Invest in Innovation & Employees to Grow the Bottom Line

Firm financial performance as a result of CSR activities can be difficult to measure: its value may lie in intangible assets like employee engagement.

The link between your firm’s social initiatives and its financial return may lie in your intangible assets.

Past research has confirmed a positive relationship between companies’ corporate responsibility performance (CRP) and corporate financial performance (CFP). Yet, the factors that explain this relationship are still not well understood.

A study by Jordi Surroca, Joseph Tribó (Universidad Carlos III de Madrid) and Sandra Waddock (Carroll School of Management, Boston College) explores whether intangible resources link corporate responsibility performance with financial performance, hypothesizing that intangible resources, traditionally seen as the basis of a firm’s competitive advantage, are the missing link between improved CRP and CFP.

Intangible assets, like empowerment & innovation, unlock CFP.

This study uses stakeholder theory and resource-based theory, applied to 599 companies from 28 countries. It uses the SiRi Pro Database to construct a corporate responsibility performance index, and an econometric approach to determine the CRP and CFP relationship.

The authors find firms can improve their financial and corporate responsibility performance by investing in innovation, and empowering employees. These investments can benefit stakeholder relations, lead to new market opportunities, and help attract and retain better and more productive workers. Key investments can also improve brand image and allow firms to charge price premiums.

Several key investments were found to improve both the financial and corporate responsibility performance of firms:

Use these four strategies to empower & innovate.

• Create innovative pollution-reducing products and processes to allow you to enter new markets.

• Invest in socially responsible actions to improve brand image, enable price premiums, and improve relations with stakeholders. These practices allow your firm to negotiate better terms with suppliers and financial institutions, and build customer loyalty.

• Improve company culture by treating employees honestly and fairly. Create formal policies for business ethics, health and safety, employment equity, freedom of association, working hours, and wages. A good culture generates greater employee loyalty, morale, productivity, and attracts highly qualified employees. These in turn improve financial outcomes.

• Provide a clean and safe working environment, health and education benefits, and training opportunities. Investing slack resources in empowering employees increases motivation and satisfaction, worker productivity, and improves your financial performance.

Acknowledge the value of intangibles.

This research highlights the importance of including intangibles when evaluating the relationship between CRP and CFP. As a manager, do not discount the power of these intangible assets to have real impact on your financial bottom line.

Future research can explore additional variables that might affect this link. It can also explore whether the results differ across countries.

Surroca, J. Tribó, J.A. & Waddock, S. 2010. “Corporate Responsibility and Financial Performance: The Role of Intangible Resources.” Strategic Management Journal. 31.5: 463-490.