ETHICS AND THE PROFITABILITY OF ORGANISATIONS

The following article is based on my dissertation for the MBA of the University of Chester, taken through Global College Malta.

1.1.      Background to the research

Over the years, the ethical stance of organisations, motivated mainly by their Corporate Social Responsibility (CSR) approach to business, has been driven from distinct theories and approaches.

The conservative stance towards ethics and ethical considerations was expressed through Friedman (1970), who insisted that business should focus on achieving its objectives regardless of any ethical considerations since “the business of business is business”. It was argued, that the core competence (and hence the corporate responsibility) of the business was to maximise the return on any investment made by the organisation. Thus, any business’s effort which sought to be ethical in its performance was a direct cost to profitability, increasing the risk that the organisation would fail economically. An ethical approach was deemed to be a detractor to the freedom of the market that should otherwise be self-regulating. This stance was criticised by Mulligan (1986).

In contrast to Friedman (1970), various non-governmental organisations, consumer groups and scholars such as Winstanley and Woodall (2000) and Greenwood (2002) had always insisted that the standards of conducting business should constantly embrace ethical considerations. The absence of such an approach would create a tentative platform for corruption, poverty and lack of consideration to the environment. Such consequences would eventually demise the business continuity of an organisation in the long term. This approach became even more relevant following the financial and economic scandals that led to the global financial crises of 2008 (Cragg & Matten, 2011).

Therefore the importance of the ethical conduct of organisations inspired the origins of this research within a local context.

1.2.      Research question

In order to accentuate the importance of ethics in the modus operandi of organisations, the ethical stance of organisations - through their Corporate Social Responsibility (CSR) approach, was analysed and assessed in relation to their financial performance.

The study therefore intended to address the research question:

“Do Maltese organisations, that adopt CSR policies and initiatives, and hence retain an ethical stance towards business, have a better financial performance than others?”

The process adopted in this research attempted to unfold the extent as to how CSR was perceived by Maltese organisations that were traded on the Malta Stock Exchange and evaluated how these companies performed financially in correlation to their CSR initiatives or absence of such initiatives.

1.3.      Justification for the research

As previously stated, one of the indicators of ethical compliance is the organisational commitment to Corporate Social Responsibility.

There is a school of thought; that is contrasting in itself, that viewed the adoption of CSR policies and initiatives by organisations, as a medium to impact the financial performance of the organisation. The focused research on this area of study investigates whether such commitment to CSR initiatives does in reality impact the financial performance of organisations in Malta.

The outcome of the research was therefore intended to address the issue of the correlation of CSR and CFP (Corporate Financial Performance) with the intent to encourage more organisations to engage into this ethical stance.

1.4.      Outline methodology

The study aimed to address the research question by using the appropriate research approach and methodology.

Following thorough analysis of secondary data which was collected through the literature review; a quantitative research approach was used to collect the primary data of selected organisations and their outlook to CSR. The intention behind this was to identify the extent of these selected organisations’ commitment in the field, also in terms of the percentage of net profit invested in CSR initiatives.

Data of the financial performance of these organisations for the financial years covered within the period 2013-2017 was gathered. This data (in the form of Return on Assets - ROA) was extracted from the financial statements that are publicly available from the Malta Financial Services Authority (MFSA).

The variables i.e. quantum of CSR commitment, percentage of net profit invested in CSR initiatives and ROA were correlated through linear regression exercises to determine clarifications of the hypotheses and the research question presented in this study.

1.5.      Definitions

Within the context of this document, the following definitions shall apply:

Corporate Social Responsibility (CSR) – There are various definitions that have emerged from several researchers on the topic but within this context, CSR shall be defined as the initiatives that an organisation takes that would have relevant impact on its internal and external stakeholders.

Corporate Financial Performance (CFP) – Orlitzky et al (2003) and various researchers have measured three forms of CFP: the market, accounting and survey measurements. In the case of this research, the Return on Assets (ROA) shall be used as an indicator of the financial performance of an organisation.

2.  Literature review

2.1.      Introduction

This chapter provides an insight into the research conducted on ethics and in particular, a focus on the ethical stance exhibited by organisations through their commitment to CSR. This commitment requires any business to address the interests of its various internal and external stakeholders, including shareholders, employees, suppliers and customers amongst others.

