Influence of CSR on Financial Performance of Pharma and Healthcare Companies in Germany
The general Topic Area
“Corporate social responsibility (CSR), or corporate conscience, corporate citizenship, or sustainable responsible business,” is a trend in corporate governance that is self-assimilated in the strategic business model (Falck & Heblich, 2007). The strategy involves taking responsibility by companies and corporations through continuous monitoring of business actions and the effect on stakeholder. (consumers, employees, investors, and communities), and the environment (Falck & Heblich, 2007). Also, it includes the evaluation of the impact of the company’s economic, social, and environmental policies, and taking appropriate measures aimed at improving the effect based on the requirements of the stakeholders’ (Cochran 2007).
Important and Relevance of the Topic
The advancements in technology and changes in laws governing companies, world’s companies publish annual corporate responsibility reports, with the majority of the reports independently audited (Robins, 2011). The negative impact of production on the environment has forced companies around the world to contribute billions of dollars aimed at solving societal challenges. Moreover, issues related to corporate tax, disturbances in the global financial markets, environment-related challenges, and high levels of unemployment force companies to take into account these issues when making decisions (Tripathi, Kashiramka & Jain, 2018). Consequently, the current state of the trade-economic growth must be more sustainable and inclusive. The corporations have a burden of producing more infrastructure, jobs, goods, and services to cater for the needs of the growing population while putting less strain on the available natural resource as well as emphasising on fairness and decent work (Robins, 2011). Therefore, if doing good, concerning transparency in business practices and addressing social ills, could be associated with doing well in corporate financial performance, then companies might be persuaded to integrate CSR into their businesses.
This study will examine the influence of CSR on the financial performance of pharma and healthcare companies in Germany. CSR will be measured by ratings from the Access to Medicine Index. The index will be used as provided in the Access to Medicine ranking. The ranking by Access to Medicine started in 2008. However, for this study 2010, 2012, 2014 and 2016 listings will be considered, because in 2008 the index had not captured much attention from the public and hence its impact would only be realised after in the second publication (2010). Besides, as at the time of writing this proposal the index report for 2018 had been published, but it will not be used in the study because the financial impact can only be reflected in the two years that follow the listing (2019 and 2020). Moreover, the corporate financial performance will be measured by EVA in this study because unlike traditional profitability measures (ROA and Tobin’s Q), EVA measures take into account the cost of equity capital (Tripathi, Kashiramka & Jain, 2018). In addition, EVA is the best measure for non-profit organization. The study will involve both non-profit and profit organizations. The research question that this study will answer is: What is the financial performance in the pharma and healthcare industry for companies that have embraced CSR in Germany?
According to Edmans (2012) and Robins (2011), the executive wing of a corporation understands the importance of CSR in promotion of respect for a firm in the marketplace, with the potential of increasing sales volumes, enhancing employee loyalty, and attracting superior personnel to the company. Public corporations have realized that aggressive CSR promotion may help in gaining a possible featuring in one of the prestigious indexes such as Access to Medicine Index and the Dow Jones Sustainability Indexes (Robins, 2011). These corporations realize that listing in the indexes may boost the prices of a company’s stock, or make executives stock options and stock more profitable (attractive) thus making the shareholders comfortable (Robins, 2011). A study by the Economist Intelligence Unit found that “corporate citizenship is becoming increasingly important for the long-term health of companies even though most struggle to show a return on their investment from socially responsible activities” (as cited by Robins, 2011, p. 1).
Researchers and industries differ in their views on the influence of CSR on the financial performance of an industry or an individual firm. This study varies from previous studies by examining the influence of CSR on financial performance in a single industry: the pharma and healthcare industry in Germany. Each industry is unique due to the different internal, external pressures and competencies. Therefore, pressures in an industry, such as consumer issues and governmental regulations, are likely to be similar within each industry (Mehralian, Nazari, Zarei, & Rasekh, 2016). Researchers have argued that a study should focus on one industry to allow the scholar to determine if similar issues within the industry are treated in a like manner (Friedman, 2007). In view of the public perception that the high cost of pharmaceutical drugs denies the poor access to medicines (Leisinger, 2009), and the complex regulations placed on the industry by the government, the pharma and healthcare company is an ideal model for studying the influence of CSR on financial performance of a corporation.
