1
-Business Performance Management Master Thesis
PROPOSAL FOR A
HOLISTIC
CORPORATE SOCIAL PERFORMANCE
MANAGEMENT SYSTEM
Aarhus, 2004 Author:
TABLE OF CONTENT
INTRODUCTION p.4
1.THE EVOLUTION FROM CSR TO CSP IN THE ACADEMIC LITERATURE
1.1 The origins of the concept of Corporate Social Responsibility p.6 1.2 The distinction between Social Responsibility and Social Responsiveness p.7
1.3 The concept of Corporate Social Performance p.8
2.THEORETICAL FOUNDATIONS OF CORPORATE SOCIAL RESPONSIBILITY
2.1 CSR and the debate on the nature of the firm p.11
2.2 The duty aligned perspective: CSR in ethical theory p.12 2.3 The instrumental perspective: CSR in economic theory p.13
2.4 Reconciling two paradigms p.14
3. THE SEARCH FOR A LINK BETWEEN CORPORATE SOCIAL PERFORMANCE AND ECONOMIC RESULTS
3.1 Thirty years of empirical research p.17
3.2 The ambiguous link between CSP and contemporaneous financial performance p.20
3.3 Further inquiry into direction of causation p.25
4. MEASURING CORPORATE SOCIAL PERFORMANCE
4.1 Operationalization of the CSP concept in academic research p.31
4.1.1Reputational indexes p.32
4.1.2 Content analysis p.33
4.1.3 Perceptual measures p.35
4.2 Validity Issues in existing CSP constructs p.35
4.3 Indications for the development of an organizational tool for assessing CSP p.37
5. CONTEMPORARY LANDSCAPES IN CSR
5.1 Definition of CSR in the business context p.39
5.2 Corporate outlooks on CSR p.41
5.2 Specific features of CSR in the European and American contexts p.43
5.3 The case of Denmark p.45
5.4 Study cases: Novo Nordisk and Danfoss p.47
5.4.1 Novo Nordisk p.46
5.4.2 Danfoss p.50
6. MAPPING ORGANZATIONAL TOOLS FOR CSR
6.1 Existing instruments for the implementation of CSR in the business organization. P.52
6.1.1 General Guidelines and Statement of Principles p.53
6.1.2 Ratings provided by investment agencies p.54
6.1.3 Accountability and Reporting Frameworks p.55
6.1.4 Certifiable Standards p.57
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-7. CORPORATE SOCIAL PERFORMANCE AND TOTAL QUALITY MANAGEMENT
7.1 Ethical openings in the TQM concept p.61
7.2 Social Environmental Dimensions in Business Excellence Models p.63
8. A HOLISTIC FRAMEWORK FOR THE MANAGEMENT OF CSP
8.1 An operational tool for Strategic Corporate Social Performance Management p.70 8.2 Integrating Wood’s construct into the EFQM causal structure p.71
8.3 Principles of Corporate Social Responsibility p.75
8.3.1 Responsible Leadership p.75
8.4 Policies and Processes of Corporate Social Responsiveness p.76
8.4.1 Responsible policies p.78
8.4.2 Sustainable Systems p.78
8.4.3 Responsible Management of Partnerships & Resources p.80
8.4.4 Ethical HR Management p.81
8.5 Outcomes of Social Responsibility p.82
8.5.1 Reputation as a responsible goods & service provider p.83
8.5.2 Reputation as a responsible employer p.84
8.5.3 Reputation as a good corporate citizen p.85
8.6 Key Business Results p.85
8.7 Social Self Assessment p.87
CONCLUSIONS p.90
INTRODUCTION
The landscape of contemporary business has been shaped by the widely discussed phenomenon of globalisation, a term referring to a set of interrelated developments including the birth of multinational companies operating on a global scale, the world-wide accessibility of information and the internationalisation of the capital and goods markets. As a result of these developments corporations are indeed presented with enhanced opportunities but they also have to face additional challenges arising from the amplified impact of their operations and the increased transparency of their activities. The interaction of these two factors affects the outlook of the competitive arena with several implications :
- Increased vulnerability of corporate reputation resulting from deeper public scrutiny. - Increased dependence upon institutional investors demanding relevant information to gauge
the company’s ability to perform in the long term.
- Rising expectations of citizens who have become aware of the far reaching impacts the modern corporation exerts upon community and environment .
At present companies are struggling to address these issues by providing the public and investors with evidence of their social-environmental soundness in order to get a licence to operate from society and the means to do it from the capital market. The concepts of ‘Corporate Social Responsibility’, ‘Sustainability’ and ‘Corporate Citizenship’ have been placed on the agendas of management forums and corporate boardrooms but a structured approach to the strategic management of the social-environmental dimension of the firm is still missing.
Responding to rising demands for accountability, international organizations, public authorities and private consulting firms have developed a range of instruments to assist companies in auditing, reporting and certifying their social-environmental activities. At present, however, available tools fail to integrate social-environmental affairs into the broader setting of corporate strategy as very few companies realize that these aspects have to be managed in just the same way as other dimensions of economic performance.
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-This thesis suggests a strategic approach to Corporate Social Responsibility, following the TQM- inspired observation that a company’s social-environmental performance is just another component of its overall effectiveness and as such constitutes one of the drivers of business excellence.
The exposition is organized around three main clusters.
The first cluster deals with the academic literature on the topic of Corporate Social Responsibility. The opening discussion of definitional issues provides an explanation for the adoption of the term of ‘Corporate Social Performance’ (CSP) to designate overall social-environmental achievement of the firm (on the three dimensions of principles, actions and outcomes). In the following theoretical discussion, a reconciliation of the instrumental and ethical theories is proposed as a foundation for integrating the management of CSP into the broader paradigm of stakeholder relationship management, were profit seeking motives do not detract from a solid ethical anchor. Evidence for the beneficial impact of Corporate Social Responsibility upon Corporate Financial Performance is then gathered in order to provide a rational for its inclusion in a broader framework tracing business results back to their antecedents.
The second cluster of the thesis offers an overview of the current landscape of CSR with the aim of establishing where an integrated framework for the management of Corporate Social Performance could bring the most relevant contributions and on which aspect should developments efforts focus. For this purpose European institutional initiatives and Danish business practice are briefly outlined and some of the most commonly adopted CSR tools and instruments are also examined.
Finally, the third cluster proposes the Integrated Management System for Corporate Social Performance which is the focus of this thesis. The purely theoretical elaboration of a tentative model is based upon concepts and methods of Total Quality Management Theory and inspired by principles of Business Excellence. The framework suggests a possible way of integrating CSP management into overall corporate strategy by embedding an operational three-dimensional construct of Corporate Social Performance into the causal structure of the EFQM Excellence Model. Performing self assessment against the model executives should be able to detect specific reputational outcomes and trace them back to policies and processes of social responsiveness driven by ethical principles.
