People and Profits?

The Search for A Link Between A Company's Social and Financial Performance

Joshua Daniel Margolis, James P. Walsh

• Publisher: Psychology Press
• Year: 2001
• Print ISBN: 9781138160576
• eBook ISBN: 9781135642266
• Topic: Business
• Subtopic: Management
• Index: Business

What is the relationship between the social performance of companies and their financial performance? More colloquially, can a firm effectively attend to both people and profits as it conducts its business? This question has been investigated in no fewer than 95 empirical studies published since 1972. The authors have assembled a compendium of this research to give researchers and practitioners alike a broad overview of these 95 studies and a systematic database detailing the content of each one.

This book provides a comprehensive portrait of this research literature. It begins with a broad orientation to the literature, exploring why the link between social and financial performance has been subject to continual inquiry and often heated debate. The authors then present an integrated overview of the 95 studies. Through the charts and tables, the authors illuminate the nature of the studies conducted; the data samples selected for investigation; the ways in which financial and social performance have been measured; and the overall tally of results.

People and Profits?

Section 1: Introduction

What is the relationship between the social performance of companies and their financial performance? More colloquially, can a firm effectively attend to both people and profits as it conducts its business? This question has been investigated in no fewer than 95 empirical studies published since 1972. We have assembled a compendium of this research to give researchers and practitioners alike a broad overview of these 95 studies and a systematic database detailing the content of each one.

Empirical inquiry into the relationship between companies’ social and financial performance — between their concern for humanity and their concern for the bottom line — has received ongoing attention since Bragdon and Marlin published the first empirical study in 1972, with 21 studies completed in the 1970s, 32 in the 1980s, and 42 in the 1990s (see Figure 1). In the most recent five-year period from 1996 through 2000, researchers published 31 new studies, and no doubt more are set to follow. Figure 1 also reveals the years in which the firms’ social initiatives under investigation actually occurred. Of course, it is in the nature of the research process to see a lag between the year of publication and the year of empirical observation. It is no surprise to discover that studies published in the 1970s investigated firms’ activities in the 1960s. The empirical focus on firm activity has generally kept pace with the times.

Our aim here is to provide a comprehensive portrait of this research literature. We suspect that policy makers and executives alike will appreciate having this work crisply summarized. The tables and figures that accompany section three offer a quick and easy overview of what academic research has been saying over the last 30 years. The research community should find it helpful as scholars work to craft new theory, ask novel questions, and conduct even more sophisticated empirical investigations. The detailed accounting of all 95 studies in Exhibit 1 provides a foundation from which scholarly work can continue.

Our portrait of this work begins, in section two, with a broad orientation to the literature, exploring why the link between social and financial performance has been subject to continual inquiry and often heated debate. In section three, we present an integrated overview of the 95 studies. Through a series of tables and figures, we illuminate the nature of the studies conducted; the data samples selected for investigation; the ways in which financial and social performance have been measured; and the overall tally of results. Section three includes a table distilling the conclusions drawn and directions proposed in twelve previous reviews of the academic literature. Following the tables and figures, an exhibit outlines each of the 95 studies, providing a detailed view of the literature and a basis for systematic comparison. This compendium concludes with a comprehensive bibliography, organized to highlight the 95 studies themselves, as well as the work that provided much of the theoretical and methodological background to this line of inquiry. An appendix explains abbreviations and acronyms used throughout this document.

Section 2: A Brief Orientation to the Question

2.1 Constructing the Business Case for Corporate Social Performance

In an effort to justify and advance — or to delegitimize and jettison — the activities that fall under the umbrella of social performance,¹ researchers and managers alike want to understand the relationship between corporate social performance and corporate financial performance. A positive connection between social and financial performance establishes a business case for having firms pursue activities motivated by societal needs and concerns.² If these activities can be shown to contribute to improved financial performance, the underlying logic goes, then companies themselves benefit from adopting practices designed to help a variety of constituents.

A business case may help justify a company’s involvement in social initiatives, but the search for a link between social and financial performance begs a fundamental question. Why are firms called upon to engage in social initiatives in the first place?³ We propose two intertwining explanations: (1) social trends drive a recurring reconsideration of the role and responsibilities of the firm, altering what is expected of corporate entities; (2) firms find themselves in situations that call upon them to respond, independent of any systematic reconsideration of a firm’s purpose and responsibilities.

First, the role of the firm is continually questioned with each successive wave of dawning social awareness in larger U.S. society. Pollution in the 1970s, South African apartheid in the 1980s, and international human rights abuses in the 1990s are emblematic of issues that instigated social movements. Efforts to redress these wrongs implicated company practices, calling into question the means through which companies generated their profit. The specific issues themselves required responses from companies, pushing executives and managers to consider the social impact of their profit-making endeavors. But pollution, apartheid, and human rights abuses have also raised broader questions about the role and responsibilities of the firm within society. These specific issues, among others, made evident the intimate relationship between corporate practices and social concerns. As a result, companies have increasingly been called upon to solve problems to which they have contributed, such as pollution, as well as those for which, though not causally responsible, they are potential beneficiaries or even uninvolved bystanders.

