The impact of distinguished elements of CSR on the financial performance of

The impact of distinguished elements of CSR on the financial performance of various businesses.
Corporate Social Responsibility impact on Financial Performance mediated by Corporate Strategy, Corporate Reputation and Stakeholder’s Engagement
A Study of Firms isted on Indonesian Stock Exchange (IDX)
Abstract—Every firm is primarily focused on profit and increasing its shareholder value. However, most of the firms understand the importance of their continuous existence; thus, it operates on the guidelines of sustainable development for their common future concept. The companies use a self-regulating commercial enterprise standard that enables them to be socially responsible to all stakeholders. Corporate social responsibility (CSR) through its components enables a firm to set the values, standards, and nature of interaction between business and its stakeholders. Interestingly, while CSR is an obligation only for the corporations operating in natural resources-related activities, most large-scale firms have embraced the principles of CSR in their operation. This is because they realize financial benefits related to CSR. A study was conducted to determine the impact of distinguished elements of CSR on the financial performance of various businesses. This study was conducted using a Quantitative (Content Analysis) approach, with the exclusion criteria of the companies listed on the Indonesian Stock Exchange (IDX). The independent variables included corporate reputation, corporate strategy, and stakeholder engagement, Political Connection, while the dependent variable was the firms ‘financial performance. The study hypothesized that a strategic corporate social responsibility improves the financial performance of a firm along with better political relationship.
Keywords; CSR, Corporate Strategy, Strategic plans, Stakeholder Engagement, Financial Performance, Political connection.
Financial performance is commonly used to assess the efficiency of operations processes, procedures, and how effective resources are utilized in the persuasion of particular objectives. Such resources include labor, normal assets, and financial resources. According to Nirmal (2004), the success of business performance depends on satisfactory output and people’s wellbeing. . Therefore, the calculation of business performance in financial performance management should involve measuring both the financial and non-financial elements of performance (Weldeghiorgis 2004). This is the essence of integrating the corporate strategy and the social responsibility strategy to form an effective corporate social responsibility. There are few studies on the general relationship between corporate social responsibility and business financial performance. Most of the studies conclude the existence of a positive relationship between economic development and negative connection and a negative relationship between economic distress and development. This is the rationale for this study to demonstrate the effect of the specific elements of CSR, such as corporate reputation, corporate strategy, and stakeholder’s engagement on a firm’s financial management.
Research Problem
Being a member of the G20 economies of the world, and the largest economy in southwest Of Asia, Indonesia has well-developed facilities and other factors that attract the establishment of multinational companies. In Indonesia, CSR is only compulsory to the companies operating in the natural resource’s activities. Other companies participate in the CSR voluntarily is only (Yadav, Dash, Chakraborty, & Kumar 2018). Nevertheless, there are reliable studies showing a positive relationship between CSR and corporate performance of firms. Consequently, most companies listed in IDX have embraced the use of CSR in their investment plans. However, a majority of the companies provide their stakeholders with reports of participation in CSR and funding community development activities, yet there is little assessment data within the report. Most of the Indonesian companies listed in the IDX have either poor or do not have evaluation tools or correct accountability systems for monitoring and assessing the efficiencies obtained from the CSR in terms of business performance. Although there are established research findings that effective use of CSR improves the financial performance of a firm, there is a rationale to breakdown the research to evaluate the effects of various CSR variables on the financial performance of the Indonesian firms. Similarly, there a research gap in identifying the effects of the distinguished component of CSR {corporate strategy, corporate reputation, and stakeholder engagement} on the financial performance of a business. This research information is important in helping the firms to understand the specific area of CSR that would reap them the optimum investment efficiency so they can invest relatively lower in the others (Adeosun, 2013).
Research questions
1. What is the relationship between the mediating variables of CSR reporting (stakeholder engagement, corporate strategy, and corporate reputation) on the financial performance of a firm {reference to the firms listed on Indonesian IDX}? Several other strategic questions must be addressed to explore the above study question in the following breakdown.
i. How do CSR activities affect a firm’s corporate reputation in Indonesia?
ii. How does an improvement of a company’s reputation due to CSR affect its financial performance in Indonesia?
iii. How does a corporate strategy affect the financial performance of a firm?
iv. How does a CSR improve the stakeholder engagement among Indonesian companies?
v. How does effective stakeholder engagement affect the firm’s financial performance?
vi. How does Political connection of the firm’s executive affect their financial performance?