The scope of this literature review is therefore to address the following main aspects:

(i)   An overview of ethical theories applied in a business context.

(ii) The effect of different cultures on the outlook towards business ethics within a global framework.

(iii) The effect of ethics on the performance of organisations with regards to profitability. Particular reference is made to Corporate Social Responsibility, being seen as the key performance indicator for compliance to ethical behaviour of organisations.

2.2.      Ethics within a business context

2.2.1.  Introduction

Although meta-analysis of ethics is fundamental to the subject of ethics from a philosophical perspective, the subject of ethics in business is generally defined as applied ethics. This thought behind this branch of ethics, projects the way in which businesses should operate within an ethical normative framework. The Theoretical Framework Normative ethics therefore provide the theory behind the foundations for moral principles, values and norms that are extracted in the form of codes of ethics to govern ethical behaviour in business transactions (Harris, 2007).

2.2.2.  Ethical theories

From a theoretical perspective, the normative framework addresses ethical dilemmas as they emerge. The understanding reveals that the moral principles of any specific social group are normative in the final analysis. Ethical theories in normative ethics are normally classified into three categories, depending on the focal points of the theory.

Solomon (1993) and Ko?yi?it et al (2016), identify two main branches of ethical theories; teleological and deontological theories. Teleological theories, also defined as consequentialist, are deemed to address the bearing of the consequences of action whilst deontological theories relate the duty to the morality of human actions. The third branch of ethical theories, relates to what is defined as virtue ethics where emphasis is placed on the character and the virtue of the person undertaking the act. (Wang, Cheney, & Roper, 2016).

2.3.      Cultures and Ethics in a Globalised Business Context

Initial drive towards deregulation within the European free market, as also requested by the WTO (World Trade Organisation) on a global scale, had opened ways to compromise on ethical considerations in lieu of business needs (Storey & Sisson, 1993). This approach facilitated the collapse of the financial markets in 2008. When there is a harsh global competitive environment, many organisations are tempted to take unorthodox and unethical paths in order to reduce costs and remain competitive. Recent scandals that emerged in this millennium, exposed shocking exploitation of children through hard labour by major and respectful organisations, with the intention to reduce their costs as part of the product procurement processes.

In the research related to Business Ethics, Sahu (2016) indicates that globalisation, liberalisation of the market and privatisation trends of organisations have changed the manner of doing business due to the introduction of innovation in business processes which has simplified business transactions on a global level. However, Sahu (2016) also notes that by opening up to a world of opportunities, this can open the doors to possible unethical behaviour through crimes, scams, corruption, abuse of human capital and other ethical concerns that become more pronounced and harder to identify and control. On this argument, more investment is required in business ethics by organisations, as these ethical considerations have a negative impact on various aspects of the organisation (Sahu, 2016).

This perception is further reinforced by Painter-Morland and Ten Bos (2011). In their argument, globalisation is a challenging issue not just because of the disagreement with regards to its definition but also because it offers ethical and political challenges through cultural differences. The challenges evolve around unfair trading practices, environmental considerations such as global warming and social exclusion resulting from unethical economic processes. Painter-Morland and Ten Bos (2011) indicate that scholars and practitioners have endeavoured to develop codes of conducts for organisations with the intention to improve the ethical stance of organisations. Their research however, indicates that the financial crises of 2008 highlighted the mistrust in multinational corporations’ willingness to comply with ethical practices when conducting business transactions. Furthermore, the link between culture and the perception of ethics is also highlighted. (Painter-Morland & Bos, 2011).

In the context of globalisation, cultural relativism emerges as one of the major problems of business ethicists in cross cultural trading. This raises the question as to how organisations are able to control the conduct of suppliers, particularly across borders or even further, across continents. Cheap labour implies cheap production costs and hence cheaper products. This lucrative idea is totally unethical to commit to but nevertheless, in scenarios of cut-throat competition - especially in international markets, had become an inviting solution for many organisations to maximise their profits. In this setting, De George (1993) emphasises that just as there are universal social moral norms against murder and in favour of honesty and respect for property of other individuals, there are also universal norms for honouring business contracts. This implies the exercise of fairness in all business transactions, the absence of which would otherwise undermine the efficiency of the business transaction process that is fundamental for a globalised market.

