The corporate social performance-financial performance link

TLDR: 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

Figures

Table 4b. Correlations with 1991 Profitability, 1990 CSP, and 1990 Financial Controls

Table 5. Regression Analysis using 1990 CSP as the Dependent Variable and 1989 Financial Data as Independent Variables

Table 1. Industries in the Sample

Table 2. Descriptive Statistics

Table 3. Weightings of CSP Attributes by Expert Panel*

Table 6. Regression Analysis with 1991 Financial Performance (Profitability) as Dependent Variable and 1990 CSP as the Key Independent Variable with 1990 Financial Control Variables Dependent Variable: Return on assets

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The corporate social performance-
financial performance link
Authors: Sandra A. Waddock, Samuel B. Graves

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The Corporate Social Performance--Financial Performance Link
Sandra A. Waddock
Carroll School of Management
Boston College
Chestnut Hill, MA 02167
617-552-0477
and
Samuel B. Graves
Carroll School of Management
Boston College
Chestnut Hill, MA 02167
617-552-0464
Strategic Management Journal, Fall 1997
Acknowledgments: The authors would like to thank Steven Lydenberg of Kinder, Lydenberg,
Domini for his help with access to the data and his input into this research. An earlier version of
this paper was presented at the Academy of Management Annual Meeting, Dallas, TX, August
1994. We would also like to acknowlege the input of the two reviewers, who helped us improve
the manuscript greatly. In particular, we thank reviewer #2 for the suggestion regarding the
posturing hypothesis.
Post-print version of an article published in Strategic Management Journal 18(4): 303-319 (1997 April). doi: 10.1002/(SICI)1097-0266(199704)18:4<303::AID-SMJ869>3.0.CO;2-G

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Post-print version of an article published in Strategic Management Journal 18(4): 303-319 (1997 April). doi: 10.1002/(SICI)1097-0266(199704)18:4<303::AID-SMJ869>3.0.CO;2-G

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The Corporate Social Performance--Financial Performance Link
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. 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.
Post-print version of an article published in Strategic Management Journal 18(4): 303-319 (1997 April). doi: 10.1002/(SICI)1097-0266(199704)18:4<303::AID-SMJ869>3.0.CO;2-G

4
The Corporate Social Performance-Financial Performance Link
Introduction
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 are coming directly
not from traditional concerns of strategic management but instead from concerns about social
issues in management (see, e.g., Prahalad and Hamel, 1994). Strategic resource allocation
decisions have always been complex, but now they are even more so, since companies are
assessed not only on the financial outcome of their decisions but also on the ways in which their
companies measure up to a broader set of societal expectations.
Prahalad and Hamel (1994) indicate that influences on strategic decisions now come from
influences that go well beyond traditional industry-based competitive forces identified by Porter
(1980). Changing customer expectations, regulatory shifts, problem of excess capacity (and
presumably the associated employees), and environmental concerns are now becoming important
influences on strategy (Prahalad and Hamel, 1994). These emerging influences on strategic
decision making are the result of the impact of different stakeholder expectations (Freeman,
1983) and company's interactions with a range of stakeholders arguably comprise its overall
corporate social performance record (c.f., Wood, 1991 a,b; Waddock, forthcoming). To
illustrate the importance of such influences on companies, it should be noted that investors now
hold some $650 billion in social investment funds. Within many of the investment houses that
run these so-called socially responsible investment funds are analysts who carefully screen
potential investments both on financial and social performance criteria.
Further, watchdog groups like the Council on Economic Priorities (CEP) have long
evaluated company performance on a range of social dimensions. In recent years CEP has
produced a widely-disseminated guide called "Shopping for a Better World" that interested
Post-print version of an article published in Strategic Management Journal 18(4): 303-319 (1997 April). doi: 10.1002/(SICI)1097-0266(199704)18:4<303::AID-SMJ869>3.0.CO;2-G

Frequently asked questions

Q1. What are the contributions in this paper?

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.