How does corporate social responsibility benefit firms Evidence from Australia

How does corporate socialresponsibility benefit firms?Evidence from AustraliaJeremy GalbreathCurtin University of Technology, Perth, AustraliaAbstractPurpose – There is a small but growing body of empirical research examining benefits of corporatesocial responsibility (CSR) beyond traditional, accounting-based financial benefits. To extend thisbody of research in contexts outside of Europe and the USA, the purpose of the present paper is toempirically examine three potential benefits of demonstrating CSR: reduced employee turnover;increased customer satisfaction; and improved reputation.Design/methodology/approach – The paper collected data on latent constructs through a surveyof chief executive officers across a spectrum of industries in Australia. Confirmatory factor analysisassessed psychometric properties of the constructs, while regression analysis was used to examineposited hypotheses.Findings – The findings suggest that firms engaging in CSR can benefit in ways beyond a purebottom-line outcome. First, due to exhibited fairness, socially responsive activities appear to be ameans toreduce employee turnover. Second, by meeting justice needs of customers, CSR is likely to increasecustomer satisfaction. Lastly, CSR activities provide visible signals from which stakeholders infer variouspositive characteristics of firms, thus creating an avenue to increase overall firm reputation.Practical implications – Firms can choose to do nothing with respect to their social responsibilitiesto doing much. While proactively engaging in CSR is not without opportunity cost, the results of thispaper suggest executives should not dismiss CSR altogether.Originality/value – Value from this paper is derived in three ways: relying on non-financialdependent variables, it supplements limited CSR research conducted in this stream; the data andimplications drawn come from Australia, thereby adding needed international insight into the benefitsof CSR; and the paper supplements financial-driven theories used in CSR research by focusing onemployee justice perceptions, equity, and signaling theories.Keywords Australia, Corporate social responsibility, Customer satisfaction, Employee turnover,Stakeholder analysisPaper type Research paper1. IntroductionCan firms benefit by engaging in corporate social responsibility (CSR)? According tothe literature, for over three decades scholars have studied the relationship betweenCSR and firm performance (FP) to answer the question (Margolis and Walsh, 2003).Although results are mixed, the trend seems to suggest a moderately positive CSR-FPrelationship (Griffin and Mahon, 1997; Stanwick and Stanwick, 1998; Orlitzky et al.,2003). However, purported benefits of CSR are numerous and include those beyond the“pure” financial, from maintaining the license to operate, to risk reduction, to efficiencygains, and to tax advantages (Weber, 2008). Although vastly smaller in scope toCSR-FP studies, a few scholars have dedicated effort to empirically test additionalbenefits of CSR.The current issue and full text archive of this journal is available atwww.emeraldinsight.com/0955-534X.htmHow does CSRbenefit firms?411

Received April 2009Revised July 2009Accepted July 2009European Business ReviewVol. 22 No. 4, 2010pp. 411-431q Emerald Group Publishing Limited0955-534XDOI 10.1108/09555341011056186In their study, Maignan et al. (1999) find that in a sample of American firms, CSR ispositively linked with employee commitment and customer loyalty. In a similar study,Maignan and Ferrell (2001) find that CSR is positively linked with employeecommitment in a sample of French firms. Brown and Dacin (1997), Sen andBhattacharya (2001) and Scholder et al. (2006), in studying US firms, find that CSRpositively influences both consumers’ purchase intent and their perceptions ofcompanies’ products. Lastly, studying US firms from the Kinder, Lydenberg,Domini & Co. database, Greening and Turban (2000) and Turban and Greening (1997)find that demonstrating CSR is important for attracting prospective employees. Whileeach one of these studies offers important insight, they fall short of empirically testingpredicted benefits (Weber, 2008). Continued research is therefore necessary to furtheruntangle our understanding of how CSR benefits firms, given strong instrumentalundertones of the concept (Rowley and Berman, 2000; Mellahi and Wood, 2003).Additional benefits that have seen little to no empirical study include employeeturnover, customer satisfaction, and firm reputation, especially in contexts outside ofthe USA and Europe.According to the literature, employee turnover, company reputation, and customersatisfaction are highly important to scholarly study (Shaw et al., 1998; Mahon, 2002;Homburg et al., 2005). Employee turnover is important because the loss of human capitalin firms can have dramatic effects on competitive advantage (Barney, 1991; Huselid,1995). Reputation is important because it reflects how a given firm compares to itscompetitors (Rao, 1994), while reflecting stakeholder impressions of the firm’sdisposition to behave in a certain manner (Clark and Montgomery, 1998). Each of thesecan affect the ability to raise prices with consumers (Kihlstrom and Riordan, 1984),provide a cushion to recover from crises or threats (Gregory, 1998; Peloza, 2006) and cancreate mobility barriers within an industry (Wilson, 1985). Customer satisfaction haslong been studied in the literature and is seen as critical to firms’ profitability and anoverall mechanism by which a firm can achieve loyalty among the customer base(Anderson et al., 1997). Further, the importance of reducing employee turnover,building a strong reputation, and improving customer satisfaction continue to be amongthe top priorities of corporate executives around the world (PricewaterhouseCoopers,2007).Is there something inherent in CSR that might lead to benefits such as loweremployee turnover, higher reputation, and improved customer satisfaction? Theliterature suggests that there is. For example, Aguilera et al. (2007) suggest that CSRmeets the justice needs of employees thereby leading to lower turnover rates. Similarly,customers develop either positive or negative perceptions of firms through theirevaluation of the fairness they demonstrate through product use and serviceinteractions, for example, Fornell et al. (1996). CSR is expected to demonstrate equity or

