Relationship Between Profitability and Corporate Social Responsibility Disclosure: Evidence from Vietnamese Listed Banks

Abstract

In view of integration and development, compliance with regulations on information disclosure has important implications for users. Corporate social responsibility disclosure (CSRD) is an increasing concern of the community and society. CSRD always poses many challenges for the profitability of banks. The article uses the ordinary least square method to examine this relationship and employs timeseries data of five years from 18 Vietnamese listed banks from 2015 to 2019. The analysis is informed by Jensen and Meckling's Agency theory, Freeman's Stakeholder theory, and Dowling and Pfeffer's Legitimacy theory. The study results show that, with the CSRD dependent variable, return on assets (ROA) and net interest margin (NIM) have an opposite influence, but return on equity (ROE) has no effect on CSRD, while on the profitability dependent variable, CSRD has a different influence from ROA, ROE, and NIM. To enhance the relationship between CSRD and profitability, Vietnamese listed banks need to comply with CSRD as well as demonstrate responsibility to the community and society. Managers need to have clear development policies and strategies to ensure both profitability and responsibility regarding social and community activities. The State Securities Commission of Vietnam should enforce strict sanctions, conduct inspection, and complete evaluation criteria for Vietnamese listed banks.

1. Introduction

Corporate social responsibility disclosure (CSRD) is an issue of global concern. It shows the responsibility of the firm to the community and society. The challenge always arises when solving the problem between profitability and CSRD. Wanless (1995) argues that the implementation of CSRD is not just about complying with the law, but it is a strategy for managers to ensure sustainable development and protect long-term profits. CSRD is about improving the lives of employees and society through training programs, taking care of public health, and building public facilities (Adekunle et al., 2017). Information related to CSRD is an important basis for investors’ decision-making (Pant & Piansoongnern, 2017). In addition to implementing CSRD, banks also often consider appropriate strategies to improve economic efficiency because profitability plays a very important role in making investment decisions in CSRD operations (Rehman et al., 2015). It is the core foundation in the investment and development process of banks. Therefore, the relationship between CSRD and profitability has always been a concern not only of banks and investors.

Vietnam is in the process of integration and development, so the implementation of economic development and CSRD is seen as an opportunity as well as a challenge for banks. In the economic development strategy, the bank should have policies to implement correctly CSRD to satisfy the needs of investors, in particular, and society, in general. Besides the implementation of CSRD, profitability is an issue of concern and plays an important role, ensuring the survival of banks (Nguyen, 2018a). It can be said that the banking industry plays a very important role as the backbone of every economy. Therefore, banks need to be pioneers in implementing CSRD to protect the environment, build a positive image in the market, and strengthen confidence with investors as well as customers. Considering these needs, the article examines the relationship between profitability and CSRD at Vietnamese listed banks (VLBs) to identify the interplay of these two factors to implement strategies to improve the bank’s profitability and CSRD.

2. Literature Review

2.1. Concepts

2.1.1. Profitability

Marshall (1920) said that profitability is shown as an action to perform financial activities; it is always tied to the goals and development strategy of the bank. Shareholders also considered CSRD as a symbol to show the ability of managers, as a symbol of the reputation of the bank (Bowman & Haire, 1975). The most commonly used financial indicators to evaluate the bank’s performance are return on assets (ROA), return on equity (ROE), and net interest margin (NIM) (Mohamud, 2018).

2.1.2. CSRD

CSRD still encompasses many concepts and different perspectives, but the core is about the responsibility to protect the environment. This is explained by the fact that, when banks work to generate economic benefits, it more or less affects the environment in which the bank operates. Therefore, the implementation of CSRD is a way for the bank to compensate the society. Due to many different views on CSRD, a Global Reporting Initiative (GRI) was published in 1979 with the desire of businesses to join hands to implement and contribute efforts to sustainable development, aiming to enhance the spiritual life of workers, their family members, the community, and society as a whole. Recently, based on the development of society, and the need for CSRD, GRI (2018) was announced to supplement and correct information related to waste, and safety and career development to help businesses better understand and fulfill their responsibilities to the environment and society.

2.2. The Theories

2.2.1. Agency Theory

This theory was formulated by Jensen and Meckling (1976). It is the basis for binding rights and obligations between the principal and the agent. The representation relationship between the parties is approved by specific terms in the contract. From there, the authorized person clearly defines his or her duties and powers to perform the assigned tasks. The theory also proves that the parties always want to maximize their interests, which give rise to a conflict of interest between the two parties (proxies and mandates). Resolving this conflict often incurs a cost called an agency cost. The implementation of socially-responsible acts always incurs costs, which more or less directly affects the performance of banks, in general, and the interests of managers, in particular.

