Impact of Corporate Social Responsibility Toward Firm Value and

Profitability
Martin Surya Mulyadi and Yunita Anwar, BINUS University, Jakarta, Indonesia
ABSTRACT
Corporate Social Responsibility is business contribution to sustainable development, that corporate
behaviour not only needed to ensure return to shareholders but also other stakeholders interest. In order to have a
long-run business, corporation need to pay attention to 3P (profit, people and planet). Application of CSR is treated
as an investment, as there are many benefit from CSR.
In Indonesia, CSR currently is an obligation only for corporation in natural resources-related business. Our
paper examined 30 selected listed Indonesia corporation (not in natural resources business) to examine relationship
between CSR to firm value and profitability.
Based on our research, using double linear regression model and usage of GRI as measurement of CSR
activity we find out that there is no significant relationship between CSR and firm value (measured by Tobins Q).
We also find same evidence for relationship between CSR and profitability (ROA, ROE and NPM).
INTRODUCTION
In industrialization era, most of corporations only focusing on profitability. Their contribution to society
only limited to available field work for society and providing goods and services. Nowadays, society demanding
corporation to do more as there is economy imbalance between business owners and society; and also negative
impact they created such as pollution.
Application of Corporate Social Responsibility (CSR) now is not treated as a cost, it is an investment
(Wibisono, 2007). CSR refer to relationships between corporation and all stakeholders, including customers,
employees, investors, suppliers, government, and even their competitors. This concept also known as 3P (profit,
people, planet) introduced by Solihin (2009). Business objective is not merely for profit, but also for welfare of
people and ensure sustainability of this planet.
Several previous research show there is positive correlation between CSR and corporate financial
performance. Jo and Harjoto (2011) find there is strongly positive impact for firms that engage in CSR on firm
value. CSR also have positive and significant relationship with corporate financial performance (Cheung et al., 2009
and Choi, Kwak and Choe, 2010). Lindgreen, Swaen and Johnston (2009) also have same conclusion. They
conclude that by reaching out to its stakeholders with CSR, corporation could increase their revenues and profits,
which in turn improves their chance of surviving in the long run.
In contrary with several previous research that conclude there is a strong and positive relationship between
CSR with either firm value or profitability, there are other research that conclude there is no relationship or weak
relationship between CSR and firm value or profitability. Nelling and Webb (2009) conclude from their research
that CSR is driven more by unobservable firm characteristic than by financial performance. Mulyadi and Anwar
(2011) and Apria (2011) also conclude there is no significant impact of CSR to firm value.
This paper will examine impact of CSR toward firm value and profitability in selected 30 listed Indonesian
corporations.
LITERATURE REVIEW
Corporate Social Responsibility
CSR defined as business contribution to sustainable development and that corporate behaviour must not
only ensure return to shareholders, wage to employees and products and services to consumers, but they must
respond to societal and environmental concerns and value (Solihin, 2009). It can be concluded from that definition
that business not only need to ensure return to shareholders. They also need to be concern with other stakeholders.

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Therefore, CSR is a commitment to improve community well being trough discretionary business practices and
contribution of corporate resources.
Triple bottom line concept (3P) explain that in order a corporation could have a long run in business, they
need to pay attention of these components:
1. Profit
Profit is the most important thing and also main objective of every business. Profit could be increase by
improving work management trough process simplification, reduce inefficient activities, save processing and
service time. Also include usage of material as efficient as possible.
2. People
Support from people (society) in business area is needed for corporate sustainability. As an integral part with
society, corporation need to have commitment in giving optimum benefit for society. A harmious relationship
between corporation and society and also good image in society will encourage society to keep existence of
corporation.
3. Planet
There is a causal relationship between corporation and planet. If corporation preserve their environment,
environment will benefit them. Benefit for corporation if they participate in conservation of their environment
is health, comfort, and also availability of natural resources.
According to ISO 26000, there are seven fundamental subjects of CSR as follow:
1. Environment
2. Labour practice
3. Human rights
4. Organizational governance
5. Fair operating practice
6. Consumer issues
7. Social development

