Doing Good Is Not Enough, You Should Have Been Ethical: Achieving Organizational Performance through Ethical Leadership and CSR

Doing Good Is Not Enough, You Should Have Been Ethical: Achieving Organizational Performance through Ethical Leadership and CSR

Abstract

The current research is an attempt to investigate the moderating role of ethical leadership (EL) on the relationship between corporate social responsibility (CSR) and organizational performance. Past literature links CSR with an organizational performance by considering how CSR influences external stakeholders (i.e. local communities, consumers and shareholders). Less attention is given to test how CSR influences internal stakeholders (i.e. Employees’ attitudes) that finally lead to organizational performance. Using survey data from 220 managerial level employees from the textile industry in Pakistan, we investigate the association between CSR and organizational performance and then investigate whether this relationship is moderated by ethical leadership. The results revealed that CSR is positively and significantly related to organizational performance. Also, ethical leadership positively moderate the relationship between CSR and organizational performance. It is concluded that the relationship between CSR and organizational performance is higher when ethical leadership is high. Theoretical and managerial implications are also discussed.

Keywords: Institutional Theory, Organizational Performance, Ethical Leadership, CSR

1. Introduction

For the last decade, corporate social responsibility (CSR) gained numerous attention of scholars and practitioners in the field of psychology and management because it positively affects individual attitudes and behaviours (Aguinis and Glavas, 2012; Wang, Fu, Qiu, Moore, and Wang, 2017). Nowadays scholars focus on individual level CSR activities as employees’ attitude and behavior play an important role in transforming CSR into a valuable organizational outcome (Muller et al, 2012). Corporate social responsibility referred to as “the organizations’ voluntary actions based on their strategies and practices to create a relationship with its key stakeholders and natural environment without financial rewards” (Orlitzky and Benjamin, 2001).  Previous findings indicate a positive effect of CSR on job outcomes i.e. Job satisfaction (Lopez et al, 2007), organizational commitment (Peloza, 2009), work engagement (Van Beurden and Gossling, 2008), organizational identification and organizational citizenship behavior (Li et al, 2010).

Initially, organizations perform CSR activities at community level (donated to local communities) but now they transfer their CSR activities at a societal level (hazard free business or environment protected business operation). This notion is based on positive ideological thinking that organizations work for positive social changes and also generate a handsome return from CSR initiatives (Lee and Kim, 2017).  Furthermore, firm’s social legitimacy is the result of such activities and make an organization able to respond to socio-cultural norm (Shin et al, 2016). Thus, the social legitimacy ensured internal and external stakeholders’ resources and support (Kim and Thapa, 2018), which may lead to improve social and financial performance (Saeidi et al, 2015).  However, researchers like Friedman (1970) and Lopez et al, (2007) argued that CSR is the waste of organizational resources. Although, many researchers argued that CRS is organizational strategic resource and through which organizations achieve sustainable competitive advantage (Kim and Thapa, 2018; Aguilera et al, 2007; Orlitzky and Benjamin, 2001). Researchers argued that the inconsistency in results as due to the lack of study that link CSR and performance through some contextual moderating or mediating factors (Saeidi et al, 2015; Lin et al, 2011; Carmeli et al, 2007). Thus, more attention is needed to explore CSR – performance link through a precise mechanism (Kim et al, 2018). Furthermore, previous researches focus on CSR – performance link and considered the effect of CSR on external stakeholders (local communities, customers and shareholders) (Aguinis and Glavas, 2012; Kim and Thapa, 2018). For instance, Saeidi et al, (2015) explored that CSR and performance link is mediated by customer satisfaction and organizational reputation. Lai et al, (2010) argued that the reputation and brand equity mediate the relationship between CSR and performance. Even though these studies enhance our understanding regarding CSR – performance link, but they fail to investigate how internal stakeholders (i.e. Employees) affect CSR- performance link. Thus, our focus is to examine the role of internal stakeholders in the CSR – performance relation. Institutional theory explains the importance of micro-level intermediary processes in macro-level variable’s relationship.  For instance, Scott (1995) stated that institutional enablers (i.e. Systems, structures or practices) affect employees’ attitude, behavior and perception that ultimately enhance financial performance. Thus, it is expected that a high-level organizational performance is achieved through CSR through positively develop employees’ attitudes and behaviors.