fairness towards customers, leading to higher satisfaction. Lastly, reputation is ageneral attribute of firms and reflects the extent to which a firm is perceived as good orbad (Roberts and Dowling, 2002). CSR is expected to signal to stakeholders a positiveideal of corporate behavior, thereby increasing reputation.This study attempts to contribute to the literature in three ways. First,organisations today have moved beyond equating success with accounting-basedfinancial results (Ittner and Larcker, 2003; Maltz et al., 2003; Kaplan and Norton, 2007).Research on CSR has not kept pace in that the vast majority of studies examineEBR22,4412the CSR-FP link. Extending the realm of study is important because multiple theoriespredict different benefits, and assessing the value of CSR therefore requires multipleapproaches. Second, the Australian context is particularly relevant: althoughinstitutions appear to be increasing pressure on firms to demonstrate more sociallyresponsible actions (Parliamentary Joint Committee on Corporations and FinancialServices, 2006), many executives in Australian corporations remain skeptical as to thebenefits of CSR (Birch, 2002). Positive results from this study will supplement theresearch base, the majority of which come from the USA, and to a lesser extent, Europe.Lastly, evidence from the research is significant for management researchers andpractitioners. Addressing posited questions will allow scholars to offer relevant adviceon the likely outcomes of demonstrating CSR across international contexts.2. Theory and hypotheses2.1 What is CSR?While there is no universally accepted definition (Silberhorn andWarren, 2007; Weber,2008), CSR generally refers to a firm’s activities, organisational processes, and status inrelation to its perceived societal or stakeholder obligations (Davis, 1973; Wartick andCochran, 1985; Wood, 1991; Sen and Bhattacharya, 2001). Much has been written onwhat constitutes CSR and although many viewpoints exist, Carroll’s (1979)conceptualization of the responsibilities of firms has remained a consistently acceptedapproach, particularly with respect to empirical study. Carroll’s (1979) conceptualizationincludes four social responsibilities, namely:(1) the economic responsibility to generate profits, provide jobs, and createproducts that consumers want;(2) the legal responsibility to comply with local, state, federal, and relevantinternational laws;(3) the ethical responsibility to meet other social expectations, not written as law(e.g. avoiding harm or social injury, respecting people’s moral rights, doingwhat is right and just); and(4) the discretionary responsibility to meet additional behaviors and activities thatsociety finds desirable (e.g. contributing resources to various kinds of social orcultural enterprises; providing employee benefits such as training and improvedsalaries).Carroll’s (1979) conceptualization suggests that although all firms have the sameresponsibilities, not all firms demonstrate CSR equally (Birch, 2002). Firms can bereactive and make minimal effort or do less than required by stakeholder standards forsocial responsibility. Firms can also do nothing – in essence they reject or deny theirsocial responsibilities. However, firms that proactively demonstrate CSR and act

beyond minimal requirements would not only expect to contribute to the creation ofsocietal welfare, but also to improve their own success (Carroll, 1979). Thus, theoperationalization of CSR used in this study can be considered a demonstration ofsocial “performance,” in the sense that it measures the degree to which a firm isdemonstrating positive outcomes/activities that are directly related to its socialresponsibilities. Of particular interest to this study is exploring the impact of CSR onthree aspects facing the success of any business firm:How does CSRbenefit firms?413(1) employee turnover;(2) customer satisfaction; and(3) reputation.In exploring relationships between CSR and employee turnover, customer satisfaction,and reputation, this paper draws upon three theoretical frameworks; namely:(1) employee justice perceptions theory;(2) equity theory; and(3) signaling theory.Studying CSR with multiple theories is logical, as the concept is multidimensional andis expected to impact stakeholders in different, yet equally positive, ways. Therefore,multi-theoretical approaches are welcomed (Aguilera et al., 2007).2.2 CSR and employee turnoverExecutives continue to suggest that employees are their most valuable asset and thata firm’s ability to retain employees is a hallmark and signal of organisational success(PricewaterhouseCoopers, 2007). The ability to retain employees not only demonstratesthat a given firm is a valued place to work (which can elicit positive corporateassociations from the public), but several scholars also find that retaining employeeshas positive consequences for firms’ financial performance and productivity (Huselid,1995; Guthrie, 2001). Of particular concern to firms then, are the mechanisms andactivities that can enable them to diminish employee turnover. Relying on employeejustice perceptions theory, firms that are proactively demonstrating CSR are posited todiminish employee turnover.Employee justice perceptions theory (Cropanzano et al., 2001a, b) posits thatemployees derive general justice perceptions of firms based on the level of fairness thatcompany demonstrates. Research has shown that in work environments that areperceived to be fair, employee well-being is positively affected, such as in the areas ofjob satisfaction and stress (Colquitt et al., 2001). Research also shows that workenvironments that are perceived as being fair have positive effects on organisationaloutcomes as well, by means such as lower employee absenteeism and higher levels ofemployee commitment (Colquitt et al., 2001). Just the opposite, work environments thatare perceived as being unjust lead to lower employee performance and even vengefulbehaviors on the part of employees (Aquino et al., 2001; Ambrose et al., 2002). CSR,arguably, conveys to employees essential information on which they judge the fairnessof a firm.According to Aguilera et al. (2007), CSR is an activity that demonstrates concern forboth internal and external stakeholders and that through socially responsibleactivities, firms exhibit fairness in their actions. This demonstration of fairness islikely to impact on employee turnover levels. For example, Tyler (1987) argues that

