, measured as stock prices (e.g., MacKinlay 1997; Vance 1975; Wright and Ferris 1997), or no relationship between the two (e.g., Abbott and Monsen 1979; Alexander and Buchholz 1978; Aupperle, Carroll, and Hatfield 1985; McWilliams and Siegel 2000; Ullmann 1985). These various results may be a function of differing definitions of CSR or financial performance and of various analysis methods. Moreover, most studies have presumed a linear relationship between the two, although impacts of CSR may vary according to the degree of a company's investment in CSR. In contrast to the linear assumption, Bowman and Haire (1975) found a U-shaped relationship between CSR and financial performance, but their simple graphical explanation lacks a statistical inference. Another factor is the time line of the research. Some researchers (e.g., Epstein and Roy 2007; Tsoutsoura 2004) have suggested that the costs of an initial investment in CSR may exceed the benefits companies can realize in a short time period.
Besides various arguments over the nature of the relationship, there are two different theories regarding the direction of the relationship between CSR and financial performance. While the available funds or slack resources theory (Waddock and Graves 1997) states that higher financial performance in time 1 leads to a higher level of CSR activities in time 2, the managerial opportunism theory (Preston and O'Bannon 1997) suggests that higher financial performance leads to a lower level of CSR activities. We test those notions below.
Methods
To examine whether or not publicly traded restaurant companies in the U.S. financially benefit from their CSR activities, we conducted a study based on a regression model which has been used in previous studies on the topic. Picking up on Bowman and Haire's indication of a U-shaped relationship, our study expands the previous models by including a curvilinear function of CSR, an approach not used in many existing studies.
FEED