Introduction
This paper examines how the various forms of social performance and types of business engagements influence the relationship between the social performance and corporate reputation of the firms operating in different industrial sectors. In the recent past, the modern literature of management and organization science has witnessed a proliferation of conceptual and empirical work in the areas of corporate social responsibility (CSR), social responsiveness behavior, corporate social values, and corporate reputation (Podolny, Reference Podolny1993, Reference Podolny1994; Fombrun, Reference Fombrun1996; McWilliams & Siegel, Reference McWilliams and Siegel2000; Hillman & Keim, Reference Hillman and Keim2001; Ali, Lynch, Melewar, & Jin, Reference Ali, Lynch, Melewar and Jin2014). The literature has paid particular attention to the relationships among CSR, corporate reputation, and corporate financial performance (Fombrun & Shanley, Reference Fombrun1990; Griffin & Mahon, Reference Griffin and Mahon1997; Waddock & Graves, Reference Waddock and Graves1997; Roberts & Dowling, Reference Roberts and Dowling2002). Extended studies conducted in this context also examined CSR and corporate reputation against consumer perceptions of product quality (Milgrom & Roberts, Reference Milgrom and Roberts1986; Sen & Bhattacharya, Reference Sen and Bhattacharya2001), employee morale, productivity, recruitment, and retention (Moskowitz, Reference Moskowitz1972; Turban & Greening, Reference Turban and Greening1996; Turban & Cable, Reference Turban and Cable2003), company ownership characteristics (Fombrun & Shanley, Reference Fombrun1990; Johnson & Greening, Reference Johnson and Greening1999), and access to capital (Cochran & Wood, Reference Cochran and Wood1984; Hart, Reference Hart1995). Despite such a plethora of studies in both CSR and corporate reputation, until recently there has been very little systematic research in exploring the possible association between the two against the backdrop of firm and industry-level variables. Moreover, predominantly all such studies were conducted in the context of the USA or European countries that may not be appropriate to explain the cases of the emerging economies.
It was evident that a few earlier studies identified a close relationship between corporate reputational capital and social responsibility (McGuire, Sundgren, & Schneeweiss, Reference McGuire, Sundgren and Schneeweiss1988; Fryxell & Wang, Reference Fryxell and Wang1994) with a strong emphasis on demonstrating the meaning of reputational indices. These studies added a different dimension to the ongoing debate by concluding that a firm’s reputation as measured by the Fortune was primarily the reflection of a firm’s financial performance (Fryxell & Wang, Reference Fryxell and Wang1994). A seminal empirical study by Fombrun and Shanley (Reference Fombrun1990) provided evidence that social responsiveness measured by the degree of corporate charitable donations coupled with separately endowed corporate charitable foundation, were positively associated with corporate reputation. Williams and Barrett (Reference Williams and Barrett2000) provided empirical evidence in support of the observed relationship between corporate philanthropy and firm reputation. Moreover, the analysis in their study confirmed that the connection between philanthropy and reputation was stronger for the firms, which frequently violated occupational health, safety, and environmental regulations. They explained this phenomenon by forwarding their view that, among other things, charitable giving could partially salvage a firm’s reputation after it has been exposed to external agents by committing some sort of actions that were detrimental to the public good and the common interest of both direct and indirect stakeholders (Williams & Barrett, Reference Williams and Barrett2000). This observation opened up a new perspective of academic inquiry of examining the role of industry type and business activities of the subsequent group of researchers in the domain of social performance and firm reputation.
The theory building and practice literature in this area would remain incomplete without establishing the moderating role of the industry type and the forms of social performance demonstrated by the firms. This paper empirically analyzed the relationship between corporate reputation and a firm’s social performance moderated by a number of organizational control variables for a variety of firms operating in India representing different industrial sectors. This study made a few specific contributions directly attributed to this area of research. First, although the relationship between a firm’s social and financial performance has been adequately explored in the recent past; firm’s reputation as an upshot of its social performance has been understudied except for a few including Porter and Kramer (Reference Porter and Kramer2002) and Brammer and Pavelin (Reference Brammer and Pavelin2006). Second, this study made special attempt to capture the effect of sectoral variations and different forms of social responsiveness activities undertaken by the firms with the help of a host of organizationally relevant variables across 11 different industries in the Indian context. Third, with the mandate of having compulsory CSR compliance from 2013 onwards for the profit-making firms operating in India; this study would enable the top and senior management teams of companies located in India to re-examine the corporate visibility strategies in relation to the firm’s external agents. Further, this study was necessitated in view of the absence of any such applied research work undertaken in the context of emerging economies, especially in the South Asian countries in the recent past. Hence, both from the perspective of theory building and organizational practice this study adds to the existing body of knowledge by adopting a meaningful and pragmatic approach to the identified research questions.
A Compositional View Of Corporate Reputation
Corporate reputation
The reputation has been defined as ‘a perceptual representation of a company’s past actions and future prospects that describe the firm’s overall appeal to all its key constituents when compared with other leading rivals’ (Fombrun, Reference Fombrun1996: 72). A careful interpretation of this definition revealed that it highlighted the aggregate or summative nature of corporate reputation concerning the perceptions of a host of individual stakeholders. Fombrun (Reference Fombrun and Shanley2001) provided the diverse perspectives of corporate reputation. It is the result of corporate branding in the area of marketing. As per the agency theory, it is a pledge that justifies and promotes expectations of a principal about the actions and behaviors of the agent. It is equivalent to goodwill in financial accounting. It is reflected as corporate identity in the field of organization theory. It acts as a potential market entry barrier in the domain of strategic management. Further, Fombrun and Shanley (Reference Fombrun1990) reiterated that external stakeholders construct reputation on the basis of information about firms’ relative positions within organizational fields. They explicated that the publics do so by using market and accounting signals indicating performance, institutional signals indicating conformity to social norms, and strategy signals indicating strategic posture. Long back Spence (Reference Spence1974) interpreted reputation as an outcome of the process in which firms signal their key characteristics to constituents in order to enhance its social position. Simon (Reference Simon1985) forwarded that reputation is the result of satisfying experiences with a company’s products. A number of scholars, including Weigelt and Camerer (Reference Weigelt and Camerer1988), Miller and Chen (Reference Miller and Chen1996), Buskens (Reference Buskens1999), and Dukerich and Carter (Reference Dukerich and Carter2000) explained that reputation is a set of attributes ascribed to a firm inferred from its past actions and behaviors. The firm’s reputation can also be perceived and formed on direct experiences as well as processed communication messages (Hall, Reference Hall1992; Dozier, Reference Dozier1993). Therefore, it is evident that corporate reputation is the overall estimation of a firm by its stakeholders expressed by the demonstrative behaviors to its customers, employees, investors, business partners, and general public.