1. THE EVOLUTION FROM CSR TO CSP IN THE ACADEMIC LITERATURE
Corporate Social Responsibility has been defined and conceptualized in several ways during the past 50 years following a process of analysis, debate and scholarly confrontation around the theme. In the present section, the evolution of the CSR model in academic research is traced in order to provide a basis for a better understanding of the subsequent discussion.
1.1 The origins of the concept of Corporate Social Responsibility
The origins of Corporate Social Responsibility (CSR) can be traced back to early fifties, with the publication of a book titled: “Social Responsibilities of the Business Man” (Bowen, 1953). With this innovative work, the author introduces the idea that each business has, among other responsibilities, a duty towards society which he defines as
An obligation to pursue those policies, to make those decisions or to follow those lines of action which are desirable in terms of the objectives and values of our society
(Bowen, 1953, p.6)
With his simple observation, Bowen triggers the debate about Corporate Social Responsibility, the discussion literally exploding in the 60es with the works of Friedman (1962), McGuire (1963), and Backman (1963). Denying the possibility of the firm acting as a moral agent, Friedman argues that only managers as individuals have moral discretion to assume any obligation going beyond profit maximization and that when doing so they levy “an illegal tax on the corporation”, stealing from owners’ dividends to tackle social problems. According to this author, the only socially responsible activity of the business should be improving profitability, therefore executives willing to engage in social causes should employ their personal income for the purpose, restraining themselves from diverting corporate resources to such a use. Following the theory of the “role specialization” within the social system, corporations as economic institutions, should specialize exclusively in this domain.
Rejecting this view and assuming an interaction of the political and cultural system with the economic system, McGuire and Backman argue that the corporation is not merely an economic institutions but also assumes a political dimension, especially given the extent of its influence on the community. Both authors view Social Responsibility as not only including but also moving beyond economic and legal considerations (Carroll, 1979). Slightly different is the conception of Manne (1972) who considers Corporate Social Responsibility as being something distinct from compliance with economic and legal obligations and including only pure voluntary acts. Despite
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-this minor difference in the scope of Social Responsibility, it is evident that Manne, McGuire and Backman, like Bowen before them, perceive the pursuit of social goals as something distinct from the pursuit of economic gains, not integrating corporate strategy but rather being a discretionary activity with a residual nature.
1.2 The distinction between Corporate Social Responsibility and Responsiveness
Following the same line of thought, Davis (1973) produced classical definition of CSR as:
the firm consideration of, and response to, issues beyond the narrow economic, technical, and legal requirements of the firm to accomplish social benefits along with the traditional economic gains which the firm seeks.
(Davis, 1973, p.312)
Clearly, corporate social involvement is not yet perceived as instrumental to the achievement of economic success but rather viewed as an optional activity the firm could engage into after having accomplished its economic and legal duties. The above definition interestingly introduces the bi-dimensional nature of Corporate Social Responsibility, as a concept embracing both the firm’s awareness on social matters and its active response to such issues.
Shortly after the publication of Davis’ work, Ackerman (1975) observes that the connotation of ‘responsibility’ is indeed incomplete in itself to capture the totality of the corporate effort in the social field as it mainly places an emphasis on motivation saying little about actual performance. The author elaborates upon the two notions of ‘social responsibility’ and ‘social responsiveness’ relating the first to the firm’s conscious assumption of a social obligation and the latter to the consequent behavioral response. As a conclusion to his analysis, Ackerman produces a definition of the ‘responsive firm’ as constantly
Monitoring the environment, satisfying the demands of multiple stakeholders and designing policies and plans to respond to changing social conditions.
(Ackerman, 1975, cited in Wood 1991)
The concept of ‘social responsiveness’ is gradually placed beyond ‘social awareness’ in an evolutionary pattern of corporate social involvement; such development obviously leading executives to put a stronger emphasis on policy development and implementation. This definition provides a major contribution to the Corporate Social Performance debate in that it juxtaposes a principles component to its action counterpart.
1.3 The concept of Corporate Social Performance
In the years following the publications of Ackerman’s work, several authors elaborate further on the dichotomy between ‘social responsibility’ and ‘social responsiveness’ and conceive the new term of ‘Corporate Social Performance’, embracing both socially responsible orientation and behaviors derived from it. In an attempt to bring some clarity into this debate, Carroll (1979) develops a three-dimensional Corporate Social Performance model, integrating both concepts of corporate social responsibility and responsiveness and featuring a third dimension covering the social issues addressed (Figure 1).
Figure 1: Carroll’s three dimensional model of CSP
Source: Carroll (1979)
The first dimension of the CSP model decomposes the Corporate Social Responsibilityinto the four sub-dimensions, derived from the author’s conception of CSR as
encompassing the economic, legal, ethical, and discretionary expectations that society has of organizations at a given point in time including economic, legal, ethical and discretionary components
(Carroll, 1979, p 499)
According to Carroll, companies should first of all fulfill their production duty in a profitable way (economic responsibility) and in compliance with legal requirements (legal responsibility). Their obligations then extend further to the respect of unwritten codes and implicit values (ethical responsibility) and finally to the consideration of further social expectations, not codified into regulation and not yet explicitly formulated by the public but still existing in a ‘latent form’ (discretionary responsibility). At this last stage, corporations engage in a truly social role, not mandated by law neither stemming from social pressure but simply assumed on a voluntary basis and implying a constant monitoring of the environment to detect opportunities of intervention.
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-Instead of arguing economic and social responsibilities to be mutually exclusive, the first one is identified as a subset of the latter. The above definition considers responsibilities of business as extending beyond economic and legal duties to include an obligation towards society; the latter not being limited to compliance with existing social norms1 but requiring the firm’s to anticipate issues of future relevance.
The dynamic nature of the above definition explains the difficulties involved in exhaustively identifying the social issues organizations should address, these issues changing through time and local context, following the contingency of social expectation. To account for these aspects and for the specific characteristics of different industrial settings, Carroll conceives a second dimension of CSP, complementing social responsibility and covering the range of issues management chooses to address: environmental, occupational safety or consumer related.
As the third facet of the CSP model, responsiveness provides an action counterpoint to the principled reflection of social responsibility (Wood, 1991). Observing different managerial attitudes to social matters, Carroll identifies this dimension of CSP as pertaining to the strategy adopted by executives when facing social issues, this dimensions ranging on a continuum from reaction to proaction and passing through defense and accommodation.
Carroll’s stated aim in developing his conceptual framework is to encourage management not to conceive voluntarily social activities as something distinct from economic performance but rather as one of the component of the total responsibility of business.