In contrast with the arguments above, although Stark (1993) acknowledges an exceptional drive of theoretical ethical awareness in academia and textbooks, he questions the relevance of ethics to managers in business processes. This challenge is not attributed to the lack of managers’ willingness to achieve compliance to an ethical stance but to the fact that ethical codes of conduct do not necessarily address or provide the tools to address real life ethical dilemmas due to the fact that the ethical principles, in these codes, are deemed to be too abstract. Furthermore, within an ever increasing highly competitive global context, managers are facing many instances where economic pressures impose a challenge to ethical compliance. A particular observation that comes out from the study is that ethics is not about doing the right things but doing things better without necessarily acting ethically to increase the organisational performance but because of good moral conduct (Stark, 1993).

2.4.      Business Ethics and profitability – a world of contrasts

2.4.1.  Introduction

Ethics has been the subject of considerable academic research. The unethical behaviour exhibited by organisations such as, Lehman Brothers, Enron and WorldCom had given rise to mistrust in the business processes that govern the interrelationship between the various stakeholders in the marketplace and heightened the need to address ethical considerations in business transactions.

This concept was also sustained by Donaldson and Fafaliou (2003) in their critique of Business ethics, corporate social responsibility and corporate governance. Although they acknowledge that in these last decades there has been a drive towards business ethics and CSR, they identify contrasting groups that challenge their relevance to organisations within a business context.

2.4.2.  Promoters of Business Ethics and increased profitability

Volkov (2011) declares that organisations that follow ethical processes within their business functions are more profitable because of greater employees’ productivity, more talented human capital and lower turnover of employees due to better working conditions. Furthermore, this is sustained by a more positive consumers’ perception of the organisation as well as that of its investors. It also encourages reputable vendors and suppliers to select to do business with the organisation. Volkov (2011) acknowledges the fact that the correlation between the ethical stance of an organisation and its profitability was initially not recognised as being vital to the long term profitability of the organisation. He argues, however, that modern organisational leadership sees compliance to ethical principles as a fundamental element to the organisation’s sustainability and hence, its increase in profitability. Good governance is now sought as being a core competence for any organisation (Volkov, 2011).

Research by the British Institute of Business Ethics (IBE) assessed four financial performance indicators of a sample of FTSE 350 firms. From this sample, it was concluded that there was “strong indicative evidence” that organisations are more profitable because of their effective ethical organisational culture since such a culture induces efficiency leading to better performance of the organisation within the market and hence increased profitability (Webley & More, 2007). However, it is noted from the study, that more research was needed in this area to actually identify those organisations that successfully implemented an ethical organisational culture.

The research made by Ethisphere, which is an independent research centre for the promotion of best practices in corporate ethics and compliance, indicated that an ethical organisation looks towards promoting ethics amongst all its stakeholders. These organisations therefore seek to be leaders in the marketplace with their philosophy of doing business entrenched in the prevailing ethical principles of good and sustainable business conduct. The full exposure of organisations especially to the new phenomenon of social media implies that unethical behaviour is exposed rapidly amongst stakeholders. Therefore, the behaviour of an organisation is, nowadays, carefully and consciously orchestrated to avoid any negative publicity from the power and reactions of the media, particularly that of social media (White, 2014)

Bowman & Haire (1975) as well as Waddock & Graves, (1997) also argued that Corporate Social Performance (CSP) and hence CSR, are strongly related to Corporate Financial Performance (CFP), which indicates that good management of an organisation is correlated to social responsibility.

Furthermore, Prahalad and Hammel (1994) identified that strategic decisions were not only influenced by financial factors and industry driven influences, but were also incorporated within social and environmental aspects. The concept of Corporate Social Responsibility has been associated to business ethics by many scholars. Caroll (1991) described CSR as the concept that manages the expectations that society has towards the organisation with regards to ethical, socio-economical and legal aspects. Furthermore, Valentine and Fieischman (2008) stated that organisations which are deemed to exercise corporate social responsibility are also perceived as being ethical organisations.