In analogue, an assortment of definitions of CSR emphasized a voluntary involvement in the solution of a variety of social issues (European Commission, 2001; McWilliams & Siegel, Reference McWilliams and Siegel2001). The firm’s social responsiveness as a research construct was viewed as multidimensional embedded into a large and varied range of corporate social behaviors channelized through resources, processes, and outputs (Carroll, Reference Carroll1979; Wood, Reference Wood1991; Waddock & Graves, Reference Waddock and Graves1997). Thus, the firms that are desirous of establishing a high degree of social responsibility have to undertake a diverse range of activities in areas like corporate philanthropy, reduction of environmental impacts, and a host of employee well-being schemes including a safe and hazard free work ambience. Eventually, each of these areas would have a separate identifiable impact on firm reputation. Likewise, different stakeholder groups have different expectations regarding firm behavior (Fombrun & Shanley, Reference Fombrun1990; Ali et al., Reference Ali, Lynch, Melewar and Jin2014; Soleimani, Schneper, & Newburry, Reference Soleimani, Schneper and Newburry2014), and the prominence of each stakeholder group varies across industrial sectors. Therefore, the impact of corporate social activism on firm reputation jointly depends on the type of corporate social activity undertaken, and the industrial sector the firm is primarily associated with. This discussion facilitates setting the background of this paper in the sense that the effect of a firm’s social performance on its reputation can be determined by the conjoint interaction of the firm’s industry-specific attributes and the type of corporate social activities the firm is engaged in.
The three most widely employed frames of reference of corporate reputation were derived from the institutional theory, resource-based theory, and signaling theory (Walker, Reference Walker2010). The institutional theory identifies the factors present within the organizational context, enabling to build up corporate reputation. The resource-based view explains the outcome of corporate reputation as a valuable and rare resource leading to sustainable competitive advantage. Finally, the signaling theory interprets the impact of the strategic signals sent out by the firms on the stakeholder group especially in the context of its social responsiveness. Corporate reputation and its determinants have been studied by scholars from diverse academic disciplines like strategy, organization theory, business ethics, psychology, and sociology. These studies showed that reputation assessments were associated with a number of attributes varied in nature. They included the quality of a firm’s product (Rindova et al., 2005), financial performance (Gabbioneta, Ravasi, & Mazzola, Reference Gabbioneta, Ravasi and Mazzola2007; Tischer & Hilderbrandt, Reference Tischer and Hilderbrandt2013), social responsiveness (Fombrun & Shanley Reference Fombrun1990), esteem (Hall Reference Hall1992), and trust (Walsh, Mitchell, Jackson, & Beatty, Reference Walsh, Mitchell, Jackson and Beatty2009; Helm, Reference Helm2010). To begin with, Fombrun and Shanley’s seminal model hypothesized that corporate reputations are summative representations of stakeholders’ views of the firms’ ability in meeting their expectations in a legitimate manner (Fombrun & Shanley, Reference Fombrun1990). Brammer and Pavelin (Reference Brammer and Pavelin2006) forwarded that a firm’s current reputation is determined by the stakeholders’ perception about its code of conduct, organizational behaviors, and practices derived directly from the firm or received through other channels like the media or the stock market. In addition, as stakeholders are expected to have diverse preferences over firm actions, process, and outcomes; reputational assessments would also depend on the congruity between the apparent behaviors of the firm and the preferences of the public (Fombrun & Shanley, Reference Fombrun1990; Brammer & Pavelin, Reference Brammer and Pavelin2006; Sur & Sirsly, Reference Sur and Sirsly2013; Ali et al., Reference Ali, Lynch, Melewar and Jin2014). Fombrun and Shanley (Reference Fombrun1990) further clarified that the external agents (outsiders) could differently interpret various types of signals that they received about the firm, and it would likely to influence their perceptions of the firm. Such signals vary according to whether they originate within or outside the company, and with respect to the type of information they contain. Musteen, Dutta, and Kemmerer (Reference Musteen, Dutta and Kemmerer2010) found that the board characteristics significantly influenced the corporate reputation by the business community. Further, their study indicated that the firms with a large board size having a higher proportion of external directors enjoyed a better reputation than the firms with a comparatively small board size having a higher proportion of internal directors. Brammer, Millington, and Pavelin (Reference Brammer, Millington and Pavelin2009) investigated whether the presence of women members on the firm’s board had, any corporate reputational effect, and found that such presence was favorably viewed by industrial sectors that operated closely with final consumers.
Rindova et al. (2005) explained that superior financial performance of the firm gives it a better visibility to the external agents, and hence enjoys a better reputation over others. Researchers like Fombrun and Rindova (Reference Fombrun and Rindova1996) and Deephouse and Jaskiewicz (Reference Deephouse and Jaskiewicz2013) reflected reputation as the outcome of the firm’s collective representation of past actions. Hence, they expressed that corporate reputation could broadly be conceptualized as the trust, admiration, confidence, and esteem that the public holds toward the firm. Rindova and Martins (Reference Rindova and Martins2012) posited the social-constructionist view of corporate reputation. According to this view, reputation is an amalgamation of diverse perceptions about firms by a variety of stakeholder groups. These perceptions extend beyond ‘the set of actions that economic theory qualifies as valid signals’ (Rindova & Martins Reference Rindova and Martins2012: 21), and include more subjective and emotional judgments of the firm influenced by the institutional environment in which the firm operates.
