TL;DR: In this article, the authors report the results of a rigorous study of the empirical linkages between financial and social performance, finding that corporate social performance (CSP) is positively associated with prior financial performance, supporting the theory that slack resource availability and CSP are positively related.
Abstract: Strategic managers are consistently faced with the decision of how to allocate scarce corporate resources in an environment that is placing more and more pressures on them. Recent scholarship in strategic management suggests that many of these pressures come directly from sources associated with social issues in management, rather than traditional arenas of strategic management. Using a greatly improved source of data on corporate social performance, this paper reports the results of a rigorous study of the empirical linkages between financial and social performance. Corporate social performance (CSP) is found to be positively associated with prior financial performance, supporting the theory that slack resource availability and CSP are positively related. CSP is also found to be positively associated with future financial performance, supporting the theory that good management and CSP are positively related.? 1997 by John Wiley & Sons, Ltd
Strategic managers are consistently faced with the decision of how to allocate scarce corporate resources in an environment that is placing more and more pressures on them.
Further, watchdog groups like the Council on Economic Priorities (CEP) have long evaluated company performance on a range of social dimensions.
These ratings services seem to be having an effect on some investment decisions, which is evident in research that shows that institutional investors are favorably inclined toward companies with higher corporate social performance when other factors are held constant and independent information about CSP is available (Teoh and Shiu, 1990; Graves and Waddock, 1994).
The Measurement Problem
One fundamental reason for the uncertainty about the relationship between CSP and financial performance is that a serious problem has plagued researchers to date: the problem of measuring CSP.
Thus, many measures are either unidimensional and may not properly reflect the overall level of a company's CSP or they are difficult to apply consistently across the range of industries and companies that need to be studied.
Together, these two issues result in a total of six possible hypotheses (O'Bannan and Preston (1993).
Those arguing for a negative relationship between social and financial performance believe that firms that perform responsibly incur a competitive disadvantage (Aupperle, Carroll, and Hatfield, 1985) because they are incurring costs that might otherwise be avoided or that should be borne by others (e.g., individuals or government).
The weight of these arguments about the potential positive benefits of CSP suggests to us that the sign of any relationship between financial and social performance will be positive, hence the authors will hypothesize that the relationship between social and financial performance is a positive one.
Direction of Causality: Slack Resources or Good Management?
The second aspect of the CSP-financial performance relationship has to do with the direction of causality.
Two views, mentioned earlier can be contrasted and tested empirically.
Slack resource theorists argue that better financial performance potentially results in the availability of slack (financial and other) resources that provide the opportunity for companies to invest in social performance domains, such as community relations, employee relations, or environment (e.g., IBM's or Digital Equipment Corporation's philanthropy programs during earlier good times).
Excellent community relations might provide incentives for local government to provide competition enhancing tax breaks (e.g., Dayton Hudson's anti-takeover campaign), improved schools (and a better workforce over the long term), or reduced regulation, thereby reducing costs to the firm and improving the bottom line.
Improved CSP leads to better financial performance, ceteris paribus, also known as H2.
To deal with the measurement problems noted above, the authors constructed an index of CSP (as proposed by Ullman, 1985), based on the eight corporate social performance attributes rated consistently across the entire Standard and Poors 500 by the firm Kinder, Lydenberg, Domini (KLD).
Second, each company is rated on multiple attributes considered relevant to CSP.
In each of the areas, KLD investigates a range of sources to determine, for example, whether the company has paid fines or penalties in an area (for concerns) or has major strengths in the area (e.g., strong family policies for the Employee Relations category).
Values from 0-100 were derived, representing the relative importance of each attribute to the overall index.
For the models that treated CSP as a dependent variable, financial data from 1989 were used.
Table 1 gives a listing of the industries, SIC codes, and average industry CSP ratings, Table 2 gives descriptive statistics for all variables used in the study; and Table 3 gives the relative weights assigned to each CSP attribute.
Regression analysis was used to test their hypotheses, first using CSP as the dependent variable, while controlling for size (three size measures were used: total sales, total assets, and number of employees), debt level, and industry, then using profitability as the dependent variable and employing the same control variables.
A total of 469 companies remained in the sample after companies missing either financial or CSP data were eliminated.
