Impacts of Firm Performance on Corporate Social Responsibility Practices: The Mediation Role of Corporate Governance in Ethiopia Corporate Business

1. Introduction

Surviving in a highly competitive market economy necessarily requires that companies focus on essential factors such as performance, governance, and social responsibility pressures for ever-increasing competitive advantages. Dynamic capabilities are the ability of a firm to combine, develop, and reconfigure external and internal expertise in order to respond to speedily changing environments [1]. Firms in similar industries perform differently because of various types of resources and capabilities [2], where the resource-based view of the organization looks at a firm’s unique, rare, and imitable resources that have created a competitive advantage and expanded growth [3]. Furthermore, the relationship between dynamic capabilities and organizational performance is positive [4].Firms are deploying a variety of significant equipment and reconfiguring business models to meet anticipated demands. The competitive advantages may be derived from firm-level resources and difficult-to-imitate corporate social responsibility actions. Corporate social responsibility (CSR) has emerged as a sustainable corporate strategy over the last few decades, whether through governmental regulation, consumer demand, or market conditions which continue to play an essential role in the global economic downturn [5]. CSR is receiving increasing attention from companies themselves, but also increasing attention from society as a whole [6].CSR is the practice of businesses incorporating social, economic, and environmental issues into their business operations and interactions with stakeholders [7]. CSR is also defined as companies’ concerns over their legal obligations towards society and environmental effects, which focus on sustainable development, public and environmental policy [8]. CSR is broadly defined as an approach to diminishing the negative consequences of corporate production, operation and ensuring society’s welfare and compassionate practices of businesses under pressure by owners and shareholders to improve profitability rather than build or preserve organizations [9]. Furthermore, CSR is a concept in which firms integrate social and environmental concerns into their business operations and interact with their voluntary and mandatory activities [10]. It is ethics, citizenship, good corporate governance, and others [11]. As the above literature shows, CSR has various concepts and contextual definitions. Therefore, to the extent that the CSR knowledge base is limited in terms of understanding, availability, and tacitness, CSR’s successful adoption commonly depends upon firms and countries developing capabilities. All these confirm that issues concerning CSR concepts are still being debated.Various researchers have explored the links between CSR and firm performance using diversified approaches. Some studies show mixed (positive, negative, or neutral) results regarding CSR and firm performance. CSR positively affects corporate performance for firms engaged in CSR, whereas firms’ social irresponsibility activities reduce their performance [12]. CSR positively and significantly influences a firms’ performance indicators, specifically return on assets (ROA), returns on equity (ROE), and earnings per share ratios [13]. Simultaneously, CSR dimensions (environment, customers, suppliers, employees, and social) relate positively to firms’ performance. CSR has a significant and positive association with firm performance [14], whereas the mediating effect of Chief Executive Officer (CEO) and ownership positively correlates to firms’ performance and ownership with CSR. Furthermore, CSR moderates significantly and positively between corporate governance and firms’ performance [15]. The firms fulfilling CSR would significantly impact firm performance [16]. According to the previous findings, there is a significant relationship between companies’ performance and their CSR [17]. The CSR not only boosts the company’s social value and reputation, but it also improves profitability and performance. Firm performance has a statistically significant impact on CSR, and companies with better financial performance also undertake more CSR practices [18].In contrast, CSR and financial performance may have a negative relationship. Firms disclose more information on CSR initiatives when they have lower returns on assets [19]; after controlling for the firms’ debt and size, highly levered firms are less profitable, and larger firms have higher profits. That is, there is no substantial relationship between CSR and corporate performance [20]. The causal relationships between CSR and financial performance reveal that greater social responsibility does not lead to better financial performance, and financial performance has a negative impact on corporate social responsibility [21]. The possible vice versa influence of company performance on CSR was found to have a mixed connection [22]. These findings revealed a positive association between operational dimensions of corporate social responsibility and firm performance, as well as a negative relationship between non-operational elements of corporate social responsibility and firm performance.

Hence, previous studies have yielded inconsistent results. While some outcomes appear plausible, others contradict one another and lead to different conclusions. Some of these studies used panel data, while others used survey data. There is a methodological gap in the use of research approach, sample, instruments, and models. Furthermore, most studies did not consider corporate governance as a mediating variable in depth and they did not mainly focus on the impact of firm performance towards CSR at the corporate or enterprise level.

Some literature analyzes the influence of firm performance, firms’ CSR practice, and CSR activities on firms’ value using descriptive modes from the selected study area context. The causal relationship between stakeholders and CSR execution has been examined [23]. These findings reveal that the environment, customer, shareholder, and community significantly affect CSR. Evidence of CSR practices, determinants, and challenges from theoretical and empirical lessons have been reviewed [24]. This study concluded that CSR centers should attempt to foster CSR and promote academic study, encouraging the private sector within the framework of responsible business practice that creates awareness. Furthermore, the CSR practices concerning the CSR triple bottom line and which focus on the people and planet perspectives have been explored [25]. These findings conclude that there is a lack of balanced CSR practice in environmental and social CSR aspects; there should be strong community engagement and effective public relations. CSR learning in selected firms has been investigated in a qualitative case study [26]. The findings showed that firms’ learning social responsibility is at the emergence stage with the state and foreign market pressure as critical motivators. While regulating environmental and labor conditions, the state offers incentives for higher economic responsibility of firms.

To summarize, the studies reviewed above show a severe limitation in focusing on the impacts of firm performance on CSR practice in the Ethiopia context. Because of this, there is room for more research into the relationship between firm performance, CSR practices, and corporate governance issues. No one has focused on how a firm’s performance affects CSR, taking into account corporate governance’s mediation role. Moreover, there are methodological gaps; most studies concentrate on descriptive methods rather than empirical approaches.

