The relationship between corporate social responsibility (CSR) and firm's financial performance (FP) has long been examined and debated in both the finance and strategy literature, yet it remains unsolved (Margolis and Walsh, 2003). On one hand, many scholars has argued that CSR is just a burden to a firm's FP (McWilliams and Siegel, 1997; Jensen, 2002), since it is unnecessary expenditures which raise firm's cost and thus cause economic disadvantage for firm in a competitive market. On the other hand, many scholars has contended that a firm with good social performance would attract resource better (Waddock and Graves, 1997), draw in quality employees (Greening and Turban, 2000), build value for its products and services (Fombrun, 1996), and even create opportunity (Fombrun et al, 2000). Thus, CSR is a source of competitive advantage (Porter, 1991).
This paper will gather and review six contemporary articles that concerned about this unresolved relationship between CSR and FP. Each article focuses on a different aspect of the topic, however all article use the same method to approach the problem: proposing hypothesis on this relationship and testing them on a wide range of sample. Another common among the articles is that they all yield positive results that support the relationship between CSR and firm's FP.
THE NATURE OF THE RESEARCH
Although all articles investigate the link between CSR and FP, each proposes hypotheses regarding different aspects of this relationship. Shen and Chang (2008) study the two long competing views: social impact hypothesis (Cornell and Shapiro, 1987), and shift of focus hypothesis (Becchetti, Ciciretti and Hasan, 2007). Also from such general view, Peters and Mullen (2009) examine the theoretical model that questions the existence of a positive cumulative effect of CSR on firm's FP. In more specific ways, other articles investigate different topics within the relationship between CSR and FP. Barnett et al. study the impact of social screening on SRI funds' performance; while Doh et al. (2009) test the hypothesis on the relationship between the addition or deletion of firm from a social index and its FP. Lev et al. focus on corporate charitable activities; and finally, Mishra and Suar (2010) propose that CSR activities address stakeholders will positively impact both the firms' FP and non-financial performance (NFP).
The subjects of the tests also vary according to the author's specific means and conditions. Most of the samples are from the U.S. companies, such as top 100 firms on the Fortune 500 list in 1996 (Peters and Mullen, 2009); or U.S. mutual funds (Barnett et al., 2006). However, there are two samples come from Asia: Indian manufacturing companies (Mishra and Suar, 2010); and CSR-firms and NonCSR firms in Taiwan (Shen and Chang, 2008).
All data are archival, collected from various sources such as COMPUSTAT, Prowess database or CRSP database. As a matter of fact, most of the data are processed by regression analysis, including Ordinary Least Square (OLS), and hierarchical regression. Other measures are matching methods (Nearest, Caliper, Mahala, and Mahala Caliper), Kynder Lydenberg Domini (KLD) rating system, and Granger causality test.
RESULTS
All hypothesis tests yield results support the relationship between CSR and firm FP. First, the findings of Shen and Chang (2008) favor the Social Impact Hypothesis. Using four matching methods to match the sample of CSR-fimrs and nonCSR-firms with similar characteristics, Shen and Chang finds firms adopting CSR agenda tend to have significant higher finance performance than nonCSR partner. Also, at the very least, adopting CSR does not deteriorate the performance of firms.
On the similar general base, Peters & Mullen (2009) find the existence of the cumulative effects of CSR on firm FP. Moreover, this effect is strengthened over time. This results show the advantages of adopting and maintaining CSR agenda.
Next, Barnett et al. succeed in reconciling the two long opposite viewpoints of scholars on the relationship between CSR and FP. The authors find a curvilinear relationship between the number of social screens used and the mutual fund's financial performance. Specifically, "as the number of social screens used increases, financial returns decline at first, but then rebound as the number of screens reaches a maximum" (Barnett et al., 2006).
The remaining three articles incline to stakeholder-based view and their findings reflect the positive impact of CSR on stakeholder satisfaction and in turn, firm's FP. Specifically, Mishra and Suar (2010) find that it is profitable and beneficial for implementing responsible business practice towards six primary stakeholders (employees, customers, investors, community, natural environment, and suppliers). Meanwhile, Doh et al (2009) find that there is a negative shareholder wealth effect associated with a firm's deletion from a social index and that firms added to a social index will have superior operating performance in the period prior to their inclusion, relatives to companies that have deleted from the index. This suggests that investors are concerned about the social performance of their invested firms. And finally, Lev et al.'s findings support the effect of corporate charitable contributions on customer satisfaction and in turn, firms' annual revenues.
IMPLICATIONS
Since all articles support the relationship between CSR and FP, the primary implications for managers is quite clear: CSR can be a good measure to improve firm's FP and even non-financial performance. Long term CSR is positive for a firm's stockholders and thus it is profitable and beneficial to firms.
Here are some specific implications for firms form each article:
Doh et al.'s article suggests that stakeholder group can influence the reputation and FP of a firm, and thus the role of them should be integrated into strategic decision regarding CSR. Also, firm should pay more attention to social investors' interests to help broadening the availability of capital as well as boosting firm's reputation and legitimacy.
Peters and Mullen (2009) share the same view with Doh et al. (2009) in addressing and responding to stakeholder obligations by engaging in CSR activities. The short-term benefit may be minimal, but long term benefits can be enough to outweigh initial cost and expenditures. This suggests the managers should not only focus on cross-sectional results, as inference and conclusion may be misleading. However, CSR commitment by themselves do not necessarily guarantee current or future success, thus, in order to maintain firm's sustainability, managers must continually readdress strategy and relationships according to changes.
For fund managers, Barnett's and Salomon's article shows that they need to be more careful in considering the effects of their screening strategies on the performance of their funds. Managers should either broadly screen irresponsible firms from the list of their funds, or exclude very few firms so that they would not interfere with their ability to diversify.