In most of the cases, there are two factors affected CSR implementation in a corporation (Apria, 2011):
commitment from CEO, and size and maturity of corporation.
a. Commitment from CEO
CSR is an investment for supporting sustainable and growth of business. With this view, CSR is not viewed as
a cost center. In contrary, it is a profit center in the future. Therefore, CSR is not an additional activity or
something that could be sacrificed to reach the efficiency rate. CSR is an important part of corporation, and
strategically could improve competitiveness of corporation.
b. Size and maturity of corporation
Of course bigger and mature corporation will contribute more than small and immature corporation. CSR show
awareness of corporation as corporation is also part of society.
There are five benefit of CSR according to Solihin (2009). These benefit are:
1. Increase in sales and market share
2. Strengthen brand position
3. Increase image of corporation
4. Decrease in operation cost
5. Increase appeal of corporation for investors and finance analysts

Corporate Social Responsibility in Indonesia

After discussing about CSR, the next question still need to be answered is whether CSR is mandatory or
voluntary. Article 74 of the 2007 Limited Liability Corporation Law No. 40 only requires corporation conducting
their business activities in and or related to the field of natural resources to implement CSR (Waagstein, 2011).

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The 2007 Limited Liability Corporation Law is the new version of the previous law, which governed the
establishment of corporation as legal entities, thier responsibilities and their dissolution. One of the major
controversial features of this law is the inclusion of CSR under article 74:
1. Companies doing business in the field of and/or in relation to natural resources must put into practice
Environmental and Social Responsibility
2. The Environmental and Social Responsibility contemplated in paragraph (1) constitutes an obligation of the
company which shall be budgeted for and calculated as a cost of the company performance of which shall be
with due attention to decency and fairness
3. Companies who do not put their obligation into practice as contemplated in paragraph (1) shall be liable to
sanctions in accordance with the provisions of legislative regulations
4. Further provisions regarding Environmental and Social Responsibility shall be stipulated by government
regulation.

Based on that regulation, currently only corporation whose business is related to natural resources are
obliged to implement CSR activities.
Global Reporting Initiative
CSR indicator used in this paper is Global Reporting Initiative (GRI). Indicators used are standard in GRI,
as follow:
1. Economic performance indicator
2. Environment performance indicator
3. Labour practice indicator
4. Human rights performance indicator
5. Social performance indicator
6. Product responsibility indicator
Previous research
Cheung et al (2009) researching CSR in Asian emerging markets. Using CSR scores compiled by Credit
Lyonnais Securities (Asia), they assess CSR performance of major Asian corporation from 2001 to 2004. The result
show that there is a positive and significant relation between CSR and market valuation among Asian corporation.
Choi, Kwak and Choe (2010) studies empirical relation between CSR and corporate financial performance
in Korea during 2002-2008. They measure corporate financial performance with ROE, ROA, and Tobins Q. ROE
and ROA could be used as a profitability indicator, while Tobins Q oftenly used as measurement of firm value.
They find positive and significant impact between corporate financial performance and stakeholder-weighted CSR
index.
Jo and Harjoto examine the impact of CSR in 2011. Using Kinder, Lydenberg, and Dominis (KLDs) Stats
database they conclude that several governance characteristics positively affect the choice of CSR engagement.
Moreover, they also find that CSR increase firm value. Also, external monitoring by security analyst over CSR
activity of a corporation is more significant than any other kind of monitoring mechanism.
Contrast finding concluded by Nelling and Webb (2009) and also Mulyadi and Anwar (2011). Nelling and
Webb examine causal relationship between CSR and financial performance. Using a time series fixed effects
approach of KLD Socrates Database, they find weaker relationship between CSR and financial performance than
what they have expected. Although they do not conclude there is no relationship between CSR and financial
performance, their study showed the result is lower than their expectation.
Meanwhile Mulyadi and Anwar in 2011 using data panel model from responsibility and corporate
governance rating of Indonesian listed companies show there is no significant impact of corporate responsibility on
stocks return (corporate financial performance/firm value).
The impact of CSR on accounting performance (for example ROA) is a long-standing but still unresolved
question. According to management literature summarized by Margolis and Walsh (2003), over 120 studies between
1971 and 2001 examine the empirical relation between CSR and financial performance, and the results are largely
inconclusive. It explain why we have different result of relationship between CSR and corporate financial
performance.

