Stakeholder Influence on CSR Strategies: Impact on Reputation in Firms

Abstract

Firms develop corporate social responsibility (CSR) strategies for many reasons.  One important reason is to build a reputation that is often influenced by the perception of stakeholders. CSR has been studied to determine many outcomes relative to the goals of the company and used to primarily increase profits. Managers use these goals framed on the values and morals of stakeholders to meet their expectations. These stakeholders are viewed from the perspective of the subgroups; primary and secondary. Using stakeholder theory, I will identify which stakeholder group impacts the strategies planned and implemented by firms to produce favorable perceptions. I will also show how these influences mitigate or build reputation, a valuable intangible asset to the firm.

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Introduction

Social concerns have become an important part of the development of a company’s corporate social responsibility (CSR) strategies. Firms are guided by these strategies using the conceptual framework described as “four kinds of social responsibilities constitute total CSR: economic, legal, ethical and philanthropic” (Carroll, 1991:40). This framework is used to develop and support CSR strategies which are often designed to address environmental concerns, social policies, community involvement, and consumer safety issues (Roberts, 1992).

Developing strong CSR strategies create an opportunity to partner with stakeholders who may develop a positive perception of the company’s image based on how social issues are addressed and create advanced positioning against competitors (Yoon, Canli & Schwartz, 2006; Du, Bhattacharya & Sen, 2007). Stakeholders are “any group or individual who can affect or is affected by the achievement of the organization’s objectives” (Freeman, 1984: 46).

There has been a considerable amount of research that has given attention to the operational definition of CSR. Studies have explored whether CSR activities should be voluntary, legal or both (Sethi, 1975). Research has also shown that firms utilize their CSR initiatives to gain a positive reputation (Fombrun & Shanely, 1990) from stakeholders. Literature supports the unique position of influence stakeholders have over a company and how accountability is measured when responding to obligations and responsibilities of CSR practices. Failure to meet the expectations of this group could result in the demise of the firm’s structure (Clarkson, 1995).

Stakeholders are divided into subgroups known as primary and secondary stakeholders. Stakeholders with objectives, rights, expectations, and responsibilities within the company are known as primary stakeholders. This group possesses some sort of stake in the company that could be at risk depending on the company’s decisions (Clarkson, 1995). Secondary stakeholders do not have as strong of an influence as primary stakeholders yet are still noted to be important to the firm. Secondary stakeholders can influence the organization’s activities while being influenced by the firm’s actions simultaneously (Clarkson, 1995). There is limited research on which stakeholder deserves the most attention (Clarkson, 1995) and how the stakeholder’s perception, form a firm’s reputation. (Siltaoja, 2006). Few studies have investigated how to develop and implement CSR strategies within the firm (Vlachos, Panagopoulos & Rapp, 2013), and which initiatives best support reputation before and after any public negative exposure (Maon, Lindgreen & Swaen, 2009).

Using stakeholder theory, this paper will examine how CSR strategies that address non-economic social issues, impact reputation and which stakeholder influence these strategies to mitigate or build reputation in SMEs. SMEs have a greater ability at responding to stakeholders who are mostly less concerned with institutional requirements which lead to greater advantage to profiting from their reputation (Sarbutts, 2003).

In the present study, I will describe the framework for CSR and explore which stakeholder influence the strategies developed and implemented by managing decision-makers to improve reputation. These strategies will address social issues implemented by the firm before or after any negative public exposure. When a firm is prosocial, consumers trust their CSR activities and supports strong and positive reactions (Yoon, Canili & Schwartz, 2006; Morsing & Schultz, 2006) to strengthen the relationships between stakeholders.

Literature Review

The idea of CSR has expanded since the early 1900s from businessmen taking on an ethical responsibility in society to developed policies that guide actions to satisfy company stakeholders. Social responsibility is referred to as “the obligations of businessmen to pursue those policies, to make those decisions, or to follow those lines of actions which are desirable in terms of the objectives and values of our society” (Bowen, 1953: 6).

CSR concepts are constantly being integrated into organizations to reunite society and business (De Roeck & Farooq, 2018). Research on CSR indicates that 68% of all CEOs commit to CSR because they believe it is a necessary plan to have in place (Kiron, Kruschwitz, Haanes & Velken, 2012). Instances of negative attention drawn from actions or behaviors within the firm affect the firm’s reputation (Sirsly & Lvina, 2016). This is especially true where the impact is derived from individuals such as CEOs and managers (Vlachos, Panagopoulos & Rapp, 2013).