Note first that CSP is positively and significantly correlated at p<.10 or better with all three of the financial performance measures (ROA--return on assets; ROE--return on equity; ROS--return on sales) for the 1989 financial data, and with those measures at the p<.05 level or better for the correlations with the 1991 financial data.
These results strongly support hypothesis 1, which posits that better financial performance leads to improved CSP.
The second finding is somewhat more difficult to explain.
Even if CSP and quality of management can be differentiated, the meaning-making that goes with creating strong social performance may elicit greater loyalty to firms from two important constituencies: employees and customers, while simultaneously providing at least certain categories of owners (i.e., those with social concerns) even more reason to invest in a particular firm.
Implications for Future Research
Much remains to be learned about the relationship between CSP and financial performance, which has been explored in the present study.
As more CSP data become available it would be useful to determine whether or not the relationships that the authors have examined hold consistently over time.
Additionally, it would be useful to examine lags other than the one-year time period used in the present study.
Further, if quality of management is a critical variable in financial outcomes, as the relationships identified in this study suggest, then controlling for the quality of management while assessing the CSP-financial performance link might also be beneficial.
Additional research is clearly necessary to explore these specific relationships between the stakeholder categories and financial performance, the findings here are suggestive of the need to alter current definitions of CSP to bring them more closely into line with stakeholder relations (c.f., Wood & Jones, 1995; Waddock, forthcoming) as the weighted index does.
Implications for Management
As strategic managers consider where to place their investments, they may wish to take into account the results reported above.
If good management theory and the virtuous circle hold, as this research begins to suggest, then CSP involves more than doing the extras: it is a way of doing business.
Wood, D. J. 199 la. Corporate Social Performance Revisited.
Fines or civil penalties paid, or major litigation or controversies, relating to communities in which a company operates; general corporate relations strained because of plant closings or general breach of agreements; if the company is a financial institution, there are investment controversies, also known as Areas of Concern.
Philanthropic giving over 1.5% of pretax earnings or otherwise notably generous giving; known for "innovative giving," prominent participant in public-private partnerships supporting housing initiatives for the disadvantaged; supports education through long-tern commitments or is prominent support of job training program, also known as Areas of Strength.
Diversity (formerly treatment of women and minorities) Areas of Concern: paid substantial fines or civil penalties, or has major controversies re affirmative action; no women on board of directors or senior line management.
CEO is a woman or minority; notable progress in promotion of women and minorities, especially to line positions; diverse representation on board of directors; outstanding employee benefits addressing work/family concerns; strong purchasing record with women/minority owned firms; initiatives in hiring disabled; progressive gay, lesbian, and bisexual policies, also known as Areas of Strength.
Relatively poor union relations; significant fines or civil penalties over employee safety or major safety controversies; recent layoffs of > 15% in one year, 25% in two years; substantially underfunded pension plan or inadequate benefits plan, also known as Areas of Concern.
Strong relative union relations; long-term policy of company-wide cash profit sharing (profitable firms only); worker involvement/ownership through gainsharing, ESOP, sharing of financial information, participation in decision making; strong retirement benefits or other innovative/generous benefits, also known as Areas of Strength.
Liabilities for hazardous waste >$30 million or significant involvement in >30 Superfund sites; significant fines or civil penalties, pattern of regulatory problems, or major controversies on environmental degradation; top producer of CFCs, HCFCs, methyl chloroform, or other ozone-depleting chemicals; high relative legal emissions (or acid rain formation); producer of agricultural chemicals, also known as Areas of Concern.
Substantial revenues from remediation products, innovative products with environmental benefits (excludes landfill, incineration, waste-to-energy and deep-well injection), company-wide changes in processes to reduce emissions and toxins; substantial user of recycled materials in manufacturing; substantial revenues from fuels with environmental advantages or notable conservation projects; environmentally sensitive PP&E (new equipment), also known as Areas of Strength.
Recent product safety controversies or product liability lawsuits or regulatory action; major marketing controversy or fines or civil penalties related to advertising, consumer fraud, or regulatory actions; paid fines or civil penalties relating to antitrust laws, also known as Areas of Concern.
Long- standing, company-wide quality program judged among industry's best; leader in industry R&D; products/services benefit the economically disadvantaged, also known as Areas of Strength.
TL;DR: This article conducted a meta-analysis of 52 studies and found that corporate virtue in the form of social responsibility and, to a lesser extent, environmental responsibility is likely to pay off, although the operationalizations of CSP and CFP also moderate the positive association.
