You firm can enjoy improved financial performance from investments in CSR through bolstered reputation.
Research suggests good corporate social performance (CSP) can improve corporate financial performance (CFP). Yet companies have been skeptical about the relationship between CSP and the bottom line, assuming current research could not draw general conclusions.
To evaluate this claim, researchers Marc Orlitzky (University of South Australia), Frank L. Schmidt, and Sarah Rynes-Weller (University of Iowa) looked at 30 years of studies on the relationship between CSP and CFP, using a sophisticated quantitative technique to evaluate what the body of literature has to say on this issue.
The authors use a psychometric meta-analysis of 52 studies, yielding a total sample size of 33,878 observations over 30 years. It corrects for sampling and measurement errors to quantify the shortcomings of previous research. CFP is measured as market based (investor returns), accounting-based (accounting returns) and perceptual (survey) measures. CSP is associated with CSP disclosures; CSP reputation ratings; social audits; CSP processes; observable outcomes; and managerial CSP principles and values.
It's All About Good Reputation
Although the relationship between CSP and CFP is generally positive (with an average correlation of .36), the relationship varies across several moderators:
- CSP improves financial performance by helping firms build a positive reputation and goodwill. This strengthens trust and helps build fruitful relationships with stakeholders and investors, and can even cushion your stock price during prickly market tides (see research from Schnietz and Epstein in the NBS article CSR Reputation Protects Share Price During Market Crisis).
- Internal financial measures such as ROA (versus external measures like stock price) are strongly related to CSP. Social forms of CSP are more likely to be related to CFP than environmental forms. For example, charitable donations to local community causes are more likely to impact the financial bottom line than a pledge to reduce carbon emissions.
- A bi-directional relationship between CSP and CFP exists. In other words, CSP impacts subsequent CFP (the good management theory) and CFP impacts subsequent CSP (the slack resources theory).
Tools for Managers
- Invest in CSP strategies. Use tools like cost-benefit analysis to determine which social investments will most improve your company's financial success and reputation.
- Use CSP as a lever to improve reputation rankings.This will help build a positive image with customers, investors, bankers and suppliers, and gain access to capital (see similar findings from Cheng, Ioannou, and Serafeim in the NBS article Two Ways Sustainability Drives Access to Capital). Improving your reputation may have the biggest impact on your financial performance.
- Be attentive to the perceptions of third parties about your reputation, such as market analysts, public interest groups, and the media. By addressing and balancing the claims of many stakeholders, managers can increase their organization's efficiency and adapt to external demands.
Build CSR Goodwill
The key link from CSP to CFP is better reputation rankings from social investments. Investments build goodwill from stakeholders and help companies access financial capital. Companies should invest in social activities, and be attentive to stakeholders to leverage their reputation rankings and gain financial benefits of social investments.
The meta-analysis helps demonstrate the need for research exploring CSR attitudes and market CFP. Research could also investigate moderators of this relationship, such as CSP reputation measures and market-based CFP to explain variance across studies. Though many CSP and CFP measures are valid, their reliability must be improved.
Orlitzky, M., Schmidt, F.L., and Rynes-Weller, S.L. 2003. "Corporate Social and Financial Performance: A Meta-Analysis." Organizational Studies. 24.3: 403-441.