1. Literature Review and Hypothesis Development

For the past few decades, researchers examined the relationship between CSR and firm performance and come to the conclusion that CSR positively affect organizational performance (Lin et al, 2011; Saeidi et al, 2015). Through CSR an organization can enhance their performance through the improving relationships with the other key stakeholders that mainly effect organization revenues and expenses. An organization can reduce costs via enhancing the relationship and build trust that ultimately reduce transaction and processing costs. Similarly, an organization can increase their revenues through establishing long lasting relationships with key players which attract new customers and investment and make organization able to charge premium prices (Orlitzky and Benjamin, 2001). Such activities improve organizational performance by inducing consumers to buy organization’s products and services (Lin et al, 2011). CSR related activities enable organizations to target socially-oriented customers as it may increase their satisfaction level. Therefore, CSR activities are advantageous as it positively affects economic, commercial and operational performance of the organizations (Kim and Thapa, 2018). Thus, based on the cited literature we propose that:

H₁: CSR is positively and significantly related to organizational performance.

H_1a: CSR is positively and significantly related to Commercial performance.

H_1b: CSR is positively and significantly related to operational performance.

H_1c: CSR is positively and significantly related to economic performance.

Organizations can improve their performance in the long run if their leaders support and encourage CSR related activities with consistency and determination (Muller et al, 2012). Ethical leadership as “the demonstration of normatively appropriate conduct through personal actions and interpersonal relationships, and the promotion of such conduct to followers” (Brown et al, 2006). Such leaders set an example of ethical behavior as they practice it consistently and discourage unethical behavior and practices and other wrongdoing in the organization (Usman and Hameed, 2017).  Thus, such practices may not only impede unlawful or destructive organizational practices, but it also helps organizations to learn and practice constructive practices. Since CSR is not a short-term activity, its need strong and consistent ethical leadership. Normally such types of leadership invest more in CSR activities which ultimately affect organizational performance (Kim and Thapa, 2018). In an organization, senior leaders may establish and practice societal responsibilities and motivate their subordinates to initiate them (Thomas et al, 2004). Thus, based on the notion that ethical leadership may enhance organizational performance, we propose that:

H₂: Ethical leadership moderate the significant relationship between CSR and organizational performance.  

H_2a: Ethical leadership moderate the significant relationship between CSR and organizational commercial performance.  

H_2b: Ethical leadership moderate the significant relationship between CSR and organizational operational performance.  

H_2c: Ethical leadership moderate the significant relationship between CSR and organizational economic performance.  

III. Methodology

Sample and Data Collection

Employees from the textile industry participate in the current research. We select textile sector for several reasons. First, the textile sector is the largest sector of Pakistan that contribute 57% of the country export. Second, the textile sector is the second largest employment sector of Pakistan. Third, the textile sector contributes 8.5% to the country GDP. Forth, a number of studies related to employee green behavior are conducted in services sector and ignore manufacturing industries like textile that high impact environment. We select 500 managerial level employees through purposive sampling to participate in the study. The sample size was selected on previous researchers’ recommendations (Sekaran and Bougie, 2013; Field, 2013; Ullah et al. 2018). Data was gathered through adapted questionnaire measured on five-point Likert type scale. We received 238 questionnaires, from which 18 were not properly filled or incomplete, thus discarded from the study. Thus, a total of 220 (response rate 44%) responses was used for further analysis.

Measurement

We adapted 12 items scale of CSR originally developed by Turker’s (2009). This scale measures stakeholders’ approach on four major domains, including environment, employee, customer and community. Environmental domain was measured through three items. Sample items include “our company makes investment to create a better life for the coming generations”. The customer’s domain was measured on three items. A sample item is “customer satisfaction is highly important for our company”. Employee domain was measured on three items. Sample items include “the managerial decisions related to employees are usually fair”. Community domain was also measured on three items. Sample item is “our company supports the non-government organizations to work in the problematic area”. To measure ethical leadership a ten-item scale developed by Brown et al, (2005) was adapted. Sample item is “our organization discusses business ethics or values with employees”. Organizational performance was measured through Fraj-Andres et al, (2009) scale. This scale has 16 items from three domains i.e. Commercial (6 items), operational (5 items) and economic (5 items). Sample item is “with respect to our competitor, our position is much batter”. All items were measured on five-point Likert type scale.