Strategy scholars who focus on reputation have recognized it to be a valuable intangible asset that firms could use to remain at a competitive advantage (Barney, 1991; Cramer & Ruefli, 1994; Shamma, 2012).  Literature has also highlighted how organizations use CSR initiatives to regain legitimacy. These initiatives are used to build reputations and mitigate threats; yet there is a lack of clear guidelines for both practitioners and academics to follow when deciding which CSR activities should be communicated (Vanhamme & Grobben, 2009).  Academic scholars and practitioners continue to realize the importance of understanding the effect CSR has on various aspects of the firm.

Developing strategies on how to use CSR to gain a competitive advantage consistently over time, is a focal point for managers that supports the efforts of advancing a positive reputation of the firm (Mahon & Wartick, 2003).  When this is done, managers succeed at achieving not only protection when encountering negative publicity, but other benefits include increasing profits. This is essential to the success of a company since a positive reputation leads to competitive advantage (Barney, 1991).

With the constant changes and shifts that guide the norms of society and the business environment, implementing CSR strategies could also support the alignment of organizations (Maon et al., 2009). Managers must make decisions that align with the socially constructed system that is guided by the beliefs and values of stakeholders (Suchman, 1995). Practitioners agree that investing in CSR practices will benefit the company’s bottom line but there is still a need to understand “how” these strategies should be implemented (Du, Bhattacharya, & Sen, 2011). Training may also be considered to further expand knowledge in understanding ways to explore implementation. Learning various context about CSR could move firms closer to meeting stakeholder expectations (Maon et al., 2009) which is also in the development of CSR practices.

Planning, developing and implementing strategies are most effective when organizations include both top and middle managers. The decision-making skills of middle managers serve as an impactful contribution to firms when conveying information and implementing strategies planned and developed by top managers and managers leading strategic operations. (Ren & Guo, 2011). However, the literature on CSR strategy tends to overlook how middle managers contribute to implementing strategic decisions made by top managers (Waldman, Siegel, & Javidan, 2006). Research on the impact of managerial decision making directly related to CSR actions continues to be an area for future research (Wood, 1991).

CSR initiatives impact reputation in many ways yet literature lacks guidelines on how firms should protect their reputation. Research supports the inclusion of advancing initiatives towards succeeding at achieving a good reputation (Fombrun, 1996).  Fombrun’s view on reputation research identifies the need for more focus on how firms can use CSR strategies to influence reputation by examining performance measurements. Strategies should be revisited to reflect new norms that are formed to shape, develop and influence the perception of stakeholders (Mahon & Wartick, 2003).

It is important to understand how CSR initiatives that address social issues such as a firm’s commitment to charitable contributions to causes that address the welfare of the community or society at large, have a strong implication on reputation (Du et al., 2010). Having a positive reputation is a valuable-asset and favorable perceptions can be leveraged for reputation (Deephouse, 2000). Managers with the responsibility of planning and implementing CSR initiatives often view social issues and stakeholder concerns as having the same issues. It is important for firms to recognize that social issues are a concern of how firms treat their consumers, employees and how their business affects the environment and community in which they operate in (Clarkson, 1995).

In the event that a firm fails to meet the expectation of a stakeholder who values social issues, guidelines lack how the influence of CSR in crises should be addressed (Vanhamme & Grobben, 2009) and therefore poses as another gap when reputation is not considered an asset and often ignored until it becomes susceptible negative perception (Fombrun & Van Riel, 1997).

Mahon and Wartick (2003) found that reputation research focused on improving and defending an organization’s competitive advantage to maintain a positive position with stakeholders when wrongdoings are publicly exposed. (Mahon & Wartick, 2003). CSR programs used to develop or improve reputation are noted as a disruption to a firm’s financial stability. The possibility of benefiting from strategic outcomes while minimizing a company’s negative reputation is described to be limited at best (Sarbutts, 2003). These two thoughts make the need for more CSR strategies and reputational research timely and essential to the current body of CSR literature for both practitioners and academics.

Stakeholders

Stakeholder management is a distinct area of literature that should be addressed with CSR and reputation. Reputation with stakeholders continues to be a significant factor when managing the reputation of an organization (Mahon & Wartick, 2003). CSR help drive the reputation of an organization and managers have the distinct challenge of deciding which stakeholder should receive the most attention (Carroll, 1991). Stakeholders can view a firm’s CSR activities in several ways. Firstly, when a firm engages in CSR, stakeholders can view their actions as exhibiting good character. Secondly, the firm’s actions could be interrupted as hypocritical and of bad character (Godfrey, Merrill & Hansen, 2009),

In the event of a crisis- situation, stakeholders hold a strong position in the development and consequences of reputation (Mahon & Wartick, 2003). This is based on how they can influence CSR strategies.  Understanding which stakeholder requires the most attention continues to be important for academics and practitioners alike. Stakeholder management examines this gap between the relationship of the firm and both primary and secondary stakeholders. However, it is not clear as to which stakeholder to focus on for the development of an impactful CSR strategy that positively influences reputation by both primary and secondary stakeholders.

