臺大管理論叢 NTU Management Review VOL.30 NO.2

The Effect of Corporate Social Responsibility Performance on Financial Risk 258 1. Introduction Since 1999, when United Nations Secretary General Kofi Annan first proposed the UN Global Compact, many multinational companies have participated in the compact and approved of the compact’s stated goal of upholding ten corporate social responsibility (CSR) related principles. Entrepreneurs and institutions around the world are placing a steadily increasing emphasis on CSR or Socially Responsible Investments (SRI). In 2004, more than 80% of corporations whose stocks are included in the FTSE 100 index, reported CSR within their annual reports (Idowu and Towler, 2004). According to the World Business Council for Sustainability and Development (WBCSD), “CSR is the continuing commitment by businesses to contribute to economic development while improving the quality of life of the workforce and their families as well as of the community and society at large.” Furthermore, SRI assumes, in effect, that corporate responsibility and societal concerns are valid parts of an investment process and take into account both the given investor’s financial needs and a given investment’s impact on society. As a result, SRI investors can affect corporate behavior and encourage corporations to improve their practices with regard to environmental, social, and governance issues. The increased levels of CSR reporting and activities in recent years have raised a question among some researchers: Are the reports of CSR activities and the CSR activities themselves beneficial to firms? This is especially important to ask when a firm effectively lowers its own profits in order to conform to its social and environmental goals. Is a firm’s goal to maximize shareholder value (the shareholder approach) or stakeholder value (the stakeholder approach)? Under the shareholder approach, a firm’s goal is to maximize shareholder value or profit. However, due to the existence of externalities, this profit-maximizing behavior does not necessarily imply the maximization of social welfare (Renneboog, Ter Horst, and Zhang, 2007). Under the stakeholder approach, managers must consider the interests of all stakeholders (including employees, customers, the community, the environment, and so forth) and attempt to maximize their aggregate welfare. Using this approach, a firm may not maximize its own profit since there is a conflict between maximizing profit and maximizing social welfare. Nevertheless, at the same time, as Jensen (2001) notes, “We cannot maximize the long-term market value of an organization if we ignore or mistreat any important constituency (stakeholder).” Prior studies examining the issues that affect companies engaging in CSR activities or CSR disclosures can be categorized by having one or more of seven main themes: