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RESEARCH BRIEF: Corporate citizenship strategy must be chosen carefully to maximize benefit
Takeaway: Firms benefit more when they adopt a corporate citizenship engagement strategy that is consistent, involves related dimensions of corporate citizenship, and begins with aspects of corporate citizenship that are more internal to the firm.
Suggested Audience: CFOs seeking to understand the relationship between corporate citizenship and financial performance, and corporate citizenship managers developing strategy
Researchers conducted this study to determine whether a firm’s corporate social responsibility engagement strategy alters the relationship between CSR and corporate financial performance. CSR engagement strategy is defined as the manner in which managers identify CSR-related activities, organize resources to conduct these activities, and use the knowledge acquired from these activities for commercial outputs.
The study found that whether a firm engages in CSR in a predictable or erratic pattern, whether it concentrates its CSR efforts or disperses its CSR engagement in many directions, and whether it tends to internal matters before turning to external matters, all affect the firm’s financial performance.
Researchers analyzed data from 130 firms in the MSCI ESG Indices and the Compustat database. To compare strategy and financial performance they measured:
- CSR – Based on scores on the seven dimensions in MSCI database: Corporate governance, diversity, employee relations, community, environment, human rights, and product
- Pace – How quickly a firm adopts CSR principles into its operations and how rapidly it develops CSR behaviors
- Relatedness – The degree to which the dimensions of a firm’s CSR are related to one another and to business strategy
- Consistency – Whether a firm’s changes in CSR over time are systematic, regular and consistent, or random and irregular
- Path – Whether a firm engages in internal or external CSR dimensions first -- Internal: Corporate governance, diversity, and employee relations. External: Community, environment, human rights, and product
- Financial performance – Return on assets
- When a firm engages in CSR in a related manner, ROA is higher than when it engages in CSR in an unrelated manner.
- Firm financial performance benefits greatly when CSR engagement strategy is consistent and suffers when the strategy is inconsistent.
- If a firm engages in internal CSR first, then moves to external CSR, firm performance will benefit. ROA will suffer if the firm adopts the reverse path.
- The CSR–ROA relationship is not affected by the pace at which CSR is adopted.
If citing, please refer to the original article, “How Corporate Social Responsibility Engagement Strategy Moderates the CSR–Financial Performance Relationship”, Journal of Management Studies, November 2012, Zhi Tang, Clyde Eiríkur Hull and Sandra Rothenberg, Rochester Institute of Technology