The Relationship Between Corporate Social Responsibility and Corporate Financial Performance

By Magdalena Mikolajek-Gocejna

The Relationship Between Corporate Social Responsibility and Corporate Financial Performance

Corporate social responsibility (CSR) has been a subject of academic studies for the past few decades. CSR has evolved from executives’ philanthropic activities to become a valuable component of stakeholder management and has been incorporated into strategic performance models. Engagement in CSR behaviours is prevalent across various types of businesses in different industries and countries. Various organisations face increasing pressure to act in a socially responsible manner. They develop codes of ethics, publish CSR statements and reports, and call in independent auditors to assess the implementation of their CSR policies and practices. However, despite its popularity the CSR concept still lacks a universally accepted definition. One of the most widely used CSR definitions has been offered by World Business Council for Sustainable Development (WBCSD, 1999). According to this definition, CSR is an organisation’s commitment to a behaviour that leads to economic development and contributes to the welfare of its employees, local community, and society at large.

 The Relationship between CSR and Financial Corporate Performance
Although many researchers have examined the effect of CSR on corporate financial and economic performance, the findings remain mixed and indicate possible bi-directional relationship between CSR and economic performance. Numerous studies have viewed the practice of CSR as an interaction between an organization and its physical and social environment, including disclosures relating to human resources, community involvement, the natural environment, product/customer safety, and corporate financial performance. Previous studies regarding the relationship between corporate social responsibility (CSR) and financial performance have been based mainly on theoretical arguments. Those that have suggested a negative relation between social responsibility and financial performance have argued that high responsibility results in additional costs, which put the firm at an economic disadvantage compared to other, less socially responsible, firms. However, other studies have concluded that the additional costs are potentially compensated for by a range of direct and indirect benefits which show a positive correlation between social responsibility and financial performance

 Methodology
This analysis of the correlation between CSR and companies’ financial performance is based on the technique of literature studies. When reviewing literature, I firstly follow a qualitative analysis by searching scholar databases and publishers’ sites. Secondly, the list of received relevant articles from each of databases were reviewed in order to find empirical studies or analyses of the relationship between CRS and corporate financial performance (accounting-based performance and market-based performance). All the studies and analyses were in electronic format and were available on line on February and March of 2016. Correlations between CSR and corporate performance were grouped into four categories: positive, neutral, negative, and mixed. Within some of the study’s sample, it is possible that the same companies were analysed by different authors in different countries at different times.

Results
In total 53 articles with empirical evidence from 16,119 companies were chosen. All the results of these studies were standardized into one format, which includes: Author; year of study; number of studies; ‘CSR pays’ (i.e. a positive correlation between CSR and corporate financial performance); ‘CSR doesn’t matter’ (a neutral correlation between CSR and corporate financial performance); ‘CSR costs’ (a negative correlation between CSR and corporate financial performance), and ‘mixed correlations’ between CSR and corporate financial performance. Through a second-level review of 53 studies on the correlation between corporate social responsibility and corporate financial performance, I was able to combine results from primary studies consisting of more than 16,000 companies. This research shows that the majority of the included studies found a positive relationship between corporate social responsibility and corporate company performance (71.7% of studies, 81.1% of companies), while only 15.1% of studies (10.8% companies of companies) showed no significant relationship between a company social responsibility and corporate financial performance. Only three studies (3.1% of analysed companies) showed a negative relationship between CSR and company financial performance.

Limitation of the study
As was said earlier, within some of the studies’ samples, it is possible that the same companies were analysed many times by different authors. This is the main limitation of this article. The second limitation is the way of choosing articles to analyse. The third limitation of this review is the inconsistency in the methodologies and research conclusions of the conducted studies. CRS and corporate financial performance was understood in general on the basis of theory. Perhaps future researches and analyses should investigate the correlation between categories of corporate social responsibility and corporate financial performance, giving more a in-depth view of the problem.

 Conclusions
This review showed that the relationship between CSR and corporate financial performance is positive one. Although the current researches analysing the link between corporate sustainability and financial performance seems to provide some support for the existence of a business rationale for corporate sustainability practices, there is a lack of empirical studies that would validate the corporate sustainability practices and mechanisms that ultimately affect the economic performance of an organization. Recently, literature has paid attention to developing an integrated framework to define and evaluate sustainability practices. Following the conceptualization by Maletic et al., sustainability practices can be conceived in the context of efficiency (e.g. reductions in materials, water and energy use), responsiveness (e.g. with respect to the demands of various stakeholders), measurement (e.g. measuring progress towards the goals of the organization) and in the context of exploiting and improving existing sustainability competencies.

 

This is an excerpt of the journal article: The Relationship between Corporate Social Responsibility and Corporate Financial Performance – Evidence from Empirical Studies, by Magdalena Mikołajek-Gocejna. Published: December 18, 2016 in Comparative Economic Research (https://www.degruyter.com/view/j/cer.2016.19.issue-4/cer-2016-0030/cer-2016-0030.xml) under a Creative Commons Attribution License (CC BY 3.0). 

Magdalena Mikolajek-Gocejna
Professor

Dr. habil. Magdalena Mikołajek-Gocejna - Ph.D. in economics in the field of management, assistant professor in the Institute of Value Management at Warsaw School of Economics, co-author of several books and numerous scientific articles in the area of value based management, investor relations, investor expectations and value reporting.