2.2.2. Stakeholder Theory

The theory emphasizes that, in addition to protecting their own interests, banks need to protect the interests of stakeholders including customers, employees, owners, communities, and shareholders. Freeman (1984) defined stakeholders as an individual or a group. Stakeholders were divided into basic, and subgroups in which the group of basic stakeholders includes employees, suppliers, customers, creditors, and shareholders. This group is directly affected and bears all risks (if any) from the business activities. Stakeholders of sub-groups such as government and community indirectly influence the bank.

2.2.3. Legitimacy Theory

Legitimacy theory was put forward by economists and sociologists Dowling and Pfeffer (1975). Suchman (1995) recognized legitimacy as the general perception or assumption that the action of an entity is desirable or appropriate in some social structural system of norms and values, beliefs, and definitions. Therefore, in order to create trust and values, the bank must comply with the provisions of law and social standards. If this goes against these standards, banks may face difficulties as well as not receive the support of society to continue operating.

2.3. Overview of Related Studies

The study of CSRD is of interest to a number of researchers. The studies focused on several factors such as corporate governance (Lee, 2018; Nguyen, 2018b; Zahari et al., 2020; Jahid et al., 2020; Tran et al., 2020). Considering the impact of profitability, CSRD is divided into three main areas. First, studies focus on assessing the impact of profitability on CSRD (Fatima et al., 2018; Batra & Bahri, 2018; Ahmed & Sharar, 2019). Second, studies look at the impact of CSRD on profitability (Abeysinghe & Basnayake, 2015; Adekunle et al., 2017; Mohamud, 2018; Sofian & Muhamad, 2018; Wagle, 2020). Third, studies combine the two above areas to evaluate the relationship between profitability and CSRD (Mallin et al., 2014; Taskin, 2015; Musibah & Alfattani, 2017; Bussoli & Conte, 2018; Nguyen, 2018a).

Mallin et al. (2014) examined the relationship between CSRD and profitability at Islamic banks of 13 countries in the period 2010–2011; the author used ordinary least squares (OLS). For the CSRD dependent variable, the author used two financial variables (ROA and ROE) and some control variables. The results showed that ROA, ROE, and bank size have the same impact as CSRD. For the ROA and ROE dependent variables, the author used the independent variable CSRD and some control variables to test the regression model. The results showed that CSRD and bank size do not affect profitability.

Taskin (2015) has studied the relationship between CSRD and profitability in Turkish banks. The article applied the OLS on collected data in 2013. In the regression model, the dependent variable is profitability, including ROA, ROE, and NIM, as well as the variable control, which is the bank size. For the NIM dependent variable, CSRD has the same effect, and vice versa, whereas bank size has the opposite effect. In the model where the ROA and ROE are dependent variable, the results showed that CSRD does not affect the dependent variable, while bank size has the same impact and direction as ROA and ROE. For the CSRD dependent variable, the author used three independent variables, namely, ROA, ROE, NIM, and the control variable is the bank size. The regression results of these three models showed that only the financial variable NIM influences positively CSRD. ROA and ROE do not affect the dependent variable. Bank size has an impact in the same direction as CSRD.

Musibah and Alfattani (2017) used a multivariate regression method to evaluate the relationship between CSRD and profitability of Islamic banks in the period 2007–2011. The dependent variable is CSRD, and the author used two financial variables as independent variables and three control variables. Then, each independent variable (ROA and ROE) affect the dependent variable. The results showed that both financial variables, bank size and financial leverage, have similar effects on CSRD. For the dependent variable profitability, the author used each CSRD variable to influence the dependent variable. The results showed that most of the profitability (ROA, ROE), bank size, and financial leverage have no effect on the dependent variable.

Bussoli and Conte (2018) studied the relationship between CSRD and profitability at banks in Europe. Data were collected from 71 listed banks from 2011–2015. The author applied a quantitative method including three OLS tests. With the CSRD dependent variable, the author used the independent variable, the financial variable (ROA), with six control variables. The results showed that ROA has a negative impact, bank size had a positive impact, financial leverage (LEV) and cost to income ratio (CIR) have no impact on the dependent variable. For the model with the ROA dependent variable, the independent variable is CSRD and some control variables. The regression model results showed that the CSRD and bank size have no impact on the dependent variable. LEV has a positive impact on profitability, CIR has a negative impact on ROA.

In Vietnam, there are several studies related to CSRD. Nguyen (2018a) studied the influence of some factors on the CSRD of banks. In addition, from another perspective, Nguyen (2018b) has studied the impact of corporate governance on the CSRD of banks. Until now, the relationship between profitability and CSRD has not been examined by researchers in Vietnam.

3. Methodology

3.1. Data

The sample is taken from published data of 18 VLBs on the stock market in Vietnam. At the time of sampling, at the end of 2020, there were 18 VLBs. Data is collected from the financial and annual reports of the VLBs over the 5-year period from 2015 to 2019 to measure the variables in the model. For samples related to CSRD, the author refers to the measurement criteria in Circular 155/2015/TT-BTC (Circular 155/2015). This circular is the basis for determining the CSRD of each bank.