Wartick and Cochran (1985) consider Carroll’s model as being extremely useful to systematize analysis of social performance as its three dimensions reflect an underlying interaction among the
principles of social responsibility, the process of social responsiveness and the policies developed
to address social issues. Adopting Carroll’s proposition and integrating it with their own ideas, these authors produced their definition of CSP as:
a business organization’s configuration of principles of social responsibility, the process of social responsiveness, and policies developed to address social issues.
(Carroll, 1985, P.758)
Implied in such conception is the underlying interaction among ethical values, providing a motivational dimension, corporate responsiveness, accounting for strategic posture, and social-
1 This idea of complying to an unwritten social obligation is summarized in the notion of ‘Social Contract’, expressed by Gray and dealt with in the following chapter.
environmental policies conceived to address specific issues relevant to the firm’s operational context.
Aiming at developing a comprehensive concept of CSP, Wood (1991) elaborates further on these ideas in order to reach an improved designation of her own. Introducing a causal dimension, she observes that a model of CSP should not simply represent interactions among its component but rather detect “actions” and “outcomes”. Taking into account these observations and addressing the concept of social responsiveness to a “set of processes” rather than a single one, Wood comes to produce a definition of CSP as
a business organization’s configuration of principles of social responsibility, processes of social responsiveness, and policies, programs, and observable outcomes as they relate to the firm societal relationships.
(1991, p.693)
According to the author, the assessment of the degree to which principles of social responsibility motivate corporate actions, should be carried out on three levels: institutional, organizational and individual. An integration of these three layers is desirable as managers should be prevented from maximizing their discretion and fulfill their own CSR agenda, regardless of the ‘rule of relevance’ according to which social responsibilities should be relevant to the firm’s interest, operations and actions (Wood, 1991). Wood’s definition of Corporate Social Performance has the merit of identifying motives driving results, through the translation via a set of processes. In this context, Corporate Social Responsibility is no more something distinct from business performance linked solely to unspoken values but becomes part of an operational construct which can be assessed in the business organization.
This brief exam of the broad development of ideas behind CSR, leads to the conclusion that the concept of Corporate Social Responsibility refers to the firm’s conscious assumption of obligations towards a range of social segments. When the acknowledgement of such duties is accompanied by a concrete action to fulfill them, and by the consequent achievement of results, then the term of Corporate Social Performance becomes more appropriate to capture the totality of the firm’s effort. This move from CSR to CSP reflects the shift from a philosophical approach to one that focuses on managerial action. Whether or not firms should undertake Corporate Social Responsibility, and the form of Social Response they should actually enact, depends upon the economic perspective of the firm that is adopted as it will be exposed in the following chapter.
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-2. THEORETICAL FOUNDATIONS OF CORPORATE SOCIAL RESPONSIBILITY
2.1 CSR and the debate on the nature of the firm
As anticipated, the debate on Corporate Social Responsibility is closely related to the discussion on the nature of the firm and follows the existing dichotomy between neo-classical theory and stakeholder perspective. Advocates of the first view argue the pursuit of social goals inevitably compromises the company’s ability to be profitable by diverting resources from shareholders to other constituencies. Being hired solely with the aim of maximizing profits, managers would have no expertise in evaluating ethical considerations and would end up usurping corporate funds in the pursuit of subjective personal goals violating their contract with their employers, namely the shareholders (Friedman, 1970).
Rejecting this extreme conception and embracing the idea that the purpose of the firm includes the satisfaction of other constituencies beside the shareholders, exponents of stakeholder theory encourage the inclusion of social and environmental considerations into corporate strategy. The definition of a stakeholder as “any group of individual who can affect or is affected by the achievement of the organization’s objectives” (Freeman, 1984, p.46), implies a two way relationship between the firm and its several constituencies and gives origin to two broad theoretical directions, defined in Donaldson and Preston’s taxonomy of stakeholder literature as the normative
realm (dealing with the issue of how managers should relate to corporate stakeholders given its
ability to affect their well being) and instrumental realm (discussing how to manage stakeholders’
relationships in order to take advantage of their influence under the assumption that corporate success can be positively /negatively affected by some key constituencies). (Donaldson & Preston, 1995)
The above outlined orientations are reflected in the dichotomy which characterizes Corporate Social Performance literature, namely CSR as ethically driven behavior, and CSR an instrumental concept to the achievement of organizational benefits (Moir, 2001).Both orientation draw upon Freeman’s stakeholder management theory but while the first adopts a rather ‘duty aligned perspective’ and is mainly encountered in business ethic literature; the second adopts a strictly ‘economic perspective’, and is more frequent in management research. The duty aligned view, coherent with the normative realm of stakeholder theory, follows the rationale that from the firm’s ability to affect the well-being of its stakeholders derives a moral obligation to include their demands into managerial approach. The economic perspective follows rather the instrumental paradigm of stakeholder theory according to which the ability of some social groups to determine the
achievement of a firm’s objectives would induce corporate executives to manage the relationship with such stakeholders in order to ensure business success.
2.2 The duty aligned perspective :CSR in ethical theory.
The duty-aligned perspective of CSR is based on the ethical principle acknowledging individuals’ right to be free from harm and pursue some benefit, and the correlated negative duty of restraining from causing harm while at the same time actively helping others to achieve their well-being. Such duties would be recognized by the firm not exclusively in order to avoid negative public consequences but rather out of pure moral motivation.
An interesting contribution to this line of thought is that of Tuzzolino and Armandi (1981) who provide a motivational theory of CSR based on Maslow’s hierarchy of needs: according to this view firms adopt CSR to fulfill their “self-actualization needs” after having satisfied ‘physiological needs’ (profits), ‘safety needs’(dividend policy) and ‘affiliative needs’(participation in trade associations). Consistent with the traditional view of the corporation the duty aligned perspective assumes social responsibility to represent cost to the corporation, at least in monetary terms, but concedes it might bring about some non-economic benefits.
According to Swanson, this approach would be incompatible with the economic perspective arguing that corporations have no motivation to go beyond mere compliance with social control since engaging in any further form of positive behavior would imply forgoing profits with no immediate justification other than philanthropy. The discretionary recognition of positive duties, postulated by ethic theory would then lie outside the boundaries of the corporate sphere. Even assuming that taking on such positive duties served some kind of corporate economic goal, then the absence of a clear moral directive would collide with ethical theory, advocating the existence of an “attitude of respect towards others” being the sole driver of corporate social responsibility. (Swanson, 1995).