individuals have a psychological need for control. This need for control is based on aself-serving concern for justice and from an employee perspective, justice (or injustice)demonstrated by firms provides information that can be used to foretell anorganisation’s actions. Thus, when CSR is demonstrated proactively and consistently,employees can gauge the extent to which they will be fairly treated, meeting theirEBR22,4414concern for justice. In turn, this creates an organisation that can position itself forhigher retention rates.Building on justice perceptions, employees also have ethical frameworks whichguide their decision making and responses (Cropanzano et al., 2003). Since mostindividuals have basic respect for human dignity and worth, firms that are unfairviolate morality-based concerns for justice. More specifically, firms that do notdemonstrate behavior that is consistent with employees’ moral or ethical frameworksare likely to suffer negative consequences. Following employee justice perceptionstheory, if irresponsible behavior is demonstrated by a firm, employees may view thisbehavior as unjust or unfair, which could potentially lead to higher turnover (Colquittet al., 2001). However, if a firm’s actions demonstrate good citizenship, employeesassess the firm as one that is just and fair, which is likely to lead to less turnover asindividual and organisational goals converge. Consequently:H1. CSR will diminish employee turnover.2.3 CSR and customer satisfactionCustomer satisfaction is a cumulative, global evaluation based on experiences withfirms over time and is a fundamental indicator of past, current, and future performance(Anderson et al., 1994). As such, achieving high levels of customer satisfaction hasbecome one of the most essential goals of firms and is an important focus of corporatestrategy (Homburg et al., 2005). To explore the CSR-customer satisfaction link, equitytheory is used (Oliver and Swan, 1989a, b; Oliver, 1997).Stemming from social exchange theory (Homans, 1961; Adams, 1965), equity theoryfocuses on fairness, rightness, or deservedness judgments individuals make inreference to what one party or an other receives (Oliver, 1997). The theory posits that inexchanges, if customers feel equitably treated – namely their input to the exchange isin balance with the output of the exchange – satisfaction is the result (Goodwin andRoss, 1992; Oliver, 1997). Hence, customers incur certain costs (inputs) in exchanges fora certain level of output from firms. According to Oliver and Swan (1989a, b) andBolton and Lemon (1999), equity is the customer’s reaction to these ratios of inputs tooutputs – or fairness. Equity, in turn, affects a customer’s overall evaluation of thefirm. With respect to this study, there are several ways CSR is expected to demonstrateequity towards customers and lift their satisfaction levels.First, firms attempt to increase customer satisfaction by focusing on internalprocesses (Kaplan and Norton, 2007). In a classic example, the retail giant Sears,Roebuck and Company, in an effort to turn around their fortunes after severaltumultuous years and declining customer satisfaction, developed and implemented theemployee-customer-profit chain model (Rucci et al., 1998). At the core of the model wasimproving employee learning and competencies through heavy investments in trainingand other actions (Rucci et al., 1998; Westbrook, 2000). Sears was eventually able toimprove the quality of exchanges between employees and customers, thereby lifting

