CORPORATE SOCIAL RESPONSIBILITY AND EARNING MANAGEMENT OF OIL AND GAS FIRMS IN SOUTH-SOUTH NIGERIA
This research examined the effect of corporate social responsibility disclosure on financial performance using selected listed firms in Nigeria. The focus is on the quoted nonfinancial firms. That is, those firms not covered by Banks and other financial institutions Act of 1991 as amended. The lack of attention to corporate social responsibility disclosure has been called into question due to the recognition that corporate social responsibility is an increasingly important part of an organisation’s total value. The choice of looking at the non-financial firms is because experience has shown that they fall under the most socially sensitive firms, especially in environmental dimensions. The research’s specific objectives examined whether corporate social responsibility disclosure (proxied by Gifts and Donations, Employment of indigenous staff, and Environmental Activities) has an effect on Financial Performance (proxied by Earnings Per-Share, Return on Equity, Return on
Asset, and Share Price). Using data from 86 non-financial companies listed on the Nigerian Stock Exchange, within a time period of 22 years (1997 – 2018), hypotheses were developed and were subsequently analysed and tested using the Panel Least Square regression technique. Consequently, findings showed that Gifts and Donations has a positive significant effect on Financial Performance considering Share Price, Return on Assets, and Return on Equity, but showing no significant effect on Earnings per Share. Furthermore, Employment of Indigeneous Staff was seen to have a positive significant effect on Finacnial Performance considering Return on Assets, Return on Equity, and Eanings per Share, however, showing a negative significant effect on Share Price. Also, Environmental Activities was seen to have a positive significant effect on Financial Performance considering Share Price and Return on Equity, on the other hand showing a negative significant effect on Return on Assets and Earnings per Share. The study concludes that corporate social responsibility disclosure has significant impact on financial performance of quoted non-financial firms in Nigeria. This implies that increase in corporate social responsibility disclosure increases the financial performance of the firms. Based on these findings and conclusion, the study recommended among other things that; corporate social responsibility disclosure should be encouraged in order to improve the brand and image reputation of the companies. Consequently, there is a need for effective regulation of corporate social responsibility disclosure practices of companies in Nigeria. Hence, the need for external verification of corporate social responsibility claims as well as ascertaining the reliability and authenticity of corporate social responsibility disclosures representation in the accounting record. The study contributed to the existing body of knowledge as the study analysed components of the dependent and independent variables in arriving at more conclusive findings. The time period employed in the study (22 years) which is relatively long as against previous studies is a contribution to the existing body of knowledge.
1.1 Background to the Study
The increasing demand for companies to be socially responsible seems to have witnessed considerable perceptual divergences especially within the context of the stakeholdershareholder debate. The idea which underlies the “shareholder perspective” is that the only responsibility of managers is to serve the interests of shareholders in the best possible way using corporate resources to increase the wealth of the latter by seeking profits (Jensen, 2001). In contrast, the “stakeholder perspective” suggests that besides shareholders, other groups or constituents are affected by a company’s activities (such as employees or the local community), and have to be considered in managers’ decisions, and the shareholders (Werhane & Freeman, 1999). Corporate social responsibility disclosure (CSRD) has attracted much attention in the last three decades (Smith, 2003).
In 1929, the market crash on Wall Street led to the emergence of CSR (Lemus, 2016). The main goal and objective of CSR is to align social aspirations and compliance with governance in the business sector. CSR continues to drive small and large business enterprises by helping them achieve the status of a “good citizen”. For instance, small companies increase their social engagement activities. In Australia, the business sector found a mutual relationship between stakeholder and social capital theories. Ferrell, Fraedrich and Ferrel (2015) indicated that stakeholder theory was understood by three approaches such as normative, descriptive and instrumental. The normative approach deals with ethical guidelines. The descriptive approach suggests the importance of understanding a firm’s business behaviour in addressing business decision strategies. The instrumental approach embraces management and organization processes. According to
Sen and Cowley (2013), social capital theory, broadly speaking, refers to social values within the business environment. Therefore, research studies indicate that the CSR conceptual framework brings more alignment in small companies than in medium and larger enterprises (Sen & Cowley, 2013).