3.2. Measurements

3.2.1. CSRD

Through many years of development, to meet the expected needs of society and investors, CSRD is gradually quantified to be measured. Recently, GRI (2018) has changed and added measurement criteria related to water elements, occupational safety, and health. The latest set of measurement criteria, valid to this day, includes 72 criteria.

In Vietnam, Circular 155/2015 regulates CSRD. CSRD is measured through 14 criteria with seven mentioned factors, including management of raw materials, energy consumption, water consumption, compliance with environmental laws, policies related to employees, reports relating to accountability to local communities, and reports related to green capital market operations under the guidance of the State Securities Commission (Vietnamese Ministry of Finance, 2015). The formula is presented as follows:

\(\mathrm{CSRD}_{i}=\frac{\sum_{t-1}^{n} X i}{n}\)

Where:

I_{ij, t}: Information disclosure index of VLBs, 0 ≤ I_j ≤14.

d_ij: 1 if information item i is published; 0 if the information item i is not published.

n_j: a number of information items on the notes if CSRD that VLBs may publish.

t: figures for 2015–2019

3.2.2. Profitability (ROA, ROE, NIM)

Return on assets (ROA): ROA is the rate of return on assets, measured based on total return after tax on average total assets. Therefore, ROA is determined as follows:

ROA = Total profit after tax / average total assets.

• Return on equity (ROE): ROE is measured by the total return after tax on average equity. This index is determined as follows:

ROE = Total profit after tax / average equity.

• Net profit margin (NIM): NIM is measured based on net interest income over total interest-earning assets. NIM is defined as follows:

NIM = Net interest income / total average interest-earning assets.

3.2.4. Control Variables (SIZE, LEV, CIR)

Bank size (SIZE): the size of a bank is measured by the natural base logarithm of its total assets. Bank size is determined as follows:

SIZE = Ln (total assets).

Leverage (LEV): LEV is a measure to evaluate the efficiency of using loans to generate profits for banks. The formula for calculating LEV is determined as follows:

LEV = Total liabilities / total assets

Cost to income ratio (CIR): Cost-to-income ratio is an indicator measured to determine a bank’s performance. CIR is calculated as follows:

CIR = Operating expenses / interest-earning assets

Figure 1: Research Model on Testing the Relationship between Profitability and CSRD of the VLBs in Vietnam

3.3. Research Model

The research model is borrowed from Mallin et al. (2014), Musibah and Alfattani (2014), Taskin (2015), and Bussoli & Conte (2018) as well as opinions of some experts from the State Bank of Vietnam to test the relationship between CSRD and profitability. In the scope of the study, the article focuses on the representative and general financial variables such as ROA, ROE, NIM, and CSRD. Control variables put into the model by the author include SIZE, LEV, and CIR. The research model of the article is designed as follows:

Model 1:

\(\begin{aligned} \mathrm{CSRD}=& \beta_{0}+\beta_{1}{}^{*} \mathrm{ROE}+\beta_{2}{}^{*} \mathrm{ROA}+\beta_{3}{}^{*} \mathrm{NIM} \\ &+\beta_{4}{ }^{*} \mathrm{SIZE}+\beta_{5}{ }^{*} \mathrm{LEV}+\beta_{6}{ }^{*} \mathrm{CIR} \end{aligned}\)       (1)

Model 2:

\(\begin{aligned} \mathrm{PROFIT}(\mathrm{ROA}, \mathrm{ROE}, \mathrm{NIM})=& \beta_{0}+\beta_{1}{}^{*} \mathrm{CSRD}+\beta_{2}{}^{*} \mathrm{SIZE} \\ &+\beta_{3}{ }^{*} \mathrm{LEV}+\beta_{4}{ }^{*} \mathrm{CIR} \end{aligned}\)       (2)

4. Research Results

4.1. Descriptive Statistics

Descriptive statistical results of the variables in the model are presented in Table 1, specifically:

Table 1: Descriptive Statistics

• The statistical results show that the average CSRD is 9.86 and the standard deviation of 7.18 is quite high. This proves that the gap is still large between banks in terms of CSRD.

• For profitability, including ROA, ROE, NIM, the average is 0.89%, 11.87%, and 3.22%, respectively. The standard deviation of ROA and NIM is insignificant, while ROE is 7.75%. This shows the efficiency of using the capital of different banks.

• For control variables, these variables have a negligible standard deviation. Average of the variables such as SIZE is 19.13 (the minimum is 17.04 and maximum is 21.12); LEV is 0.92% (the minimum is 0.83% and the maximum is 0.95%); and CIR is 0.01% (the minimum is 0.008% and the maximum is 0.03%).