This paper proposes a framework to identify the impacts of firm performance on CSR using corporate governance’s mediation role. Furthermore, this study used a path model analysis combining a structural equation model (SEM). In the study area context, CSR’s problem lies at the company, the public, and the government level for which both are less aware of their roles, rights, and responsibilities. Ethiopia is far behind developed countries in terms of industrialization, firm performance, CSR awareness, and corporate governance. However, there is still a need to build awareness of CSR’s benefits for enterprises, corporate business companies, and stakeholders. Moreover, CSR has not yet been sufficiently implemented and studied in Amhara Region, Ethiopia; for this reason, firms are taking CSR as a liability instead of a source of long-term benefits for firms, public, and environment. Therefore, there is an intense interest in studying this critical issue and understanding enterprises’ socially responsible behavior in the selected study area. The impacts of firms’ performance on CSR adoption using corporate governance have still not been well exploited, and CSR is not successful. The difficulty of the corporate companies in CSR activities mainly relates to firms’ performance and corporate governance gaps. Thus, the deep-rooted problem becomes complicated, and the corporate companies have been exposed to critical challenges on their competitive advantage and CSR execution. These difficulties initiated and inspired the researcher to research this area. Hence, the study’s main objective is to identify the impacts of firms’ performance on CSR practice using the mediation role of corporate governance evidence from the Amhara Region corporate company, Ethiopia. The study also explores the impacts of firms’ performance, CSR, and corporate governance accordingly. Furthermore, this study tried to identify and address the following three primary research questions based on the stated objectives: (1) What is the influence of firm performance on corporate social responsibility practices? (2) How does the mediation role of corporate governance influence firms’ performance and CSR practice? (3) Is there a relationship between the impacts of firm performance, CSR, and corporate governance?

5. Conclusions

Companies have responsibilities towards society in the context of their business location and activities. As a result, corporate social responsibility (CSR) integrates social, economic, and environmental effects in their operations and the interaction with their anticipated stakeholders. Firms engage in CSR because they believe it will provide them with a competitive advantage. Hence, resource-based perspectives help to understand why firms to engage or do not engage in CSR activities and disclosure. From a resource aspect, CSR can be considered as generating both internal and external benefits. Firms that practice good social responsibility improve their external stakeholder connections as well as their employees’ motivation, morale, dedication, and loyalty. Investments in socially responsible activities may provide internal use by assisting companies in developing new resources and capabilities. In this regard, it is difficult to think about CSR practices that incorporate business companies without jointly considering the impacts of firm performance and corporate governance. Hence, this study tried to identify and address the three determined research questions based on the stated objectives: (1) What is the influence of firm performance on corporate social responsibility practice? (2) How does the mediation role of corporate governance influence firms’ performance and CSR practice? (3) Is there a relationship between the impacts of firm performance, CSR, and corporate governance?

According to the findings of this study, we conclude the theoretical implications as follows: CSR is a debatable issue, particularly in developing countries such as Ethiopia, including the study area, i.e., the Amhara region. As a result, firms’ performance, corporate governance, and CSR are two sides of one coin. The practice of CSR is determined depending on firms’ performance and the role of corporate governance. The research findings indicate that the outcome variable CSR is affected by firm performance, firm performance is influenced by corporate governance, and CSR is affected by the role of corporate governance with estimated factors of β = 0.956 ***, β = 0.841 ***, and β = 0.776 ***, significant at p-value < 0.05, respectively. Similarly, the indicator variables ROS, ROE, ROA, and liability on capital structure strongly and significantly influence the company’s performance. The indicator variables board, ownership, audit, and transparency positively and substantially affect corporate governance.

From the managerial point of view, the corporate firms’ performance and governance have no more conducive ground to focus on CSR due to the impacts of debt on capital structure and the lack of return on exited assets related to the performance and governance gaps. Most of the corporate assets rely on fixed asset expansion and purchasing obsolete fixed assets due to an inefficient management system. Most of the available fixed assets have no direct linkage with the ultimate goals of the corporation. The other inevitable problems are foreign currency and power supply problems. The supply chain problems with stockholders are other bottlenecks. This research recommends that the company should identify unproductive enterprises and outsource non-core services. The corporation should minimize the capital expense on fixed asset expansion instead of increasing creation of other profitable assets. The adoption of CSR values results from some pressures or regulations to bring impact on development. To solve foreign currency problems, the enterprises should focus on export-based production. The government should give a special intervention to supply power energy and the corporation itself should provide other options. This study proposes that TIRET corporate enterprises should restructure, merge, rebrand, and reconsider existing business models.

Limitations and Future Direction

The limitations of this study open up new research areas. The sample was taken from TIRET corporate business enterprises in Ethiopia’s Amhara region, which is one of the study’s limitations. The study could be expanded to include other state-owned and non-state-owned firms at the regional and national levels for future research. In addition, the study’s limitations can be seen in the context of CSR practices, the area of variable measurement, and the research objective scope.

This study proposes some future directions that take into account the potential synergistic effects of firm performance and CSR practices. The TIRET Corporation is currently a state-owned, monopoly, and non-competitive business sector. Due to its undistinguished ownership structure and monopoly practices, it does not play its expected role. To make use of social responsibility for better development, it needs increasing state intervention. At the corporate company level, all the 21 enterprises should be technology-based firms using advanced technology such as bitcoins to manage, evaluate, and sustain efficient operations rather than using a traditional manual system.

However, this research is significant. It adds to the CSR literature in the context of emerging economies. Firms, policymakers, and practitioners may take steps to improve CSR practices. Moreover, the contribution of this study on corporate social responsibility will fill gaps in the use of corporate governance as a mediator role between the impacts of firm performance and CSR practices, which other studies have not explored broadly.


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Written by Ethiotime1

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