Companies have had to consider their social performance for a second reason. Companies continually find themselves in new situations, undertaking a broader range of activities. It is not simply a matter of having the role of the firm reassessed under the weight of rising social concerns, but rather, an ever-shifting role emerges from the reality of taking on new responsibilities. With globalization, firms operate in regions where the basic institutions of Western welfare capitalism simply do not exist. In order to operate, firms must perform the functions that government might otherwise be expected to perform.⁴ Meanwhile, in the United States, and in some other industrialized nations, the tremendous success of corporations since the 1970s, and the economic prosperity they have produced, are juxtaposed to the limitations and perceived failings of other societal institutions, particularly those of government. As a result, companies are asked to extend their effectiveness and step in — for educational programs, volunteer drives, and public health initiatives, to name a few examples — where other institutions might formerly have been counted upon.

The reality of having to do new things dovetails with an ongoing reconsideration of the purview of the firm, together drawing companies into civic activities. At its root, the forces drawing companies into social performance rest on the conviction that the engines of tremendous economic growth might be able to expand what they do to improve the lot of humanity, beyond the contribution they make to economic growth.⁵ However, from the perspective of owners, executives, and managers trying to generate financial returns from a set of assets, the logic that makes the firm a target for moral and social appeals, and the forces that draw corporations into social initiatives, says nothing about the impact these activities have upon the firm itself. A business case documenting financial gains from social performance can hasten efforts to gain corporate involvement, allay fears about its costs to the bottom line, and provide a rhetorical cudgel for proponents and rhetorical cover for executives.

2.2 Academic Debate

The practical reality of corporate social initiatives and attempts either to justify or invalidate them has motivated researchers to investigate the connection between corporate social performance (CSP) and financial performance (FP). In addition, inquiry into the relationship between corporate social performance and financial performance contributes to hoary debate about vying theories of the firm (Berle, 1931; Dodd, 1932; Orts, 1993; Bradley, Schipani, Sundaram and Walsh, 1999). Proponents of a narrow economic role for the firm may point to.negative and neutral financial returns from social performance, and to a connection between antecedent financial performance and subsequent social performance, as evidence that socially responsible practices squander a firm’s (and thus shareholders’) resources. Proponents of a broader role for the firm may point to positive and neutral financial returns from social performance as evidence that an expanded set of responsibilities neither jeopardizes the financial role of the firm nor squanders resources.

Empirical evidence of a positive causal relationship moving from social performance to financial performance also promises, for some, a solution to endless debate about the `5"/>role and responsibilities of the firm. If social performance turns out to contribute to financial performance, competing models of the firm might converge. The need to return once more to first principles about the “true” purpose and nature of the firm would disappear, as a broad conception of the firm’s role and responsibilities might be perfectly consistent with a narrower conception. Those who construe a narrow economic role for the firm would embrace a financial rationale for socially responsible practices, and those with a broader conception of the firm’s responsibilities would need not appeal to an alternative construal of the firm’s purpose to justify expansive responsibilities. Demonstrating the bottom-line benefits of corporate social performance would make room for humanitarian concerns within the paradigm of shareholder wealth-maximization. For those debating the theory of the firm, there is much at stake, and thus great academic interest, in identifying the relationship between social and financial performance.

Independent of any debate about the purpose and purview of the firm, understanding the determinants of financial performance is a central interest for all research focused on business.⁶ A company’s financial performance is a function of innumerable variables. Isolating the effect that a firm’s socially responsible practices have on financial performance contributes to the broader program of tracing financial performance to a variety of factors and their interrelationships.

2.3 Purpose of this Compendium

Within the context of continuing corporate initiatives, demands for even greater corporate involvement, and lively academic debate and inquiry, this research compendium is designed to achieve three aims. We seek to (1) provide a comprehensive portrait of academic research into the relationship between social and financial performance; (2) to create a template for reviewing this literature, from which future research and theory can build; and (3) to lay the groundwork for engaging different questions,⁷ questions implicated but often unexamined in the quest to document a relationship between social and financial performance.

Section 3: An Integrated Portrait of the Empirical Literature

3.1 Method

This compendium covers empirical studies that examine the link between socially responsible conduct — positive acts of corporate social performance — and financial performance.⁸ To identify studies for this compendium, we followed the process outlined by Capon, Farley and Hoenig (1990) in their review of work on the determinants of financial performance. We began by searching the computerized database ABI/Inform and the references listed in prior review articles on corporate social performance. From the articles collected, we repeated the process, culling additional citations from references until no new studies were found. In addition, suggested articles and chapters were generated at interim presentations of this work at five different academic institutions in winter 1999 and spring 2000 and at the 1999 Business for Social Responsibility conference.

To be included in the compendium, a study had to meet several criteria: (1) be published or accepted for publication; (2) contain at least one variable the authors specified to be measuring the financial performance of companies, and at least one variable the authors specified to be measuring the social performance of companies; (3) report the relationship between the measures of social performance and financial performance. Studies examining the relationship between irresponsible corporate actions and financial performance were excluded, as were studies where inferences could not be drawn about the corporation as the unit of analysis. In total, we reviewed 95 studies publi...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• Acknowledgments
• About the Authors
• Series Editor’s Foreword
• Section 1: Introduction
• End Notes
• Tables and Figures:
• Exhibit 1: 95 Studies of the Relationship between Corporate Social Performance and Financial Performance, 1972–2000
• Bibliography
• Appendix: A Guide to Abbreviations and Acronyms