12.01
M AGUS SUDRAJAT
Sebelas Maret University, Indonesia
ABSTRACT
This study addresses the following research questions: Are there any significant
social and environmental performance differences between Indonesian companies
and MNCs operating in Indonesia? Do the levels of social and environmental
performances have positive association with financial performance? The findings of
the study indicate that in terms of social variable, the performance of Indonesian
companies and MNCs is the same, while in terms of environmental perspectives,
the performance of MNCs is better than the one of Indonesia companies. In
Indonesian companies, corporate performance and corporate social and
environmental performances are not related, while in MNCs the relation is partially
supported for social perspective and mostly supported for environmental
perspective.
Keywords: social performance, environmental performance, content analysis,
multinational corporation (MNC), slack resource theory, and good management
theory.
Introduction
Environmental performance and international issues are significant as corporate
social responsibility (CSR) consideration. These factors contribute to the
relationship between CSR and financial performance (Fauzi, 2004, Mahoney and
Robert,2007). This means that the issue of triple bottom line, a set of performances
for a company comprising of social, environmental, and financial is desired by
stakeholders. In addition, the issue of internationalization is an important aspect of the business structure.
There are two factors triggering changes in business structure in the 21th century:
globalization and information technology (Choi, 1993 and Fauzi, (2001).
Globalization in the business context is the unification of business entities and
world-wide market resulting in increasingly intense. Consequences of the
globalization are the emergence of free trade agreement in Asian and in Pacific
areas well. The implementation of the agreement is to free the committed nations
from the “barriers to entry” for free flows products and services.
Based on their interaction with cultures, customs or laws of the country where they
are operating, international companies can be classified into two categories: multi-
domestic company and multinational company (Simerly and Li, 1999). As
companies expand beyond their original national borders, the first stage is to export
products from their home base. While they can be classified as being international
firms, there is relatively little need for interaction with the cultures, customs, or
laws of the countries to which they export. Adler ( in Simerly and Li, 1999)
classified such firms as being multi-domestic. When the companies move
production facilities beyond their borders, they are becoming what we classify as
multinational corporations (MNCs). Then they will interact with national
companies.
MNCs have strong in technological know-how and brand names, market power
resulting from scope and scale economies, a wider range of investment
opportunities, competitive retaliation, lower factor cost, and lower systematic, or
beta risk (Grant, 1987). It is reasonable to expect MNCs have higher level of
profitability than the national companies do. In addition to the factors, due to
operating experience in diverse business environments, MNCs have more abilities
to develop diverse capabilities and have a broader learning opportunity than their
partner in the same country.
The increase in numbers of MNCs operating in Indonesia during the last two
decades had a strong impact on the economic growth and patterns of competition..
The rapid growth may make the MNCs face internal risk pressure. The failure of
taking appropriate steps to deal with the risk results in the companies getting
involved with fatal errors both in commission or omission errors (Simons, 1995).
That is why, MNCs often have been found to be guilty of violating human rights,
exploiting the environment, and corrupting the governments (Simerly and Li,
2001).
Based on their experience in CSR from the countries of origin, the MNCs, have
changed their behavior and there is sign that their reputation has improved (Simerly
and Li, 2001). More importantly, there are indications that MNCs are including
social issues in their management practices as an integral part of their corporate
strategy (Dechant and Altman, 1994).
Journal of Knowledge Globalization, Vol. 1, No 1, Spring 2008
One of theories developed in corporate social responsibility (CSR) is slack resource
theory. Under this theory resources are highly needed to have CSR. The more
resource the companies have, the higher CSR level the companies will do. MNCs
having more assets in generating more income should have higher level of
corporate social performance (CSR) than national companies. Do MNCs operating
in Indonesia have higher level of CSR than Indonesia companies do? This study
addresses the following issues:
Are there any significant social and environmental performance differences
between Indonesian companies and MNCs operating in Indonesia?
Do the levels of social and environmental performances have positive association
with financial performance?