Literature & Hypothesis
According to Albuquerque, Koskinen, and Zhang, (2018), financial performance is commonly used to assess the efficiency of operations processes, procedures and how effective resources are utilized in the persuasion of particular objectives. Such resources include labor, normal assets, and financial resources. The essence of the existence of a corporate firm is to make a profit and generally improve the shareholders’ value. Therefore, every company must retain an effective strategy of allocating and reallocating its resources, establishing strategic goals/objectives, improving its organizational structure for efficiency, and adapting to the dynamics of its macro and microenvironment (Saleh, Zulkifli, & Muhamad, 2008). Both the social responsibility plan and corporate strategies ought to be integrated strategically to achieve optimum efficiency. According to Didin Fatihudin (2018), financial performance is measured through financial efficiencies, repayment capacity, profitability, solvency, and liquidity.
However, recent studies suggest the inclusion of non-financial performance calculation (NFPMs) in determining the efficiencies of a business operation (Larrán, Martínez, & Martínez-martínez, 2016). Various research programs have been undertaken in the bid to identify the applications and restrictions of conformist financial performance calculations (Al-Enizi et al. 2006). Some of the research programs highlighted the elements of non-financial performance calculation (NFPMs) such as the observation of social responsibility, transport, consumer consent, competitiveness, reputation, and “noteworthy accomplishment aspects” (Muhammad Kamran Khan et, al, 2015). Other non-financial key performance indicators (KPIs) include customer engagement and relationships, organizational supply chain, cycle-time, employees’ job satisfaction, quality of services effectiveness of services, service-time, and the innovation scale (Carmeli, 2001).
Basically, any firm that boasts of a good reputation benefits socially while boosting its brands; thus, it earns corporate benefits related to marketing (Chun, 2005). More so, CSR gives a firm a platform for establishing strong bonds with employees, suppliers, customers, the government, and the entire community. Chun (2005) argues that the operation efficiency (OE), Institutional Size (IS), and Assets Management efficiency (AME) also contribute significantly to a firm’s financial performance. However, even the non-financial performance elements are facilitated through financial costs. Thus, it is impossible to sustain social responsibility activities if a company continuously make losses. The impact of CSR on corporate efficiency, in particular financial performance, is a central topic in corporate governance and governance. The traditional view is that CSR is expensive because it is environmentally beneficial and incurs extra costs. Examples of environmentally conscious acts include carbon control initiatives, workplace insurance programs, contributions and corporate sponsorships, etc. (Cadez, 2017). The prevailing opinion holds that these outlays would depreciate competitiveness and contribute to an’ economic disadvantage’ (Alexander & Buchholz, 1978). The stakeholder theory, first proposed by Freeman in 1984, advocates the opposite view. The discontent of any stakeholder group may theoretically impact economic rents and could even endanger the viability of the business (Clarkson, 1995). Therefore, CSR is a requirement for the security of the bottom line (Epstein & Rejc-Buhovac, 2014). In accordance with this philosophy, managers should take into account both people and organizations with a stake in or demand on a company (Melé, 2008), and not only depositors (Ruf, Muralidhar, Brown, Janney, & Paul, 2001).