Although some organisations view ethical compliance in business processes as an additional cost, McMurrian et al (2016) declared that the ethical stance of any organisation adds value to all its stakeholders, increasing the profitability thereby improving the financial performance and hence the sustainability of the organisation.

CSR can therefore be considered as a framework that would allow an organisation, irrespective of size and nature of its core business, to operate responsibly and consequently in an ethical manner. This arises from the fact that no business can be seen in isolation and that the operations and approach to business of any organisation is expected to influence its surrounding community. Moreover, the European Union accentuates the fact that any organisation does not need to adopt a fully developed CSR programme to be effective, but instead, the implementation of CSR principles in various phases of the business, which are sufficiently structured to be manageable, would create the necessary benefits for the organisation from the aspect of operational efficiency and brand imaging. This would eventually have an impact as an improved profitability (Bank of Valletta, 2014).

2.4.3.  Critics of Business Ethics and increased profitability

Much of the initial research on the subject of the correlation between Business ethics and profitability started in the early 1990s. Increased research activity was noticed as a reaction to the Enron and WorldCom accounting scandals. Subsequently the Sarbanes-Oxley Act (SOX) was introduced in July 2002 to bring about more accountability and compliance to ethical principles in business trading, resulting in good governance as sought to be the core competence of any organisation. There was however split debate on the effectiveness of the legislative provisions in the SOX, as many argued that the newly imposed checks and balances where increasing costs to the organisations and therefore its relevance was put in doubt by certain critics (Shahid & Garneau, 2009).

John White (2014) in an article that relates to the perceived conflict between business ethics and profit maximisation, taps into his professional experience to emphasise that although the vast majority of organisations choose to conduct business ethically, there are still organisations that opt to maximise their profit through unethical ways, through processes and actions which are not necessarily illegal. This reinforces the notion of ‘doing things right’ as opposed to the core concept of ethical conduct that is ‘doing the right things’. Compliance to a legal framework does not therefore guarantee compliance to a morally correct stance and hence ethical behaviour.

Robins (2015) in his article regarding the link between profitability and Corporate Social Responsibility (CSR), refers to a survey carried out by the Economist Intelligence Unit (EIU) in 2008 regarding the sustainability and profitability of businesses. The survey indicates that the ethical stance of ‘corporate citizenship’ (CC) (which is the term used for CSR) taken by many organisations, has become the source of the business sustainability and increase in profitability. The survey highlights, though, the difficulties experienced by organisations, to actually justify the link between ethical compliance and increase in profitability since ethics is a set of abstract actions and notions which are difficult to measure. This raises the question as to whether the ethical aspect of CSR or CC does actually contribute factually to the well-being of an organisation with regards to its profitability or is merely morally influencing its internal and external stakeholders. This positive moral impact does not necessarily translate in additional turnover or profitability or else the correlation is weak (Robins, 2015).

This was also confirmed by an independent research paper by Baron et al (2009) where they investigated the economics and politics behind CSR. The empirical research identified that although from a Business to Consumer perspective, an ethical stance of the organisation helps profitability, not the same thing could be said with regards to Business-to-Business transactions.

The research work of Vance (1975) and Lopez et al. (2007), however, showed that there is a negative correlation between Corporate Social Responsibility and Corporate Financial Performance, concluding that socially responsible firms were not a good investment. Vance’s work challenged the earlier conclusions from the work of Moskowitz (1972) who derived a strong correlation between the independent variable of CSR and the dependent variable of CFP (Corporate financial performance). However, Moskowitz’s (1972) methodology was flawed as the conclusions were derived from the analysis of 14 organisations that were deemed to be socially responsible.  Moskowitz did not justify the selection of these organisations and therefore created a bias in his research (Vance, 1975) .  .

The correlation between the variables was also researched by Abbott and Monsen (1979) who reviewed the annual financial reports of the Fortune 500 list, and classified the organisations into high and low social responsible groups. Following the analysis of the data of each group’s profitability, they concluded that there was minimal difference between the organisations, in term of financial performance.

Brenkert (1992) argued that the adoption of CSR by private organisations was an act of concession by society. For this reason, society was deemed to divest itself from the opportunities to address social issues but rather allow this initiative to be taken in hand by privately owned organisations.