Corporate social responsibility (CSR) has gained wide recognition in different sectors of various economies worldwide. However, there are different perceptions of what corporate social responsibility entails. It was originally defined as the commitment to society beyond the economic and legal obligations with the aim of managing and augmenting the ramifications of their operations on the economy, environment and society ranging from firm to global scales. According to Geetika and Shukla (2017), the Triple Bottom Line concept (the 3Ps), People, Profit and Planet, are great determinants of the sustainability of an organized business. The 3Ps model enables an organized business to appreciate the long term significance of corporate social responsibility so that it can be embraced as a framework for facilitating profitability.
An efficient corporate governance framework will help in mitigating a recurrence of global financial crises such as the one that happened in East Asia in the late 90s as well as the American corporate scandals like the case of Enron, world.com and Anderson in 20012002 (Strandberg, 2005). Therefore, an efficient corporate governance and CSR framework will ensure that corporations act as good corporate citizens with regard to human rights, social responsibility and environmental sustainability. Conversely, Munisi and Randoy (2013) hinted that companies across sub-Saharan Africa partly implemented good governance practice.
In Nigeria, the role of corporations to reflect social responsibility and nation building is also defined by the goals and objectives of the National Economic Empowerment
Development Strategies (NEEDS) expressed in the provision of health care facilities, social welfare, employment, poverty reduction through skill acquisition and
Corporate Social Responsibility Disclosure (CSRD) refers to a company’s systematic disclosure or exposure of information on its social performance. The term social performance is understood in a broad sense and refers to social, environmental, and governance issues that are typically not covered by financial performance metrics. In contrast to Managerial Accounting, CSRDs primarily addres external stakeholders such as customers, investors, and the public. In absene of formal mandatory rules, CSRDs significantly vary in form (design, distribution, media, disclosing frequency, etc) and content (scope quality, etc) (Encyclopedia of CSR, 2013). In other words, it is a voluntary activity particularly in developing countries where at least there is no laws enforcing its practice and as such it will be interesting to appreciate which ompanies disclose information about social and encironemtnal activities and the extent of such disclosure (Coffie, Aboagye-Otchere & Musa, 2018).
CSRD can be defined as the information that a company discloses about its environmental impact and its relationship with its stakeholders by mans of relevant communication channels (Campbell, 2004; Gray, Javad, Power & Sinclair, 2001). It discloses information on what the firms have done for the sake of the community. It also shows the disclosure of firms’ action on what they have been contributing to the welfare of society and what they will do in the future for the welfare and interest of society. Usually the disclosure is disclosed in a social responsibility report and published in company’s website or annual report of public listed companies. CSRD is very important to company’s stakeholders. The stakeholders of the company always take note of the disclosure because it shows what the company plans to do, and have done for the welfare of society.
By the disclosure of CSR information, a firm addresses the information needs of stakeholders and provides a basis for dialogue between the firm and its stakeholders. As a critical avenue for stakeholder management, CSR disclosure shapes external perceptions of the firm, helps relevant stakeholders assess whether the firm is a good corporate citizen, and ultimately justifies the firm’s continued existence to its stakeholders. Geib and Strawser (2001) argued that a greater level of reporting was itself a form of social responsible behaviour. Branco and Rodrigues (2006) noted that Corporate Social Responsibility was seen as a source of competitive advantage and not as an end in itself. In effect, the concept of CSR has evolved from being regarded as detrimental to a company’s profitability to being considered as somehow benefiting the company as a whole, at least in the long run. Corporate social responsibility disclosure is basically divided into two: the mandatory disclosure and the voluntary disclosure. The mandatory disclosure is backed by law and practiced in the developed or western countries. Failure to disclose in these countries attracts statutory sanctions.
The voluntary disclosure on the other hand, is not backed by law. This means that companies that practice this type of disclosure are at liberty to disclose or not to disclose. And failure to disclose attracts no statutory penalties or sanctions. Most of the African nations practice the voluntary disclosure including Nigerian. This study therefore, is devoted to the voluntary disclosure, being carried out in Nigeria. The disclosure measures adopted in this study include: Gifts and donations (GD); Employment of indigenous staff (EIS); and Environmental activities (EA).