4.2. Suitability of the Model

The suitability of the model is assessed by R-squared, but to explain more clearly the appropriateness of the regression model regardless of the magnification deviation of R-squared, the article uses the adjusted R-squared as the basis for evaluation. The conformity test results of each model are presented as follows:

4.2.1. CSRD Dependent Variable (Model 1)

According to the results from Table 2, the model has adjusted R-squared by 0.493, which means that the independent variable can explain 49.3% of the variation of the dependent variable. The level of explanation for this model is relatively good and acceptable.

Table 2: Evaluation of the CSRD Model

4.2.2. Profitability Dependent Variable (Model 2)

Table 3 shows that adjusted R-squared reached 61.6%, 48.7%, and 76.1% of ROA, ROE, and NIM, respectively. The level of interpretation of this model is relatively good and acceptable.

Table 3: Evaluation of the Profitability Model

4.3. Regression Results

On the basis of analyzing and evaluating the suitability of each research model, the article presents specific models for the CSRD dependent variable and the profitability dependent variable.

4.3.1. CSRD Dependent Variable (Model 1)

Based on the results in Table 4, the regression results of the above model show that the profitability variables (ROA, and NIM) have a negative impact on CSRD, in which ROE is not statistically significant. Therefore, the regression model is defined as follows:

Table 4: CSRD Regression Results

4.3.2. Profitability Dependent Variable (Model 2)

Based on the results in Table 5, CSRD and LEV have a different effect than ROA. SIZE and CIR impact in the same direction as the dependent variable. The results of the regression model are as follows:

Table 5: ROA Regression Results

Based on the results in Table 6, CSRD and LEV have a negative relationship with ROE, while SIZE and CIR have a positive relationship. The results of the regression model are presented as follows:

Table 6: ROE Regression Results

Based on the results in Table 7, CSRD and LEV have opposite impact. The other two variables (SIZE, and CIR) have positive impact on NIM. The model results are presented as follows:

Table 7: NIM Regression Results

5. Discussion and Policy Recommendations

5.1. Discussion

The regression results of the model show that the dependent variable CSRD, the independent variable ROA, and NIM have a different influence on the dependent variable, but ROE has no effect on CSRD. Bussoli and Conte (2018) showed similar results with ROA having an impact different from CSRD. This shows that VLBs are quite cautious in implementing CSRD. The reality shows that the higher the profitability of the VLBs, the lower the CSRD. This explains that banks are very careful and consider seriously CSRD.

For the model whose dependent variable is profitability, the independent variable CSRD has a different influence and impact on ROA, ROE, and NIM. For control variables, in both models, SIZE, and CIR have an influence in the same direction as the dependent variable, while LEV has a different direction from the dependent variable. This result is not consistent with the previous study due to the specific national characteristics.

5.2. Policy Suggestions

For VLBs, in order for the information to be of quality, transparent, complete, and appropriate, regulators need to increase awareness and take responsibility for the disclosure of information to create equality and fairness among the VLBs and information users. To do this, managers of VLBs need to care for and implement the following specific issues:

• Strictly comply with the regulations on CSRD according to Circular 155/2015.

• In loan verification projects, VLBs should act as an intermediary to request customers to make commitments on implementing socially and environmentally responsible loans. This job plays an important role to contribute to protecting the living environment of the whole society.

• Not for profit, but ignoring CSRD factors in loan application censorship criteria that harms the environment and society.

For the State Securities Commission of Vietnam, to manage information published on the stock market well, especially information about profitability and CSRD. The State Securities Commission, as the direct managers of VLBs, should have specific measures such as:

• Strict sanctions to ensure banks always comply and do it well.

• Carry out inspection activities, especially large VLBs that have complied with the provisions of Circular 155/2015 to take timely remedial measures.

• Completing the evaluation criteria that banks that have been listed on the stock market, as well as those that are about to publish on the stock exchange, must comply with the regulations on general information disclosure and CSRD in particular. This helps VLBs to provide transparent, complete, accurate, and timely information.

6. Conclusion

The implementation of CSRD is essential because it provides sufficient information to help investors to review and make timely investment decisions. For VLBs, the CSRD aims to demonstrate compliance with state regulations. In addition, CSRD also helps banks improve their reputation through responsible behavior toward society and the community. Especially, it helps to attract capital from investors, create a solid foundation for economic development, and improve economic efficiency. Therefore, in order to contribute to improving the profitability and CSRD of VLBs, each bank needs to comply with regulations and strictly comply with CSRD requirements. In addition, managers need to have clear development policies and strategies to ensure both their profitability and responsibility regarding social and community activities. To manage this well, the State Securities Commission of Vietnam needs to have strict sanctions to ensure VLBs comply with regulations. In addition, the State Securities Commission should add additional criteria to evaluate banks with high profitability as well as compliance with CSRD.