Impact of corporate social responsibility on the financial

performance of insurance companies in Bangladesh

1. Introduction:

1.1: Background of the study

The social impact of corporations is becoming a very important issue in business administration. The
performance of business organizations is affected by their strategies and operations in market and non-
market environment.
Mohammad Sanaullah, Director, Corporate Affairs & Company Secretary of Singer Bangladesh said,
'Corporate Social Responsibility is one of the new dimensions in corporate management once if the
focus was on financial Management. Most of that time people were saying that maximization of profit is
the main objective of the company but in modern times we do not speak like that. We feel that the
company's corporate management's main objective is to achieve the corporate goal and incentives as
well. Whenever you have to achieve the corporate goal you think about the stakeholder's interest and at
the same time the corporate social responsibility. Corporate Social Responsibility is for progressive
companies and definitely they will look after the under privileged people, the distressed people and
those who don't have the capacity to survive in this society'.

Importance of the corporate social responsibility especially in the insurance sector has been
raising due to contractual intermediaries is gaining importance. However, in Bangladesh
corporate social responsibility in the insurance sector is an infant stage.
Providing social and economic benefit is more weighed than the profit motive. The
Function of insurance is to protect a few against the economic loss they many suffer by
spreading the losses amongst many who are exposed to homogeneous risks. Upon opening up
of the insurance market, whoever can offer better service, ensure prompt settlement of claim
and sell the same product at a lower premium will thrive and prosper.
The Insurance Market in Bangladesh now consists of two state-owned corporations, forty three
and seventeen private sector general & life insurance companies respectively, a total of 62
insurance companies. Thus the insurance sector in Bangladesh has grown up substantially and
deepened remarkably with number of companies in both life and general segments. With the
expansion of size of the insurance market, the volume of assets of the industry has also
increased substantially.

1.1.1: Corporate Social Responsibility

There are several proposed definitions of corporate social responsibility available, but often
they are unclear or vague. For example, Marrewijk (2003) defines CSR as “...company activities,
voluntary by definition, demonstrating the inclusion of social and environmental concerns in
business operations and in interactions with stakeholders”, which is similar to the definition
made by McWilliams, Siegel &Wright (2006) explaining CSR as “...actions that appear to further

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some social good, beyond the interests of the firm and that what is required by law”.
Pava &Krausz (1996) on the other hand write that as there is so much uncertainty surrounding
the definitions of CSR , it is tempting to suggest that there is no such thing as CSR and that there
is no difference between socially responsible and non-socially-responsible firms.
Anyhow, there is a growing interest in the area of CSR, and especially for the strategic role of
CSR for companies (McWilliams et al., 2006).
As companies are growing and becoming multinational, the external pressure from
stakeholders will most likely continue to increase. Opinions on whether companies should
engage in CSR have however varied in the past. For example, Friedman (1970) argues that CSR
is a result of possible agency problems within the firm, a misuse of resources that instead could
be spent on value-creating activities, while Freeman (1984) rather argues that the firm has to
satisfy a number of stakeholders, as they can influence the firm’s performance and outcomes,
and hence supports companies’ CSR activities.
Peloza & Shang (2011) use three different categories for distinguishing CSR activities, namely
philanthropy, business practices, and product-related. They argue that generalization of CSR
activities is not easy as there is a wide variety of CSR activities included in different measures.

1.1.2: CSR and Financial Performance

The relationship between CSR and financial performance is of importance within the business
and management area, and is also in the interest of investors (Weber, 2008).
Several empirical papers and theoretical research have examined this relationship in different
ways over the years, and the correlation as well as the potential conflict between the two
aspects have been subject to investigation over the last 40 years
(Bird et al., 2007). Despite the companies’ primary responsibility of earning profits, they can at
the sme time contribute to social and environmental goals. They can integrate social
responsibility as a strategic investment in the central corporate strategy, management
instrument, and the business (Folksam, 2013). There is no guarantee that socially responsible
activities automatically lead to an increased value for the shareholders.
However, evidence indicates that it could be a type of insurance protection and therefore
maintains the value for them (ibid).