Gifts and donations (GD) is the amount of gifts and donations by the firm expressed in monetary terms. Employment of indigenous staff (EIS) is the ratio of number of indigenous staff employed by the firm to the total number of staff in the firm. While, Environmental activities (EA) is the total number of activities carried out by the firm to nurture and protect the environment expressed in monetary terms.
Corporate performance refers to how well an organization achieves its market-oriented and financial goals. Performance is the function of the ability of an organization to gain and manage its resources in several different ways to develop a competitive advantage.
According to Benjalux (2006), performance measures are the lifeblood of economic units since without them no decisions can be made. Financial performance measure is one of the important performance measures for economic units. Financial performance measures are used as indicators to evaluate the success of economic units in achieving stated strategies, objectives and critical success factors.
Specifically, CSR may signal to the market that the firm is socially and environmentally responsible, and may create goodwill for the firm thus leading to positive effects for firms’ financial performance. Bowen (2000), in this regard, explained that corporations engaged and reported their CSR activities in order to increase their social visibility and improve stakeholder relations as they create promotional opportunities for the firm. Furthermore, many CSR activities are made on the basis of presenting corporations in a positive light and providing reputation effects that improve how the organization is perceived. In addition, Roberts and Dowling (2002) explained that corporate social responsibility initiative could lead to a reputation advantage which could result to an improvement in investment trust, new market opportunities, and positive reactions on the capital market which could ultimately enhance organizations’ financial position.
The measures of financial performance used in this study are: Return on assets (ROA); Return on equity (ROE); Earnings per share (EPS); and Share price (SP). This study focuses on the quoted non-financial firms in Nigeria.
Return on assets (ROA) is equal to a fiscal year’s net income (after preferred stock dividends but before common stock dividends) divided by total assets. Return on equity
(ROE) is equal to a fiscal year’s net income (after preferred stock dividends but before common stock dividends) divided by total equity (excluding preferred shares), expressed as a percentage. Earnings per share (EPS) is the earnings after interest and taxes divided by total ordinary shares. Also known as price earnings ratio, it is measured by the stock price. While Share price (SP) is measured by price earnings ratio.
1.2 Statement of the Research Problem
The choice of the study for quoted non-financial companies was informed by the gaps created in previous studies in the area. This study was poised to fill those gaps. Firstly, so much that has been written on this subject area concentrated on the financial sector such as banks, insurance companies, other finance houses, etc Ehioghiren and Eneh (2019);
Oyewumi, Ogumeni and Oboh (2018); Wan and Muhammad (2016); Mahbuba and
Farzana (2013); El Mosaid and Boutti (2012); Amole, Adebiyi and Awolaja (2012); Keffas and Olulu-Briggs (2011); Abbott and Monsen (1979); Alexander and Buchholz (1978); Preston (1978); Vance (1975); Moskowitz (1972). But not much has been written that emphasised the non-financial sector of the economy.
Secondly, most of the researches conducted in this area adopted Corporate Social
Responsibility Disclosure (CSRD) and Financial Performance (FP) as single variables
Wakesa (2017); Babalola (2012); Matthew, Rebecca and Greg (2007); McWilliams and Siegel (2000).
Thirdly, most of the studies conducted in this area used small samples (from 1 – 10 samples); thus making the generalization of results to be unreliable and inconsistent,
Wekesa (2017); Seungwo, Junseok & Ahreum (2017); El Mosaid and Boutti (2012); Anderson and Frankle (1980); Ingram (1978); Preston (1978); Spicer (1978); Sturdivant amd Ginter (1977); Heinze (1976); Bowman and Haire (1975); Folger and Nutt (1975); Bragdon and Marlin (1972); Moskowitz (1972).