If strategically figured and supervised, CSR will not only increase the trust of these stakeholders but will also contribute to better financial results by increasing corporate reputation (Aver & Cadez, 2009). For instance, satisfied workers will be more likely to work better, satisfied consumers will be more inclined to make regular transactions and to recommend goods to others, satisfied vendors will have discounts, etc (Cadez, 2017). There are five advantages of CSR. These benefits are Increase in sales and piece of the overall industry, strengthened brand position, an increased brighter picture of the organization, Decrease in operation cost and increased interest of partnership for investors and financial analysts. One of the recently written works concentrating on benefit improving part of CSR contended that social obligations positively affect companies‟ earnings per Share (EPS). There is unbiased or normal positive connection between the social responsiveness and EPS in securities exchange. Later on, many inquiries have likewise discovered a positive association amid CSR and monetary performance. We can assess a company’s performance regarding ROA, ROE, Sales growth rate, Leverage, Firms esteem and so forth and every one of these factors has a positive connection with CSR. There was a positive association with ROE, ROA and CSR. Different analysts additionally discovered the comparative connection. Firm’s esteem can be utilized as a company’s performance marker (Fifka, 2013). These markers have a positive association with CSR. They figure, CSR will expand their benefits and at last they will have the capacity to make do over the long term. Supporting the contention determination instead of the over-speculation proposes that CSR engagement decidedly influences firm’s incentive in the wake of adjusting for the endogenous treatment impact. There is a solid positive financial effect on firms that take part in CSR activities. However, the inverse expressions about the connection between CSR and benefit are not less in number. The most customary and still most usually utilized estimation devices to gauge the execution of an association from a monetary point of view are profit on money, profit on value, and profit on deals and so on. A portion of the more prominent measures include: profit, income, Return on Investment (ROI), Return on Assets (ROA), Return on Equity (ROE), Return on Capital Employed, Earning Per Share (EPS), Price/Earning proportion (P/E Ratio),Return on Sales, Asset Turnover, Overhead/Sales proportion, and so forth.
This is as yet an unsolved issue that how CSR has any effect on corporate financial performance or whether these two have any positive relationship. As to set up the connection between CSR and Profitability, there is a saying that, “in total, returns are inconclusive‟ meaning when numerous findings are viewed as a summed-up conclusion is many-sided to be drawn (Hond et al, 2014). There were many audits and hypotheses by multiple analysts who endeavored to propose general systems for a causal connection between CSR and Corporate Profit yet neglected to do as such. The causal factors behind these conflicting findings were observed to be partner heterogeneity. The consequence of CSR on monetary performance is an established yet uncertain inquiry. More than 120 investigations have been led to inspect the exact connection between CSR and financial performance, and the outcomes are to a great extent inconclusive. In 2007, a review was conducted to discover the level of CSR of mechanical organizations in Indonesia, and it was found that CSR has a positive connection with the substantial benefit although the relationship was observed to be feeble. Another finding proposes a comparable conclusion as the creators were not ready to locate any considerable relationship between corporate social responsibility along with its component varibales and financial performance/gainfulness. CSR is affected more by sound qualities which are not in any case discernible. Financial performance is less related to CSR than sound attributes are. Some different researchers additionally don’t locate any critical connection between CSR and Profitability of a firm (Hond et al, 2014). Research around the world has found that businesses with political ties have increased financial efficiency and better access to finance (Yan, Wu, & Wilson, 2014 & Dicko, 2016). Nearly no research on financial institutions have been done so far. These are also seen as a significant source of finance for companies who are not financial institutions. This is also impossible to believe that financial institutions will make use of their relationships to obtain access to sources of financing. Financial institutions can, however, use their contacts for non-financial activities such as tracking policy decisions, the main goal of which will be profitability, reducing regulatory obstacles and enhancing efficiency (Dicko, 2016). On the basis of these arguments we therefore propose the following hypothesis:
Corporate reputation and stakeholder engagement are non-financial performance indicators whose progression leads to labor-management, marketing, sales, distribution, and even quality management efficiencies. When integrated with a sound corporate strategy, a considerate investment in corporate reputation and stakeholder engagement eventually leads to improved business performance and Political Connection of the firm influences the Financial performance.
Theoretical Model Development
The step of developing the theoretical model in this research is done by exploring scientifically variables and relationship between variables through literature review in order to get justification for the developed theoretical model. The essence of developing the theoretical model is to make a representation of the model identified in the research showing a simplified theoretical relationship between the variables, thus creating an understanding and justification for the developed theoretical model. The model shows a representation of the relationship between the corporate reputation, stakeholder engagement, and corporate strategy, political connection and financial performance (path diagram). Based on the relationship between variables, theoretically made model in the form of the path diagram as follows,
The diagram can also be expressed in terms of the following equation:
Z Stakeholder Engagement = P1 Z Corporate Social Responsibility + ε1
Z Corporate Strategy = P2 Z Corporate Social Responsibility + P3 Z Stakeholder Engagement + ε2
Z Corporate Reputation = P4 Z Corporate Social Responsibilit y + P5 Z Corporate Strategy + ε3
Z Financial Performance = P6 Z Corporate Social Responsibility + P7 Z Corporate Strategy + Z Corporate Reputation + Z Political Connection + ε4
P is path coefficient that show effect of exogenous variable into endogenous variable, and ε refers to error for each causality model.