Lange, Lee, and Dai (Reference Lange, Lee and Dai2011) observed that financial performance and corporate social performance (CSP) were found to have the most frequent and consistent positive relation to corporate reputation. Superior financial performance of a firm ensures its successful implementation of strategy, effective resource allocation, and achievement of goals and objectives. A number of scholars were of the view that in a way the strong financial performance of the firm ratifies the diverse expectations of stakeholders placed on it through legitimate conduits of communication and networks (Donaldson & Preston Reference Donaldson and Preston1995, Waddock & Graves Reference Waddock and Graves1997, Walsh, Weber, & Margolis, Reference Walsh, Weber and Margolis2003). CSP refers to the extent to which a firm’s actions attend to the needs and interests of stakeholders beyond simply its investors (Waddock & Graves Reference Waddock and Graves1997). It encompasses the areas of community spending; voluntary community engagement; transparency in both financial and social behavior; enactment of employee safety, health, and training policies; and adopting environmental standards. The fact that in the recent times, the firms have confronted with growing normative pressures to act in a socially responsible manner have placed strong emphasis on them to improve on CSP along with the conventional measures of financial performance (Brammer & Pavelin, Reference Brammer and Pavelin2006; Campbell Reference Campbell2007; Ali et al., Reference Ali, Lynch, Melewar and Jin2014).
Cross-country perspective
Lange, Lee, and Dai (Reference Lange, Lee and Dai2011) cautioned that although prior research on the determinants of corporate reputations has yielded important insights, most empirical works to date were made in the context of the USA. Since there has been little comparative research, knowledge about the impact of country-level drivers and contextual differences across countries in reputation formation remains limited (Gardberg Reference Gardberg2006). A number of scholars observed a pattern in the previous studies in the sense that the relative impact of financial and social performance was normally treated as fixed and independent of institutional factors (Fombrun & Shanley Reference Fombrun1990; Staw & Epstein Reference Staw and Epstein2000; Brammer & Pavelin Reference Brammer and Pavelin2006; Soleimani, Schneper, & Newburry, Reference Soleimani, Schneper and Newburry2014). Given such concentration of studies in the US context, a number of scholars extrapolated that most of such studies placed sole emphasis on the stockholders’ satisfaction approach and ignored the perspective of other financial stakeholders of the firm (Gompers & Metrick Reference Gompers and Metrick2001; Acharya & Subramanian Reference Acharya and Subramanian2007; Lange, Lee, & Dai, Reference Lange, Lee and Dai2011). Although comparative research in this area was found grossly inadequate, a few available evidences confirmed that the factors used in reputational assessment varied across countries. Despite cultural similarities between Denmark, Norway, and Sweden; Apéria, Simcic-Brønn, and Schultz (Reference Apéria, Simcic-Brønn and Schultz2004) found significant differences in reputational assessments by inhabitants of those countries. Danish citizens provided higher reputational assessments of domestic companies than Swedes and Norwegians. Additionally, whereas financial performance had the lowest weight among corporate reputation determinants in Denmark and Norway, social responsibility was the least important factor in Sweden (Apéria, Simcic-Brønn, & Schultz, Reference Apéria, Simcic-Brønn and Schultz2004). Based on their results, these researchers suggested that sociocultural, legal, and other institutional differences might be important causes of these variations. Likewise, Gardberg (Reference Gardberg2006) examined the cross-cultural construct equivalence of corporate reputation in six countries: Australia, Belgium, Greece, Italy, the Netherlands, and the UK. Despite the construct equivalence of corporate reputation across countries, differences were found in antecedents and consequences of reputation in these countries. To support, profitability had a more salient role in firm reputations in Australia and the Netherlands; where a company was highly unlikely to have a good reputation if it was not profitable (Gardberg Reference Gardberg2006). Soleimani, Schneper, and Newburry (Reference Soleimani, Schneper and Newburry2014) using a sample of 593 of the largest publicly traded companies in the world from 32 countries established that in societies where shareholders enjoyed a high degree of legal rights, the stock market returns and corporate reputation had a strong positive association. Whereas, the negative relationship between earnings volatility and corporate reputation was found stronger where the creditors’ group had more power and rights. The most recent study conducted by Mattera and Baena (Reference Mattera and Baena2015) in the Spanish context revealed that the Spanish firms with a high international presence were able to earn the confidence of global stakeholders by working on the socially relevant innovation projects. In view of these arguments; this study makes the proposition that a firm’s reputation is determined by its social performance moderated by a host of firm and industry-specific variables like the firm’s financial performance, product/service quality, ownership composition, age, size, media appearance, and industry type. Moreover, no such comprehensive study was reported to have been conducted till date in the Indian context. Therefore, it is expected that this research work developed and conducted solely in the Indian context would be able to contribute in terms of both theoretical validation and practical implications of corporate reputation as a body of academic discipline.
The Association Of Corporate Reputation And Social Performance
In general, all the previous studies conducted in this area have favorably supported the proposition that social responsiveness play a significant role in promoting the compatible relationship with the various groups of stakeholders. Mitchell, Agle, and Wood (Reference Mitchell, Agle and Wood1997) cautioned that if the stakeholders (shareholders, employees, consumers, financiers, pressure groups, government, and regulators) take the view that the firm is not having the legitimate power, would impede the uninterrupted functioning of the firm. Hence, they form an important coalesce to the corporate management in directly or indirectly supporting the firm in executing various actions. To the extent that social responsiveness helps managers encourage constructive contributions from stakeholders, it can be reasonably expected to augment the firm’s reputation since the expectations of both managers and other stakeholders are satisfied (Donaldson & Preston, Reference Donaldson and Preston1995). Woodward, Edwards, and Birkin (Reference Woodward, Edwards and Birkin1996) postulated that organizational legitimacy may be challenged in the absence of a mutually accountable relationship between the agent (firm) and the principal (society). The counter argument to this view holds that CSR activism is a wasteful discretionary act of management representing their altruistic impulse or the desire for self-aggrandizement (Navarro, Reference Navarro1988; Bartkus, Morris, & Seifert, Reference Bartkus, Morris and Seifert2002). Long back Friedman (Reference Friedman1970) reiterated this view with the implication that social performance would affect the financial performance, and hence the reputation of the firm in a negative manner. Later, McWilliams and Siegel (Reference McWilliams and Siegel2001) supported this in saying that it might have a detrimental effect as the firm’s social investment would crowd out investment in other relevant projects from a pure business point of view. In view of such debate, it becomes imperative that even if social performance, ceteris paribus, would enhance the reputation of the firm, it comes at an opportunity cost associated with diverting resources away from other activities of the firm (Russo & Fouts, Reference Russo and Fouts1997). However, of late, given the evidence of strategic use of the firm’s CSR policy in generating corporate social values (Porter & Kramer, Reference Porter and Kramer2002; Saiia, Carroll, & Buchholtz, Reference Saiia, Carroll and Buchholtz2003; Hillenbrand, Money, & Ghobadian, Reference Hillenbrand, Money and Ghobadian2013; Ali et al., Reference Ali, Lynch, Melewar and Jin2014; Mattera & Baena, Reference Mattera and Baena2015), firm’s social responsiveness are believed to augment the corporate reputation. Accordingly, the following hypothesis is formulated:
Hypothesis 1: There is a positive relationship between CSP and corporate reputation independent of the firm’s nature of business and the type of social responsiveness activities.