Although clearly different, the two strands of CSR theory do not appear to be mutually exclusive when considering the role of ethical principles as being “anchors not detracting from profit seeking motives but rather emphasizing sustainable performance through valuing people and the environment”(Wood, 1991, p. 701). According to Wood and other authors the instrumental benefits of stakeholder management would only be achieved if social activities of the firm are supported by
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-a genuine commitment to ethic-al principles2. To exemplify using an observation by Bernstein (1999, p.493): “if a firm’s commitment to trust and cooperation is only strategic rather than intrinsic, it will be difficult for the firm to maintain the sincere manner and reputation.” This idea does not appear so ground-breaking considering the fact that, a management theory developed 20 years ago, Total Quality Management has always displayed “a strong ethical focus while at the same time contributing to organizational goals” (Mc Adam, Leonard).
2.3 The Instrumental perspective : CSR in economic theory
According to the economic perspective there exist no such thing as a moral obligation to engage in positive duties and managers should restrain their behavior when pursuing their ultimate goal of profitability only when compelled to do so by law, social pressure or public policies, under the threat of costly sanctions. The theoretical system is not based on the assumption than the entrepreneur has a propensity to be altruistic but rather that competitive forces in the system act as a form of social control directing self interest into the pursuit of social goals.
Sethi (1979) and Davis (1973) embrace this line of thought implying that when failing to fulfill social expectations organizations loose the legitimacy3 society grants them; otherwise stated what
would be defined socially responsible behavior would simply be “a step ahead of time before the new social expectations are codified into legal requirements.” Integrating this view with the instrumental approach to stakeholder theory, organizations would then be motivated to restrain certain business practices not out of respect for their stakeholder but under the threat of retaliation from constituencies able to exercise some kind of influence on corporate success. Using Ullmann’s words: “when stakeholders control resources critical to the organization, the company is likely to respond in a way that satisfy their demands ”( 1995, p.552)
According to Gray’s notion of ‘Social Contract’4 theory companies must respond to both explicit and implicit claims from different constituencies. The failure to honor implicit contracts would induce the parties to transform them into explicit agreements, backed by law and far more costly for the firms involved. Thus, firms might pursue a high CSR profile in order to face fewer and lower-cots explicit claims. Cornell and Shapiro suggested that what motivates management to honor implicit contracts with stakeholders is the belief that long term value of the corporation includes
2 Principles of social responsibility provide a foundation for polices and processes of social responsiveness (see chapter 1)
3 Suchman (1995) defines legitimacy as “a generalized perception that the actions of an entity are desirable, proper or appropriate within some socially constructed system of norms, values, beliefs and definitions”.
market value of implicit claims it expects to sell: a certain work environment not stated in an employment contract or a promise to the customer not codified into a guarantee charter.
The instrumental realm of stakeholder theory referring to the consequences of treating stakeholders in a certain manner; the undertaking of social responsibility activities is justified by expected payoffs in terms of corporate image, attractiveness and credibility. Using McGuire (1963) words, social responsibility would consist of “a crude blend of long-run profit making altruism”. This same author introduces the concept of “enlightened self-interest”, so often used with negative connotations by philanthropists criticizing corporate actors who adopt CSR to achieve some a competitive advantage.
2.4 Reconciliation of two paradigms
Both views discussed in the previous paragraphs are stakeholder-focused and represent a valid countervailing paradigm to the neoclassical theory of the corporation. The economic theory, centered around the concept of virtuous self-interest, rejects the assumption of Friedman’s traditional perspective that there must be a trade-off between CSR and financial performance and concedes that their relationship might rather be a synergistic one. The approach adopted by the instrumental stakeholder theory is indeed coherent with the neoclassical postulation that “social responsibility of business is to increase profits”, (Friedman 1970) unlike Friedman though, the advocates of enlightened self interest dismiss the existence of a trade-off between a responsible conduct and profit maximization.
A conscious pursuit of social goals may result in a better financial performance in the long run since adapting to demands being made on the corporation, despite the costs involved, will positively affect market value of the stock of the firm by giving investors confidence in the firm ability to avoid long run sanctions and crisis. Thus, the firm would simply forgo short term profits in order to maximize long term profitability. Introducing a temporal dimension, the difference between neoclassical theory and instrumental stakeholder theory boils down to a matter of short versus long term focus. As Bernstein made it clear: “the ultimate result [of stakeholders’ management] may have nothing to do with the welfare of stakeholders in general. Instead the firm’s goal is the advancement of the interest of only one stakeholder group, its shareholders”. (1999, p.492). Chun et Al also embrace this view and comment: “shareholders should insist for their own financial benefit that their companies become seen as good corporate citizens”. (2003, p.15). Considering these arguments, it’s clear how the settling of the theoretical dispute over the purpose and responsibility
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-of the firm might be -offered by providing solid evidence -of an existing association between social and financial performance, bringing competing models of the firm to converge and making room for humanitarian concerns within the paradigm of shareholder wealth maximization.
This same view is consistent with assumptions underlying holistic management framework such as Norton’s Balanced Scorecard Strategic Map and the EFQM model, assuming the existence of a causal mechanism linking major stakeholders’ satisfaction levels to shareholders’ wealth. According to this concept, embraced by TQM philosophy, stakeholders’ management becomes an element of corporate strategy but in no way drives it.
When it comes to current business practice, the general business approach to CSR alternate basically between on the one hand ‘social philanthropy’ and on the other ‘being an element in or support of commercial strategies’. Both the diversity of social welfare models, history and business traditions in the member countries flavor the balance between the two orientations” (The Copenhagen Centre Response to EU Greenpaper Consultation, 2001). We note from the current European commercial approaches to CSR that stakeholder analysis is important, but that the rational remains largely instrumental. In support for the integration of the two paradigms, the English think-tank Business in the Community in its CSR survey published in 2000, concluded that “CSR should be based against set purposes and values-nevertheless such purposes and values are also linked to contributing to reputation and success” (cited in Moir, 2001)
These first two chapters illustrated how different ideas behind Corporate Social Responsibility and conflicting paradigms of Stakeholder Theory can be reconciled and brought to coherence in a unique framework of Corporate Social Performance. As a theoretical foundation to this thesis, an integration of several of the previously discussed lines of thought will be proposed, recognizing CSP to be based upon instrumental stakeholder theory, whereby ethically driven principles provide an anchor to a management strategy integrating stakeholders concerns to achieve shareholders’ wealth maximization as an ultimate goal.