Theoretical Framework
Generally, both the non-financial performance calculation (NFPMs) and the financial key performance indicators are important in measuring business operation efficiency. The stakeholder’s theory suggests that firms should take care, have a concern, appreciate the respect and safeguard the interest of all the people it interacts with (Cordeiro, and Tewari, 2014). Corporate reputation and stakeholder engagement are examples of measures of improving the bond between a firm and its stakeholders. Cordeiro and Tewari (2014) concur that the philanthropic dimension has high corporate returns to a firm as it earns the firm various non-financial performance indicators. The non-financial performance indicators from the baseline of a firm’s competitive advantage (Larrán, Martínez, & Martínez-martínez, 2016). The theory of social capital stipulates that each person has a number of social ties, called social capital, which depend on hereditary capital (social origin), economic capital, financial capital and other forms of capital. Such social ties (connections) are the basis of both financial and non-gains (Dicko, 2016). Each company has character with contacts or social interactions that can be useful and helpful, either within board of directors or on the management team. Companies are axes of networking and influence where we can consider rising prominent communities in society Nevertheless, these interactions are not one-way ties. To order to acquire the capital they need, corporations also need powerful groups in society; people within such communities do need businesses. (Dicko, 2016)
Research Methodology
A quantitative approach is used to analyze the relationship between CSR values and financial performance values among IDX listed companies. A deductive approach is used to qualify any new findings on the lines of existing theories, literature, and knowledge. The study developed a correlational analysis to investigate the connection, association, or interdependence between the three mediating variables, one independent variable with PC as dummy and one dependent variable (as illustrated on research model development).
Data Collection, Population and Inclusion Criteria
The research used secondary data collection techniques and content analysis (through Index formation and binary coding) of the annual reports, financial statements for 78 firms listed in the IDX. The reports were obtained from the existing IDX website, distinguished companies’ websites, and existing literature from credible databases. The 78 companies were publicly traded in Indonesia between the period of 2015 and 2018 for the purpose of enhancing causal inferences and gaging corporate trends. The data were collected on both the state-owned companies and the non-state-owned companies with a focus on the population group of the 653 companies listed in the IDX. the research Analyse the annual reports of Indonesian PLCs with the objective of examining extent and quality complied in terms of items and CSR and its variable patterns. For the extent of disclosure, a score of “1” is given if any item is disclosed by means of the company, otherwise “0”, while for the quality, this take a look at adopts a score of “3”developed by Wiseman (1982) and used by (Abdirahman Anas, et al, 2014).
Method of Data Analysis
CSR was operationalized utilizing different measurements measuring particular zones of CSR in the organization, Each inquiry in the data gathering will be measured numerically by using a scoring arrangement of 0,1,3 in light of the degree to which the group embraces/executes the demonstrated approach as takes after: None – (0) nothing set up and just sporadic or specially appointed movement happens Halfway or attempts- (1) Objectives/frameworks set up however not meeting the satisfactory level of CSR practices or objectives are being made to set destinations. Surpassing (3) Objectives/Systems are set up exceeding the level of worthy CSR rehearses. Generally, CSR framework contains 24 items from previous literature including (8 items for environment, 6 items for Social responsibility and community involvement, 6 items for workplace and economic responsibility and 4 items for complying with legal responsibility). Stakeholder engagement consist of 18 items, corporate reputation consists of 18 items and Corporate strategy with 17items (e.g. shareholders, investors, academics, regulatory affairs, the society and community support, Company profile, Human resources and employees.
The data obtained through content analysis will be analyzed using a correlational analysis and partial least squares structural equation modeling (PLS-SEM) since PLS-SEM allows a larger capacity for managing a variety of modeling issues and does not impose restrictive distribution assumptions (Vinzi et al., 2010). The larger the sample, the more reliable the PLS estimates and Suitability of secondary data used and recording of sampling and other statistics (e.g. distributions and estimates of statistical power) The inclusion of additional structural model evaluation criteria in compliance with the PLS-SEM prediction-oriented goals, and PLS-SEM plays better role in reporting of the particular procedures employed, and the algorithmic options employed (Rigdon, 2012).