Industry moderation effect
A number of scholars argued that the industry environments were correlated with significant pressure from the institutional and other stakeholders. Therefore, the strength and direction of the relationship between corporate reputation and social performance are contingent on the type of business activity a firm is engaged in (Pfeffer & Salancik, Reference Pfeffer and Salancik1978; Scott, Reference Scott1987, Reference Scott1995; Ali et al., Reference Ali, Lynch, Melewar and Jin2014). This observation offered two specific implications. First, the industry in which the firm is operating plays a moderating role in the relationship between corporate reputation and social performance. Second, the industry-specific stakeholders may demand for improved social responsiveness from the primary stakeholders of the firm such as employees, customers, business communities, and legal and regulatory bodies. A close nexus among the firm’s economic activities, social responsibilities, and environmental externalities create pressure on the firms to respond in a positive and satisficing manner (Miles, Reference Miles1987; Berman, Wicks, Kotha, & Jones, Reference Berman, Wicks, Kotha and Jones1999; Rowley & Berman, Reference Rowley and Berman2000). Also from the resource dependence perspective, the firm’s favorable responses to its external constituencies are justified because of their dependence on such constituencies for resources vital to their survival and success (Clarkson, Reference Clarkson1995; Mitchell, Agle, & Wood, Reference Mitchell, Agle and Wood1997; Hillman & Keim, Reference Hillman and Keim2001). The empirical study done by Brammer and Pavelin (Reference Brammer and Pavelin2006) established that the stakeholders’ pressure associated with a particular type of industry significantly moderated the relationship between the firm’s social performance and its reputation. Based on these arguments presented and discussed above, the following hypothesis was formulated to capture the industry moderating effect on the relationship between corporate reputation and social performance. While formulating this particular hypothesis, it was also kept in mind that the relative significance of the firm’s social responsiveness in meeting the expectations of the industry-specific stakeholders would vary among the sectors:
Hypothesis 2: The relationship between CSP and corporate reputation is moderated by the industrial sector such that the relationship is stronger in sectors that are associated with salient social and environmental issues.
Conjoint influences of industry and social performance types
Understanding the expectations of stakeholders is important to the firms while designing the organizational responses to address them (Frooman, Reference Frooman1999). Such a due diligence made on the part of the firm satisfy the stakeholders as they can clearly identify the cause-effect relationship in the chosen course of action (Rowley & Berman, Reference Rowley and Berman2000; Ali et al., Reference Ali, Lynch, Melewar and Jin2014). Existing evidence suggests that the nature of focal social issues varies systematically across different industries. Earlier empirical work has identified a number of sectors as having particularly high environmental impacts, e.g. the metals, resources, paper and pulp, power generation, water, and chemicals sectors (Morris, Reference Morris1997; Sharma, Reference Sharma1997; Hoffman, Reference Hoffman1999; Sharma, Pablo, & Vredenburg, Reference Sharma, Pablo and Vredenburg1999; Bowen, Reference Bowen2000; Clemens, Reference Clemens2001; Brammer & Pavelin, Reference Brammer and Pavelin2006). Brammer and Pavelin (Reference Brammer and Pavelin2006) made a comprehensive assessment of the expected association between the nature of industry and social reputation of the firm. They explicated that the tobacco and alcoholic drinks industries are associated with highly visible social issues. These industries are thought to produce large social externalities (crime and health), and are subject to strong regulatory regimes (competition, safety, and taxation). Brammer and Pavelin (Reference Brammer and Pavelin2006) also argued that the defense and pharmaceutical industries receive particular attention from ethical pressure groups, and the profile of workplace health and safety concerns is relatively high in the construction and resource extraction sectors. Their work specifically indicated that the reputational effect of the firm’s social performance varied both across and within the industrial sectors, and even for various types of social performance indicators attributed to the firms. Several implications may arise from the above findings in this context. The reputational benefits of improved social responsiveness arise out of meeting the expectations of stakeholders for the mitigation or reparation of social issues. Consequently, the firm would take a cautious approach and make an informed choice in selecting its activities in social performance; where it is likely to have maximum possible benefits of building a reputation over medium to long run period of time. These arguments supported by evidences give rise to two observations. First, the relationship between corporate reputation and its social responsiveness is dependent on the specific dimension of social responsiveness that the firm caters to. Second, the relationship is also contingent on the type of business and the industry sector the firm is associated with. Hence, it was hypothesized that a firm’s social performance activity and its business domain influence the relationship between social performance and reputation with the relative variation impacts among the firms:
Hypothesis 3: The interaction effects of the nature of industry and type of social performance influence the association of firm’s social performance and its reputation.
Method
Data were collected from the companies operating in India engaged in either manufacturing or service sectors, and were included in the Prowess database of the Centre for Monitoring Indian Economy (CMIE). The companies were chosen based on the availability of the corporate reputation data disclosed in the form of CSR activities in their annual reports. It was also ensured that the stock of all the chosen companies was listed and regularly traded on the Bombay Stock Exchange India. Also, a variety of firms were targeted within manufacturing and service sector to represent the different types of industry. Hence, purposive sampling was adopted for the purpose of deciding the organizations to be studied as part of this research. In total, 220 companies were found to have met all the criteria mentioned above.