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The impact of CSR on firm value, however, is relatively less examined. In particular, there is less evidence
regarding how corporate governance and CSR engagement jointly affect firm value. Barnea and Rubin (2010)
conclude that according to the over investment hypothesis, insiders such as the CEO and the board have a natural
motivation to over-invest in CSR activities if doing so enhances their reputation building process.
Based on these previous research, we have formulated our hypothesis in this study. Our first hypothesis is:
There is significant relationship between CSR and profitability. Furthermore, we formulate second hypothesis:
There is signifcant relationship between CSR and firm value.
RESEARCH METHODOLOGY
This research using data from 30 Indonesian listed corporations in 2007-2009. Data used in this research
are financial data, stock price, and information of CSR activities extracted from annual report. For profitability
testing, we use three indicators here: Return on Asset (ROA), Return on Equity (ROE), and Net Profit Margin
(NPM). While to measure firm value, we use Tobins Q (Q).
Model we use in this research is as follow:

ROA = 0 + 1CSRi + 2 SIZE + 3 LEVi + 4 GROW +

ROE = 0 + 1CSRi + 2 SIZE + 3 LEV + 4 GROW +

NPM = 0 + 1CSRi + 2 SIZE + 3 LEV + 4 GROW +
Q = 0 + 1CSRi + 2 SIZE + 3 LEV + 4 GROW +
where:
CSRi=CSR disclosure calculated using GRI standard
ROA=Return on Asset
ROE=Return on Equity
NPM=Net Profit Margin
Q= Firm value (Tobins Q)
GROW=Sales growth rate
LEV=Leverage, measured by debt to equity ratio
SIZE=Size of corporation, measured by total asset
= Error term

In calculating CSR disclosure variable , we employ GRI standard and dummy variable. Focus of GRI we
used in this paper are economic, environment, and social. Score 0 was given if corporation did not disclose item in
questionnaire list, and 1 otherwise.
RESULT AND DISCUSSION
Table 1 shows descriptive statistics of all variable in this research. In CSR variable, its mean is 57% which
we can conclude that there is quite good awareness of CSR activities in Indonesian corporation (as it is above 50%
level). Minimum value of ROA, ROE and NPM is 0, as we decide to use 0 as net income if in a specific year a
corporation has net loss instead using negative amount as symbol of net loss. This minimum value belong to PT
International Nickel Indonesia in 2008 and 2009.

N
ROA
ROE
NPM
Q
GROW
LEV
SIZE
CSRi
Valid N (listwise)
Source: Processed data

90
90
90
90
90
90
90
90
90

Table 1. Descriptive Statistics

Descriptive Statistics
Minimum
Maximum
.00
.43
.00
3.24
.00
.43
.52
3998.25
-.92
.98
.07
.89
1.63
4.99
.24
1.00

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Mean
.1283
.2603
.1068
53.8250
.1014
.4270
3.4368
.5788

Std. Deviation
.10266
.36128
.08245
423.79975
.25711
.19739
.71606
.17634

319

Maximum ROA and NPM of 0.43 belong to PT Aneka Tambang in 2007, while PT Multi Bintang
Indonesia has the highest ROE (in 2009). PT HM Sampoerna has the highest firm value (3,998.25), and corporation
in our sample which has the lowest firm value is PT Asahimas Flat Glass.
Before testing the variable using our model, we conduct multicollinearity test to ensure regression model is
free from multicollinearity between indepent variables. Multicollinearity test could be seen from table 2 to table 5.