Fourthly, most of the researches in this area concentrated on Asian and European countries or developed nations such as Malaysia, China, India, Italy Bangledash, etc. Not much has been done in African countries, especially Nigeria, Wan and Muhammad (2016);
Mahbuba and Farzana (2013); Iqbal (2012); El Mosaid and Boutti (2012); Keffas and
Olulu-Briggs (2011); Abbott and Monsen (1979); Alexander and Buchholz (1978); Preston (1978); Vance (1975); Moskowitz (1972).
Finally, the time periods employed in the previous studies were too short (1 – 5 years),
Wekesa (2017); Seungwo Junseok and Ahreum (2017); Uweigbe and Egbide (2012); El Mosaid and Boutti (2012). This makes it necessary for further studies in this study area.
Based on the above gaps in this area of studies in Nigeria, this study attempts to carry out an investigation on corporate social responsibility disclosure (CSRD) and financial performance in selected quoted firms along several dimensions. These include further examination of CSRD using extended dimensions; large sample size, longer and more recent period of study and a wider coverage of industries.
1.3 Objectives of the study
The broad objective of this study was to ascertain the impact of corporate social responsibility disclosure (CSRD) on financial performance of selected quoted firms in Nigeria. The specific objectives were to:
- Examine whether gifts and donations (GD) has any significant impact on financial performance (FP) of selected quoted firms in Nigeria;
- Ascertain if employment of indigenous staff (EIS) has any significant effect on financial performance (FP) of selected quoted firms in Nigeria;
- Establish whether environmental activities (EA) have any significant impact on financial performance (FP) of selected quoted firms in Nigeria.
1.4 Research Questions
The following research questions were posed for the study:
- Does gifts and donations (GD) have any significant impact on financial performance (FP) of selected quoted firms in Nigeria?
- Does employment of indigenous staff (EIS) have any significant effect on financial performance (FP) of selected quoted firms in Nigeria?
- Do environmental activities (EA) have any significant impact on financial performance (FP) of selected quoted firms in Nigeria?
1.5 Hypotheses of the study
The following null hypotheses were formulated for the study:
Ho1: Gifts and donations (GD) has no significant impact on financial performance (FP) of selected quoted firms in Nigeria.
Ho2: Employment of indigenous staff (EIS) has no significant effect on financial performance (FP) of selected quoted firms in Nigeria.
Ho3: Environmental activities (EA) have no significant impact on financial performance
(FP) of selected quoted firms in Nigeria.
1.6 Significance of the study
This study will be beneficial to all aspects of economic units, that is, public limited companies, stakeholders, creditors, debtors, host communities, shareholders, investors, managers, employees, etc, and also the international community in areas of standardization of new improved formats for disclosure in companies using corporate social responsibility.
The relationship between CSR disclosure and corporate financial performance is important to both researchers and managers. A relationship between these variables could have a significant impact on how managers approach CSR, and whether their firms are likely to participate or not. A negative relationship might provide a warning to managers to think carefully when deciding on whether to undertake CSR (Cochran, 1984). This research adds to previous literatures by controlling variables that were pointed out in previous research papers. CSR is a new trend and always changing so, this research provides evidence of whether or not there is a relationship (positive or negative) between CSR disclosure and corporate financial performance in quoted non-financial companies.
This study will also be useful to communities especially those in the oil producing areas of Nigeria where a lot of social and environmental hazards have been unleashed on the people by the activities of the corporations which operate there. The study will also be useful to government and other regulatory agencies in the formulation of policies to foster CSR activities in Nigeria as most companies are not committed to their CSR obligations. The study will also be useful to other researchers who are interested in conducting further researches in this area by providing a good background for them. For managers, the empirical nature of this study will help them to examine how and in what proportion CSR activities impact on their corporate performance and also which corporate performance measure reacts more to CSR activity. These are very interesting issues for management.