Corporate reputation measure
To measure corporate reputation, ‘India’s most admired companies’ survey of Fortune India (2014)Footnote 1 was considered that employed a similar methodology to construct the Fortune index, a commonly used measure of the reputations of US firms (McGuire, Sundgren, & Schneeweiss, Reference McGuire, Sundgren and Schneeweiss1988; Fombrun & Shanley, Reference Fombrun1990; Fryxell & Wang, Reference Fryxell and Wang1994). The chairmen, managing directors, and selected members of the board of the 10 largest companies in 24 industrial sectors were surveyed. Participants were asked to rate each company in their sector (excluding their own company) on a scale of 0=‘poor,’ to 10=‘excellent’ for their performance in nine criteria: quality of management; financial soundness; ability to attract, develop, and retain top talent; quality of products/services; value as a long-term investment; capacity to innovate; quality of marketing; community and environmental responsibility; and use of corporate assets. The assessments received for each firm were averaged across criteria and respondents to produce a single reputational score. It has also been found that most of the previous studies conducted in this context viewed CSP as an investment to generate the valuable return through building up the firm reputation.
CSP measure
Social performance data were obtained from India Corporate Responsibility Reporting Survey 2014 conducted by KPMGFootnote 2 as a periodic annual survey. Although the report was compiled and published in the year 2014, the survey was made in the previous year 2013 covering the period from January to December 2013. This report, in particular, assesses CSP against a consistent and objective set of criteria, principally for the consumption of investors. This annual survey also offers the most comprehensive multidimensional social performance coverage of Indian companies including issues relating to employment, the environment, and community management. This study primarily explored these three dimensions of CSP.
The indicator of employee responsibility was based upon five separate components relating to health and safety systems, training and development, equal opportunities practices, employee relations and job creation and security. The indicator of environmental responsiveness was based upon four separate components relating to the quality of environmental policies, systems, reporting, and performance. The indicator of community responsiveness was based on the firm’s orientation toward CSR, statutory compliance (with effect from 2013), voluntary involvement of employees, and developmental outcomes. The textual narrations developed by Kansal and Singh (Reference Kansal and Singh2011) in Indian context were transformed into a number-grade rating following the guidelines developed by the Indian Institute of Corporate Affairs. Each environmental measure had five text categories; the employment measures had three text categories, while community had four. Each of the environment text scales was coded into a 5-point scale, each of the employee responsibility text scales into a 3-point scale, and created a 4-point scale for community responsiveness. In each case, the codes began with a value of 1 and larger numbers indicated more social responsiveness. Thus, community performance was graded 1–4 (with the possibility of maximum score of 16); environmental performance was graded 1–5 (with the possibility of maximum score of 20); and employee performance was graded 1–3 (with the possibility of maximum score of 18). Finally, a single aggregate measure of social performance was arrived at by summing up these three scores having normalized each component on 1–4 grading. This generated an overall score ranging from 3–12 to be considered valid for final data analysis.
Control variables
Financial performance
Corporate reputation is invariably attributed to the company’s current financial performance in terms of either accounting data or movements in stock prices (Fombrun & Shanley, Reference Fombrun1990). Strong financial performance generally signals an effective corporate strategy, good management, and good resource allocations, and so helps a firm establish or maintain a good reputation (Roberts & Dowling, Reference Roberts and Dowling2002; Sabate & Puente, Reference Sabate and Puente2003; Sur & Sirsly, Reference Sur and Sirsly2013; Ali et al., Reference Ali, Lynch, Melewar and Jin2014), particularly among groups of financial stakeholders such as creditors, investors, and external analysts (Fama, Reference Fama1970; Fombrun & Shanley, Reference Fombrun1990). In view of the risk averseness of external agents, Fombrun and Shanley (Reference Fombrun1990) posited that in the case of two firms with similar levels of financial performance, the firm that appears to offer less risk would gain better reputation. They also reviewed and found that a higher degree of leverage would be associated with lower reputation because of the perceived threat to the future viability of the firm. A measure of each firm’s profitability (measured by the ratio of pretax profits to total assets) and corporate leverage (measured by the ratio of total debt to total assets) were extracted from CMIE. Data concerning the market performance of sample companies was obtained from Capitaline database. The β measure was adopted for measuring the risks associated with stock ownership in relation to the expected response of a stock to the overall market.
Firm age
Age of the firm has been reviewed in the literature in two ways, namely incorporation age and listing age. The incorporation age is measured as the number of years elapsed since the year of incorporation of the company, whereas the listing age is computed as the number of years elapsed since the year of the company’s initial public offering (IPO). We therefore follow Fama and French (Reference Fama and French2001) and Pastor and Veronesi (Reference Pastor and Veronesi2003) and assume that firms are ‘born’ in the year of their first appearance on the Center for Research in Security Prices (CRSP) tapes. Firm age is consequently the number of years (plus one) elapsed since the year of the company’s IPO. Most studies that look at firm age use the same definition. We refer to this variable as the firm’s listing age. Shumway (Reference Shumway2001) and Loderer and Waelchli (Reference Loderer and Waelchli2010) that argued the listing is a defining moment in a company’s life as it affects ownership and capital structure, multiplies growth opportunities, increases media exposure, and demands different corporate governance structures. Hence, they forwarded that the listing age is the economically most meaningful measure of firm age. Since the stock of all the representative organizations in this study was listed and traded on the country’s leading stock exchange, it was decided to adopt the listing age as a proxy measure of the firm age. Moreover, as wide differences were observed for a few firms compared with their incorporation ages, using the listing age parameter could provide some kind of parity to the analysis. On average, the listing age was found to be 18 years with the median value of 14. The distribution of firm age remained fairly stable over the period of 2010–2014 for the studied organizations. For the incorporation age, the median firm is 27 years old that went public at the age of 11.
Firm size
A number of previous researchers, including Brammer and Pavelin (Reference Brammer and Pavelin2006), and Ali et al. (Reference Ali, Lynch, Melewar and Jin2014) viewed that the better reputation of larger firms compared with the smaller ones could be attributed to their capability of designing and implementing the successful business strategies. They also observed that because of this reputational asymmetrics, the outsiders (external agents) tend to take more interest in exploring the larger firms by accumulating and processing more information available through media support. Firm size as a measure of visibility to external agents is well accepted as a measure in this area of research (Damanpour, Reference Damanpour1987; Adams & Hardwick, Reference Adams and Hardwick1998; Bowen, Reference Bowen2000). To capture this dimension, a measure of each firm’s size (the natural logarithm of the value of total assets) was extracted from CMIE.