Abstract: Most theorizing on the relationship between corporate social/environmental performance (CSP) and corporate financial performance (CFP) assumes that the current evidence is too fractured or too variable to draw any generalizable conclusions. With this integrative, quantitative study, we intend to show that the mainstream claim that we have little generalizable knowledge about CSP and CFP is built on shaky grounds. Providing a methodologically more rigorous review than previous efforts, we conduct a meta-analysis of 52 studies (which represent the population of prior quantitative inquiry) yielding a total sample size of 33,878 observations. The meta-analytic findings suggest that corporate virtue in the form of social responsibility and, to a lesser extent, environmental responsibility is likely to pay off, although the operationalizations of CSP and CFP also moderate the positive association. For example, CSP appears to be more highly correlated with accounting-based measures of CFP than with market-based ...
TL;DR: In this article, the authors outline a supply and demand model of corporate social responsibility (CSR) and conclude that there is an "ideal" level of CSR, which managers can determine via cost-benefit analysis.
Abstract: We outline a supply and demand model of corporate social responsibility (CSR). Based on this framework, we hypothesize that a firm's level of CSR will depend on its size, level of diversification, research and development, advertising, government sales, consumer income, labor market conditions, and stage in the industry life cycle. From these hypotheses, we conclude that there is an “ideal” level of CSR, which managers can determine via cost-benefit analysis, and that there is a neutral relationship between CSR and financial performance.
Cites methods from "The corporate social performance-fi..."
...An empirical test of the CSP framework is presented in the work of Waddock and Graves (1997), who report a positive association be-...
TL;DR: The authors argue that companies are increasingly asked to provide innovative solutions to deep-seated problems of human misery, even as economic theory instructs managers to focus on maximizing their shareholders' wealt.
Abstract: Companies are increasingly asked to provide innovative solutions to deep-seated problems of human misery, even as economic theory instructs managers to focus on maximizing their shareholders' wealt
TL;DR: In this paper, the authors propose an institutional theory of corporate social responsibility consisting of a series of propositions specifying the conditions under which corporations are likely to behave in socially responsible ways, and argue that the relationship between basic economic conditions and corporate behavior is mediated by several institutional conditions: public and private regulation, the presence of nongovernmental and other independent organizations that monitor corporate behaviour, institutionalized norms regarding appropriate corporate behavior, associative behavior among corporations themselves, and organized dialogues among corporations and their stakeholders.
Abstract: I offer an institutional theory of corporate social responsibility consisting of a series of propositions specifying the conditions under which corporations are likely to behave in socially responsible ways. I argue that the relationship between basic economic conditions and corporate behavior is mediated by several institutional conditions: public and private regulation, the presence of nongovernmental and other independent organizations that monitor corporate behavior, institutionalized norms regarding appropriate corporate behavior, associative behavior among corporations themselves, and organized dialogues among corporations and their stakeholders. Concerns about corporate social responsibility have grown significantly during the last two decades. Not only has the issue become commonplace in the business press and among business and political leaders (Buhr & Graf
Cites background from "The corporate social performance-fi..."
...Because firms that are less profitable have fewer resources to spare for socially responsible activities than firms that are more profitable—an argument that is often referred to as slack resource theory (Waddock & Graves 1997)....
...There are also several dimensions that we might use to identify important aspects of socially responsible corporate behavior (Rowley & Berman, 2000; Waddock & Graves, 1997)....
...For example, Waddock and Graves (1997) found through regression analysis that an increase in corporate financial performance was associated positively with an increase in corporate social responsibility....
TL;DR: In this article, the authors classify the main CSR theories and related approaches in four groups: (1) instrumental theories, in which the corporation is seen as only an instrument for wealth creation, and its social activities are only a means to achieve economic results; (2) political theories, which concern themselves with the power of corporations in society and a responsible use of this power in the political arena; (3) integrative theories, focusing on the satisfaction of social demands; and (4) ethical theories based on ethical responsibilities of corporations to society.