The stated need for social activities to be accompanied by a sincere commitment to principles of social responsibility does not necessarily conflict with the hypothesis that social behavior might be undertaken for the ultimate benefit of owners and shareholders. As a matter of fact, if corporate engagement in a social cause seriously compromised the ability of the firm to be profitable in the long term, this would result in the failure to fulfill the primary obligation of business, namely the creation of wealth (not only in the form of dividends but also salaries and taxes paid to the
state).Then the assumption of ethical and discretionary social responsibility if not in line with overall business strategy might end up hampering the firm’s economic performance in the long term and preventing the corporation from complying with the other two component of it’s overall responsibility to society, consisting in economic and legal obligations. (See Carroll, 1979)
In this thesis, theories to explain active proactive Corporate Social Performance are identified: those derived by the instrumental stakeholder approach to explain ‘why’, those derived from the ethical approach to explain ‘how’. Inherent in this conception is the hypothesis that corporate social behavior is, in part at least, motivated by the interest of the firm but needs to be sustained by the ethical commitment and motivation of individuals, and specifically leaders.
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-3. THE SEARCH FOR A LINK BETWEEN CORPORATE SOCIAL PERFORMANCE AND BUSINESS RESULTS
As illustrated in the previous two chapters, adopting an instrumental stakeholder perspective and assuming the ultimate goal of the firm to be sustained profitability, there is still scope for the assumption of discretionary social responsibility in the firm, provided this does not conflict with the fundamental economic and legal obligations the company has towards society . It is among the stated aims of this thesis, to gather evidence to support the hypothesis that Corporate Social Performance not only does not compromise profitability, but also positively contributes to financial performance; such a prove providing the rationale for the integration of the previously introduced CSP construct into a causal framework explaining the mechanism through which enhanced business results could be achieved as a consequence of an excellent social performance.
There is an ample body of literature encouraging the business community to assume a societal role and claiming this will result in improved corporate performance, however, considering the difficulties involved in producing an unambiguous definition of CSP and an operational measurement for the concept, it comes as no surprise that almost 30 years of empirical enquiry into the relationship between companies’ social and financial performance have so far produced conflicting evidence and results. In this chapter the controversy will be first considered at a theoretical level and then evidence for and against each argument will be presented.
3.1. Thirty years of empirical research
The relationship between a firm’s corporate social performance (CSP) and its financial results has been the subject of a lively debate since the 70es and has considerable implications for corporate management. The discussion on the nature of the relationship between social and financial performance is strictly connected to the different theories of the firm; proponents of a narrow economic role for the corporation pointing to negative and neutral returns while advocates of the broader role of the firm claim positive financial returns as evidence that a balanced response to multiple stakeholders’ needs pays off.
A review of the literature on the association between Corporate Social Performance and profitability shows that their relationship is complex and theories and empirical studies fail to prove an unequivocal causal link between the two. Much of the research done in the area has been
incomplete and simplistic in methodology, many difficulties stemming from the lack of valid measures for the concept of CSP itself.
In the overwhelming majority of the research papers produced between 1972 and 2003, CSP is treated as an independent variable, preceding financial performance and in most cases positively affecting the bottom line. Anyway, to the extent that social activities are costly to the firm, the hypothesis of a negative relationship between social performance and financial performance finds indeed some support from opponents of CSR, arguing that social and environmental programs involve unproductive consumption of valuable resources, destroying shareholder’s value without creating any additional wealth in the company. A high responsibility resulting in additional costs, it would then put firms at an economic disadvantage compared to other less responsible firms (Vance, 1975). The essence of this argument is best captured by Friedman’s (1970) well-known critique to the social responsibility movement, according to which executives would pursue socially responsible goals at the expense of profits and thus levy an “illegal tax” on their employer, namely the shareholder. Coherent with this last view, the few authors who examined CSP as a dependent variable found it to be determined by levels of financial performance and explained their findings with the ‘slack resource theory’, according to which only financially solid firm could afford to divert funds to unprofitable social uses1 and justify expenditures in discretionary areas with the
availability of excess funds2 (Mc Guire, 1988).
Several empirical studies have been carried out to provide evidence for these conflicting theories, the different statistical methodologies and operationalization of latent variables often leading to conflicting results, especially in the early years, when the concept of CSP had not fully taken shape. Considering studies carried out in the 70es, questions arise about the connection between the underlying CSP construct and measures to estimate it as well as about the direction of causation, given the reliance upon correlation analysis and contemporaneous financial and social performance data (Margolis and Walsh, 2001). In the following it will be shown how in later years the identification of lagged effects on financial performance and the progressive inclusion of several intervening variables improved the quality of empirical research. Relying upon stakeholder management concept to develop improved measures of Corporate Social Performance, studies conducted in the 90es offer relatively solid evidence for the existence of a positive causal link between the instrumental conception of CSP and subsequent financial performance.
1 The reduction observed in social initiatives in lean years would also speak for the hypothesis that these activities are not clearly generating profits and are therefore reduced during a negative economic cycle as actually happened during the 1970 recession.
2 The ‘slack resource’ theory assumes CSP to be dependent upon managerial discretion rather than planned at a corporate level and integrated in the company’s strategy.
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-Considering the table accompanying Margolis & Walsh’s overview of empirical literature on CSP it emerges that, when treated as an independent variable, Corporate Social Performance is found to have a positive relationship to financial performance in 53% of the studies, a negative one in 5% of them and a mixed one in 19%. The remaining 24% of considered research papers fail to detect any significant relationship (see Figure 2).
Figure 2: Link between CSP and CFP in empirical literature
P o s itiv e Z e ro N e g a tiv e 2 5 3 0 2 0 N o o f s tud ie s N a tu r e o f R e la tio n s h ip 5 1 0 1 5 3 5 4 0 42 4 19 15 M ix e d C S P a n d F in a n c ia l P e rfo rm a n c e A n O v e rv ie w o f th e R e s u lts re v e a le d in 8 0 s tu d ie s
P o s itiv e N o re la tio n s h ip N e g a tiv e
Source: Margolis and Walsh (2000)
Of course, condensing information from several decades of academic research in such a statement does not automatically provide definitive evidence of the existence of a positive mechanism linking CSP to enhanced results, given the fact that studies differ in their degree of validity and the strength of their conclusions should be evaluated according to the quality of the analysis performed3. At the light of these considerations, the aim of this section is not to produce a comprehensive portrait of research literature on CSP but rather to discuss results and methodologies of major empirical studies, showing the evolution of the debate and providing evidence to justify the activities that fall under the umbrella of Corporate Social Performance. Support for the hypothesis of the positive link between CSP and CFP will be gathered not simply by counting the number of studies supporting it but rather by weighting the strength of their conclusion according to the soundness of the methodological approach. Factors which will be taken into account include:
- operational constructs used to measure latent variables (CSP, CFP) - soundness of the statistical analysis (sample size, methodology) - inclusion of appropriate control variables (size, industry, risk) - consideration of a time-dimension accounting for lagged effects
3 The technique of ‘vote counting’, implying the codification of quantitative studies as showing positive, negative or statistically insignificant results, has been shown to be invalid by many statistical experts as it does not account for the impact of theoretical, methodological deficiencies in a given line of enquiry (Orlitzky, 2003)
3.2 The ambiguous link between CSP and contemporaneous financial performance
The first empirical studies were published during the second half of the 70es and explored the correlation between CSP, measured by Moskovitz reputational scales4, and contemporaneous
financial performance, operationalized through use of accounting or market measures.