Media coverage
Saiia (Reference Saiia2000) and Ali et al. (Reference Ali, Lynch, Melewar and Jin2014) argued in favor of media coverage of the firm as a measure of its visibility to external agents. This information was obtained from the archive of The Economic Times that provided periodic coverage of the corporate in the media for a considerably wide number and range of companies. Data were gathered for each of the calendar years from 2010 to 2014, and the natural logarithm of the average number of annual news hits was used as a measure of corporate visibility.
Stockholder composition
The composition of a firm’s shareholder constituency has been experienced to exert significant influence on various aspects of firm behavior. Institutional investors are motivated to become more engaged with corporate management because of their increased visibility and the expectation of an enhanced return on their investment (Ryan & Schneider, Reference Ryan and Schneider2002; Sur & Sirsly, Reference Sur and Sirsly2013; Ali et al., Reference Ali, Lynch, Melewar and Jin2014). A strong presence of institutional shareholders may therefore signal to other stakeholders that the firm’s performance is keenly monitored, and deemed to be satisfactory by these relatively well-informed and experienced investors. Ownership data were drawn in June 2014 from a share ownership analysis database called Capitaline. Derived from the records of share trading on the Bombay Stock Exchange, the database decomposed the share ownership pattern according to different types of owners. Following the approach forwarded by Ryan and Schneider (Reference Ryan and Schneider2002) and Johnson and Greening (Reference Johnson and Greening1999), a variable was adopted equal to the sum of the proportions of firm equity held by long-term institutional investor groups.
Investments in (perceived) product or service quality
The firms perceived to produce high-quality goods or provide high-quality services enjoy better reputations (Fombrun & Shanley, Reference Fombrun1990). In light of this, one should expect corporate reputation to be augmented by those activities most closely associated with the vertical differentiation of products: technological advancement and the cultivation of a strong brand image. Accordingly, we hypothesize that reputation is increasing in a firm’s research and development and advertising intensities. A measure of each firm’s research and development intensity (the ratio of research and development expenditures to total assets) was extracted from CMIE. So far as the firm’s advertising intensity was concerned, the India Brand Equity Foundation reports were consulted to identify the firms as either top advertisers (within first 100) or as a big brand already established in India. Accordingly, the dummy variable advertising intensity was constructed. In overall, it was observed in the reports that the higher the ranking of the firm, the higher was the advertising expenditure, and hence enjoyed a higher brand equity in the market.
Type of business
Despite the above observations, the firm’s reputation is also in variance across industrial sectors, and the type of business they are engaged in. Moreover, some business activities may predispose a firm with a better reputation than undertaking other similar activities. Each firm’s prime business activity was extracted from CMIE database. Using the standardized industry classification, the representative firms in this study were from any of these sectors, namely oil and natural gas, chemicals, construction, consumer products, engineering, financial services, digital technology, telecommunication, pharmaceutical, retail, automobile, and information technology services.
Results And Findings
Corporate reputation consisting of the explanatory variables described in the previous section was analyzed with the help of ordinary least squares regression model. Table 1 represents the descriptive statistics and correlation matrix for key variables. To check for, the evidence of heteroscedasticity, White’s method was used as it adjusts standard errors to facilitate the drawing of sound inferences concerning the statistical significance (White, Reference White1980). To test for the existence of simultaneity in the relationships between corporate reputation and both social and financial performance, Durbin–Wu–Hausman tests were employed as suggested by Davidson and MacKinnon (Reference Davidson and MacKinnon1993). For both social and financial performance, no evidence of simultaneity was found. Hence, it was concluded that the estimates provided by ordinary least squares were consistent and reliable. In the first stage of analysis, the relationship between corporate reputation and social performance was explored for all the studied sectors with the assumption that all types of social performance must have the same effect on corporate reputation. This assumption was subsequently removed in the subsequent stages of the analysis toward the preferred specification of the model.
Table 1 Descriptive statistics and correlation matrix
Note. Some units of measurement.
(2) the ratio of pretax profits to total assets; (4) the ratio of total debt to total assets; (6) the natural logarithm of the value of total assets; (7) the natural logarithm of the average number of annual news hits 2010–2014; (8) the ratio of R&D expenditures to total assets (as a percentage); (10) the percentage of firm equity held by institutional investors.
R&D, research and development.
a , bCorrelation coefficient is significantly different from zero at a 95% and 99% level of confidence, respectively.
Model specification
Table 2 described the results for three model specifications. A single measure of social performance was used for all three model specifications. The sectoral dummy variables were not considered in the first regression, and were subsequently introduced in the second and third regressions. The variation of the reputational effect of social performance across sectors was considered in the third regression by including the interaction between social performance and the sectoral dummies. Through the first regression analysis, it was found that the firm reputation was positively associated with current financial performance measured by profitability (p=.026) and degree of long-term institutional ownership (p=.000), whereas negatively associated with market risk (p=.009). These findings were in alignment with the previous studies conducted in the context of corporate reputational indices and financial performance. Additionally, it was also found that corporate media visibility to have a significant positive effect on corporate reputation (p=.041).
Table 2 Regression results for pooled social performance analysis
Note. For regressions 1, 2 and 3, the dependent variable is corporate reputation.
1: N=220; R 2=0.327; Adjusted R 2=0.302; Breusch–Pagan test statistic (10 df)=12.7 (p=.163).
2: N=220; R 2=0.462; Adjusted R 2=0.428; Breusch–Pagan test statistic (21 df)=46.2 (p=.003).
3: N=220; R 2=0.564; Adjusted R 2=0.535; Breusch–Pagan test statistic (32 df)=61.6 (p=.006).
In regressions 2 and 3, the omitted sectoral dummy variable is ‘oil and natural gas.’
+Interaction between social performance and a sectoral dummy variable.
*,**,***Significance at the 90, 95 and 99% levels of confidence, respectively.
Conclusions about the appropriateness of each model specification was drawn based on the combined analysis of three regression results. The significant coefficients associated with a number of the sectoral dummy variables justified their inclusion in the model. In parallel, the inclusion of the interaction variables was found to be valid by having a number of significant associated coefficients in the third regression analysis. It was observed that by adding industry and interaction effects the model specification improved as the adjusted R 2 statistic value went up from 0.30 to 0.53. This also enabled to choose the third regression as the most suitable specification for the purpose of this study. Therefore, it could be inferred that when the measures of corporate reputation are industry specific, the effects of industry specifics need to be controlled accordingly.