Model
B
1
(Constant)
GROW
LEV
SIZE
CSRi
a. Dependent Variable: ROA
Source: Processed data

Table 2. Multicollinearity test, ROA as dependent variable

Coefficientsa
Unstandardized
Standardized
Coefficients
Coefficients
Std. Error
Beta
t
Sig.
.026
.064
.415
.679
.115
.039
.289
2.935
.004
-.135
.051
-.259
-2.644
.010
.041
.014
.287
2.994
.004
.011
.058
.019
.187
.852

Table 3. Multicollinearity test, ROE as dependent variable

Coefficientsa
Standardized
Unstandardized Coefficients
Coefficients
Model
B
Std. Error
Beta
t
Sig.
1
(Constant)
-.108
.241
-.449
GROW
.166
.149
.118
1.111
LEV
.412
.194
.225
2.129
SIZE
.062
.052
.123
1.187
CSRi
-.065
.219
-.032
-.296
a. Dependent Variable: ROE
Source: Processed data
Table 4. Multicollinearity test, NPM as dependent variable
Coefficientsa
Standardized
Unstandardized Coefficients
Coefficients
Model
B
Std. Error
Beta
t
Sig.
1
(Constant)
.052
.051
1.013
GROW
.083
.032
.259
2.625
LEV
-.129
.041
-.308
-3.140
SIZE
.031
.011
.271
2.828
CSRi
-.010
.046
-.022
-.218
a. Dependent Variable: NPM
Source: Processed data

Model
1

(Constant)
GROW
LEV
SIZE
CSRi
a. Dependent Variable: Q
Source: Processed data

Table 5. Multicollinearity test, firm value as dependent variable

Coefficientsa
Standardized
Unstandardized Coefficients
Coefficients
B
Std. Error
Beta
t
Sig.
-156.393
295.051
-.530
-63.602
182.583
-.039
-.348
48.799
236.694
.023
.206
67.156
63.894
.113
1.051
-60.421
268.018
-.025
-.225

Collinearity Statistics
Tolerance
VIF
.945
.954
.995
.932

1.058
1.048
1.005
1.073

Collinearity Statistics
Tolerance
VIF
.655
.270
.036
.238
.768

.945
.954
.995
.932

1.058
1.048
1.005
1.073

Collinearity Statistics
Tolerance
VIF
.314
.010
.002
.006
.828

.945
.954
.995
.932

1.058
1.048
1.005
1.073

Collinearity Statistics
Tolerance
VIF
.597
.728
.837
.296
.822

.945
.954
.995
.932

1.058
1.048
1.005
1.073

Table 2 show VIF of all variables (GROW, LEV, SIZE, CSRi) are between 1.005 and 1.073. Tolerance
value of all variables are between 0.932 and 0.995. As there is no variable with VIF more than 10 and tolerance
value below 0.1, we can conclude there is no multicollinearity between independent variables in this regression
model.

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Table 3 examine whether there is multicollinearity in second model of our testing. There is no independent
variable with tolerance value below 0.1 and VIF more than 10, so there is no multicollinearity in this regression
model.
With the same analysis for table 4 and table 5 (testing of multicollinearity for third and fourth model), we
can conclude there is no multicollinearity in both models. In both tables we can see there is no independent variable
having tolerance value below 0.1 and VIF more than 10.
After passing multicollinearity test (and also normality as well as heteroskedasticity test), we run double
linear regression using first model to fourth model. First model to third model is used to test relationship between
CSR and profitability, while fourth model is used to test relationship between CSR and firm value. The result is
presented from table 6 to table 9.
Table 6. Result of first model, ROA as dependent variable
Coefficientsa
Standardized
Unstandardized Coefficients
Coefficients
Model
B
Std. Error
Beta
t
1
(Constant)
.026
.064
GROW
.115
.039
.289
LEV
-.135
.051
-.259
SIZE
.041
.014
.287
CSRi
.011
.058
.019
a. Dependent Variable: ROA
Source: Processed data
Table 7. Result of second model, ROE as dependent variable
Coefficientsa
Standardized
Unstandardized Coefficients
Coefficients
Model
B
Std. Error
Beta
t
1
(Constant)
-.108
.241
GROW
.166
.149
.118
LEV
.412
.194
.225
SIZE
.062
.052
.123
CSRi
-.065
.219
-.032
a. Dependent Variable: ROE
Source: Processed data