Primary stakeholders are individuals or groups who are relevant to the firm’s survival and share risks based on the decisions made by company managers. This group includes creditors, long-term customers, employees, investors, shareholders and suppliers (Clarkson, 1995; Mitchell, Agle & Wood, 1997). Government is considered a public stakeholder group that enforces laws and regulations essential to the firm’s existence.

Secondary stakeholders are not engaged in nor are at risk by a firm’s decisions or CSR activities.  Media, government regulators, competitors and groups with a special interest such as activist who have the power of guiding public opinion are among this group. (Clarkson, 1995).  Having this type of power also leaves the opportunity for this group to shape and influence the demands of primary stakeholders. Secondary stakeholders should be managed with caution as they can potentially damage the relationships between the firm and their primary stakeholders (Mahon & Wartick, 2003).

Business practices confirm the idea that reputation can be built on communicated CSR activities that address social issues. These activities can support, guard and maintain a company’s image in the event of any public exposure of wrongdoings (Vanhamme & Grobben, 2009).  A company’s reputation is assessed by their commitments and performance in sociopolitical environments as perceived by stakeholders (Brown & Logsdon, 1999).

Reputation

Reputation is relatively understudied because it is often ignored until firms encounter negative exposure from wrongdoing (Fombrun & Van Riel, 1997).  To build a reputation, firms must recognize and value it as an asset and use the perception of their stakeholders to guide the development of strategies to maintain competitive (Sirsly & Lvina, 2016). Other benefits that enhance creditability that managers could consider using when developing strategies to increase reputation, is that it makes the public aware of causes and actions the firm support. This entail shows support of multiple stakeholder interests (Shamma, 2012).

A firm’s commitment to socially performing and the importance of protecting the asset leading to a favorable reputation is limited (Sirsly & Lvina, 2016).  While stakeholder needs, values, and interests guide the strategy of the firm, the stakeholder’s perception of the firm is guided by the firm’s ability to act socially responsible (Fombrun & Van Riel, 2004). Several factors could interfere with how a firm’s reputation is threatened. Managers must consider these factors when establishing CSR strategies to address these issues. They include: a firm’s size, the industry the firm falls in according to CSR monitoring sources, the culture of the firm, adapting to and adhering to regulations and laws, owner and leadership structure and media exposure (Cappozzi, 2005).

CSR engagement requires managers to be more aware of stakeholder expectations (Morsing & Schultz, 2006). Balancing efforts to maximize economic return on behalf of shareholders, engaging in community-based development projects, while protecting the values and ethical responsibility of the firm and each stakeholder is the challenge managers face when determining which stakeholder is the key asset to the organization. (Waldman et. al., 2006).

Research on CSR has used the stakeholder framework to support its functions.  The stakeholder framework is used to provide data for both practitioners and academics. It supports financial and non-financial, information to evaluate stakeholder satisfaction before and after CSR activities are implemented (Clarkson, 1995).  The stakeholder conceptual framework has moved into other areas of research such as stakeholders and value-creation (Morsing & Schultz, 2006). The use and development of this framework continue to be essential for CSR research.

Institutional theory is another theory that can be used to describe the relationship between firms and stakeholders. This theory helps firms to recognize their ability to seek legitimacy while explaining the motivation behind how a firm responds to societal demands (Scott, 2008).  Organizations who look to behave accordingly when they face pressures to conform under societal conditions use this theory (Oliver, 1991).  CSR is used to control society’s perception of their attempts to legitimize the firm’s behavior (Young & Makhija, 2014).

Theory Development

This study will be building upon the existing stakeholder theory. Freeman (1984:46) defines a stakeholder as “any group or individual who can affect or is affected by the achievement of the organization’s objectives proved to be untenable”.  Using stakeholder theory would be relevant to this study because of the influence both primary and secondary stakeholders bring to organizations.  Integrating stakeholder theory and CSR activities is supported in the strategy stream of literature (Roberts, 1992). Stakeholder theory is foundational for mangers when making decisions (Waldman et al., 2006). The theory also covers the many dimensions of the Carroll (1991) four-part principal components of CSR that guide companies to build a foundation on making a profit, while being ethical, a good citizen and following the law.