Table 3 also described the results for three model specifications by making the social performance decomposed into its constituent elements for each case. The sectoral dummy variables were not considered in the fourth regression, and were subsequently introduced in the fifth and six regressions. The sixth regression analysis also included the interaction effect between CSP and sectoral dummy variables. The pattern of interaction between each dimension of social performance and all the sectoral dummies, but one (n-1) was found through an iterative process. This generated a huge increase in the number of parameters to be estimated from 24 to 58. To effectively manage the data analysis and objective interpretation of results, the least significant findings of these interaction effects were omitted and the regression was reconducted. This procedure was repeated until all remaining interaction variables were significant at the 90% level of confidence. This helped to reduce data in a meaningful manner, and finally 12 of the 41 interactions were retained in the final specification.
Table 3 Regression results for segregated social performance analysis
Notes. For regressions 4, 5 and 6, the dependent variable is corporate reputation.
4: N=220; R 2=0.293; Adjusted R 2=0.238; Breusch–Pagan test statistic (12 df)=21.2 (p=.032).
5: N=220; R 2=0.484; Adjusted R 2=0.427; Breusch–Pagan test statistic (23 df)=50.1 (p=.001).
6: N=220; R 2=0.676; Adjusted R 2=0.608; Breusch–Pagan test statistic (36 df)=66.8 (p=.001).
In regressions 2 and 3, the omitted sectoral dummy variable is ‘oil and natural gas.’
+Interaction between social performance and a sectoral dummy variable.
R&D, research and development; IT, information technology
*,**,***Significance at the 90, 95 and 99% levels of confidence, respectively.
The association of significant coefficients with the sectoral dummy variables in regressions 5 and 6, and a number of the interaction variables in regression 6, were considered for their inclusion in the specified models. As a result of this additive effect of industry and the selected interactions on the model specifications, the adjusted R 2 statistic value went up from 0.29 to 0.67. This provided support in favor of adopting the model specification in regression 6 as the most appropriate one. It should also be further noted that there were significant variations across the various types of social performance among the regressions 4, 5, and 6. Hence, the impact of disaggregation of social performance on corporate reputation across various industrial sectors provided the scope for better judgment and analysis through regression 6 compared with regression 3.
The sixth regression analysis provided satisfactory evidence in support of roles of control variables (financial performance, market risk, listing age, media exposure, and long-term institutional ownership) in determining corporate reputation. However, no significant evidence was found for leverage, firm size, research and development intensity, and advertising intensity. The analysis also generated strong evidence in support of the proposition that firm reputation varies across industrial sectors. Interestingly, the analysis also established that high orientation toward good corporate reputation was found in pharmaceutical and engineering sectors; whereas low orientation toward bad corporate reputation was found for financial services, consumer products, chemicals, and automobile.
Result Interpretation And Discussion
The variations of the effect of CSP across the different regressions throws insights for discussion and consolidation. The first regression did not show any significant effect of social performance unless corporate reputation was allowed to vary systematically across sectors. The second regression established that the firm’s social performance enhanced corporate reputation when all the sectors were considered for aggregation. However, the third regression shows that this relationship is subject to significant cross-sector variation. Although the significant role was found prominent for the chemicals, consumer products, financial services, pharmaceutical, and automobile sectors; the effects were positive throughout all these cases.
While the regressions 4 and 5 were concerned with measuring the impact of CSP with respect to the corporate reputation and type of the firm’s business activities, regression 6 captured the impact of social performance variations across industry sectors via the components of social performance. Accordingly, the components of the firm’s social performance produced different impacts for different sectors studied as part of this research. Two sectors, namely chemical and engineering reported to have significant positive impacts of all three components of social performance, namely community performance, environmental performance, and employee performance. Eventually, these sectors have been commonly identified as industries with salient environmental issues within the environmental management literature (Halme & Huse, Reference Halme and Huse1996; Sharma, Pablo, & Vredenburg, Reference Sharma, Pablo and Vredenburg1999; Bowen, Reference Bowen2000; Clemens, Reference Clemens2001).
Employee performance as a constituent of CSP was found to influence corporate reputation for chemical, construction, engineering, and automobile sectors. Eventually, these sectors involve manufacturing activities, and are prone to job hazards and risky operations compared with service industries. Therefore, it can be understood that the firms operating in such sectors would take an additional care and precaution so far as the handling of day to day activities are concerned. The lapse on these firms to responsibly disburse such measures may seriously jeopardize their reputation and tarnish public image. This predisposition stands in conjunction with the relevant legal compliances as applicable to the firms and industry. The absence of any reported significance of employee performance for other industries covered in this research reconfirms the variation of CSP across industrial sectors.
The overall positive effect of community performance on firm reputation was observed through regressions 4, 5, and 6. In particular, the results of regression 6 provided evidence for significant community performance in chemical, consumer products, engineering, financial services, and pharmaceutical sectors. Thus, the overall analysis generated empirical support for a significant positive impact of community responsiveness in all the industrial sectors examined in this study. This observation can be explained with the help of the growing focus on firms’ CSR policy in exerting strong influence on corporate reputation routed through its social performance. In addition, the present normative pressure created on the firms operating in India through the statutory compliance of CSR justifies this finding. Besides from the pure literature point of view, this significant role of community involvement was found consistent with the evidence for philanthropic expenditures identified by Fombrun and Shanley (1990), Williams and Barrett (2000).
Regressions 3 and 6 provided support for Hypotheses 2 and 3. Although significant positive impacts were evident in all the industrial sectors in the overall analysis, distinctive effects were there for a few sectors as shown in the regression 6. This result provided support for the acceptance of Hypothesis 2, which made the supposition that the relationship between CSP and corporate reputation varies across industrial sectors. Hypothesis 3 was also supported through regression 6 as the relationship between corporate reputation and its social performance was subject to the variation of the types of social performance. The available empirical evidences in support of Hypotheses 2 and 3 strongly vouched for adopting the model in regression 6 as having a better explanatory capacity over all other models specified in this study.