Review of literature
There are five key constructs for this study: corporate social and environmental
performance (CSP), financial performance, company size, management risk, and
institutional ownership.
Corporate Social and Environmental (CSE) Performance Model
In an effort to meet the stakeholder’s expectations, every company should try to
improve the corporate social performance from time to time and at the same time
improve the economic and financial performance. Waddock and Graves (1997) and
Dean (1999) put forward two theories for CSR. The slack resource theory and the
good management theory. Under the slack resource theory, a company should have
a good financial position to contribute to the corporate social performance.
Delivering the social performance corporations need some funds resulting from the
success of financial performance. According to this theory, financial performance
comes first. A good management theory holds that social performance comes first.
Based on the theory, a company perceived by its stakeholders as having a good
reputation in the social and environmental concerns will make it easier for the
company through market mechanism to achieve a good financial performance.
There are four main models in modeling CSR construct: Carroll’s (1979) and
Igalens and Gond (2005), Wartick and Cochran’s (1985) and Igalens and Gond,
2005), Wood’s (1991) and Igalens and Gond, (2005), and Clarkson (1995) and
Igalens and Gond, 2005). Carroll defined CSP as the intersection at a given
moment in time of three dimensions: Corporate Social Responsibility (CSR)
principles, to be apprehended at four separate levels (economic, legal, ethical, and
discretionary); the sum total of the social problems that a firm faces (i.e., racial
discrimination, etc.); and the philosophy underlying its responses(s), which can
range anywhere along a continuum going from the firm’s anticipation of such
problems to the outright denial that it bears any corporate responsibility at all.
Wartick & Cochran’s model adopted and fine-tuned this model, re-sculpting its
final dimension by borrowing from the strategic management of social problems
school an analytical framework enabling them to specify a “Management of Social
Issues” dimension
Model of Wood proposed a renewed CSP model that soon became an omnipresent
yardstick in the construct’s theoretical development (Gerde and Wokutch, 1998 and
Igalen and Gond 2005). In line with earlier studies, the author defined CSP as “a
business organization’s configuration of principles of social responsibility,
processes of social responsiveness, and policies, programs, and observable
outcomes as they relate to the firm’s societal relationship” (Wood, 1991, and
Igalens and Gond 2005). The second orientation is based on a more pragmatic
observation of how hard it is to apprehend CSP using the preceding typologies, and
suggested applying Stakeholder Theory as a framework to model CSP, which
would then be defined as a firm’s ability to manage its stakeholders in a way that is
satisfactory to them (Clarkson, 1995) and ( Igalens and Gond ,2005).
CSP Measurement
There have been five approaches to measuring corporate social performance:
Measurements based on analysis of the contents of annual reports, pollution indices,
perceptual measurements derived from questionnaire-based surveys, corporate
reputation indicators, and data produced by measurement organizations (Igalens and
Gond, 2005).
In the first approach, CSR is measured using content of corporate annual report.
This method of measuring CSR is focused on disclosure in the annual report. In the
second approach, measurement of CSR is focused on one of dimensions of CSR:
environment. External party normally conducts this method. Questionnaire-based
surveys approach to measuring CSP, a perceptual measurement in nature, use
questionnaires instrument developed by researcher based CSR dimensions
discussed in the CSR models. Corporate Reputation indicator is an approach to
measuring CSR using reputation indicators as perceived by external parties of
company. Data produced by measurement of organizations activities is a result of
measurement approach of CSP of perceptual in nature conducted by external
agency using a multidimensional measurement.
Because of complexity, rather than using the index approach to corporate social
performance resulting from survey of primary data as conducted by the researchers
mentioned above, some have tried to use social disclosure contained in corporate
annual reports (CAR) as proxy of CSR measure (Waddock & Graves, 1997 and
Itkonen, 2003). In an effort to investigate the pattern of environment reporting,
Thomas and Kenny (1997), and O’Donovan and Gibson, and Cunningham (2002)
used environment index resulting from environment disclosure in CAR.
