Corporate social responsibility in the hospitality and tourism industry: Do family control and financial condition matter?

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Abstract

Family firms have been known to perform better both financially and socially (CSR) than their nonfamily counterparts. However, it is not known whether the better social performance is a consequence of better financial performance. Within the hospitality and tourism industry, we find that family firms are financially stronger, but do not actually invest more in CSR than nonfamily firms once controlled for their financial condition, as measured by credit ratings. Interestingly, we also find that family firms invest more in mitigating concerns than in taking positive initiatives to build strengths in CSR performance. Finally, we find that judicious investment by family firms in CSR positively affects their future financial performance.

Introduction

Research in the finance and management literature finds that publicly traded family firms generally exhibit stronger financial performance than nonfamily firms (Anderson and Reeb, 2003, Van Essen et al., 2010, Villalonga and Amit, 2006). Other studies have found that family firms are rated higher than nonfamily firms in terms of their corporate social performance (Dyer and Whetten, 2006). Although the debate regarding whether financial performance leads to better social performance, the slack resources theory (Waddock and Graves, 1997), or whether better social performance leads to better financial performance, the instrumental theory or the doing well by doing good, hypothesis (Donaldson and Preston, 1995) is not resolved in family or nonfamily firms, it has not hitherto been examined in the context of hospitality related firms to the best of our knowledge.

This gap in the literature is surprising because hospitality is an important service industry that has several large and well-known family controlled firms like Marriott, Hilton, Hyatt, Wynn, Carnival Cruises, etc. (Getz et al., 2004). While studies that have explored CSR in the hospitality industry (Lee and Heo, 2009, Lee and Park, 2009) have focused on issues like CSR and customer satisfaction in hotels and restaurants, and CSR and financial goals of casinos and hotels, they have not examined the relationship between ownership, CSR, and financial performance. A recent study by Paek et al. (2013) examines the role of managerial ownership and stakeholder management in hospitality firms, but it stops short of exploring the impact on the financial condition or the performance of the firm. Therefore, in this paper, we evaluate the ownership effect (family vs. nonfamily firms) and the financial condition effect (credit rating) to answer three related questions about CSR in the HT industry.

Based on the multiple logics of reputation, identity, and long-term orientation in family firms (Dyer and Whetten, 2006), we first examine whether HT family firms have greater investment in CSR than nonfamily firms. We then use a more nuanced approach and study whether or not the investment in CSR by family firms is dependent on their financial condition, given that while a long-term orientation is important to family firms, immediate short-term survival will take precedence in case of deterioration of financial slack (Le Breton-Miller and Miller, 2011, Lumpkin and Brigham, 2011). We further explore whether, controlled for financial condition, family firms truly invest more in CSR initiatives than nonfamily firms. Finally, we extend our analysis to examine the causality between CSR and financial performance, and attempt to comment on the “doing well by doing good” hypothesis (Orlitzky et al., 2003). While there are no universal definitions, in this paper, CSR is conceptualized as a set of voluntary activities in the environmental, social, and governance areas that are integrated into the business activities of the firm, thus adhering to the triple bottom line approach that incorporates people, profit, and planet into corporate level decision-making.

We make several contributions to the literature. First, we note that scholars have recognized the importance of corporate social responsibility in the hospitality and tourism (HT) industry and its impact on financial and operational performance (Garay and Font, 2012, Lee and Park, 2009, Lee et al., 2012) and therefore evaluate investment in CSR by family and nonfamily firms where family ownership is particularly important. Secondly, while it is known that macro-economic conditions impact CSR investments in the hospitality industry (Lee et al., 2012), the impact of firm idiosyncratic financial condition is not known and is thus examined in this paper. Moreover, by introducing the use of credit ratings of the firm to evaluate firm financial condition a commonly accepted measure in the general literature but new to the hospitality literature, we bring our measures in line with the broader literature. A firm's credit rating incorporates numerous accounting and financial factors but most importantly it estimates a firm's expected future performance, which is critical in determining a firm's financial condition. Finally, we aggregate all KLD indicators to construct a single CSR measure that represents all aspects of CSR potentially providing a better connection between CSR, the firm, and its performance. While separate dimensions of CSR may have differential impacts on aspects of firm outcomes, we believe that when firm performance and organization slack are measured, an aggregate measure that provides a comprehensive score is more useful, and this measure can be used in future research on CSR and firm performance.

In the following sections, we develop our hypotheses using several theoretical lenses, describe our methodology, report and discuss our results and finally conclude our paper with implications for future research and practice.

Section snippets

Family firms and CSR in hospitality

While a positive corporate image is important to all firms in the formation of consumer perceptions and choice, it becomes especially important to firms operating in service industries like hospitality and tourism. Consumers make purchase decisions about a product or service based on the entirety of its attributes or characteristics (Lancaster, 1966), weighted in accordance with personal preferences and values. Whereas product quality can be determined somewhat objectively, service quality is

Categorization of firms as family and nonfamily firms

Although there is no single accepted definition of a family firm (Steier et al., 2004), there are several conceptualizations of family firms (Chrisman et al., 2005) and various operational definitions. Following Anderson and Reeb (2003) we operationalize a family firm where there is fractional ownership by founding family or descendants plus membership on the board of directors. This definition encompasses the requirement of both ownership by the founding family indicating a financial stake in

Methods

First, we examine investment of family firms in various components of CSR relative to nonfamily firms by testing the difference in means. This is followed by regression estimates with necessary control variables. Second, we compare the financial condition of family firms with nonfamily firms based on credit ratings. Third, we evaluate the relationship between financial condition and CSR of firms in a regression framework. In addition, we also test whether there is a difference in CSR investment

Discussion

Past research has documented that on average family firms perform better financially than nonfamily firms (Van Essen et al., 2010) and that firms with financial slack are better able to incur discretionary expenditures like CSR (Waddock and Graves, 1997). It is also generally believed that family firms invest more in CSR than nonfamily firms (Bingham et al., 2011). However, it is not clear whether greater investment in CSR by family firms is merely due to financial slack, or whether it is due

Contributions and implications

Although the hospitality literature is rich in studies related to CSR, we believe this is the first study to examine CSR among public family-controlled firms in the industry. As explained above, CSR is important to HT firms, and the HT industry is characterized by family-controlled firms more so than other industries (Getz et al., 2004). In our sample, we find that both the slack resources theory, ‘doing well while doing good’ and instrumental theory, ‘doing good while doing well’ are

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