By Qian Wang, Junsheng Dou, & Shenghua Jia
Blog Editor’s note: The authors’ paper, A meta-analytic review of corporate social responsibility and corporate financial performance: The moderating effect of contextual factors, is open access until July 24th 2021 as part of the journal’s 60th anniversary celebrations.
“Shareholder primacy” became the golden rule for most firms to set their priorities ever since 1997 when the Business Roundtable issued a statement establishing this rule as the doctrine of U.S. corporate governance. The rule stems from Milton Friedman’s doctrine conveyed via his 1962 book Capitalism: “There is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game.” Against this background, if firms engage in a noneconomic action, they need to first prove the legitimacy and rationality of such actions by exhibiting a positive relation between the action and the firm’s financial performance. In response to the growing public outcry that firms should undertake broader social responsibilities, scholars began to devote great efforts to uncover the relationship between corporate social responsibility (CSR) and corporate financial performance (CFP). This attempt led to more than 100 studies empirically examining this relationship in the past half century. However, the findings remained inconsistent (Margolis & Walsh, 2003).
Our study entitled “A meta-analytic review of corporate social responsibility and corporate financial performance: The moderating effect of contextual factors” systematically reviews and quantifies the CSR-CFP link. We proposed that CSR behaviors are more likely to lead to CFP in the developed world because of its relatively mature institutional system and efficient market mechanism that allows such CSR to be more visible. Based on 119 effect sizes from 42 studies, we estimated that the overall effect size of the CSR-CFP relationship is positive and significant, thus endorsing the argument that CSR does enhance a firm’s financial performance. We found that subsequent financial performance was associated with prior social responsibility; however, the reverse direction was not supported. We also found that the positive effect of CSR on CFP was stronger for firms from the advanced economies than those from the developing economies.
The practical implications of these findings are threefold. First, the management literature has long suggested that firms have economic and noneconomic goals (Cyert & March, 1963; Simon, 1964). Firms vary in how they prioritize and allocate different proportions of resources to their multiple goals. From the utilitarian perspective, economic goals and non-economic goals should not be simply regarded as irreconcilable contradictions in resource contention; instead, they can be compatible with one another. Managers can indirectly and effectively enhance the corporate financial performance by taking on more social responsibility, especially in the more developed market economies. Second, from a normative perspective, firms are organs of society and should undertake multiple social responsibilities, not just earn economic profits, although the latter is a very important part of their goal structure. Third, governments are recommended to establish a healthy market signal transmission mechanism to identify conscientious firms for CSR behaviors, thus further promoting the construction and development of a healthy business ecosystem on a larger scale.
We have recently started seeing more firms are undertaking socially responsible initiatives by focusing on the interests of a wider range of stakeholders, thus setting a new modern standard for corporate responsibility. Unlike the 1997 statement, the 2019 statement by the Business Roundtable outlines a modern standard for corporate responsibility, which focuses on stakeholders rather than shareholders. Such new initiatives suggest that firms and their managers should be more open and develop a more systematic thinking in the new era.
References:
Cyert, R. M., & March, J. G. 1963. A behavioral theory of the firm. Englewood Cliffs, NJ, 2.
Margolis, J. D., & Walsh, J. P. 2003. Misery loves companies: Rethinking social initiatives by business. Administrative Science Quarterly, 48(2), 268-305.
Simon, H. A. 1964. On the concept of organizational goal. Administrative Science Quarterly, 1-22.