1. Results

Respondents’ Profile

There were 91.4% male respondents and 8.6% were their female counterparts who participated in the study. Also, 3.6% participants have FA/Fsc degree, 18.6% have BA/B. Sc. qualification, 74.5% have Master qualification and 3.2% have other qualifications like MS/M.Phil. /PhD or Diploma. Furthermore, 7.3% respondents have 1-5 years’ experience, 17.7% have 6-10 years’ experience, 40.9% have 11-15 years’ experience, 30.9% have 16-20 years’ experience and 3.2% have more than 20 years’ experience in textile industry. Moreover, 14.1% respondents fall in the age group of 21-30 years, 33.2% respondents belong to an age group of 31-40 years, 30% employees have an age group of 41-50 years and 22.7% respondents belong to an age group of 51-60 years.

Reliability Analysis

To measure internal consistency among variables we performed reliability analysis through Cronbach alpha technique. Table 1 report reliability analysis and as depicted the scales used in the study have high internal consistency value as all scales have a Cronbach alpha value above 0.7.

Table 1: Reliability Analysis

Variable                                                No. of Items                  Alpha Coefficient

Ethical Leadership                                         10                                         .917

Organizational Performance                         16                                         .896

Corporate Social Responsibility                    12                                         .904

Table 2 reports confirmatory factor analysis (CFA) of the scales used in the study. Fit indices for all three variables/scales are satisfactory. All measurement variables are statistically significant, and the range of standardized loading values lies between 0.62 to 0.91. Similarly, the values of GFI and AGFI is almost equal to 0.90 and χ2/df values are less than 2. Furthermore, RMSEA values are below 0.05 and CFI values is above 0.90, thus indicating a good model-data fit.

Table 2: CFA Statistics

Table 3 depicted intercorrelation and average variance extraction (AVE) of the study variables. The results of both tests ensure construct and discriminant validity and also confirm that there is an issue of common method bias (based on Harman’s one-factor test (Lee et al, 2013). The values of composite construct reliability are above 0.7. The correlation coefficient of the tested variables is also significant.

Table 3: Correlation, AVE and CCR

EL              CSR                OPC                OPO                    OPE

EL                     1

CSR                .647**             1

OPC                .424**          .457**               1

OPO               .435**           .419**            .616**                1

OPE               .471**           .429**             .531**             .686**                    1

Mean              3.56               3.39                 3.84                  3.79                     3.77

SD                  .867               .841                 .768                  .721                     .747

AVE              0.712              0.798               0.687                0.754                   0.792

CCR              0.916              0.905                0.865                0.935                  0.932

Regression Results

Table 4 reports regression coefficients of the proposed models. Hypothesis 1 that is “CSR is positively and significantly related to organizational performance (OP) is accepted (coefficient = 0.388, t = 8.520). Similarly, H_1a, H_1b and H_1c that link CSR with commercial performance (coefficient = 0.417, t = 7.585), operational performance (coefficient = 0.359, t = 6.808) and economic performance (coefficient = 0.381, t = 7.021) are accepted at 95% confidence interval.

  Table 4: Regression Coefficients

Path                                               Coefficient           Std. Error           t-value          p-value

CSR OP                                .388**                  0.46                  8.52              0.000

CSR OPC                              .417**                 0.55                  7.585             0.000

CSR OPO                              .359**                 0.053                6.808             0.000

CSR OPE                               .381**                 0.054                7.021             0.000

Moderation Results

Moderation analysis was performed through Hayes and Preacher (2013) procedure. We calculate interaction term between EL and CSR. A case where the p-value of interaction term is significant, indicating that the moderator moderates the relationship between independent variable and dependent variable (Hayes and Preacher, 2013). The interaction term coefficient value (coefficient = 0.234, p = .00) having no zero at lover level confidence interval (LLCI) and upper level confidence interval (ULCI) ensured the moderating role of EL. Thus, hypothesis 2 is accepted. The subsequent hypotheses H_2a (coefficient = 0.195, p = .00), H_2b (coefficient = 0.291, p = .00) and H_2c (coefficient = 0.223, p = .00) are also accepted as the coefficient values of interaction term are significant. Thus, we concluded that CSR and OP relationship is strong when EL level is high. Interaction plots are reported to confirm the moderating role of EL on CSR and OP (OPC, OPO and OPE) relationships. To create interaction plots we used Dowson (2014) excel sheet.

