Your firm may benefit financially if it invests a lot (or a little) in CSR activities including corporate philanthropy - but will enjoy a longer, more sustainable period of financial return with a good CSR strategy.
CSR and Financial Return: Not a Linear Correlation
Research to date has struggled to identify a clear relationship between social and financial performance due to four main reasons: (1) social performance has many facets and each influences financial performance differently; (2) contextual factors of social-financial relationship were usually not controlled; (3) measuring both social and financial performance is difficult; and (4) researchers usually ignore the time horizon over which social and financial performance are related.
Authors Stephen Brammer and Andrew Millington of the University of Bath investigated the relationship between corporate social performance (CSP) in the form of charitable giving, and corporate financial performance (CFP), measured by stock market performance. The researchers applied a two-stage distinctive empirical approach using secondary data from 537 large U.K. companies in the period 1990-1999. Firms were classified in three categories as having high, low, or average levels of charitable giving, and this was correlated to their financial performance over a one, five, and 10 year period.
CSP and CFP Create a Curvilinear Relationship
- Very high social performance (top 10 per cent of firms) can improve employee motivation and increase customer and investor loyalty, resulting in higher financial performance.
- Very low social performance (bottom 10 per cent of firms) is also linked to higher financial performance because those firms allocate resources instead to investment projects or return them to shareholders as dividends.
- Firms with the lowest social performance have the best financial performance in the short run while firms with very high social performance have the best financial performance over a longer time period.
- Larger, more profitable, R&D intensive, advertising intensive, and less leveraged firms make donations at higher rates than other firms.
- Lastly, firms in industries with "damaging" reputations (e.g. mining) give more to charity than other firms.
High levels of CSP in the form of philanthropy may be rewarded by exceptional financial performance in the long run. But, it is understandable why managers in firms with high demands for cash from operations direct resources away from philanthropy: in the short-term, they outperform firms with "average" philanthropy.
(Read the work of Barnett and Salomon in the NBS article CSR Pays when You Bake it In or Ignore it Completely.)
Give More for Long-Term, Sustainable Business
Your firm can benefit from a stronger financial return in the form of stock performance if you participate in very low or high levels of corporate philanthropy, as opposed to average levels of participation. Firms with the lowest social performance have the best financial performance in the short run, but if you want to secure ongoing financial performance in the long-term, you will invest in high levels of corporate giving and social participation.
Future research can consider forms of CSR other than philanthropy. While the results of this research are compelling, the causality of the relationship between social and financial performance needs more study.
Brammer, S., and Millington, A. 2008. "Does it pay to be different? An analysis of the relationship between corporate social and financial performance." Strategic Management Journal. 29.12: 1325-1343.