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RESEARCH BRIEF: Does it pay to be good? It doesn’t hurt and it just might help


Takeaway: Milton Friedman’s (1970) concern about corporate social performance causing diminished value to shareholders may be misplaced: companies are not overtly penalized for social investments. Penalties only accrue to companies that do wrong and perhaps only if they are caught. An analysis of more than 200 studies also suggests that companies might benefit from communicating more about their good works.

In 2009, researchers from Harvard, the University of Michigan, and Berkeley analyzed 192 effects revealed in 214 frequently cited studies, conducted over the past 35 years, of the link between corporate social performance and corporate financial performance. Their analysis revealed that positive corporate social performance correlates to small but positive financial performance effects and, perhaps as importantly, does not appear to diminish financial performance. 

Measures of financial performance were divided into accounting-based measures of financial returns (e.g., return on assets, return on equity) and market-based measures of financial value (e.g., stock returns, market/book value ratio). The researchers sorted each of the studies into one of the following nine categories. Five represent specific dimensions of social performance and four represent different approaches to capturing measures of social performance.

*Environmental performance:  A large sample of 44 studies examined environmental objective measures such as the toxic release inventory, fines paid, and energy reduction expenditures, as well as subjective perceptions of environmental performance. Taken together, the results of measurement of CFP and CSP suggest that firms benefit from improving environmental performance.

*Proactive social reporting: Seventeen studies examined the influence of proactive transparency. Taken together, the results of measurement of CFP and CSP suggest that the market reacts positively to company disclosures regarding socially responsible behavior.

Charitable contributions: Thirteen studies examined the effect of corporate financial performance upon charitable contributions. These findings suggest that slack resources promote generosity toward charitable endeavors (Seifert, et al., 2003). Companies are more able or willing, or they face stiffer pressure, to donate when they do well.  Similarly, the expectation to communicate when called upon to answer specific requests for information may be higher. There is positive correlation between responsive reporting (reports elicited by researcher, analyst, or media) and CFP, but causality is not suggested.

Revealed misdeeds:  Announcements of negative events, such as regulatory violations, lawsuits, and fraud, were the topic of 16 studies. Findings indicate that the stock market reacts negatively to news announcements that a company has done something socially irresponsible.

Third-party audits (KLD Index, Dow Sustainability Index, U.S. Department of Labor) and observers’ perceptions (Fortune Most Admired, etc.): In the case of self-reported social performance and observer perceptions (25 studies), the CSP-CFP relationship may reflect biases such that corporate social performance assessments are consistent with financial performance (Brown & Perry, 1994).  Companies that perform better on financial dimensions may be perceived to be better corporate citizens.

Corporate policies do not suggest a significant association to financial performance. Prior financial performance does seem to predict future socially responsible policies. Inclusion in screened mutual funds (29 studies) does not reveal significant effects, in particular when CSP is measured first.

Overall, the researchers found that companies do not appear to suffer financially for their social or environmental or governance (ESG) investments. While some may oppose the use of corporate resources to advance ESG purposes, analysis indicates no damage is done to the owners of those resources. The research suggests that well-performing companies ignore CSP at their peril. Given the positive link between CFP and CSP, it may be that wealthy companies risk their “operator’s license” if they avoid such investments.

*Suggests positive effects on financial performance

If citing, please refer to the original article: “Does it Pay to be Good? A Meta-analysis and Redirection of Research on the Relationship Between Corporate Social and Financial Performance”, July 2009; Joshua D. Margolis, Harvard University, Hillary Anger Elfenbein, Haas School of Business, University of California, James P. Walsh, Ross School of Business, University of Michigan

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