Table 5: Moderation Results

Path                               coefficient           se             t            p           LLCI           ULCI

CSR to OP int_1                   0.234                 .046        5.11       0.00         .144             .324

CSR to OPC int_1                0.195                 .074         2.65      0.00          .151             .341

CSR to OPO int_1                0.291                 .055         5.31      0.00          .183             .399

CSR to OPE int_1                 0.223                 .062         3.60      0.00          .101             .346

Figure 1: Interaction Plot of CSR, OP and EL Relationship

Figure 2: Interaction Plot of CSR, OPC and EL Relationship

Figure 3: Interaction Plot of CSR, OPO and EL Relationship

Figure 4: Interaction Plot of CSR, OPE and EL Relationship

1. Discussion and Conclusion

Although many studies highlighted the relationship of CSR with OP, but very little research has been done to explore this relationship through considering internal processes (Aguinis and Glavas, 2012; Kim et al, 2018). Previous researches investigated CSR and OP relationship while focusing on external – oriented perspectives (Luo and Bhattacharya, 2012; Roberts and Dowling, 2002), except Kim et al, (2018) who examined this relationship through considering authentic leadership as possible internal resource that enhance CSR and OP relation. We tried to complement previous researches limitations by investigating CSR and OP relationship through internally oriented perspective (i.e. Ethical leadership). Based on our empirical investigation, we found that EL play a moderating role between CSR and OP (OPC, OPO and OPE) relationship. It means that leaders’ ethical behavior is an important factor that moderates the influence of CSR on OP and its dimensions (i.e. OPC, OPO and OPE). Based on our empirical investigation, we concluded that the relationship between CSR and OP is high when EL is high and this relationship is weak when EL is low.

Theoretical Implications

The current research contributes to the existing literature in the following ways. First, we link CSR and OP by providing internally oriented perspective through the combination of both micro and macro-level approach. Based on institutional theory, it is suggested that macro-level perspective (i.e. CSR and OP relationship) can be extended through micro-level mechanisms, such is employee’s attitudes. Second, this research highlighted the importance of ethical leadership in organizational perspective. No matter how actively an organization practices CSR activity, it should decrease the positive attitudes of members if it is not based on ethical ground. Attitude and a positive mindset are essential to perform a good act that affects others. Our findings also suggested that a leader’s ethical practices must be critically considered in order to achieve the positive effect of CSR on employees’ attitudes.

Managerial Implications

Based on the findings of the current research, we recommended certain suggestions to the leaders and top management of the organizations who practices CSR activities to boost their performance. First, based on the study findings, the leaders/managers are advised to consider CSR is a profitable investment instead of obligation that organizations must perform. If CSR practices are sincerely and actively implemented, it would positively improve employee’s attachment and dedication towards their organizations. Based on the notion that employees’ attitudes and behaviors have an impact on the firm’s performance, there is a reasonable choice for organizations to actively practice CSR activities to positively improve employees’ attitudes and perceptions. It is the responsibility of top management to not only practices CSR but to nourish a long-lasting CSR-oriented culture in their organizations. Second, top management is also responsible to not only communicate CSR related practices of organization, but also rewarded those employees who are directly involved in CSR activities. Lastly, the decisions, actions and communication of top management should be ethical. As in our case, EL enhance the relationship between CSR and OP relationship.

Limitations and Future Directions

Although our study has many important contributions, but its lack in a few areas that need attention. First, we tested the proposed hypotheses by selecting employees only from the textile sector. Most of the firms from this sector do not actively participate in CSR activities. It is suggested for future researchers to link CSR with OP in diverse organizational setting. Second, we collect the data through purposive sampling technique that may bias generalizability of findings. To overcome this issue, future researches may use robust sampling techniques. Lastly, we used EL is a possible moderator on the CSR – performance link and ignore other important leadership styles (i.e. authentic and transformational) that may positively impact CSR and OP relationship. Thus, it is recommended for future studies to test the moderating role of authentic leadership and transformational leadership styles on CSR and organizational performance relationship.

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