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1.2: Research Problem :

Being socially responsible involves cost and in order to be a sustainable business practice it
should add value to the firm. However, in most cases, it seems that the time frame of the costs
and benefits can be out of alignment the costs are immediate, and the benefits 7 are not often
realized in short-term (Soloman and Hansen, 1985). Several studies done before have produced
conflicting results. The research project will therefore add value to the business community
especially insurance companies as this will allow them to determine the costs and benefits of
CSR-and whether corporate social responsibilities will improve on their financial performance
or not. Therefore there is a justifiable business case for carrying out the research.
Despite that various researchers have analyzed the relationship between CSR and financial
performance, there are mixed results with regard to the benefits of such an analysis. Friedman
(1970) has suggested a negative link, as social responsibility involves costs and therefore
worsens a firm‟s competitive position; while a decade later, Arlowand Gannon (1982), after
reviewing seven empirical studies, concluded that economic performance is not directly
related, in either a positive or a negative way, to social responsiveness (Arlowand Gannon,
1982). Literature provides conflicting results on the relationship between corporate social
responsibility (CSR) practice and firm financial performance with some studies showing a
positive relationship (Waddock & Graves, 1997),others negative (Cordeiro&Sarkis, 1997;
Wagner et al, 2002) and still others showing that there is no relationship between the two
variables (McWilliams & Siegel, 2000; Aragon & Lopez, 2007).
Most studies, both locally and internationally, have focused on the other sectors listed at the
securities exchanges and not the insurance sector.
Corporate social responsibility in the insurance sector has rarely been studied and there are
inconsistent prior results and limited research on the insurance sectors of developing countries
about factors influencing corporate social responsibility and financial performance.. CSR
relationships have been partly neglected in many studies conducted in developing countries.
This study intends to plug that gap. The research seeks to answer the question
“ Does the involvement in CSR activities affect financial performance of
Insurance companies in Bangladesh? ”

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1.3: Research Objectives
The general objective of this study is to examine the impact of CSR expenditure on insurance
companies’ profitability.
Specifically, the study sought to investigate whether CSR guarantees the strong profitability
linkage.

1.4: Value of the Study

The study on insurance companies is very important to the government and policy makers in
Bangladesh due to the contribution of insurance companies to the Bangladesh economy in both
terms of employment and GDP. Policy makers would be enlightened to make policies relating to
CSR and ascertain the appropriate guidelines to be put in place for governing insurance
companies.

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The research would add value to the business community especially insurance company
investors as this would allow them to determine whether to practice corporate social
responsibilities to improve on their financial performance or not. The results of the study would
help corporate managers in the decision making process, because the study would establish
whether there is a linkage between the CSR and financial performance of the organization. The
outcome of this research helps the employees to identify insurance companies which are
environmentally and socially responsible when looking for prospective employers. Further, the
results would also assist the society in finding firms with strong CSR practices to support.
The study would add value to the academic community. The study would be of great value to
the body of corporate financial management discipline and would form the basis of further
research by identifying the gap that arises from this study, Further, the study would create
forum for further discussions and debate on firm financial performance related issues among
financial consultants and financiers thus adding value to the body of knowledge that already
exist. This study would shed more light in the CSR activities on the Bangladeshi insurance sector
and its impact on the financial performance.

2. Literature review

Research on the correlation between financial performance and CSR with financial performance
is widespread and has shown ambiguous results (McWilliams & Siegel, 2000). The results from
these studies can roughly be grouped into those with results showing negative correlation,
results showing positive correlation, and results showing no or insignificant correlation.
The findings of some of the previous studies are discussed here.
“Making Good Business Sense”-- CSR According to The World Business Council for Sustainable
Development in its publication.
Good CSR reputation and higher reported profitability are strongly related. (Herremans,
Akathaporn & McInnes -1993).
No significant relationship between social responsibility and financial performance
(Aupperle, Carroll & Hatfield-1985).
A marginally significant positive association between social responsibility and financial
performance is found.( Cochran & Wood -1984).
The firms which have been perceived as having met social-responsibility criteria have generally
been shown to have financial performance at least on a par, if not better, than other firms.
(Pava & Krausz (1996))
Corporate social responsibility manages reputation by creating good image in the mind of
customers, suppliers etc. Stakeholders will think that when a company is fulfilling its social
responsibility then how it is possible that it will do anything bad for them, so their trust will

Page 5
enhance on company. Stakeholders trust will impact on company’s profitability and success.
Therefore, it is concluded that corporate social responsibility has positive impact on the
financial performance of a firm (Brine, M., Brown, R., & Hackett, G.)
3. Methodology of the research

3.1: Introduction
This chapter expounds in details the structure of the research. It provides a discussion of the
research methodology that was used in this study. It discusses the research design especially
with respect to the choice of the design. It also discusses the description of the population and
sample of the study, data collection methods as well as data analysis and data presentation
methods that was employed in the study.

3.2: Research Design

This study used a co-relational inferential survey research design. Inferential statistics makes
inferences and predictions about a population based on a sample of data taken from the
population in question. Co-relational designs measure the nature and magnitude of the
relationship between two or more quantitatively coded variables, and predicting the values of
the criterion variable given the value of the predictor variable.