One such a study is the one by Moskowitz (1972), who relied upon his own ratings of CSP and
found them to be positively related with stock market performance, measured by excess returns on funds. Although having the merit of suggesting a first method to assess CSP levels, this work lacks in objectivity and is statistically meaningless, since just relying upon a case study methodology and failing to provide any indication concerning confidence intervals. The study being cross-sectional in nature, it simply assumes the causal relationship theoretically but does not test it directly, therefore the detected association says nothing about direction of causation. Because of the absence of a temporal dimension, the author’s hypothesis that engaged companies perform better because of their higher social performance is easy to disconfirm. As Judge & Douglas comment, another possible explanation for the detected association between CSP and CFP could be that “higher levels of financial performance lead to more slack, which permits greater integration of social-environmental issues into the strategic planning process” (1998, p.251).
Not convinced by Moskowitz’s arguments, Vance (1975) set out to replicate his study by using the
same CSP reputational ratings and relating them to stock market performance during 1974. Invalidating Moskowitz hypothesis, the author found stock returns of firms identified as responsible to be lower than average stock returns of the control sample including firm listed on three national indexes. The use of regression analysis confers a higher credibility to the conclusions of this research relatively to the previous one; anyway the lack of control variables and the reliance upon the same reputational index make the results rather weak5. To confirm reliability, the study was
replicated by its author using CSP reputational ratings provided by The Business and Society Review6 and came to the same results of the first one. In both cases the samples used (14 and 40 subjects) are too small to draw any general conclusion and lack an adjustment for risk of the firm portfolio (resulting in spurious correlation given the fact that a company’s financial performance is closely associated with the risk of its stock).
4 For a discussion of Moskovitz Index see the following chapter.
5 Vance however performed no statistical test to determine whether differences were significant. 6 The Business and Society Review Reputational Ratings are illustrated in the following chapter.
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-Three years later Alexander and Bucholz (1978) obviated to this last inconvenient by including in
the analysis the beta coefficient of the firm’s stock and using risk adjusted returns7 to measure financial performance. The authors wanted to test the hypothesis that socially aware management would also possess the skills to run a ‘superior company’ and socially responsive firms would therefore outperform nonresponsive ones in terms of accounting variables (this being in turn reflected in the firm’s stock price and attached systematic risk). Failing to confirm both Vance’s and Moskowitz’s hypotheses, the authors concluded “there is no significant effect of social responsibility on stock market performance” (1978, p.481) and that stock risk levels are not related to the company’s social endeavors, invalidating the hypothesis that investors perceive socially responsible companies to be better managed and less risky than irresponsible ones. If considered to be reliable, such results would no doubt discourage executives from undertaking social efforts; however this study is tainted by the same methodological deficiencies as Vance’s paper, namely the small sample size (40 subjects) and short time horizon (securities’ differential returns were calculated for a period of 4 years surrounding the responsibility surveys).
Despite being one year older, the work of Sturdivant and Ginter (1977), displays a better
approach to the evaluation of CSP effects in that it recognizes “several factors affect company performance and social responsiveness might be assumed to have a long run influence”(p.31). Taking into consideration a longer time span, the authors again used Moskowitz ratings and related them to economic performance measured as growth in earnings per share (EPS). Results of this research confirm that “responsibly managed firms enjoy better performance over a 10 years period” and induce the authors to speculate that “a management group which reflects narrow views of social change might also be expected to respond less creatively and effectively in the traditional but also dynamic arenas in which business functions”(p.38). Although having the merit of considering a longer time span for financial performance and breaking the sample into homogeneous industry categories8, the analysis is performed on an insufficient number of companies (28) and lacks an adjustment for risk of the firm portfolio, unfortunately compromising generalizabilityof results.
In 1984 Cochran and Woods re-examined the relationship between CSP and financial
performance using improved financial performance measures and controlling for factors omitted in previous studies by including ‘asset age’ among explanatory variables. Performance of 29 firms assigned by Moskovitz to the three categories of best, honorable mention and worst CSR
7 Securities being described in terms of two parameters of risk and returns, higher risk securities naturally display higher returns, therefore in evaluating their performance both risk and return should be incorporated in the analysis.
8 Controlling for industry accounts for the fact that each sector faces specific environmental-social challenges determined by the different nature of its activities. For example environmental issues are far more relevant to the pharmaceutical companies than legal firms.
performers was compared to performance of a control group of 386 firms in the same industry. Using a regression with dummy variables and a logit model, the authors found CSP levels to be strongly correlated with asset age and concluded therefore that omission of the latter would resulted in spurious correlation of CSP and financial performance. Asset age was found to be the most significant variable in predicting whether a company would be best, honorable or worst performer, accounting based measures being only marginally significant. To explain lower levels of CSR performance among older firms, the authors advanced the hypothesis that ancient plants would be more polluting and less safe than modern ones and their management would be less responsive to social demands. Regarding the financial impact of social activities, the authors conclude that “even after controlling for asset age, using a large sample, and industry specific control groups, there is still weak support for a link between CSP and CFP” (p. 55). Instead of being tempted to embrace the neo-classical view and conclude social activities to be harmful for the shareholders, Cochran and Woods attributed the detected lack of association to the poor measure of CSP used and argued that it would have been better to have rankings of social responsibility replicated over many years and on a more extensive sample of firms, thus allowing an investigation on causality. Providing directions for further research, the authors observed “there might be separate ranking for each of the different constituencies [...] giving researchers some indications on the effects of certain policy changes on perceptions of CSR and subsequent effects on financial performance” (p. 55). The latter observation might have provided the direction followed by a set of studies conducted in the 90es developing their own measures for the CSP construct inspired by stakeholder management concepts (see following paragraph).
Above discussed studies differ in methodology and operationalization of financial performance construct but all rely upon the same measurement of Corporate Social Performance, namely the reputational tripartite ranking of worst-honorable mention-best social performing firms compiled by Moskowitz in 1972. Basing social performance evaluation upon reputational surveys expressing value orientations of a single business critic is however a questionable methodology since these judgments do not reflect social performance per se but rather corporate social reputation as it is perceived by interest groups, and therefore notably influenced, among other factors, by public relations campaigns forging corporate image (Aupperle et Al, 1985). Realizing the deficiencies
implied in the use of Moskowitz’s ratings to estimate CSP levels, another group of authors writing in the 70es investigated the relationship between social efforts and financial performance relying
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-upon the alternative method of content analysis to obtain an allegedly more objective measure of Corporate Social Performance9.
