Impact of Institutional Corporate Social Responsibility on Banks Loans of the Secondary Stakeholders

In addition, institutional CSR also tempers the positive impact of loan maturity and firm leverage on interest rates and loan spread. These effects were strongest among firms that demonstrated sustained performance, rather than among firms that showed mixed performance in terms of their secondary stakeholder-related activities. This study indicates institutional CSR is valued by stakeholders for its risk mitigating and transaction cost reducing effects independent of technical CSR, defined as CSR targeted at primary stakeholders

The authors of the article present their study of the impact of institutional corporate social responsibility on banks loans of the secondary stakeholders. The authors underline that CSR principles and their fulfillment are extremely important at all levels of organization, despite its size and amount of stakeholders. Such huge corporations as Nike use this principles in the process of work at all levels (Zadek, 2004). Thus, effects of CSR are witnessed in banking sector as well. For instance, article’s findings propose that higher levels of institutional CSR are connected with lower levels of interest rates and loan spreads (Francis, Harper and Shyam, 2016).  In addition, the authors admit that institutional fulfillment of CSR principles ensure the positive impact of loan maturity and influence on interest rates and spread of loans. The authors underline that the strongest effects are witnessed among those companies that showed sustained performance, rather than among those companies that demonstrated mixed performance in terms of their secondary stakeholder-related activities (Francis, Harper and Shyam, 2016). These activities are influenced by the institutional CSR goals as major sustainable development goals, aimed at making companies attractive for companionship and investing (Sachs, 2012).  This study demonstrates that stakeholders usually value institutional CSR for its risk mitigating and transaction cost decreasing effects independent of technical CSR, which many primary stakeholders define as the most important (Francis, Harper and Shyam, 2016).

Reasons for the Article’s Choice

The article for analysis was chosen, because it is printed in the international journal. In addition, it is very interesting in terms of its discussion and detailed depiction of the reasons why the fulfillment of CSR principles is so closely examined in the process of providing loans to institutions and organizations.  The interest banks to the CSR principles as basic conditions for loans issuing, is clear. Since business plays a major role in improving the well-being of society, corporate social responsibility is a central concept in the management system. It positions companies both from the point of view of existing risks, and from the point of view of the benefits of the opportunities offered to it, especially regarding their corporate reputation and wide involvement in the activities of stakeholders, employees, consumers, community, suppliers, government, non-governmental organizations, international organizations with which the company’s activities are related.

Relation of the article to CSR

The article demonstrates relation between the CSR and financial performance of the company, its reliability and relations with financial institutions.  The authors underline that the stability of CSR principles is a defining factor of the company’s further development and its consideration as a realizable loan taker.

The basic idea of the article is that CSR adds value not only to the institutions and their major stakeholders, but all the stakeholders, which are somehow related to this institution. As soon as consumers began to take into account the level of responsibility of the company along with the quality and price of goods, investors began to take CSR into account (Hart and Milstein, 2003). Today, according to the estimates of the Reputation Institute, a good reputation, which is based on CSR, increases the company’s capitalization (Garriga and Mele, 2004). Later, according to the calculations of the Boston research company, socially active companies’ sales grew by 3%, assets - by 4%, and capital - by 10% compared to structures that do not manifest themselves in CSR (Garriga and Mele, 2004). So, organizations with higher CSR, are more reliable in the eyes of banks, since they have higher net profits and capitals. Therefore, they are more likely to repay the loans faster. Banks are also stakeholders, when the company addresses them to take loans, therefore, their attention to the company’s CSR principles can be easily explained.

Discussion

The roles that CSR plays in making investment decisions, affect the number of the instruments that help investors. More than 100 sustainable development indices are already used in the world. They are used to define the most and the least socially responsible organizations. Banks, in their turn, use this raking to identify the most reliable institutions in terms of loans taking. Some of them rank socially responsible companies by geographical location, such as the British FTSE4Good Global 100 Index, the Scandinavian OMX GES Ethical Denmark Index (Camilleri, 2017). Others are repelled by the level of sustainable development of the company. For example, the first of the Domini 400 stock indexes launched in the world (now MSCI KLD 400), is based on negative screening. And the Dow Jones Sustainability World Index is based on positive screening and includes 250 leading companies in terms of sustainable development among the 2500 largest companies in the world that are members of the S & P Global Broad Market Index (Fowler and Hope, 2007). On the basis of these data, banks can define the amount of interest rate and identify the level of CSR of the company to evaluate its potential as a loan taker. Taking into this information, the authors of the article found out that higher level of institutional CSR, directed at secondary stakeholders, such as banks and consumers, are connected with lower interest rates and spreads of loans on bank loans made to organizations, engaged in these activities (Francis, Harper and Shyam, 2016). CSR is able to reduce loan spread only as long as the organization shows coherence and sustainable performance in addressing concerns of the secondary stakeholders. These secondary stakeholders are not merely banks, but political institutions that create laws and issue policies, binding the organizations to lead socially responsible business (Friedman, 2016). 

The article was interesting to analyze, because it provides definition of CSR as not simply the way of sustainable behavior of the companies in relation to employees, primary and secondary stakeholders and environment, but as a broad range of strategies and investments that companies use to facilitate their relations with stakeholders (Francis, Harper and Shyam, 2016).  Thus, Kramer and Pfitzer (2016) write that modern companies prefer making serious investments into environmental projects in order to reshape the ecosystem and create shared values with other organizations, for which CSR is also important. As a result, they form the basis for future cooperation, based on common interests (Kramer and Pfitzer, 2016).  Stephen Howard writes that old visions of CSR about the necessity of philanthropy and good deeds are obsolete, as nowadays close attention is paid to relations of the company with the environment and building string relationship with other institutions (Howard, 2015). That is why more and more companies are switching their businesses to making them more ecologically friendly, because such companies look more reliable in the eyes of investors and financial institutions (Howard, 2015). In this respect, Francis, Harper and Shyam (2016) in their article underline that those firms that are closer to CSR in their attitude to the environment, are more likely to have long-term and reliable relations with banks and get loans. The reason is that most consumers prefer choose the companies, which pay enough attention to the development of socially responsible businesses (Pfarrer, 2010).

Summing up, it should be said that corporate social responsibility is not just a company’s responsibility to people, organizations that it encounters in the process of activity, to society as a whole (Prahalad, 2010). It is a set of principles, according to which a company builds its business processes, and the philosophy of organizing business and social activities, which are followed by companies that care about their development, ensuring a decent standard of living for people, the development of society as a whole and the preservation of environment for future generations. CSR affects the loan price, loan spread and interest rate and further relations between the companies and financial institutions.

References

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Fowler, S.  and C. Hope. 2007. ”A Critical Review of Sustainable Business Indices and Their Impact”. Journal of Business Ethics. 76 (3), 243-252

Francis, B., Harper, P. and Shyam, M. 2016. ”The Effects of Institutional Corporate Social Responsibility on Bank Loans”, Business and Society, 57 (7), 1-33

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