3-Step Model to Assess Firms’ Social Initiatives

Managers can evaluate which are the most mutually-beneficial social causes to become involved with – and which ones their firm should avoid.

A study by Joshua D. Margolis of Harvard University and James P. Walsh of the University of Michigan re-examines the relationship between corporate social performance (CSP) and corporate financial performance (CFP), and says firms can decide whether to respond to social development issues using a three-step approach.

The Social Dilemma

Arguments against corporate social initiatives suggest that companies are already sufficiently involved in improving social welfare: with governments responsible for addressing social problems, firms have the right to decide whether they want to get involved.

However, most research to date has focused on establishing a positive relationship between CSP and CFP to show that corporate involvement in social issues is consistent with maximizing wealth. Margolis and Walsh revisit this relationship to clarify the company’s role in society and to suggest how managers can make decisions regarding a firm’s CSP.

Bridging the CSP-CFP Gap

The authors identified the gap in understanding the CSP-CFP relationship by reviewing both theoretical stakeholder literature and 127 published empirical studies. They identified companies’ responses to social issues by asking five questions: (1) How are companies made aware of social problems? (2) How do firms determine their potential responses? (3) What criteria do firms use to decide on a course of action? (4) How do companies manage and structure their involvement?; and (5) What non-financial consequences result from corporate involvement? A descriptive and a normative research agenda were developed.

After reviewing the published studies, the authors found that the CSP-CFP empirical literature does not solve the tension in the relationship. A lack of consistent findings and even causal direction satisfies neither opponents nor proponents of CSR.

The Three-Step Model

1. Evaluate efficacy of corporate resources.

  • Are corporate resources misappropriated if used toward social goals?

  • Can corporate resources efficiently solve the problem?

  • Is the process accountable and transparent?

2. Evaluate corporate involvement.

  • Did the company play a causal role in the social problem?

  • Will the company benefit from the social problem?

  • Is a duty of care owed that is consistent with the duty of everyone in society?

3. Determine the corporate response considering three factors:

  • Features of the problem (the depth and scope of the problem)

  • Features of the firm (the firm’s capabilities and proximity to solve the problem)

  • Features of the impact (the range of consequences expected from firm involvement)

Margolis, J. D., & Walsh, J. P. 2003. “Misery Loves Companies: Rethinking Social Initiatives.” Administrative Science Quarterly. 48.2: 268-305.

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