Abstract: The Corporate Social Responsibility (CSR) field presents not only a landscape of theories but also a proliferation of approaches, which are controversial, complex and unclear. This article tries to clarify the sit- uation, ''mapping the territory'' by classifying the main CSR theories and related approaches in four groups: (1) instrumental theories, in which the corporation is seen as only an instrument for wealth creation, and its social activities are only a means to achieve economic results; (2) political theories, which concern themselves with the power of corporations in society and a responsible use of this power in the political arena; (3) integrative theories, in which the corporation is focused on the satisfaction of social demands; and (4) ethical theories, based on ethical responsibilities of corporations to society. In practice, each CSR theory presents four dimensions related to profits, political performance, social demands and ethical values. The findings suggest the necessity to develop a new theory on the business and society relationship, which should integrate these four dimensions.
Cites background from "The corporate social performance-fi..."
...…and financial performance of corporations in most cases (Frooman, 1997; Griffin and Mahon, 1997; Key and Popkin, 1998; Roman et al., 1999; Waddock and Graves, 1997) However, these findings have to be read with caution since such correlation is difficult to measure (Griffin, 2000; Rowley…...
TL;DR: Porter as mentioned in this paper presents a comprehensive structural framework and analytical techniques to help a firm to analyze its industry and evolution, understand its competitors and its own position, and translate this understanding into a competitive strategy to allow the firm to compete more effectively to strengthen its market position.
Abstract: Michael Porter presents a comprehensive structural framework and analytical techniques to help a firm to analyze its industry and evolution, understand its competitors and its own position, and translate this understanding into a competitive strategy to allow the firm to compete more effectively to strengthen its market position. The introduction reviews a classic approach to strategy formulation, one that comprises a combination of ends and means (policies), factors that limit what a company can accomplish, tests of consistency, and an approach for developing competitive strategy. A competitive strategy articulates a firm's goals, how it will compete, and its policies for achieving those goals. Competitive advantage is defined in terms of cost and differentiation while linking it to profitability. Part I, "General Analytical Techniques," provides a general framework for analyzing the structure of an industry and understanding the underlying forces of competition (and hence profitability). Five competitive forces act on an industry: (1) threat of new entrants, (2) intensity of rivalry among existing firms, (3) threat of substitute products or services, (4) bargaining power of buyers, and (5) bargaining power of suppliers. Looking at industry structure provides a way to consider how value is created and divided among existing and potential industry participants. One competitive force always captures essential issues in the division of value.There are three generic competitive strategies for coping with the five competitive forces: (1) overall cost leadership, (2) differentiation, and (3) focus. There are risks with each strategy. A firm without a strategy is "stuck in the middle." This framework for examining competition transcends particular industry, technology, or management theories. Building on this framework, techniques are presented for industry forecasting, analysis of competitors, predicting their behavior, and building a response profile. Essential for a competitive strategy are techniques for recognizing and accurately reading market signals. Implications of structural analysis for buyer selection and purchasing strategy are presented. Game theory provides concepts for responding to competitive moves. Using the concept of strategic groups, structural analysis can also explain differences in firm performance (profitability), provide a guide for competitive strategy, and predict industry evolution. Part II, "Generic Industry Environments," shows how firms can use the analytical framework to develop a competitive strategy in industry environments, which reflect differences in industry concentration, state of industry maturity, and exposure to international competition. These environments determine a business's competitive strategic context, available alternatives, and common strategic errors. Five generic industry environments are examined: fragmented industries (where level of industrial concentration is low), emerging industries, transition to industry maturity, declining industries, and global industries. In each, the crucial aspects of industry structure, key strategic issues, characteristic strategic alternatives (including divestment), and strategic pitfalls are identified. Part III, "Strategic Decisions," draws on the analytical framework to examine important types of strategic decisions confronting firms that compete in a single industry: vertical integration, major capacity expansion, and new business entry. Additional use of economic theory and administrative consideration of management and motivation helps a company to make key decisions, and gives insight into how competitors, customers, suppliers, and potential entrants might make them. Appendix A discusses use of techniques for portfolio analysis applied to competitor analysis. Appendix B provides approaches to conducting an industry study, including sources of field and published dat
TL;DR: In this article, a conceptual model that comprehensively describes essential aspects of corporate social performance is presented, and three aspects of the model address major questions of concern to academics and managers alike: What is included in corporate social responsibility? What are the social issues the organization must address? and what is the organization's philosophy or mode of social responsiveness?
Abstract: Offered here is a conceptual model that comprehensively describes essential aspects of corporate social performance. The three aspects of the model address major questions of concern to academics and managers alike: (1) What is included in corporate social responsibility? (2) What are the social issues the organization must address? and (3) What is the organization's philosophy or mode of social responsiveness?