their perceived treatment, and ultimately its customer satisfaction and financialsuccess. Maignan et al. (1999) point out that firms are not legally required to offer thetype of training or make the investments in employees such as Sears made; rather,training and investments in employees suggests a firm is demonstrating socialresponsibility (de la Cruz De´niz-De´niz and De Saa´-Pe´rez, 2003), particularly byengaging the discretionary dimension of CSR (Carroll, 1979).How does CSRbenefit firms?415Second, customers seek value in the purchases they make (Zeithaml, 1988).Following equity theory, perceived value is one way in which customers assess thefairness or equitable treatment given by a firm in exchanges. In the case of VolvoCars, in the mid-1990s, the company embarked on a strategy to improve its customersatisfaction. Rather than focus on customer service like Sears, Volvo’s main emphasiswas on improving product quality (Dahlsten, 2003). After a series of qualityinitiatives leading to new model development and enhanced features across a numberof existing models, Volvo was able to consistently lift its customer satisfactionresults by demonstrating value for money (Dahlsten, 2003). According to Carroll(1979) and Maignan et al. (1999), delivering quality products that meet customerneeds is consistent with CSR, particularly with respect to their economicresponsibility.Lastly, evidence suggests that ethical status impacts on customer perceptions ofequity demonstrated by firms (Maignan, 2001). By example, when founded, a corevalue of Enterprise Rent-A-Car was to deliver high levels of customer satisfaction bybeing honest, fair, and going the extra mile (Taylor, 2003), characteristics that define anethical commitment. Although the firm consistently delivered positive financialresults, by the early 1990s, customer satisfaction levels had slipped. After taking actionto address the problem through initiatives such as standardized practices in customerservice and reengineering processes, Enterprise Rent-A-Car was able to consistentlyimprove customer satisfaction ratings. However, a key factor to the firm’s success wasre-orientating itself to the core values of honesty, fairness, and integrity in dealing withcustomers (Taylor, 2003). When honesty and fairness are demonstrated, customers feelequitably treated. The issue of honesty, fairness, and integrity is intrinsically tied tothe ethical dimension of a firm’s social responsibilities and as such, reflects CSRactivity (Carroll, 1979).Firms continue to search for ways to improve customer satisfaction. Given that CSRappears to demonstrate equity towards customers, the expectation is that:H2. CSR is positively associated with customer satisfaction.2.4 CSR and reputationA positive reputation indicates that a firm is highly esteemed or well regarded(Weiss et al., 1999). According to Brown and Logsdon (1999, p. 169), reputation isdefined as “outsiders’ assessments about what the organisation is, how well it meetsits commitments and conforms to stakeholders’ expectations, and how effectively itsoverall performance fits with its socio-political environment.” Thus, reputation is ageneral attribute of firms and reflects the extent to which “stakeholders see firms as‘good’ or not ‘bad’” (Roberts and Dowling, 2002, p. 1078).From a scholarly perspective, although the link with firm financial performance isof primary interest (Roberts and Dowling, 2002), reputation is also a measure of

success, a dependent variable (Dollinger et al., 1997). Further, several scholars(Dierickx and Cool, 1989; Srivastava et al., 2001) argue that a positive reputation is akey strategic asset, one that helps firms build and sustain competitive advantage.Given that reputation is a strategic asset of firms and a measure of organisationalsuccess, much research has been interested in studying reputation-building activities(Winters, 1986; Varadarajan and Menon, 1988; Drumwright, 1996; Brown and Dacin,1997). However, underlying theory suggests that reputation formation can be broadlyEBR22,4416understood as a signaling process in which firms’ strategic choices and activitiessend signals to stakeholders (Weigelt and Camerer, 1988); stakeholders in turn usethese signals to form impressions or associations of these firms. CSR is increasinglyrelevant to strategic choices and strategic activities (Porter and Kramer, 2006) and ispart of firms’ signaling processes. There are two principle means by which CSR isexpected to positively shape stakeholders’ assessment of firms, and therefore, aperceived “good” reputation: substantive signaling actions and symbolic signalingactions.Substantive signaling actions with respect to CSR are actions that are tangible,measurable and/or reflect visible expenditure of resources (Mahon, 2002). For example,firms in Australia, the USA, and other industrialized countries seek to differentiatethemselves from competitors through expending resources in support of social causesor in capital projects that advance the goals of communities within which they operate(Birch, 2002; Cone et al., 2003). Firms taking this approach are using the discretionarydimension of CSR (Carroll, 1979) to send signals to stakeholders that they are sociallyresponsible; in turn, reputation is expected to be bolstered. Firms also seek todifferentiate themselves by developing products that appeal to consumers in particularmarkets. They can do this by targeting highly visible social issues, for example, usinghybrid vehicles to appeal to educated and environmentally aware people in theautomobile market (McWilliams et al., 2006). Here, firms signal to the market theirsensitivity to stakeholder concerns over an issue such as climate change, by focusingon their economic responsibility (Carroll, 1979). In doing so, a firm that exercises itseconomic responsibility, to respond to a social issue such as climate change, isengaging in reputation building activities.Symbolic signaling actions with respect to CSR are perhaps less obvious andeasy to identify. Symbolic signaling actions are actions where little to no resourcecommitments are made by firms. For example, at one point in the history of Gerberbaby foods, allegations were made that glass was found in its products, which posed aserious danger to infants (Nash, 1993). Gerber immediately recalled the product andinvestigated the problem. The findings suggested that extremely small traces of glasswere found in the product but was a result of handling in transit and posed no dangerwhatsoever. Some time later, similar allegations were made. However, this time, Gerberdid not recall the product and cited the extensive research and findings of the firststudy. Customers, the media, and other stakeholders found Gerber’s argumentacceptable, in part, due to the findings in the previous recall (Nash, 1993), whichfollows Peloza’s (2006) concept of “reputation insurance” that can protect a firm’simage in times of crisis or threat. Here, Gerber did not expend resources but ratheracted in a symbolic fashion, signaling to the market their moral credibility as a socially