The community performance had a significant stronger impact on the firm reputation for chemical, consumer products, engineering, financial services, and pharmaceutical sectors than for the reference category (information technology services). Environmental performance had a significant stronger impact on the firm reputation for chemical, construction, engineering, and automobile sectors than for the reference category. Employee performance had a significant stronger impact on the firm reputation for chemical, construction, engineering, and automobile sectors than for the reference category. These findings take us back to the fundamental research question of explaining the relationship between the firm’s social performance and the business activities undertaken by it in alignment with the specific industry sector. It is worth exploring to explain that the lack of a significant interaction for the sectors, namely digital technology, telecommunication, retail, and information technology services for various dimensions of CSP (community performance, environmental performance, and employee performance) in relation to the firm reputation implied that the social performance did not have a stronger effect for these industries than for the reference category. Three out of these four belonged to the service industry that may not have any direct detrimental effect on the environment or community or even employees stemming from its operational activities. Whereas, almost all the sectors found to have a stronger effect of social performance on the firm reputation enroute the individual components social performance belonged to the manufacturing sector. Therefore, it can be deduced that for the firms operating in sectors, which are prone to environmental degradation would be more careful and sensitive to its social performance in order to mitigate the perceived risk of reputation to external agents. By reverse logic, it can be deciphered that the firms operating in comparatively less damaging environmental ramifications, would be less proactive in building its reputation through social performance because of the perceived reduced risk in the eyes of the social stakeholders.
Conclusion And Study Implications
This study examined the relationship between corporate reputation and its social performance with the industry moderation effect in the context of an emerging country. The study offers a significant, but overlooked organizational perspective, and contributes to integrating this knowledge with the prevailing existing theories available in this domain. First, this study conceptually differentiated among the various components of CSP, and explored its influence on corporate reputation. Second, the effect of industry variations was allowed to moderate the relationship between corporate reputation and its social performance. From the empirical findings, it was evident that the different types of social performances influenced firm reputation differently, and was contingent on the industry the firm belonged to. In finding that social performance impacted corporate reputation, it was self-explanatory to deduce that social responsibility influenced the firm’s market valuation. Despite such an attempt of broad theorization, significant variations in the firm’s reputation impacts were observed across business activities and dimensions of the firm’s social performance. This study was necessitated to validate the presupposition of the kind of conjugal relationship existed between the firm’s social performance and expectation of its stakeholders. It was found that the firms operating in environmentally sensitive industries had a stronger evidence of environmental performance, and enjoyed a better reputation in the eyes of its stakeholders. Whereas, the employee and community responsiveness were found to have an overall positive impact on the firm’s reputation across industrial sectors. These findings, in particular, highlighted the importance of the practice-based knowledge in developing a contingency framework for explaining such organizational phenomena.
As evident from the previous studies conducted in this context, most of them were limited to the firms located in the USA. This study being conducted for the firms operating in India, offers the scope of revalidation of the findings made from similar studies conducted in the USA or other countries (MacMillan, Money, & Downing, Reference MacMillan, Money and Downing2002; Wiedmann, Reference Wiedmann2002; Kitchen & Laurence, Reference Kitchen and Laurence2003). In addition, the findings from this study reinforces the point that the determinants of corporate reputation, namely financial performance, market risk, institutional ownership, and the firm’s business activities are fairly universal in nature, and hence hold good across geographies. The results suggested that the firm’s response to industry-specific stakeholders’ expectations can make its social performance strong and robust in the eyes of the external agents. Recognizing the importance of this relationship of congruence may help address the inconclusive findings in the literature concerning the relationship between social performance and financial performance (Griffin & Mahon, Reference Griffin and Mahon1997). This study restrengthened the previous works done by Brammer and Pavelin (Reference Brammer and Pavelin2006), Sarstedt, Wilczynski, and Melewar (Reference Sarstedt, Wilczynski and Melewar2012), and Ali et al. (Reference Ali, Lynch, Melewar and Jin2014), but in the context of an emerging country. In addition, by employing the inclusive measures of CSP (community, environment, and employee) this study provided support in favor of the signaling theory (Walker, Reference Walker2010) and the stakeholder multiplicity theory (Fassin, Reference Fassin2012) in the Indian context. Therefore, it becomes imperative that the holistic theory development on the association between corporate reputation and social performance would have to encompass the contingency factors like the internal and external stakeholders, firm-level variables, industry type, and the type of socially responsible activities undertaken by the firm. Given the importance of emerging markets, practitioners involved with developing the strategic planning of multinational corporations in these markets can consider to design CSR strategies as a catalyst to leverage the brand equity of the company. The goodwill and reputation created out of such effort can earn the trust and confidence of the consumers and other stakeholders that in turn would generate sustainable competitive advantage for the firm. Moreover, the interplay of the contextual factors against the backdrop of sectoral variations explained in this study provides significant insights for the practitioners to take preemptive additional measures to avert any apparent conflict between the interest of the external stakeholders (especially local community, minority, and social groups) and the growth of the firm’s business. The findings of this study can also be of special interest to the owners of risk, compliance, and CSR function in individual firms.
Limitations And Future Research
This study acknowledges a few limitations. First, as the data and analysis are cross-sectional in nature, arriving at causality is questionable. Second, given the attempt to capture the sectoral variations, covering a few more industries as well as the firms under each industrial sector could substantially improve the generalizability of the study in the Indian context. Third, corporate reputation and social performance as the basic research constructs were explored in line with the previous studies conducted mostly in the USA and UK as similar instances were not adequately evidenced in the Indian context. However, it is expected that taking the lead from this present work more in-depth and substantial studies would be made in the South Asian context in a near future by the scholars engaged in this area of research. In conclusion, this study is unique in the Indian context in explaining a suggestive framework of corporate reputation and its social performance in alignment with the growing realization of CSR and managing diverse stakeholders among the firms. The findings and interpretations derived from this study would enable the managers and executives to decide, implement, and monitor the organization’s social performance criteria and the related action plans from a strategic perspective. With the growing importance of corporate governance and statutory CSR in India, it is believed that more sophisticated measures and indices of corporate reputation and social performance would be developed, and made available in this relatively unexplored area of academic discipline.
Acknowledgement
The author is grateful to the anonymous reviewers for their valuable comments and suggestions to improve the initial version of this paper.