2.5.      Literature gap

As observed from the literature review described in this chapter, there is extensive literature that addresses the correlation of CSR and CFP on the international scenario. However, no literature was identified that would indicate that quantitative-based research was made to confirm whether there is any relation between the adoption of CSR policies and initiatives by organisations and the consequence on the financial performance within a local scenario. CSR is only perceived as a concept and therefore the application of CSR initiatives are still in their infancy. In 2013, PricewaterhouseCoopers (PwC) conducted a survey amongst large organisations in Malta with the intent to bring awareness to the CSR concept and principles (Sammut & De Marco, 2013). This survey however did not address the correlation to profitability.

Furthermore, in 2015, the GRTU - Malta Chamber for SMEs launched a national platform CORE – (Corporate Citizenship for Responsible Enterprises) to introduce the concept of Corporate Social Responsibility based on the activities of SMEs in Malta. Since 94% of the business in Malta derives from SMEs, the platform was intended to provide the support network for SMEs to allow them to fulfil their CSR ambitions with the intent to bring social wealth for the community. At the same time, the motive was to ensure business continuity and improved financial performance for the SMEs. Since this time, no further research has been done in this regard.

Therefore, the main purpose of this study is to address this research gap by determining any possible correlation between CSR and CFP for organisation operating within the local perspective giving rise to the following two contrasting hypotheses:

Hypothesis 1: Maltese organisations that are engaged in ethical conduct (through the adoption of CSR policies and initiatives) are deemed to have a better financial performance than others.

Hypothesis 2: Ethical conduct in business transactions is not deemed to be relevant to enhance financial performance of Maltese organisations.

3.  Methodology

3.1.      Introduction

The aim of this chapter is to identify the approach that was adopted for defining the research strategy and methodology whilst distinguishing the reasoning behind such selections. The research was inspired by similar studies conducted in the field of correlation of CSR to the financial performance of organisations. This chapter initiates by conceptualising CSR through the application of the stakeholder theory.

1.2.      Conceptualisation of CSR and its relation to profitability

Due to the multifaceted and dynamic nature of the socio-economic environment faced by globalisation, the conceptualisation of CSR was more susceptible to the organisation’s internal and external stakeholders and  hence this suggested the need for ongoing stakeholder management. Hence the conceptualisation of CSR through Stakeholder theory became more prominent. The expectations of consumers, suppliers, the community, the government and the environment aspects that are influenced by the organisation together with the shareholders/investors and employees needed to be managed.

On these principles, in their research within the Cypriot business context, Papasolomou et al. (2005) reasoned that the different stakeholders of an organisation are affected or tend to affect the organisation, leading therefore to the notion of assigned responsibilities imposed on the various stakeholder groups within the conceptualisation of CSR. The CSR initiatives of the various stakeholder groups were identified as shown in the table 1 below. The same conceptualised approach was used in this research to operationalise CSR.

Table 1: CSR actions vis-à-vis key stakeholders Papasolomou et al. (2005)

Source: Papasolomou et al. (2005)

3.3.      Research philosophy

Figure 1: Saunders et al (2009) research onion

Source: Mark Saunders, Philip Lewis and Adrian Thornhill 2008

Referring to Saunders et al’s (2009) Research Onion shown in Fig. 1, the outermost layer is the Research Philosophy and the philosophy taken in this research is Positivism.

As a philosophy, Positivism relates to the view that only objective knowledge gained through scientific means such as observations or measurement is deemed to be reliable. In the Positivist stance, the role of any researcher is confined to the collection of data and then the manipulation of this data through an objective approach, making therefore the research findings observable and quantifiable.

It follows that Positivism lends itself to quantifiable observations that can be subjected to statistical analysis to determine correlation between the variables being observed.

Furthermore, in Positivism research studies, the researcher is independent from the study and there is no interaction with the subject implying that the researcher needs to focus on the facts (Collins, 2010).

1.4.      Research approach

There are two distinct approaches in which a research study can be conducted. The research approach can either be deductive or inductive in nature. Depending on the selection of the approach, the purpose and scope of the research would differ (Saunders, Lewis, & Thornhill, 2009).