responsible company. They achieved this by highlighting past actions in a crisissituation while demonstrating their ethical commitment. Following Carroll (1979),ethical responsibility is a key dimension of CSR and signals to stakeholders that a firmis seeking to avoid harm or social injury, respects people’s moral rights, and is seriousabout doing what is right and just.To summarize, CSR activities provide visible signals from which stakeholders infervarious positive characteristics of firms. CSR is, therefore, predicted to be a keymechanism by which a firm can build its reputation. Hence:H3. CSR is positively associated with firm reputation.How does CSRbenefit firms?4173. Methods3.1 Sample and data collection proceduresA sample of Australian firms was selected for this study. The sample’s parametersincluded only firms with manufacturing or services classifications. Given that the focusof this study was on business firms, other organisations, such as public administrationand community service entities, were excluded.To obtain the sample, firms were randomly selected from The Business Who’s Whoof Australia database provided by Dunn and Bradstreet. A total sample size of 3,000firms was selected, containing 1,500 firms each from manufacturing and servicesindustries. The chief executive officer (CEO) was the targeted informant for this studyas they are the prime strategist and have breadth of knowledge of firm operations andits success.After accounting for undeliverables, the response rate was belowthe anticipated rate of15 percent; specifically, the response rate was 10 percent. Although the response rateyielded may prima facie appear low, the rate is similar to other studies surveying “elitepersonnel,” where response rates range from 6 to 13 percent (Lewin et al., 1995;Schlegelmich and Robertson, 1995; Agle et al., 1999).Atotal of 20 surveyswere eliminateddue to missing data; therefore, 280 useable surveys were included for final analysis.The mean firm size was 630 employees while the mean firm age was 42 years old.Firms in manufacturing sectors comprised 39 percent of the sample, with the rest offirms in services sectors. Most of the firms were clustered into two sales revenuecategories, with 42 percent of firms generating between $10,000,001 and $50,000,000,and 22 percent over $200,000,000. Lastly, the average respondent age was 50 years old,with 92 percent being male.3.2 MeasuresAll constructs were measured using multi-item scales and the control variables weremeasured using either single item indicators or categorical indicators. To avoid orderbias, the items used to measure the independent and dependent scales were placedrandomly in the final instrument whereas, the scales for the predictor and criterionvariables were placed as far apart from each other as possible.CSR. This study was interested in exploring the extent to which firms weredemonstrating CSR activity across four dimensions prescribed by Carroll (1979). Afterreviewing several studies (Aupperle et al., 1985; Pinkston and Carroll, 1994, 1996;Quazi, 2003), the scales used in the studies of Maignan et al. were chosen. Maignan andFerrell (2000, 2001) and Maignan et al. (1999) after conducting an extensive literaturereview, identified and developed various socially responsible activities that aligned

with Carroll’s (1979) conceptualization of CSR. Thus, the scales do not assess thedegree to which a firm believes it has social responsibilities or how they rank orderthose responsibilities; rather, the scales assess actual CSR activity, making them ideafor this study.Accordingly, measurement of CSR included four dimensions:(1) economic;(2) legal;(3) ethical; and(4) discretionary.EBR22,4418However, the conceptualization used in this study suggests that one dimension is notnecessarily more important than the others (Maignan and Ferrell, 2000; Maignan et al.,1999); hence, equal weights were applied to each of them. Therefore, a firm’s CSR levelwas computed as the simple averages of the sums of the scores of the responsesacross the four dimensions. To measure CSR, informants were asked to rate each item,where “1 – strongly disagree” and “5 – strongly agree.” The Appendix displays itemsfor CSR.Customer satisfaction. Andreassen and Lindestad (1998) suggest that customersatisfaction indicators should tap into the construct by addressing an overallevaluation of consumption experiences with a firm. Following Ping’s (1993) proposalthat the relationship between customer and firm reflects overall satisfaction, fouritems were developed relating to customers’ expectations and the relationshipbetween customers and the firm. In addition, three items were adopted that arecommonly used in customer satisfaction research as indicators of the construct (Oliverand Swan, 1989a). Thus, the scale contained seven items designed to gauge firms’perceptions of the satisfaction of their customers. Informants rated each item on afive-point Likert scale, where “1 – strongly disagree” and “5 – strongly agree” (see theAppendix).Employee turnover. In their studies of CSR, Maignan and Ferrell (2001) and Maignanet al. (1999) measured employee commitment as the degree to which employees feltconnected and committed to a firm. However, their measurement did not assess actualturnover levels and thus a different measurement is required. Thus, to assess turnoverlevels, following Huselid (1995) and Guthrie (2001), a single question was used in thisstudy, asking informants to list what the average annual employee turnoverpercentage was for their firm.Reputation. A widely used measure of reputation is the Fortune Most AdmiredCompany index ofUSfirms(Mahon, 2002).However, the Fortune index has been criticizedto the point of some scholars arguing that the measurement should not be used as a proxyfor reputation (Fryxell andWang, 1994; Mahon, 2002). Further, inAustralia, a comparableindex does not exist. Thus, this study relied on the reputation scale developed byWeiss et al. (1999).Weiss et al., following the unidimensional perspective (Yoon et al., 1993),developed a scale that assesses a firm’s general perception of their reputation.The scale does not assess reputation for anything specific (e.g. product innovation);rather, the scale measures a firm’s assessment of how customers perceive their overallreputation. This is consistent with theoretical treatments of reputation (Brown andLogsdon, 1999;Roberts andDowling, 2002).The scale contained five itemsand informants