3.3: Population and Sample

The research design is content analysis which involves tracing of sentences of each component
of the corporate social responsibility disclosed in annual reports of Bangladesh insurance
companies in the sample. This study is based on the voluntary disclosure index constructed
using the annual report of the sampled insurance companies.
Since this study is on the impact of corporate social responsibility disclosure on company
financial performance, we used a sample of 5 insurance companies from 47 listed insurance
companies on the Dhaka Stock Exchange (DSE) was randomly selected . Sample size is 10.64%
of the whole population size .

3.4: Data collection

In order to analyse the financial performance of insurance companies in Bangladesh, the
secondary data is collected from financial statements of respective companies for the year
2016.. The study used the annual reports of insurance companies’. Data used include CSR
expenditure, Net asset and PAT for the year 2016. An extensive literature reviewed to

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understand the concept of CSR and the relationship between CSR and financial performance of
insurance business. Data relating to cost/investment/expenditure for the insurance companies
on Net asset, CSR and PAT were used to test the hypothesis of the study; if there is a
relationship and the extent of the relationship, if any, between the variables (CSR expenditure)
and (PAT) as well as (CSR expenditure) and (Net asset).

4. Data Analysis, Discussion and findings

4.1: Data Analysis:
Data collected was edited, coded and classified into different components to facilitate better
and efficient analysis. The quantitative data collected was analyzed and presented through
percentages, means, variances and standard deviations. Pearson product moment correlation
coefficient (r) was used to determine the nature of relationship, coefficient of determination
(r2) and adjusted r2 to conclude on the power of independent variables in explaining the
variations of dependent variable. The P-value was used to test the hypothesis of whether there
is a significant impact of CSR on Financial performance of the insurance companies.

4.2: Statistical Test

In order to test the significance of the model in measuring the relationship between corporate
social responsibility and financial performance of insurance companies in Bangladesh, the study
conducted an Analysis of Variance (ANOVA). On extracting the ANOVA statistics, the researcher
reviewed the significance value (P-values). The study tested at 95% confidence level and 5%
significant level.

4.3: Correlation analysis and interpretation (CSR and PAT)

Table 1 represented the total amounts of CSR which 5 insurance companies spent in the year
2016 and PAT of 2016 .
Table 1. CSR and Profitability of 6 insurance companies for 2016 .

Sl No Company names *CSR *Net Profit (Tk.)

1 Meghna Insurance 3 10.679

2 Prime Insurance 25.792 122.961
3 Green Delta 0.561 -2.696
4 Reliance Insurance 23.328 562.709
5 Global Insurance 8.7618 29.943
*Source: DSE website and annual reports of the insurance companies of year 2016 .

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Statement of Hypothesis

H0: There is no significant effect of CSR expenditure on insurance companies’ Profitability.

H1: There is a significant effect of CSR expenditure on insurance companies’ Profitability.

Table 2. Mean value calculation of CSR and PAT :

SL. NO. Company Names CSR(X)/ PAT(y)/ (TK. (X−𝑋̅) (Y-𝑌̅)

(X−𝑋̅) (Y-
(TK.Million) Million) 𝑌̅)
1 Meghna Insurance 3 10.679 -9.28856 -134.04 1245.0404
2 Prime Insurance 25.792 122.961 13.5034 -21.7582 -293.8105
4
3 Green Delta 0.561 -2.696 -11.7276 -147.415 1728.8206
4 Reliance 23.328 562.709 11.0394 417.99 4614.3755
Insurance 4
5 Global Insurance 8.7618 29.943 -3.52676 -114.776 404.78741
Mean= 12.28856 144.7192 T0tal= 1649.8278

The co-efficient of correlation is independent of the scale used if we divide the term
Σ(X- )(Y- )by the sample standard deviation. It is also made independent of the sample
size, and bounded by the values +1.00 and -1.00 if we divide by (n-1).

Correlation Coefficient r = 0.6935

Coefficient of determination r2 = 0.481

Adjustd r2 = .2878

The calculated value of r suggests that there is a direct relationship between CSR and
profitability for the insurance companies. However, the r2 value points that the association is
not so strong.
CSR can only explain 28.78% of the variation in profitability.

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t test for the coefficient of Correlation:
At the 0.05 level of significance, the decision rule state that if the computed t falls in the area
between + 2.306 and -2.306 the null hypothesis can not be rejected.
t= 1.132
p = 0.25
The computed t value is 1.132 which falls within the critical limit. Additionally, the calculated p
value is higher than the predetermined level of significance.
Thus at the 5% level of significance, the null hypothesis that there is no significant effect of CSR
expenditure on insurance companies’ profitability can’t be rejected.

4.4: Correlation analysis and interpretation (CSR and Net Assets) :

Table 3: represented the total amounts of CSR which 5 insurance companies spent and Net
Asset of 2016.