Hyde (2000) identifies that a deductive approach would mean that the research is being based on established theories with the intent to examine whether the theories still apply within the context of a given research. The deductive approach is most commonly associated with quantitative research (Hyde, 2000). It can, however, also be associated with qualitative research or a combination of both, according to Saunders et al (2009).

Furthermore, quantitative research involves numbers and statistical measurements that assist in finding any correlation between different variables (Saunders, Lewis, & Thornhill, 2009).

In the deductive process, Robson (2011) indicates five steps that constitute the process and these are identified as being:

? The identification of a verifiable hypothesis based on existing theories.

? The operationalisation of the hypothesis by accurately defining variables into measurable factors.

? Testing the hypothesis.

? Acceptance or rejection of the hypothesis depending on the outcome of the tests.

? Applying the results to the existing theory to identify whether revisions are needed

In contrast, the inductive approach to research is based on observations from the real world which, consequently, form the basis of the theory. The inductive approach is applied mainly in qualitative research (Bryman & Bell, 2011) and therefore not considered adequate for this research project.

The analysis of the relationship between CSR and an organisation’s financial performance involves manipulation of statistical data. Hence a quantitative analysis through a deductive approach was deemed to be the most appropriate (Bryman & Bell, 2011). A deductive approach was further justified as being adequate since the research was based on existing theories and compared to the results from studies conducted by other researchers in the field (Saunders, Lewis, & Thornhill, 2009).

1.5.      Research Design

For any study, the research design illustrates how the investigation shall be conducted. This would include the methods used to collect primary data and clear identification of the instruments that would be utilised in the analyses of the data gathered.

Descriptive research emphasises the comprehensive descriptions of social phenomena, experiences and situations. Exploratory research investigates uncharted occurrences or new research areas. Explanatory Research aims to ascertain the casual effect of determining how variables interact and therefore how a variable can cause a change in another variable (Saunders, Lewis, & Thornhill, 2009).

Since the objective of this research was to assess the relationship between CSR (as an indicator for ethical behaviour) and the financial performance of an organisation, then linear regression analysis was used. Linear regression analysis essentially investigates the relationship between two or more variables, two of the variables, the independent variables, were in this case, the CSR commitment and the percentage of the net profit invested in CSR and the financial performance, expressed through the ROA, was therefore the dependent variable. Hence, this research design approach was aimed at establishing and analysing the relationship, interdependence or association of at least two or more variables of a given situation or occurrence (Kumar, 2006).

1.6.      Research Strategy and Methodology

1.6.1.  Operationalisation and measurement of CSR

As stated in the Chapter two, in Malta, CSR as a concept and therefore the application of such CSR initiatives are still in their infancy and hence, as also confirmed by Mr. George Sammut (Advisory partner- consulting) of PricewaterhouseCoopers (PwC), in Malta there is little standardised CSR reporting as is found abroad. Hence “it would be challenging to correlate the two variables i.e. CSR and profitability without establishing a practical methodology” – Sammut (2017).

In order to be able to correlate CSR and profitability of companies in Malta, the CSR commitment of Maltese organisations needed to be identified on an appropriate index and then correlated to the profitability of the organisations which, according to the literature review, is mostly expressed through ROA. For this purpose, a questionnaire was issued to the various organisations traded on the Malta Stock Exchange, using surveymonkey.com. The reason for limiting the list of organisations to those traded on the Stock Exchange emanated from the fact that these organisations are seen to be more susceptible to their external stakeholders than other organisations that are not publicly traded.

The organisations were given the choice to access the questionnaire either via a web link or through an e-mail always sent out from surveymonkey.com.

Those organisations that preferred the web link option remained anonymous to the researcher as their identity was totally concealed. Those that replied to the survey through the e-mail invitation had no restraints to indicate their identity.

Figure 2 : Collectors from surveymonkey.com

The questionnaire was split into the following section:

·        Section 1 – GENERAL - consisted of general questions to identify the firms in the different industries and evaluate their capacity with regards to human capital and turnover.