were asked to rate each itemon a five-point Likert scale,where “1 – strongly disagree” and“5 – strongly agree” (see the Appendix).Control variables. Several measures were used as control variables in this study.These included firm size, firm age, industry type, and sales revenue. Firm size wasmeasured with a single item, number of full-time employees. Firm age was measuredwith a single item, number of years in business. Industry type was a categoricalvariable measuring six different industries. Since industry impacts a firm’scompetitiveness, dummy variables for the six industry types were included tocontrol for possible affects on the dependent variables. For sales revenue, dummyvariables were created for six categories, from less than $1,000,000 to a category of over$200,000,000 per year.How does CSRbenefit firms?4194. Analysis and results4.1 AnalysisMeans, standard deviations, and correlations are presented in Table I. To assess thepsychometric properties of the constructs, EQS version 6 (Bentler, 2006) was used toconduct confirmatory factor analysis (CFA). To assess the constructs, four fit indiceswere used:(1) comparative fit index (CFI);(2) goodness-of-fit index (GFI);(3) root mean squared (RMR); and(4) standardized root mean squared (SRMR).These four indices are widely used as key fit indicators in CFA and the results arepresented in Table II. According to the findings, after scale purification (see theAppendix), all constructs met thresholds for goodness-of-fit indicators in CFA (Bentler,1990). Moreover, since the standardized factor loadings of all the measurement itemson their respective constructs were significant ( p , 0.05) and none of the confidenceintervals of the f values contained a value of one, the conclusion was made that theconstructs exhibited convergent and discriminant validity (Montoy-Weiss et al., 2001).Finally, all constructs demonstrated sufficient reliability, exceeding the commonbenchmark of 0.70 (Table II).4.2 ResultsTo test for statistical significance between the independent and dependent variables,regression analysis was used. For each equation, all variables were entered into a singleVariable Mean SD 1 2 3 4 5 61. Firm size 630.35 1,852.61 1.002. Firm age 42.42 40.91 0.09 1.003. CSR 4.05 0.46 0.12 * 0.06 1.004. Employee turnover 12.65 10.18 0.12 * 20.07 20.14 * 1.005. Customer satisfaction 4.09 0.54 20.04 20.04 0.45 * * 20.22 * * 1.006. Reputation 4.38 0.55 0.04 20.03 0.49 * * 20.14 * 0.62 * * 1.00Notes: *p , 0.05; * *p , 0.01Table I.Descriptives andcorrelationsModel/variable Mean SD

InternalconsistencyCronbach’salpha CFI GFI RMR SRMRCSR 0.94 0.92 0.04 0.06Economic 3.94 0.55 0.73 0.72Legal 4.50 0.42 0.82 0.81Ethical 4.25 0.59 0.83 0.79Discretionary 3.51 0.71 0.82 0.79Customersatisfaction 4.09 0.54 0.86 0.85 0.97 0.97 0.01 0.02Reputation 4.38 0.55 0.89 0.88 0.99 0.99 0.01 0.01Table II.Results of CFAEBR22,4420block. Prior to hypotheses testing, multicollinearity was tested using variance inflationfactors (VIF) and tolerance values. Since VIFwere no higher than 2 and tolerance values nolower than 0.780, collinearity among the variables did not seemto be a problem(Hair et al.,1995).The statistics for the regression analysis are presented in Table III.The results indicated that CSR does appear to reduce employee turnover. CSR wassignificantly and negatively associated with employee turnover (b ¼ 20.16;t ¼ 22.81; p ¼ 0.001), which was the expected direction, suggesting that firmsdemonstrating proactive CSR are reducing their turnover levels. Thus, H1 wassupported by the finding. With respect to H2, CSR was significantly and positivelyassociated with customer satisfaction, resulting in a beta of 0.50 (t ¼ 9.02; p ¼ 0.000).Given the findings, H2 was confirmed. Regarding reputation, CSR was significantlyand positively associated with the construct (b ¼ 0.53; t ¼ 9.49; p ¼ 0.000). Hence, H3was also supported. Lastly, as for the control variables, the consumer productsindustry dummy was negatively linked with employee turnover, suggestingemployees were not leaving their jobs at a rate of others industries. The threehighest sales revenue dummies were positively associated with customer satisfactionand reputation, suggesting firms with higher income might be in a better position tocommit resources to improve customer relations while bolstering reputation.4.3 Additional analysisThere is precedent in the literature for examining the individual dimensions of CSR inexploring potential benefits (Maignan and Ferrell, 2001). Thus, to extend the researchfindings, dependent variables were regressed on each of the individual dimensions ofCSR (Table IV). With respect to employee turnover, both legal CSR (b ¼ 20.28;t ¼ 23.51; p ¼ 0.001) and discretionary CSR (b ¼ 20.15; t ¼ 22.04; p ¼ 0.042) weresignificant with a corresponding negative sign. For customer satisfaction, economicCSR (b ¼ 0.29; t ¼ 4.48; p ¼ 0.000), legal CSR (b ¼ 0.26; t ¼ 3.74; p ¼ 0.000), anddiscretionary CSR (b ¼ 0.23; t ¼ 3.72; p ¼ 0.000) were significant and positive. As forDependent variablesIndependent variables Employee turnover Customer satisfaction ReputationFirm size (number of employees) 0.09 0.01 0.03Firm age (number of years in business) 20.09 20.03 20.03