In 1975, Bowman and Haire set out to examine the relationship between Corporate Social
Performance, measured by the number of lines of prose in annual reports, and Corporate Financial Performance, estimated by using the accounting-based measure of returns on equity (ROE). By limiting their focus to the food processing sector, the authors accounted for industry effect and moreover included a control variable to capture differences in size. Using pairwise comparisons, they found medium scoring companies to perform better in ROE than both those in the higher and lower range, thus suggesting a U-shaped correlation. A possible explanation for this finding would be that both a too scarce and an exaggerated allocation of resources to social activities compromise profitability. Once again caution should be used in interpreting the results, considering that the precise confidence level figure is uncertain and that ROE is a function not only of profitability but also of financial leverage. Moreover, since accounting-based measures tap only historical aspects of the firm’s results and are subject to managerial manipulations, market based measures appear to be more suitable to gauge corporate performance, since they represent investors’ evaluations of a company’s ability to generate future economic earnings. Despite these shortcomings, the authors’ implied suggestion that corporate efforts should somehow be balanced between economic and social duties is worth taking into consideration, as it provides some empirical support for theories encouraging a the joint consideration of social and economic objectives in the corporate planning process.
The same methodology, only slightly more refined, is employed in a later study by Abbott and Monsen (1979) who operationalized CSP by using the SID content index developed by Ernst and
Ernst10 and linked it to investment yield over a 10 years period. After controlling for company size, the authors concluded that “being socially involved does not appear to increase investor’s total rate of return nor does it appear that being socially involved is dysfunctional for the investors” (p. 514). As it was the case with Bowman and Haire’s research, the validity of the measure of CSP used is questionable and the performance criterion of investors’ yield is not necessarily an adequate surrogate for profitability, being a function of both capital gains and dividends.
Despite being more objective than reputational scales, the use of content analysis is also subject to critique given the fact that it is likely to be more closely related to a company’s communication on
9 See next chapter for a discussion of measurement methods in the academic literature.
10 SID stands for ‘Social Involvement Disclosure’ and indicates a scale based upon the number of social activities mentioned in Fortune500 annual reports. For a further treatment of the topic see next chapter.
social matters than to corporate efforts and achievements in the field. As observed by Ulmann (1985) “All studies of the relationship between social performance and economic performance are highly questionable when social disclosure is used as a proxy for social performance” (p. 541) If the quantity and quality of a firm’s social disclosure was positively correlated with its social performance, then socially concerned investors could assess the extent of a company’s social effort simply by examining its annual statements and environmental-social report. However, given the lack of unquestionable evidence to prove such a positive link between disclosure and performance, “social disclosure cannot be substituted for performance […] no matter how impressive the quantity and quality of the disclosed information” (Ullmann, p.543).
Noticing the bias introduced in previous research by the use of inadequate measures of corporate social responsibility, Aupperle, Carroll and Hatfield (1985) developed their own survey
instrument to assess Social Orientation of an organization through the importance managers placed upon legal, ethical and philanthropic goals compared to the economic ones. The authors drew upon Carroll’s four dimensional CSP construct and tried to determine the relative weight executives placed upon the different categories of corporate responsibility: economic, legal, ethical and discretionary. Factor analysis confirmed the existence of four distinct components of CSR and revealed the economic factor to be negatively correlated with the three non economic counterparts. Although adjusting for firm and industry specific risk the authors failed to detect any significant correlation between degree of social orientation and firm’s profitability (measured by short and long term ROA). The authors reached therefore to the same conclusions as Abbot and Monsen that it is neither beneficial nor harmful for a firm to fulfill its social contract. The findings of the study are anyway limited to the perceptions on corporate social responsibility of CEOs and their representatives and only reflect the motivational component of CSP, failing to account for the behavioral dimension. As Ackerman notices, this is an unsuitable measure to capture the totality of the social effort in the firm since “responding to social demands is much more than deciding what to do. There remains the management task of doing what one has decided to do, and this task is far from trivial” (cited in Carroll, 1979, p.498)
Although failing to provide undeniable evidence for the positive impact of social activities on financial results, all these studies gave interesting indications for further research and gradually built the foundation for a body of empirical literature supporting the business case for CSR by offering sound evidence for the positive impact of strategic corporate social performance measurement upon financial results.
25 -3.3. Further inquiry into the direction of causation
The intuition that past and current economic performance could determine levels of social responsibility in the company induced a number of authors to investigate further into the nature of the causal mechanism linking social and financial performance. Introducing a time dimension into the research, the distinction between past, concurrent and subsequent economic performance helped to gain further insight into the causality of the relationship between CSP and economic results. Urging for the inclusion of a temporal dimension in empirical research, Ullmann (1985) observed that, in the absence of any clue concerning direction of causation, the positive association between CSP and financial performance detected in some previous studies does not provide any conclusive evidence of the positive impact of social engagement upon business results. Indeed he argued, that the positive association between social and financial performance may be a prove of the contrary, namely that social activities represent a net cost to the corporation, as only financially sound firms would dispose of excess funds to divert to unprofitable social causes, while poor economic performers would rather undertake short term, high-yield investment.
Drawing upon Ullmann’s theoretical paper, Mc Guire et al (1988) set out to clarify the nature of
the causal mechanism linking corporate and social financial performance by combining the use of 1983 Fortune’s reputational CSR ratings with a time series of stock market returns and accounting measures obtained from the COMPUSTAT database. In order to investigate into the relationship between social performance and past-subsequent financial results, the authors averaged performance variables over two periods ranging from 1977 to 1981 and 1982 to 1984. As correlation analysis suggested little contemporaneous association between social responsibility and measures of financial performance, the authors tried to regress CSP ratings upon prior financial performance and found the latter to have a higher explanatory value of CSP levels (accounting-based measures proving to be better predictors of corporate social responsibilities than market measures)11. Risk measures included in the study, were found to be negatively associated with social responsibility, thus confirming the hypothesis that socially responsible firms are less risky investment since less likely to incur in fines and law suits. The strength of the results is moderate given the lack of control for industry and size, two variables which had been proved to be intervening in the relationship between social and financial performance.
11 Coherent with slack resource hypothesis it is interesting to note that accounting measures are most likely the ones managements would rely upon to assess existence of excess funds for the engagement in discretionary social activities.