Sig.
.415
2.935
-2.644
2.994
.187

.679
.004
.010
.004
.852

Sig.
-.449
1.111
2.129
1.187
-.296

.655
.270
.036
.238
.768

From table 6 and table 7, we extract the following model:

ROA = 0.026 + 0.011CSRi + 0.041SIZE 0.135 LEV + 0.115GROW +

ROE = 0.108 0.065CSRi + 0.062 SIZE + 0.412 LEV + 0.166GROW +

It could be seen that CSR has no significant impact either to ROA or ROE. Although it has different sign
(positive in ROA, and negative in ROE), as the relationship is not significant so it does not matter. Growth rate,
leverage and size significantly affected ROA (leverage has negative significant impact). In ROE, it is only leverage
that has positive significant correlation.
Meanwhile, from testing of NPM and firm value from table 8 and 9 we can gather this following model:

NPM = 0.052 0.010CSRi + 0.031SIZE 0.129 LEV + 0.083GROW +

Q = 156.393 60.421CSRi + 67.156 SIZE + 49.799 LEV 63.602GROW +
Once again, there is no significant relationship between CSR to NPM and firm value. NPM is significantly
affected by size, leverage and growth rate (similar with ROA, it has positive correlation with size and growth rate;
and negative correlation with leverage). For firm value analysis, we found there is no variable that is significantly
affected firm value.

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Table 8. Result of third model, NPM as dependent variable

Coefficientsa
Standardized
Unstandardized Coefficients
Coefficients
Model
B
Std. Error
Beta
t
1
(Constant)
.052
.051
GROW
.083
.032
.259
LEV
-.129
.041
-.308
SIZE
.031
.011
.271
CSRi
-.010
.046
-.022
a. Dependent Variable: NPM
Source: Processed data

Sig.
1.013
2.625
-3.140
2.828
-.218

Table 9. Result of fourth model, firm value as dependent variable

Coefficientsa
Standardized
Unstandardized Coefficients
Coefficients
Model
B
Std. Error
Beta
t
Sig.
1
(Constant)
-156.393
295.051
-.530
GROW
-63.602
182.583
-.039
-.348
LEV
48.799
236.694
.023
.206
SIZE
67.156
63.894
.113
1.051
CSRi
-60.421
268.018
-.025
-.225
a. Dependent Variable: Q
Source: Processed data

.314
.010
.002
.006
.828

.597
.728
.837
.296
.822

CONCLUSION
CSR defined as business contribution to sustainable development and that corporate behaviour must not
only ensure return to shareholders, wage to employees and products and services to consumers, but they must
respond to societal and environmental concerns and value. Application of CSR now is not treated as a cost, it is an
investment. CSR refer to relationships between corporation and all stakeholders, including customers, employees,
investors, suppliers, government, and even their competitors. This concept also known as 3P (profit, people, planet).
Article 74 of the 2007 Limited Liability Corporation Law No. 40 only requires Indonesian corporation that is
conducting their business activities in and or related to the field of natural resources to implement CSR.
The impact of CSR on accounting performance (for example ROA) is a long-standing but still unresolved
question. While the impact of CSR on firm value relatively less examined. We examined 30 selected Indonesian
listed corporation to find out is there any relation between CSR to firm value and profitability. We employ GRI
method to measure CSR.
Using double linear regression model on 2007-2009 data, and divide profitability to three measurements
(ROA, ROE and NPM) and measure firm value with Tobins Q, we conclude that from four models we used in this
paper there is no significant relationship between CSR and profitability. There is also no significant relationship
between CSR and firm value.
REFERENCES
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Cheung, Y.L., et.al. (2010). Does corporate social responsibility matter in Asian emerging markets? Journal of Business Ethics, 92, 401-413.
Choi, J.S., Kwak, Y.M., and Choe, C. (2010). Corporate social responsibility and corporate financial performance: Evidence from Korea.
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