Sl No Company names *CSR *Net Asset (Tk.)

1 Meghna Insurance 3 438.562

2 Prime Insurance 25.792 1111.223
3 Green Delta 0.561 24.226
4 Reliance Insurance 23.328 6599.452
5 Global Insurance 8.7618 727.47
*Source: DSE website and annual reports of the insurance companies of year 2016 .

Statement of Hypothesis

H0: There is no significant effect of CSR expenditure on insurance companies’ net asset.
H1: There is a significant effect of CSR expenditure on insurance companies net asset.

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Table-4 : Mean value calculation of CSR and net asset
SL. NO. Company Names CSR(X)/ Asset(y)/ (TK. (X−𝑋̅) (Y-𝑌̅) (X−𝑋̅) (Y-
(TK.Million) Million) 𝑌̅)
1 Meghna Insurance 3 438.562 -9.28856 -1341.63 12461.764
2 Prime Insurance 25.792 1111.223 13.5034 -668.964 -9033.315
4
3 Green Delta 0.561 24.226 -11.7276 -1755.96 20593.138
4 Reliance 23.328 6599.452 11.0394 4819.26 53201.987
Insurance 4 5
5 Global Insurance 8.7618 727.47 -3.52676 -1052.72 3712.6802
Mean= 12.28856 1780.187 T0tal= 16174.445

The co-efficient of correlation is independent of the scale used if we divide the term

Σ(X- )(Y- )by the sample standard deviation. It is also made independent of the sample
size, and bounded by the values +1.00 and -1.00 if we divide by (n-1).

Correlation Coefficient r = 0.6392

Coefficient of determination, r2 = 0.4085

Adjusted r2 = 0.2444

The calculated value of r suggests that there is a direct relationship between CSR and
profitability for the insurance companies. However, the r2 value points that the association is
not so strong.
CSR can only explain 24.44% of the variation in profitability of insurance companies.

t test for the coefficient of Correlation:

At the 0.05 level of significance, the decision rule state that if the computed t falls in the area
between + 2.306 and -2.306 the null hypothesis cannot be rejected.
t= 1.4516
p = 0.18

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The computed t value is 1.456 which falls within the critical limit. Additionally, the calculated p
value is higher than the predetermined level of significance.
Thus at the 5% level of significance, the null hypothesis that there is no significant effect of CSR
expenditure on insurance companies’ profitability can’t be rejected.

4.5: Discussion of study findings:

There is a positive relationship between CSR and PAT with correlation of 0.6392 and from the p
value it can be said the relationship is not significant.

There is a positive relationship between CSR and PAT with correlation of 0.6935 and from the p
value (0.25) it can be said the relationship is not significant.

5. Summary, Conclusion and Recommendation

5.1: Summary of the Findings:

There is a positive relationship between CSR and Financial performance of insurance companies
and the impact of CSR on insurance companies Financial performance is not significant.

5.2: Conclusions :
A propos relationship between the CSR and FP in the present study tried to provide the
returning answer of the main question, Is there any relationship between CSR and FP and if
there is any relationship between them, then what is the nature of the relationship? So the
results shows that there is positive relationship between CSR and insurance companies FP, this
positive relation on the basis insurance companies’ data showing the positive social corporate
behavior of Bangladeshi insurance companies towards society. The study concludes that there
was a positive relationship between CSR and Profitability. As the expenditure on CSR increase,
the insurance companies‟ financial performance is also bound to increase. The study further
concludes that CSR however not significant in explaining the changes in the financial
performance of insurance companies.

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5.3: Limitations of the Study
The study experienced limitations in accessing segregated data on insurance companies’
investment in CSR. Majority of the companies did not keep separate records on the exact
allocations spent on CSR making it difficult to access accurate data. Instead, majority of the
companies only indicated a portion of their expenditures allocated for CSR activities.
The study also faced the challenge of unstandardized accounting practices among insurance
companies. The policies applied in the preparation of financial statements and in the
computation of Profit was not uniform across all the insurance companies.

5.4: Recommendations:

The study recommends that insurance companies increase their investments in CSR. This is
because there is no any single organization that exists in a vacuum but instead, they all exist in
a society. As such it is important for organizations to invest in CSR as they affect the society in
the same manner that they are affected by the society.
Through CSR, an organization is able to improve its financial performance; therefore
organizations are advised to engage in CSR activities as this leverage the firms operations. The
management of firms should include CSR as one of their policies for profit maximization.
Organizations should view corporate social responsibility as an avenue for revenue generation
besides undertaking it as per the requirements that mandate it. It should be adopted as a going
concern so as to sustain the returns in future. Corporate social responsibility should be an
integral part of every organization’s operations.

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