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The Value of Responsibility
New Way of Measuring Its Link to Company Performance
Corporate social responsibility (CSR) is a concept that has gained such traction in the business world that a recent survey by The Economist found that 53.5 percent of responding firms said it “is a necessary cost of doing business.” Yet for all its acceptance by large companies, there has been little hard evidence of its impacts and ramifications.
“The long-lasting question in this area is if a company engages in CSR, will it be rewarded?” says Hoje Jo, associate professor in the Finance Department. “The research so far has been inconclusive: Some said yes, some said no, and some said it depends.”
A significant step toward answering that question was taken in a paper released earlier this year by David P. Baron of Stanford, Martetno A. Harjoto of Pepperdine, and SCU’s Jo. Titled “The Economics and Politics of Corporate Social Performance,” the paper was awarded the 2009 Moskowitz Prize from the Center for Responsible Business in the Haas School of Business at UC-Berkeley in September.
In the paper, Jo and his colleagues focused on Corporate Social Performance (CSP), which is typically (though not necessarily) an outgrowth of CSR and more measurable by concrete standards, such as corporate policies and contributions. Mining material from multiple sources, they looked at data covering more than 2,000 companies over an eight-year period that was evenly divided between Democratic (Bill Clinton) and Republican (George W. Bush) administrations.
Large firms, they said, are operating in three markets: a product market, a capital market, and a market for social pressure as generated by shareholders, government, non-governmental organizations (NGOs) and social activists. CSP was defined as social activities that go beyond the requirements of law and regulation and that involve either the private provision of public goods or private redistribution. To evaluate the relationships among these markets, they created a three-equation structural model that provided a measurement.
Viewed from this perspective, they found that there was no overall evidence of a connection between a company’s financial performance and social performance, but that social pressure had a significant impact on both. The more social pressure a company faces, the more it’s likely to feel the sting on the bottom line and also to step up its involvement in social performance activities.
Jo says that point can be illustrated by the automotive industry. “General Motors has problems with unions and with its management/shareholder relations. Toyota has few internal problems and has never had a strike.” The first is in trouble, and the second is thriving.
Although he and his colleagues found little or no overall connection between social and financial performance in companies, Jo says the matter is more complicated. Industrial firms that primarily sell to other companies tend to be adversely affected by their CSR efforts, while companies that sell directly to consumers through known brands tend to see more of a connection. When CSR activity is geared toward appealing to consumers, investors are more likely to respect the effort, Jo says.
It also matters, the researchers found, whether CSR/CSP activity is strategic or responsive. When done proactively, with a certain goal in mind, the results tend to be more favorable; when done in response to attacks or outside influences, a less positive outcome is likely.
“If a company does CSR properly, it can improve financial performance,” Jo says. “If it’s used as an intelligent means of conflict resolutions, it can mitigate agency problems among the various stakeholders and raise up a company’s value.”