Specifically, Mangos and O’Brien (2002) also used the CSR index (environmental
aspect included) in their attempt to relate this index to economic performance.
Journal of Knowledge Globalization, Vol. 1, No 1, Spring 2008
Regarding the use and role of CAR as object of investigation to evaluate the
transparency of management as implementation of a good corporate governance
principle, Beattie, McInnes, and Fearnly (2002) reported the amount and quality of
disclosure practiced by the sampled companies. The disclosure amount was
determined based on the number of text unit of certain thematic contents in CAR.
Furthermore, Stanton and Stanton (2002) explored the role of CAR as the object of
investigation in studies later studies. In their work, Stanton and Stanton (2003) put
forward political economy, legitimacy, accountability, and marketing as subject of
analyses. Iu and Clowes (2001) also supported the importance of evaluating
narrative disclosures of accounting by using a method called texture index, the one
developed by Sydserff and Weedman (Iu and Clowes, 2001). The texture index is
part of content analysis, a research methodology originally developed in
communication science. Studies on the field of CSR conducted by the researchers
mentioned above adopted the content analysis to determine the CSR index.
Financial Performance
It is also the responsibility of management to improve the financial performance.
The higher financial performance leads to the increase in wealth of the
stakeholders. In addition, based on the slack resource theory (Waddock and Graves,
1997; Dean, 1999), improving financial performance provides more opportunities
to improve social performance.
There are many measures used to represent the financial performance. They
divided the measures into three categories: ROA and ROE (Waddock and Graves,
1997;Mahoney and Roberts, 2002); profitability in absolute term (Stanwick and
Stanwick, 1987); and multiple accounting based measure with the overall index
using the score of 0 –10 (Moore, 2001). Using score of 0-10 to have overall index
of financial performance raises a problem of objectivity of scoring process and of
validity of the result of the index.
Research Questions and Hypotheses Development4
The objective of this study is to addresses the following questions: are there any
significant social and environmental performance differences between Indonesian
companies and MNCs operating in Indonesia? In addition, do the levels of social
and environmental performances have positive association with financial
performance?
Research Question 1
Q1: Is there any significant social and environmental performance difference
between Indonesian companies and MNCs operating in Indonesia?
Based on slack resource theory (Waddock and Grave, 1997 and Dean, 1999),
financial performance becomes prerequisite to have good corporate social
performance including environmental performance. The implementation of CSP
dimension such as community development and employee relation needs enough
financial resources. Multinational corporations are generally characterized as
having strong financial and other resources compared to their counterparts in home
countries, especially in developing countries. Simerly and Li (1999) support that
the level of multinationality contributed to the level of CSP in a company. In
addition, some previous studies also have found that company size affected the CSP
(Wadock and Grave, 1997, Orlitzky, 2001, and Itkonen, 2003). In term of the
company size, MNCs are considered bigger than national companies. Based on the
understanding of the previous study, it is reasonable to suggest that social
environmental performance in MNCs will be better than Indonesian companies.
However, Ite (2004) observed that the existence of MNCs in country did not
automatically improve CSP if the government’s policy was not conducive. The null
hypotheses of this study can be formulated into two types in the following:
H1a: The difference of the mean of corporate social performance of Indonesian
companies and MNCs operating in Indonesia is larger than zero
H1b: The difference of the mean of corporate environmental performance Of
Indonesian companies and MNCs operating in Indonesia is larger than zero
Research Question 2
Q2: Do the levels of social and environmental performances have positive
association with financial performance?
Based on the literature the relationship between corporate social responsibility and
the corporate financial performance could be positive, neutral, or negative. But
most of the studies indicated a positive relationship and very few indicated the
negative relationship (Itkonen, 2003). Following is summary of Itkonen’s
exploration regarding result of studies on relationship between corporate social
responsibility and corporate financial performance.
(lengkapnya hub saya)
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