Figure-1 Path Diagram of Research Framework
Figure-II Analysis PLS- SEM
The construct is reliable if composite reliability or Cronbach alpha value above (Latan & Ghozali, 2012) and AVE above 0,5. The output result for composite reliability, Cronbach alpha, and AVE for are showed below.
Cronbach’s Alpha
Composite Reliability
Average Variance Extracted (AVE)
Table 1. Composite Reliability, Cronbach’s Alpha and AVE
Based on table-1 above, it shows that the Composite Reliability and Cronbach’s Alpha is above 0,7 generally. The AVE of CS, CSR, FP, and PC is above 0,5 and the AVE of CR and SHE are close to 0,5. It means that the constructs on the model is reliable.
Hypothesis Testing
The result of hypothesis testing is showed in table below.
Table-2. Hypothesis Testing Results
Path Coeff.
Significant; There are the positive influence of CS to CR
Significant; There are the positive influence of CS to FP
Significant; There are the positive influence of CSR to CS
Significant; There are the positive influence of CSR to CR
Not Significant; The influence of CSR to FP is not significant
Significant; There are the positive influence of CSR to SHE
Not Significant; The influence of CR to FP is not significant
Significant; There are the positive influence of SHE to CS
Not Significant; The influence of SHE to FP is not significant
Significant; There are the positive influence of PC to FP
Determinant Coefficient
Table-3. R2 of the Constructs
R Square
Predictive Relevance (Q2) of a research formwork
According to Ghozali (2014), Q2 value can show the fit of observation value produced by model and its model parameter. If Q2 above 0 shows the model have predictive relevance and if Q2 below 0 shows the model not good to predictive relevance. The Q2 can be obtained by the formula below:
According the formula, we can get Q2 =1-(1-0,6182)*(1-0,1422)*(1-0,1892)*(1-0,2102)= 0,442 which means that the predictions made by the model are relevant.
Quality Index
According to Latan & Ghozali (2012), research model needs the validation of measurement model, structural model, and the overall model that is measured by Goodness of Fit (GoF) index.
GoF ≥ 0.1 shows the small quality of overall model, GoF ≥ 0.25 shows the moderate quality of overall model, and GoF ≥ 0.36 shows the high quality of overall model. GoF is obtained by formula presented by (Tenenhaus, 2004) below:
Based on the formula above, we obtain the GoF 0.429 and it is above 0.36. It means the model in research have the high-quality Goodness of Fit.
Indirect Effect
Table-4 below show the indirect effect between construct on model.
Direct Effect
CSR -> SHE -> CS -> CtR -> FP
CSR -> CtR -> FP
CSR -> SHE -> FP
CSR -> SHE -> CS -> FP
CSR -> CS -> CtR -> FP
CSR -> CS -> FP
SHE -> CS -> FP
SHE -> CS -> CtR -> FP
CSR -> CS -> CtR
CSR -> CtR
CSR -> SHE -> CS -> CtR
CSR -> SHE -> CS
SHE -> CS -> CtR
SHE -> CtR

CS -> CtR -> FP
CS -> FP
The indirect effect of CSR to FP with moderating SHE and CS have the influence about 0.137 and bigger than the direct effect. It means moderation variable of SHE and CS have the influence to increase the relation of CSR and FP. But the others moderation variable does not show the great influence.
The indirect effect of SHE to FP with moderating CS, or CS and CtR simultaneously have the influence bigger than the direct effect. It means moderation variable of CS or CS and CtR have the influence to increase the relation of SHE and FP. CS moderation variable (0.298) have the bigger influence than CS and CtR moderation variable simultaneously (0.015).
The indirect effect of CSR to CtR with moderating CS or SHE and CS simultaneously have the influence smaller than the direct effect. It means the direct effect path have the bigger influence than indirect effect path.
The indirect effect of CSR to CS with moderating SHE have the influence about 0.316 and bigger than the direct effect. It means moderation variable of SHE has the influence to increase the relation of CSR and CS. The indirect effect path has the bigger influence than direct effect path.
The indirect effect of CS to FP with moderating CtR have the influence about 0.022 and smaller than the direct effect. It means the direct effect path have the bigger influence than indirect effect path.