Waddock and Graves (1997) set out to address the issue of the sign of the relationship between
CSP and CFP and the direction of causation testing the hypothesis of the existence of a ‘virtuous circle’, whereby better financial performance would result ceteris paribus in improved social performance, which in turn would lead to enhanced subsequent financial results. The authors criticized previous studies for relying upon uni-dimensional measures of CSP, implying social activities to be discretionary in nature and added-on to normal strategic decision making and argued for the need to define CSP in terms of stakeholder relations considered critical to firm’s performance. Drawing upon the instrumental stakeholder paradigm, the authors suggested that stakeholders’ concerns should be integrated in the corporate decision-making process only if they have strategic value to the firm, an idea adopted by most advocates of the enlightened self-interest theory of Corporate Social Responsibility. Judging Fortune’s ratings to be rather a measure of overall management ability than an indicator of CSP, the authors searched for a more representative multidimensional measure of corporate social performance and selected the Kinder, Lyndenberg, Domini (KLD) Index, whose 8 dimensions include 5 directly related to key stakeholder groups. To overcome the lack of a system of weights accounting for different relevance of each dimension, a panel of experts was asked to rate the relative importance of each attribute, thus allowing top account for shifting of the relative importance of items over time. Building above findings from previous studies, all three intervening factors of size, industry and risk were included as control variables and three accounting measures of profitability were employed to measure financial performance (ROA, ROE, ROS). After performing lagged regressions both with CSP as a dependent and as an independent variable, the authors found very strong evidence for the link between previous financial performance and CSP and also between CSP levels and subsequent financial results. The methodological robustness, the use of a 469 firms sample and the very high significance levels (p<0.001) confers high credibility to the results of the study. Findings thus validated the hypothesis of the existence of a virtuous cycle between CSP and CFP and encouraged the management of CSP in the paradigm of instrumental stakeholder theory.
In the same year the recourse to stakeholder analysis to gauge levels of Corporate social performance, brought Preston, Douglas and O’Bannon (1997) to the same conclusions reached
by Waddock and Graves, providing further support for the virtuous cycle hypothesis. In an effort to systematize arguments and empirical findings presented in the literature, these authors framed their research question around a comprehensive typology of possible relationships between corporate social and financial performance, according to sign and causal direction of the link. The hypothesis are investigated using a sample of 67 companies, evaluated on three selected dimensions of Fortune500 Reputation Rating allegedly reflecting the interests of key stakeholders groups:
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-employees (Ability to select and retain Good People), customers (Quality of Products and Services) and society at large (Community and Environmental Responsibility). Hypothesis were tested computing correlation coefficients between CSP and accounting based measures of performance (ROI,ROA,ROE) in both contemporaneous and lead-lag combinations, over a period of 11 years. The rather extensive dataset used, enabled the authors to calculate a total of 270 correlation coefficient, not a single one displaying a negative sign. Despite the lack of control a variable for industry and risk this study provides evidence of a positive relationship between social and financial performance indicators and supports the stakeholder theory of the corporation.
Further elaborating on the stakeholder concept of CSP, Berman and Al. (1999) improved Waddock
and Graves model by including variables accounting for the firm’s strategy and the operational environment. The author’s stated objective was to formalize and test two empirical models underlying different theoretical approaches to Corporate Social Responsibility: the strategic
stakeholder management model, according to which concern for a constituency would be solely
determined by its ability to affect financial performance, and the intrinsic stakeholder commitment
model, postulating the existence of a moral duty to satisfy stakeholders’ needs. The longitudinal
study analyzed the performance of 81 firms from Fortune 500 over a period of 6 years and relied upon 5 dimensions of the KLD index to measure a CSP construct inspired by stakeholder management theory. On the lines of Waddock’s work, Berman and Al. also selected the 5 dimensions from the KLD index according to their ability to reflect concerns of key constituencies: ‘employee relations’ and ‘diversity’ for the workforce, ‘local communities and ‘natural environment’ for society, ‘product quality and safety’ for customers. To test for validity of competing theoretical models of stakeholders’ orientation, the authors estimated several regression models: including strategy and stakeholder relationship as predictors of profitability in the case of the strategic stakeholder management model and considering strategy as a mediating variable between a firm’s stakeholder posture and profitability in the case of the intrinsic stakeholder commitment model. Results provided support for the instrumental stakeholder model, according to which it is concern with profits that dictates the extent to which stakeholders’ concern are integrated in corporate decision making12. No support was found for the hypothesis that firms address stakeholders’ issues out of philanthropic reasons and that this commitment results in improved performance, as implied by the duty aligned perspective of social responsibility. The authors conclude that not only “fostering positive connections with key stakeholders improves profitability”, but, more importantly, that stakeholder relationships and resource allocation decision
12 Only two out of five variables (employees relations and product safety/quality) were found to be positively, significantly related to financial performance; the lack of significance for the environment and community variables being probably due to the lack of control for industry type and geographical location.
are inseparable” (p. 503). An interesting suggestion for further research is to include survey data capturing “management intentions” in order to categorize the nature of the firm’s commitment to stakeholders and to compare motives with observed behaviors. The authors stressed the need to expand the business performance construct to non-financial measures to better understand the link among stakeholder relationship, strategy and performance. Indeed this suggestion is worth taking into consideration as an investigation of intangible effects of Corporate Financial performance would bring clarity into the debate and provide operational indications to executives wishing to implement a strategic management of Corporate Social Performance (see chapter 8)
A last interesting contribution to the debate which is worth mentioning is the comprehensive study by Balabanis et Al.(1998) testing a model explaining the relationships between Social
Performance, Social Disclosure and past-contemporaneous-subsequent economic performance, following a recommendation by Ullmann (1985) who questioned the methodological validity of previous empirical research and suggested exploring the interactions between Social Disclosure, Social Performance and Economic performance in one single conceptual framework. The selected ratings to operationalize Corporate Social Performance and Disclosure were obtained from the New Consumer Group, a British organization who compiled them by using diverse secondary sources in conjunction with primary data collected via mail survey. Each company was rated on 13 aspects such as CSR disclosure, advancement of women and minorities, charitable giving, environmental action, business with oppressive regimes. Reliability and validity problems in this rating are minimized thanks to triangulation of different information sources and data collection methods, resulting in reduced bias and lower systematic measurement error. Economic performance was operationalized through a combination of accounting based measures (ROE, GPS, ROCE) and market based measures (EVM, Beta), tracked over a 10 year period, extending itself from 5 years preceding CSR assessment to 5 years following it. Relying upon a sample of 56 firms the authors tested their theoretical model assuming past financial performance to be an antecedent of Corporate Social Disclosure and performance, in turn driving subsequent financial results together with other intervening factors such as concurrent financial performance, firm’s size and environmental impact of the industry. Performing correlation analysis the authors came to the conclusion that a combination of high levels in both Corporate Social Performance and Disclosure have a positive effect on firms’ overall profitability while “low corporate social disclosure combined with good social performance or high social disclosure combined with poor performance were found not to be economically rewarding strategies” ( 1998, p.42).