·        Section 2 – CURRENT PRACTICES - consisted of a number of questions intended to assess how many respondents of the survey were actually aware of Corporate Social Responsibility, whether they did take an interest in implementing CSR practices and which initiatives were implemented by the organisation. The respondents had to select from a list of thirty six (36) initiatives that were identified through the conceptualised model of CSR based on the stakeholder approach.

During the analysis of data, the 36 initiatives were translated onto an index of 0-12 such that ‘0’ meant no initiatives undertaken; ‘12’ implied all initiatives were undertaken. Consequently, each set of 3 initiatives were considered equivalent to 1 point on the 0-12 index. The respondents’ replies regarding the selected initiatives acted as a surrogate to indicate the organisational commitment to CSR and scaled accordingly.

Using the mathematical formula:

X = (B/C) × A

Where      A = 12 (maximum score on the index)

            B = number of initiatives (out of 36) taken by the organisation

            C = 36 (maximum number of possible initiatives)

           X = number of initiatives taken, converted onto the index

In the analysis, the organisations were then grouped into low (0 to 6.9), high (7 to 12) commitment to CSR according to their score. Any organisation that achieved a score of 6.9 or less was considered as forming part of the low commitment group whilst above this score was considered a higher commitment.

·        Section 3 - REGULATION, COMPLIANCE AND DISCLOSURE - This section assessed the level of regulation that organisations need to comply with and/or the take-up of standards in the environmental and social fields. It also sought to understand whether organisation tended to disclose their CSR efforts.

·        Section 4 - FINANCIAL COMMITMENT AND PERFORMANCE - This section was intended to assess the financial commitment of the organisation towards Corporate Social Responsibility practices and initiatives as well as the perceived results in terms of financial performance. In this section the organisations were asked to give advice on their observations with regards to the accounting parameter ROA over the 2013-2017 financial years.

The format of the questionnaire was inspired from the original work conducted by PricewaterhouseCoopers (PwC) in 2013.

1.6.2.  Measuring Financial Performance

In the research community there is no real compromise as to what parameters are considered as viable gauges of the financial performance of an organisation (Cochran & Wood, 1984).

Various researchers have utilised mainly three categories of financial indicators. Accounting and profitability based measures such as Return on Assets (ROA) where employed by Aupperle et al (1985), Russo et al. (1997) and Tang et al. (2012).

Cochran & Wood (1984), Waddock & Graves, (1997); Preston & O’Brannon, (1997); Lee et al., (2009); Cavaco & Crifo, (2014); Saeidi et al. (2015), based their assessment on a combination of various other accounting variables such as excess market valuation (excess value - EV) and profit margins.

Other evaluation approaches involve the use of market based assessments such as the stock market performance or market value (Alexander & Buchholz, 1978); (Brammer, Brooks, & Pavelin, 2006); (Martinez-Ferrero & Valeriano, 2015) or a combination of both accounting variables and market measures (McGuire, Sundgren, & Schneeweis, 1988). However, McGuire et al. (1988) and Orlitzky et al (2003) point out that there is a stronger correlation of accounting based parameters to CSR rather than market based parameters.

In this research, financial performance was therefore determined through the assessment of the accounting based parameter which is the Return on Assets (ROA) for the financial years 2013-2017.

ROA = Net Profit ÷ Average Total Assets x100%

This value is normally expressed as a percentage but for the purpose of the linear regression analysis, its absolute value was considered.

The information related to the ROA for the organisations considered in this research was extracted in two ways. One way was to consult the financial reports that are filed with Malta Financial Services Authority (MFSA). The respondents to the questionnaires were asked to personally identify or pinpoint the trend of the ROA parameter over the period covering the financial years from 2013 to 2017. It is important to note that the year 2013 was not chosen arbitrarily but because it was the year where in Malta there was a change in Government and the new Labour Government introduced aggressive financial measures to stimulate the economy resulting in a nearly 6% economic growth over four years.

1.6.3.  Multiple and Simple Linear Regression

This research utilised multiple and simple linear regression models, by using Microsoft Excel, in order to examine the correlation between independent variables and dependent variables. CSR commitment expressed through adoption of initiatives and percentage of net profit invested in CSR initiatives were consider as the independent variables. The dependent variable was the financial accounting factor ROA. Regression analysis is commonly used as a statistical tool to measure relation between independent and dependent variables (Yan & Su, 2009). The technique also illustrates the trending relationship between the variables, whether positive or negative, as well as the strength of the correlation.