Conclusion & Discussion
The influence of Corporate Social Responsibility (CSR) on Corporate Reputation is significant seen through the p-value is positive indicating the relationship is both direct and significant, meaning that the better the Corporate Social Responsibility (CSR) carried out by a company, the better the Corporate Reputation, Corporate reputation is a strategic success factor that has a positive relationship with strategy and CSR and therefore deserves attention in a complex business environment.
The effect of Corporate Social Responsibility (CSR) on Financial Performance is not significant seen through the P-value and T-value indicating the relationship between the two is positive in direction but not significant, meaning that Corporate Social Responsibility (CSR) conducted by the company has no impact on the company’s Financial Performance and this suggest there ought to have some changes in conducting CSR operation for achieving targeted benefits. we found that the effect of Corporate Strategy on Financial Performance is significant seen through the coefficient indicating the relationship between the two is in positive and significant, meaning that the Corporate Strategy owned or implemented by the company has great impact on the company’s Financial Performance. It could be concluded that corporate strategy properly utilized to gain marginal objectives or properly injected will certainly to increase firm’s performance.
The influence of Political Connection on Financial Performance is significant, seen through the p-value Coefficient is positive indicating the relationship is both unidirectional and significant, meaning that the better if a company has a good political connection, the better the Financial Performance of the company. political connections through relation with political elites and work experience in government unveil a positive and significant relationship with firm performance and that such political connections exert a stronger influence through legal environment and government intervention, affects the relation between political connections and firm performance. The political connections effect on firm performance is pronounced more for firms position in regions with a less developed market economy, with weaker legal protections or with full size government involvement. The business connections with political elites exert a stronger influence through the legal environment and government intervention, eventually causing a positive and significant change in the firm’s firm performance (Van De Velde, Vermeir, & Corten2005).
The coefficient was positive for the three components of CSR to stakeholder engagement, corporate reputation, and the corporate strategy. But only corporate strategy has a positive and significant relation with financial performance of the firm and the stakeholders identified for the stakeholder’s engagement included customers, shareholders, employees, competitors & communities, investors, government, and lobby groups. More to involving them in decision making, various companies engage their stakeholders in dialogue to find out the social and environmental issues that matter most to them. By engaging the stakeholders, a company obtains important characteristic features of the society, such as values, gender, beliefs, traditions, culture, religious values, and other identities (Vitezic, 2016). A company is able to make a strategic marketing plan that enables it to earn financial benefits through the market-informed operation. Similarly, a firm’s reputation is important since it forms the baseline for marketing a firm’s brand. Building a reputation is, therefore, a form of investment that popularize a company’s brand (Fauzi, Rahman, Hussain, Adenan, 2009). Building a reputation is, therefore, a form of investment that popularize a company’s brand. 
The general aim of the research was to measure the relationship between CSR and financial performance of organizations in the bursa Indonesia. In summary, the underlying PLS-SEM investigation on the Ars of PLC in the bursa section uncovers a measurably substantial definite connection between the Corporate Social Responsibility (CSR) and financial performance. Further investigation by segment revealed some relationship between Corporate Social Responsibility through its supportive varibale corporate strategy and financial performance. Be that as it may, in leading the investigation several open doors for refining the study were recognized below as suggestions. Considering all things, this paper could be viewed as a further advancement in testing the relationship between Corporate Social responsibility (CSR) and financial performance in Indonesia.
Overcoming Challenges
There is a need to develop a measure of corporate social responsibility index, and an ethical requirement for firms to provide their shareholders with CSR reports in Indonesia. Companies ought to have evaluation tools or correct accountability systems for monitoring and assessing the efficiencies obtained from the CSR in terms of business performance. This will help firms to regulate the levels of their investment in the CSR to the most efficient level to avoid the point of diminishing return and be flexible at times of low profits. Consequently, researchers have a great role in identifying the most appropriate measure of CSR output and efficiencies for the incorporated companies. While it was easy to measure the financial performance of firms, it was relatively hard to quantify the non-financial key performance indicators. Similarly, although it was easy to quantify the input in corporate reputation and stakeholder engagement, it was relatively hard to quantify the impacts of the two on the firm’s financial performance. Future research should come up with reliable methods of approximating the effects of the non-financial social responsibility input on the financial performance of a firm.
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