The uniqueness of stakeholder theory is that it leaves room for managers to explore morals and values as the principal focus when making managerial decisions (Phillips, Freeman, & Wicks, 2003). The theoretical work of the theory guide practitioners and researchers into discovering various ways to align strategies with stakeholders while framing issues or problems that may pose as a threat to their reputation (Mahon & Wartick, 2003).  Freeman (1984) view on the stakeholder was to imply that they are an important element to strategy for managers to consider. Although stakeholder theory is criticized for allowing managers to act on their own self-interest rather than the benefit of stakeholders (Phillips et. al, 2003) the theory continues to be the foundation of addressing ways to manage stakeholders.

Theoretical Model

The theoretical model for this study contains three constructs (1) CSR strategies are the independent variable developed as a result of managerial decisions. The strategies will address social issues that will explain the importance of having plans in place to mitigate threats to increase reputation as perceived by stakeholders. These strategies include engaging in social, political and government regulations (Mahon & Wartick, 2003).

(2) Stakeholders are the moderator that influences the relationship between both the independent and dependent variables.  Managing the perception of stakeholders help firms meet expectations and establish commitments to those who have the power to influence reputation.   (3) Reputation is the dependent variable. Reputation causes firms to focus on strategizing to develop ways to enhance their products or services, to strengthen their image and legitimacy perceived by stakeholders overall driving profitable goals.

The measurement of reputation is aggregated to include identity, an image perceived by stakeholders (Wartick, 2002) and attached to the financial performance of the firm. If firms do not meet the expectations of stakeholders, implement CSR strategies based on these expectations, the firm could be met with the consequences of a damaged reputation. The firm’s image could also be damaged if the stakeholder sense that the motives for these strategies are not authentic to the company’s true ethical values (Yoon et al., 2006).

Hypotheses

CSR strategies support and guide public opinion (Ensen, 2013) and when stakeholder exchanges fail, reputation is impaired (Love & Kraatz, 2017). Managerial decisions must address those stakeholders whose values and interests directly reflect the importance of those social issues (Wood, 1991).  Reputation is a combination of several ways in which firms attract stakeholders (Van Riel & Fombrun, 2007).

H1: Corporate reputation is increased when managers implement CSR strategies addressing social issues.

Primary stakeholders are employees, customers, creditors, suppliers and shareholders (Clarkson, 1995).  CSR strategies are planned and implemented based on the values and morals of primary stakeholders. The expectation of primary stakeholders is becoming more essential to firms causing them to act more socially responsible (Kim & Kim, 2010). These expectations include lending to philanthropic causes, supporting equal rights, contributing to educational or health awareness campaigns and goodwill towards employees, consumers and public policy that supports the welfare for all (Waldman et al., 2006; Fombrun & Shanley, 1990).

H2: Corporate reputation increased when CSR strategies were moderated by the influence of primary stakeholders.

Secondary stakeholders include activists or special interest groups, media, and government (Mitchell et al., 1997). CSR strategies are planned and implemented based on the values and morals of secondary stakeholders.  Although secondary stakeholders do not embody the power of the primary stakeholder, they control influence bilaterally as they both influence and are influenced by the activities of the firm (Magness, 2008).

H3a: Corporate reputation increased when CSR strategies addressing social issues were moderated by the influence of secondary stakeholders.

CSR strategies were planned and implemented based on the values and morals of secondary stakeholders. The media act as a catalyst for disseminating information and re-evaluating a firm’s actions, by conveying information through various outlets (Fombrun & Shanley, 1990). An example of this would be media scrutiny harming a firm’s reputation.

H3b: Corporate reputation decreased when CSR strategies were moderated by the influence of Secondary stakeholders.

Research Design and Methods

The research design will be a quantitative study using content analysis method. Quantitative research is often used to examine societies, institutions, and groups (Siltaoja, 2006). “Content analysis describe cultural model groups, institutions, and societies to reveal the social attachments of individuals, groups, and institutions” (Siltaoja, 2006:97).  Quantitative research design can make inferences about relationships among variables.  The quantitative research method is used to collect data to predict analysis at a higher-level (Aguinis & Glavas, 2012). The main constructs for this study are CSR strategy, stakeholders, and reputation.

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This study will look at the process of analyzing reputation that is developed over time. The influence of both primary and secondary stakeholders will measure a firm’s reputation before CSR strategies on social issues are in place and after. The aim is to identify the linkage between CSR strategies, and the influence of stakeholders when measured by reputation. It will also seek to dismiss the notion that consumers are uninterested in the sincerity of a company’s development and initiation of CSR strategies to be perceived in a more favorable manner (Yoon et. al, 2006).