1.7 Scope of the Study
This study examined the effect of corporate social responsibility disclosure on financial performance of selected quoted non-financial companies in Nigeria. Corporate social responsibility disclosure (CSRD) is proxied by gifts and donations (GD); employment of indigenous staff (EIS); and environmental activities (EA). Additionally, financial performance (FP) is proxied by Return on Equity (ROE); Return on Assets (ROA); earnings per share (EPS); and share price (SP). This study was restricted to the secondary data obtained from the published financial statements in the annual reports and accounts of the sampled companies whose shares were publically traded on the floor of the Nigerian Stock Exchange from 1997 to 2018 (22 years). The selected companies were: Afromedia,
Capital Hotel, Daar Communications, DN Tyre & Rubber, Ikeja Hotel, RT Briscoe,
Tantalizers, Tourist Company of Nigeria, Transcorp Hotels, University Press, Afrik
Pharmaceuticals, Ekocorp, Evans Medical, Fidson Healthcare, GlaxoSmithKline Nigeria,
Neimeth International Pharmaceuticals, Nigeria-German Chemicals, Pharma-Deko, Union
Diagnostic & Clinical Services, African Paints (Nigeria), Aluminum Extrusion Industries,
O.C. Gases Nigeria, Berger Paints, First Aluminum Nigeria, Meyer, Paints & Coatings
Manufactures, Port & Paints & Products Nigeria, Premier Paints, Thomas Wyatt Nigeria, Cadbury Nigeria, Champion Breweries, Dangote Flour Mills, Dangote Sugar Refinery, Flour Mills of Nigeria, FTN Cocoa Processor, Guinness Nigeria, Honeywell Flour Mill,
International Breweries, Livestock Feeds, McNichols, Morison Industries, Multi-Trex
Integrated Foods, Cascon Allied Industries, Nestle Nigeria, Nigerian Breweries, Nigerian
Enamelware, Northern Nigeria Flour Mills, Okomu Oil Palm, Presco, PZ Cussons Nigeria,
Nascon Allied Industries, Unilever Nigeria, Union Dicon Salt, Vitaform Nigeria, ABC Transport, A.G. Leventis Nigeria, Academy Press, Beta Glass Co, Cement Company of
Northern Nigeria, Dangote Cement, Global Spectrum Energy Services, Interlinked Technologies, John Holt, Julius Berger Nigeria, Studio Press (Nigeria), Red Star Express,
Lafarge Africa, SCOA Nigeria, Nigerian Aviation Handling Company, Trans-Nationwide Express, Tripple Gee & Co., UAC of Nigeria, Capital Oil, Conoil, Forte Oil, MRS Oil
Nigeria, Japaul Oil & Maritime Services, Total Nigeria, Seplat Petroleum Development,
Eterna, Anino International, Caverton Offshore Support Group, Africa Prudential Registrars, Computer Warehouse Group, Courteville Business Solutions, E-Tranzact International and Omatek Ventures.
1.8 Limitations of the Study
A considerable amount of effort went into writing this empirical research. However, some factors which were unavoidable contributed to limiting the study. Data were limited to only the disclosed information on CSR variables found in the financial statements and footnotes in the annual reports and accounts of the sampled companies. The data used were self-reported by the companies involved. Lack of universal standards for CSR disclosure may have limited the sample size of the companies involved. However, the study accomplished its objectives.
1.9 Definition of Operational Terms
Corporate social responsibility: These are responsibilities of companies or firms to their society or immediate environment.
Corporate social responsibility disclosure: This discloses information on what the firms have done for the sake of the community. It also shows the disclosure of firm’s action on what they have been contributing to the welfare of society and what they will do in the future for the welfare and interest of society.
Financial performance: Overall performance of an organization in relation to cash/money.
Earnings per share: This is the profit after preference share and taxation.
Employment of indigenous staff (EIS): Engagement of the indigenes of the host community in the services of the companies at all levels.
Environmental activities (EA): All actions/activities taken/to be taken in other to safeguard or protect the environment by the companies.
Gifts and Donations (GD): Quantifiable gifts and donations in monetary terms including community development activities by the companies.
Non-financial companies: Means all quoted companies on the Nigerian Stock Exchange excluding those that perform financial services such as banks, finance houses, insurance companies, etc. That is those companies not covered by Banks and other financial institutions Act (BOFIA) of 1991 as amended to date.
Return on assets: This is the profitability of a company in relation to its assets.
Return on equity: This is the profitability of a company based on the investment of the shareholders.