Mishra's and Suar's article focuses on ethical aspect of CSR activities. "Strategic CSR" has been criticized by researchers as "marketing instrument" (Maignan and Ferrell, 2001), and turns stakeholders as "means" to maximizing shareholder's wealth. This suggests that by designing stakeholder-sensitive policies and bringing ethical issues into CSR framework, a firm will cater to a wider range of issues related to stakeholders and such an approach can be beneficial to both the firm and its stakeholders.
Lev et al.'s article demonstrates that corporate managers can justify philanthropy programs to skeptical shareholders by explaining how these giving would enhance customer satisfaction and, after that, sales growth.
In general, the findings indicate that CSR is positively related to firm's FP and this relationship is significant, therefore, socially responsible corporate can be associated with bottom-line benefits.
APPENDIX
Table 1 - Summary of articles
Authors
Hypothesis / Proposed relationship
Subject
Data
Analysis
1. Shen &Chang (2008)
Social impact hypothesis, proposed by Cornell &Shapiro (1987), and Preston &O'Bannon (1997)
Shift of focus hypothesis, suggested by Becchetti, Ciciretti and Hasan (2007)
CSR-firms and NonCSR firms in Taiwan from 2005Q2 to 2006Q1
CSR-firms data was taken from Global View Monthly's "CRS award", with a total of 20 firms
NonCSR-firms were taken from Taiwan Stock Exchange-listing companies, with a total of 640 firms
The author use four matching methods: Nearest, Caliper, Mahala, and Mahala Caliper to match the sample of CSR-firms and nonCSR-firms with similar characteristics
OLS regression analysis
2. Peters &Mullen (2009)
Theoretical model - The existence of a positive cumulative effect of CSR on firm financial performance.
Top 100 firms on the Fortune 500 list in 1996
Berman et al. (1996) gathered data from these companies over 1991-1996 period. The data set is 81 firms with total sample size of 486 over 6 years.
KLD measures
3. Barnettt et al. (2006)
H1: The relationship between the intensity of social screening and FP for SRI funds is curvilinear
H2: SRI funds that select firms for their portfolios based on community relations screening criteria will earn higher financial returns than those that do not
U.S. mutual funds tracked by the Social Investment Forum
Data come from various sources:
CRSP data
Weisenberger and ICDI
Ordinary Least Square (OLS) regression method
4. Mishra &Suar (2010)
The favorable CSR towards stakeholders will positively impact the firms' FP and non-financial performance (NFP)
Indian manufacturing companies
Six stakeholder groups: employees, customers, investors, community, natural environment, and suppliers
Company data was taken from Prowess database of CMIE, the largest database of Indian companies.
Company's financial data (ROA) was taken from the questionnaire sent to companies' CEOs
Hierarchical regression analysis
5. Doh et al. (2009)
H1: There is a positive (negative) shareholder wealth effect associated with a firm's addition (deletion) from a social index
H2: Firms added to a social index will have superior operating performance in the period prior to their inclusion, relatives to companies that have deleted from the index
U.S. companies that had announcements of endorsement and repudiation of CSR
Calvert social index
Financial data from COMPUSTAT
KLD ratings of firms' social responsibility and social irresponsibility
OLS Regression
6. Lev et al. (2010)
The effect of corporate charitable contributions on firms' annual revenues
U.S. public firms with corporate philanthropy programs from 1989 through 2000
Taft Corporate Giving Directory from year 1989 through 2000 (Taft Group, 1994-2002)
National Center for Charitable Statistics (NCCS)
Financial information is taken from COMPUSTAT annual data base, and institutional investor holdings from Thomson Reuters 13F filings database
Granger (1969) causality tests
Social Impact Hypothesis vs. Shift of Focus Hypothesis
The social impact hypothesis, proposed by Cornell and Shapiro (1987) and Preston and O'Bannon (1997), claims positive association between CSR and financial performance. Several channels could explain this positive effects, such as providing better working place improves employee productivity (Turban and Greening, 1997); donation to the public benefits increases social reputation, trust (Bowman and Haire, 1975; Alexander and Buchholtz, 1978) and brand image and product competitiveness (Porter and van der Linde, 1995; Fombrun et al., 2000). Studies by Moskowitz (1972), Parket and Eilbirt (1975) and Soloman and Hansen (1985) also claim that CSR leads to more benefits than the cost incurred, suggesting that there is positive correlation between CSR and financial performance.
The shift of focus hypothesis, the competing view, suggested by Becchetti, Ciciretti and Hasan (2007), argue that most of the CSR activities such as building employee and community relationship, providing environmental protection and improving corporate governance causes a shift of focus from the maximization of stockholders' value to the interests of a wider set of stakeholders and thereby increasing the firm's costs. Previous studies also argue that corporations engaged in CSR activities are found to have lower market competitiveness and worse performance through using resources inefficiently (Friedman, 1970), limiting product developments (Bragdon and Marlin, 1972) and pushing nonprofitable social activities (Aupperle et al., 1985; Vance, 1975; Ullmann, 1985). Particularly noteworthy is the lack of public responsiveness to philanthropic behavior as well as the insignificant feedback effect on financial performance (Henderson, 2002; Walley and Whitehead, 1994). Therefore, firms having higher social awareness result in worse financial performance.
Kynder Lydenberg Domini (KLD) rating system
Kinder, Lydenberg and Domini (1993) rate companies on multiple dimensions of stakeholder relationship and social performance in their role as investment advisors for socially responsible mutual funds. The ratings in the KLD database are determined by both quantitative data (annual reports, proxy statements) and qualitative, content driven evaluation (e.g. reports in business press, company announcements,media publicity).
(Peters and Mullen, 2009)