ROA = ?x (Quantum of CSR initiatives, % of net profit invested in CSR)

This regression analysis and the primary data analysis provided the conclusions for the Hypotheses indicated earlier in this text.

Simple linear regression was also used to investigate the strength of the correlation between the individual independent variables and the dependent variable.

Hence: ROA = ?x (Quantum of CSR initiatives)

And: ROA = ?x (% of net profit invested in CSR)

1.7.      Sampling

Sampling techniques are methods to determine a minimum number of participants from a population from which data needs to be gathered in order to achieve the objectives of the research (Saunders, Lewis, & Thornhill, 2009).

Simple random sampling, which is commonly referred to as random sampling, is the simplest and most basic probability sampling strategy. In random sampling, each member of the population has an equal chance and probability to be selected as part of the sample, just as any other participant. Hence random sampling eliminates any possible bias from the selection process and therefore this results in a more representative sample.

At present there are fifty (50) organisations that are traded on the Malta Stock Exchange. These organisations come from various industry sectors. These companies are deemed to be leading enterprises within the local scenario, either due to their turnover or number of employees or dominance in the sector they operate or a combination of all or multiple of the parameters indicated.

By using a simple random sampling technique, with an online sample calculator from surveymonkey.com and assuming the following parameters:

·        Confidence Level:  95%

·        Confidence Interval:           5%

·        Population:  50

The sample size was determined to be: 45 **

**using a conservative response distribution of 50%.

Due to the limited time available for this research, the researcher could not expand the study to cover a larger number of organisations. If more time was available, rather than going for the organisations that are traded on the stock exchange, the study would have covered more small and medium enterprises that constitute an extensive portion of Malta’s economic activity.

1.8.      Validity and Reliability 

The principles of the validity and reliability of any research are fundamental within the context of achieving meaningful and appropriate results that are able to support the interpretation of the data.

Issuing the first draft of the questionnaire as a pilot attempt was fundamental to determine whether there were any incongruences in the questions raised that would have led to a flawed result or discouraging response either due to the nature of the questions posed or due to the timeframe within which the questions could be addressed.

Furthermore there are a number of factors that might have influenced the outcome of the result of this research especially in the scaling of CSR initiatives. These factors include consideration of local business oriented organisations against multi-national structures, size of the organisation, risk factors associated with the industry it operates in and economic growth of the country. As already indicated, Malta has registered a high economic growth rate over the last four years and this might have been a distorting factor. However, given that the researcher is considering a percentage of the net profit rather than actual figures when it comes to determining the commitment of organisations to CSR, then this should counterbalance the size and structure bias; the risk factors associated with the industries being sought are relatively contained due to heavy regulation in the various sectors and given that the economic growth had a positive effect across all sectors, this biasing effect is therefore neutralised since all organisation would have been subjected to the same possibilities of economic growth.

1.9.      Ethical considerations in the research

An important aspect of any research is the ethical considerations that need to be taken into account during data collection. The commonly ethical issues addressed relate to the fact that any research should not provoke harm to the participants, expose the participants to an invasion of their privacy or provide any form of deception. This therefore leads to the requirement of informed consent from the participants about the full research process (Bryman & Bell, 2011).

The ethical issues concerning the use of secondary data for this research might be considered as difficult to determine as it involves the manipulation of data that is collective in nature and available from the public domain (Saunders, Lewis, & Thornhill, 2009).

There are, however, ethical considerations that may need to be noted when manipulating the secondary data in the way not originally intended or that could lead to possible legal infringements and rights to access such data for the purpose of the research from a public domain without informing the owners of this data (Bryman & Bell, 2011).

The data in the financial statements of the organisations participants to the survey were readily available on-line through the MFSA website and hence no ethical dilemmas should emerge. However, the researcher still felt duty bound to inform these organisations about the intent to use such data from the financial statements to be able to extract information about the financial performance of the organisations. In view of this ethical stance taken by the researcher, most of the organisations collaborated to the extent that they provided the information, about their financial performance directly to the researcher, thus facilitating the process of acquiring the said information.