Revenue dummy ($1.001M to $10M)Revenue dummy ($10.001M to $50M) 20.03 0.09 20.06Revenue dummy ($50,001M to $100M) 20.09 0.23 * * * 0.15 *Revenue dummy ($100.001M to $200M) 0.08 0.21 * * * 0.12 *Revenue dummy (over $200M) 20.03 0.24 * * * 0.13 *Industry dummy (consumer products) 20.22 * * * 0.06 0.01Industry dummy (financial services) 20.07 0.08 20.05Industry dummy (insurance) 0.09 0.00 20.08Industry dummy (personal services) 0.01 0.09 0.01Industry dummy (business services) 20.02 0.04 20.04CSR 20.16 * 0.50 * * * 0.53 * * *R 2 0.12 0.29 0.30F 2.81 * * * 9.02 * * * 9.49 * * *Notes: *p , 0.05, * *p , 0.01, * * *p , 0.001; overall assessmentTable III.Benefits of CSRHow does CSRbenefit firms?421reputation, economic CSR (b ¼ 0.24; t ¼ 3.71; p ¼ 0.000), legal CSR (b ¼ 0.23; t ¼ 3.42;p ¼ 0.001), and discretionary CSR (b ¼ 0.25; t ¼ 3.91; p ¼ 0.000) were all significantlyand positively associated with the construct. Ethical CSR was not significantlyassociated with any of the dependent variables.5. DiscussionAll three of the hypotheses were supported by the findings in this study. As a result,this study offers some level of confirmation for scholars who have theorized that CSR isa value creating activity important to firms beyond direct financial benefits, such asthose measured by traditional accounting-based measures. For example, the work ofAguilera et al. (2007) suggests that meeting employees’ justice needs through CSRshould have the effect of lowering turnover rates. This study finds that CSR doesappear to reduce employee turnover. On the other hand, customer satisfaction is acumulative, global evaluation of product or service use based on experience with firmsover time and is a fundamental indicator of past, current, and future performance(Anderson et al., 1994). This paper argued that, based on equity theory, firms canimprove their consumption experiences with customers by demonstrating CSR.The results indicate that CSR is positively linked to customer satisfaction. Lastly,Neville et al. (2005) argue that reputation is the overall evaluation received by anorganisation from its stakeholders concerning the credibility of the organisation’sidentity claims. The case was made, based on signaling theory, that CSR sends signalsto stakeholders that generates positive impressions or associations which, in turn,affect reputation. The findings from this study confirm that CSR is positively linked toreputation.Dependent variablesIndependent variables Employee turnover Customer satisfaction ReputationFirm size (number of employees) 0.10 0.02 0.03Firm age (number of years in business) 20.10 20.03 20.02Revenue dummy ($1.001M to $10M)Revenue dummy ($10.001M to $50M) 20.06 0.12 * 0.03

Revenue dummy ($50,001M to $100M) 20.11 0.26 * * * 0.19 * *Revenue dummy ($100.001M to $200M) 0.05 0.21 * * * 0.13 *Revenue dummy (over $200M) 20.05 0.22 * * * 0.12 *Industry dummy (consumer products) 20.20 * * * 20.01 20.05Industry dummy (financial services) 20.07 0.01 20.10 *Industry dummy (insurance) 0.07 0.04 20.04Industry dummy (personal services) 20.01 0.10 * 0.02Industry dummy (business services) 20.01 0.04 20.03Economic CSR 0.06 0.29 * * * 0.24 * * *Legal CSR 20.28 * * * 0.26 * * * 0.23 * * *Ethical CSR 0.13 20.10 20.01Discretionary CSR 20.15 * 0.23 * * * 0.25 * * *R 2 0.17 0.34 0.34F 3.38 * * * 9.06 * * * 8.94 * * *Notes: *p , 0.05, * *p , 0.01, * * *p , 0.001; assessment by individual componentTable IV.Benefits of CSREBR22,44226. ImplicationsTaken together, the findings of this study have two important theoretical implications.First, the findings supplement a small research base of studies empirically examiningbenefits of CSR beyond those that rely purely on financial-based dependent variables.For example, while Greening and Turban (2000) find that CSR acts as a means to attractnew employees, the present study finds that CSR reduces employee turnover, suggestingthat CSR might create a symbiotic relationship between acquiring and retainingemployees. By expanding studies beyond theUSAand Europe, the findings of this studyare particularly important as scholars have called for researchers to further study howand under what conditions CSR benefits firms (Rowley and Berman, 2000).This requiresan international body of research and the results here should give scholars additionalconfidence in predicting whether or not – and how – CSR benefits firms.Second, there is debate among scholars as to which dimensions of CSR are mostimportant (Rowley and Berman, 2000). According to Carroll (1979), firms have fourresponsibilities; however, do firms necessarily need to demonstrate responsibilityacross all dimensions equally to be considered a socially responsible company?By separately evaluating the four dimensions of CSR as an additional component to themain tests, the results of this study suggest that some individual dimensions of CSRmight be more important than others. In the case of reducing employee turnover, legal,and discretionary dimensions had the biggest impact. One explanation might be thatfirms who meet or exceed legal requirements or offer outstanding care for employees orcommunities may be in the best position to diminish turnover due to employees’positive justice perceptions. On the other hand, economic, legal, and discretionarydimensions of CSR were positively associated with customer satisfaction. The findingsuggests that, for example, firms who are demonstrating strong commitment to theireconomic responsibility (e.g. through offering highly valued products), ensuringcustomers are not harmed in any way by meeting legal standards (legal CSR), or whoare treating employees well through benefits and high salaries (discretionary CSR)