TL;DR: In this article, the authors define corporate social performance (CSP) and reformulate the CSP model to build a coherent, integrative framework for business and society research, where principles of social responsibility are framed at the institutional, organizational, and individual levels; processes of social responsiveness are shown to be environmental assessment, stakeholder management, and issues management; and outcomes of CSP are posed as social impacts, programs, and policies.
Abstract: This article defines corporate social performance (CSP) and reformulates the CSP model to build a coherent, integrative framework for business and society research. Principles of social responsibility are framed at the institutional, organizational, and individual levels; processes of social responsiveness are shown to be environmental assessment, stakeholder management, and issues management; and outcomes of CSP are posed as social impacts, programs, and policies. Rethinking CSP in this manner points to vital research questions that have not yet been addressed.
TL;DR: This paper analyzed the relationship between perceptions of firms' corporate social responsibility and measures of their financial performance and found that a firm's prior performance, assessed by both stock-market returns and accounting-based measures, is more closely related to corporate social concern than is subsequent performance.
Abstract: Using Fortune magazine's ratings of corporate reputations, we analyzed the relationships between perceptions of firms’ corporate social responsibility and measures of their financial performance. Results show that a firm's prior performance, assessed by both stock-market returns and accounting-based measures, is more closely related to corporate social responsibility than is subsequent performance. Results also show that measures of risk are more closely associated with social responsibility than previous studies have suggested.
TL;DR: In this article, the authors present an integrative presentation of the principles of decision analysis in a behavioral context, including sensitivity analysis, value-utility distinction, multistage inference, attitudes toward risk, and attempt to make intuitive sense out of what have been treated in the literature as endemic biases and other errors of human judgement.
Abstract: Decision analysis is a technology designed to help individuals and organizations make wise inferences and decisions. It synthesises ideas from economics, statistics, psychology, operations research, and other disciplines. A great deal of behavioural research is relevant to decision analysis; behavioural scientists have both suggested easy and natural ways to describe and quantify problems and shown the kind of errors to which unaided intuitive judgements can lead. This long-awaited book offers the4first integrative presentation of the principles of decision analysis in a behavioural context. The authors break new ground on a variety of technical topics (sensitivity analysis, the value-utility distinction, multistage inference, attitudes toward risk), and attempt to make intuitive sense out of what have been treated in the literature as endemic biases and other errors of human judgement. Those interested in artificial intelligence will find it the easiest presentation of hierarchical Bayesian inference available.
Using a greatly-improved source of data on corporate social performance, this paper reports the results of a rigorous study of the empirical linkages between financial and social performance.
Q2. How did the panelists evaluate the attributes of the CSP?
Using the simple multi-attribute rating technique (SMART) (Von Winterfeldt andEdwards, 1986), the authors asked each panelist to evaluate the eight CSP attributes, perform tradeoffs among the attributes, then construct a scale.
Q3. What is the significance of the weights in the CSP index?
the heavier weights in the CSP index are those that most closely represent critical stakeholders, such as employees, customers, and community, while less directly stakeholder-related categories of involvement in nuclear industries, military contracting, or South Africa receive considerably less weight.
Q4. What are the sources of information used by KLD?
External data sources include articles about a company in the general business press (e.g., Fortune, Business Week, Wall St. Journal), trademagazines, and general media.
Q5. What is the relationship between slack resources and financial performance?
If slack resources are available, then better social performance would result from the allocation of these resources into the social domains, and thus better financial performance would be a predictor of better CSP.
Q6. Why are previous studies mixed on the relationship between profitability and corporate social performance?
In part because of the measurement difficulties, previous findings on the relationship between profitability and corporate social performance have been mixed.
Q7. What is the significance of controlling for industry in the analysis of the KLD data?
Table 5 presents the results of the regression analysis using CSP as the dependentvariable and financial performance as the independent variable, controlling for debt, size, and industry (industry controls are omitted from the table in the interest of space), using a one-year lag between the financial performance (1989 data) and the CSP measurement (1990 data).
Q8. What is the relationship between CSP and debt-to-asset ratio?
CSP is negatively related to debt-to-asset ratio in each of the first nine models, but is only significant (p<.10) when ROE is used.