Sample

The level of analysis will be organizational, and the population survey will consist of the top 100 firms ranked by revenue on Fortune’s World’s Most Admired Companies (MAC). The MAC measurement is most commonly used when measuring reputation (Sirsly & Lvina, 2016; Love & Kraatz, 2017; Shamma, 2012). The 8 ratings on key attributes used are innovation, people management, use of corporate assets, quality of management, financial soundness, long-term investment value, quality of products/services and global competitiveness (Sirsly & Lvina, 2016). These key attributes are important both to a firm’s success in achieving economic goals and how stakeholders perceive their efforts which directly affects reputation.

The best companies are ranked by financial analysts and executives who were surveyed and rated their industry (Love, Lim & Bednar, 2017; Shamma, 2012) using a scale 0 as the lowest to 10 as the highest. Managers perceive stakeholders to consider power, legitimacy, and urgency to be three areas of importance when viewing a company as reputable.  Social and financial performance data collected from CEOs also agree with the importance of these same three areas to build a more committed relationship with their stakeholders (Harrison & Freeman, 1999).  Managers understand that financial performance connects the relationship between CSR and reputation (Esen, 2013).

CSR will be measured by Kinder, Lydenberg, Domini and Co., Inc. (KLD). KLD is a self -reported database using ratings from seven categories to include: community, government, diversity, employee relations, environment, human rights and products (Sirsly & Lvina, 2016). Stakeholder groups will be measured by survey using a 7-point Likert scale where 1=strongly disagree and 7=strongly agree. Data from the four components of CSR referenced in Carroll (1979) will be used which determines the economic, ethical, legal and discretionary responsibilities of firms.

Controlled variables

To isolate the reputational effects of the stakeholder groups, several control variables were used. First, it was established whether the company had a CSR strategy and corporate communication manager in place to respond to social issues to effectively communicate their position to each stakeholder group. Secondly, the firm’s CSR historical performance was measured to establish each stakeholder’s perception. Third, the number of both positive and negative press releases that guided the perception of primary and secondary stakeholders was established. Finally, the study controlled for the firm size focusing only on Fortune 500 companies.

Methods

To establish these results, Hierarchal Linear Modeling (HLM) will be used for the purpose of prediction because it best analyzes the structure of variables used in this research.  It is an ordinary least square (OLS) regression-based analysis that uses the data of groups or units to finalize results. Other methods used are case studies (Harrison & Freeman, 1999). Case studies would be ideal when studying CSR since it is a conceptual framework and there is still a need for solid theory. Since reputation can change over time, cross-sectional time-series regression is also an option to use as a method (Hsiao, 2014).

Explanation of Constructs

Results

Firms who plan, implement and participate in CSR activities positively affect reputation. CSR strategies directly affect the reputation of a firm and can positively direct the opinion of stakeholders to manage reputational threats. Based on the expectations of stakeholders, CSR programs should be improved to increase reputation (Esen, 2013). The study analyzed the linkage between CSR initiatives addressing social issues and reputation based on the perception of stakeholders. The results indicate that the samples in the study could be viewed as bias.  Fortune Reputation Index has been criticized for not being a reliable measurement tool for reputation (Bromley, 2002; Mahon, 2002).

Planned and implemented CSR strategies addressing social issues developed a positive perception between organizations and primary stakeholders that can affect a firm’s reputation while considering both primary and secondary stakeholders equally.  When CSR strategies were planned and implemented based on the values and morals of secondary stakeholders produced a negative perception from secondary stakeholders whose morals and values were considered after primary stakeholders.  Secondary stakeholders are said to be the influencers of primary stakeholders because of their direct impact on outcomes, should not be misjudged (Mahon & Wartick, 2003).

Discussion

87% of conscious consumers respond favorably to firms that have sustainable CSR initiatives in place (Cone Corporate Citizenship Study, 2017). These initiatives are perceived to be genuine and innately established within the core of the firm’s DNA by stakeholders.  Carroll (1991) four principal components of CSR, established a foundation for firms to follow when attempting to implement strategies to do good in the eyes of their stakeholders. Stakeholders became a powerful and recognizable need for managers to consider when making decisions on how to embrace social issues.  Other advantages of implementing CSR initiatives is to reduce employee retention, increases competitiveness within and purchase intention within the industry (Carroll, 1991). This study focused on the linkage between CSR and reputation. The purpose was to identify stakeholders t