might ultimately be reaping the rewards of higher customer satisfaction.Most surprising, perhaps, was that the ethical dimension of CSR was notsignificantly associated with any of the dependent variables. This does seem at oddswith previous studies that have found firms’ ethical practices to impact on organisationoutcomes (Choi and Jung, 2008). An implication of the finding suggests that all CSRactivities do not necessarily have equal impact on organisational outcomes. Forexample, in their study, Maignan and Ferrell (2001) found that only the economic anddiscretionary dimensions of CSR were significantly associated with outcomes such asemployee commitment and financial performance. However, further research wouldneed to investigate why and under what conditions the ethical dimension of CSR is lessimportant to organisational success relative to the other three dimensions.As for practical implications, firms throughout the world are challenged todemonstrate responsible corporate behavior. However, demonstrating responsiblecorporate behavior is not without opportunity costs. On the plus side, evidence ismounting to suggest that proactive CSR is directly related to financial performanceindicators. The findings of this demonstrate that CSR also appears to reduce staffturnover, while increasing both customer satisfaction and reputation levels. This isimportant as some executives in Australia (Birch, 2002), and around the world(McKinsey & Company, 2006), continue to believe that CSR is an activity to avoid,How does CSRbenefit firms?423other than their economic responsibility. Thus, companies should realize that CSRactivities can represent a robust strategy, particularly in an environment wherestakeholders, such as customers, employees, and the government, have increasedsocial concerns (Davis and Stephenson, 2006). In fact, Porter and Kramer (2006)suggest that CSR may become the new battleground for competitive advantage.7. Limitations and conclusionThere are limitations to this study. First, as with much data used in organisationalscience, the data are cross-sectional. As a result, the research did not assess the degreeto which employee turnover, customer satisfaction, or reputation changed over time;nor did it measure the extent to which changes in CSR affect these variables over time.Clearly, longitudinal research is needed to develop richer insight. Second, all of the datawere self-reported by the participating firms. While CEOs were expected to be in a goodposition to assess the variables used in this study, common method bias is a concern.However, a Harman’s ex post one-factor test (Podsakoff et al., 2003) revealed thata single factor solution did not emerge, nor did any factor account for a majority ofthe variance. Hence, common method bias appears to be minimal. Lastly, thegeneralizability of the study is limited by the sampling frame.While the firms sampleddo represent a wide range of industries and sizes, they are limited to the Australiancontext. Replicated studies in other countries are required to validate the findings inthis research.In conclusion, CSR has long been a controversial topic in discussions on businessfirms, mainly with respect to diverting corporate attention – and capital – frommaximizing shareholder value. Thus, to legitimize the field, empirical research hasmainly concentrated on testing the relationship between CSR and financial performance;results increasingly demonstrate a positive link (Griffin and Mahon, 1997; Orlitzky et al.,2003). While studies of the CSR-financial performance relationship are numerous and

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Ethical:. Our business has a comprehensive code of conduct.. Members of our organisation follow professional standardsb.. Top managers monitor the potential negative impacts of our activities on our community.. We are recognized as a trustworthy company.. Fairness toward coworkers and business partners is an integral part of our employeeevaluation process.. A confidential procedure is in place for employees to report any misconduct at work(such as stealing or sexual harassment).. Our salespersons and employees are required to provide full and accurate information toall customers.Discretionary:. The salaries offered by our company are higher than industry averages.. Our business supports employees who acquire additional educationb.. Our business encourages employees to join civic organisations that support our community.EBR22,4430. Flexible company policies enable employees to better coordinate work and personal life.. Our business gives adequate contributions to charities.. A program is in place to reduce the amount of energy and materials wasted in ourbusiness.. We encourage partnerships with local businesses and schoolsb.. Our business supports local sports and cultural activities.Customer satisfactiona:. Compared to competitors, our customers find that our products/services are much better.. Our customers are very satisfied with the products/services we offer.. Our customers are very satisfied with the value for price of our products/servicesb.. Our customers find that the products/services we offer exceed their expectationsb.. The likelihood that our customers will recommend our products/services to others is high.. Our customers are very satisfied with the quality of our products/services.. The ability to achieve high levels of customer satisfaction is a major strength of our firm.Reputationa:. Our firm is viewed by customers as one that is successful.. We are seen by customers as being a very professional organisation.. Customers view our firm as one that is stable.. Our firm’s reputation with customers is highly regarded.. Our firm is viewed as well-established by customers.Notes: aFive-point scale ranging from strongly disagree to strongly agree; bitem eliminated basedon refinement procedure.Corresponding authorJeremy Galbreath can be contacted at: [email protected] does CSRbenefit firms?431To purchase reprints of this article please e-mail: [email protected] visit our web site for further details: www.emeraldinsight.com/reprints