CSR in the Pharmaceutical Industry
CSR has become a strategic business practice for many firms in the pharmaceutical industry (Brewer, 2014). Many scholars advocate pharmaceutical companies investing in CSR to remain profitable while satisfying the needs of its various stakeholders (Brewer, 2014). Others argue that it is important for pharmaceutical companies to be engaged in CSR performance because the pharmaceutical industry is different from other sectors since its business decisions have a direct impact on human lives (Droppert & Bennett, 2015). The pharmaceutical industry differs from other industries since its business is drugs that can save human lives. Therefore, the pharmaceutical industry is perceived as having a distinct ethical responsibility to the public such as providing access to drugs to all patients.
CSR is still a new business domain, and yet the pharmaceutical industry has come to realise that CSR is an important concept that must be considered in its business practices (Kosalathevi, 2013). In a study that asked managers about the impact of CSR on their companies, the unanimous answer was that a company’s business is at risk if CSR is not embedded in the firm’s business processes (Carroll & Shabana, 2010). The danger and risks to the pharmaceutical industry for neglecting CSR include outrage from the public, loss of reputation, government sanctions, and litigation from class-action tort lawyers (Nassbaum, 2009).
The pharmaceutical industry was among the most important sectors in the in the 1990’s (Juliano, 2013). For example, the headline on Fortune magazine’s 1990 reputational survey ran with “America’s most admired corporations: Merck leads the pack for the fifth year running” (Juliano, 2013, p. 393). The slogan from Squibb pharmaceuticals stating, “The priceless ingredient in every product is the honour and integrity of its maker” (Juliano, 2013, p. 393) depicted the extent to which pharmaceutical companies valued their reputations. Many people distrust the pharmaceutical industry, and the bright public image of the sector has been tainted by various reports in the media of unethical and illegal behaviour such as not disclosing negative results in clinical trials, high drug prices, and companies enticing doctors with gifts to use their drugs.
The data obtained from the financial reports will be inputted into Microsoft Excel 2016 where cleaning and calculation of EVA will be performed. The cleaned data will then be exported to SPSS version 25 for analysis. In SPSS three approaches will be employed: (1) calculation of the descriptive statistics to help in identifying trends in EVA and CSR components such as general access to medicine management, pricing, manufacturing and distribution. (2) Calculation of Spearman’s correlation coefficients for identifying relationships between CSR and EVA. However, only relationships that are significant at 95% level of significance will be discussed in detail. SPSS provide p-values for Spearman coefficients thus making it easier to determine significant correlations (Bolboaca, & Jäntschi, 2006). (3) Wilcoxon matched pairs test will be used to compare CSR and EVA scores in 2010 and 2012, 2012 and 2014, 2014 and 2016. Wilcoxon test will be used since the CSR data do not follow a specific distribution (Such as normal, or student t-distribution) (Wilcoxon Matched Pairs Signed Rank Test – Principles, 2018).
Data Collection Approach
The study will use publicly available records to collect financial data and CSR data for the period 2010 to 2016. Economic data (annual revenues) will be obtained from the annual reports of the pharm & healthcare companies listed in the Frankfurt Stock Exchange (FSE). The annual report is the most characteristic instrument of corporate disclosure because it is the principal source of information for investors, it is an essential communication between a company and its stakeholders, and it is considered highly credible because it is similar to audited financial statements (Griffin, Brant & Koerber, 2015). The CSR data will be obtained from Access to Medicine index website for the years 2010, 2012, 2014 and 2016.
The table 1 below shows the proposed study timeline
|Table 1: Proposed Research Timeline|
|Activity||Duration (Days)||Due Date||Quantity (Pages)|
|Results and Analysis||7||1/11/2018||15|
|Discussion and Conclusion||7||8/11/2018||15|
|Total||65||03/10 to 06/12, 2018||100|
|Source: Author (2018)|
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