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Profits?
Responsibility Increase
that, For consumer industries, greater CSP [corporate social performance] is associated
with better CFP [corporate financial performance], and the opposite is true for industrial
industries Empirical studies have examined the relation between CSR and corporate
financial performance, and while the results are mixed, overall the research has found a
positive but weak correlation.
However, reviewing individual empirical studies can be confusing. But by using the
technique of meta-analysis, many studies can be statistically analysed to determine
collective results. A meta-analysis on CSR and its link to profits won the famed socially
responsible investing, Moskowitz Prize in 2004. The study, "Corporate Social and
Financial Performance: A Meta-Analysis," was compiled by researchers Marc
Orlitzky, Frank L. Schmidt and Sara L. Rynes. It yielded encouraging data suggesting a
positive link between CSR and increased profits.
Summing up their results, the researchers said, we conduct[ed] a meta-analysis of 52
studies (which represent the population of prior quantitative inquiry) yielding a total
sample size of 33,878 observations. The meta-analytic findings suggest that corporate
virtue in the form of social responsibility and, to a lesser extent, environmental
responsibility, is likely to pay off CSP [corporate social performance] appears to be
more highly correlated with accounting-based measures of CFP [corporate financial
performance] than with market-based indicators, and CSP reputation indices are more
highly correlated with CFP than are other indicators of CSP. This meta-analysis
establishes a greater degree of certainty with respect to the CSP-CFP relationship than
is currently assumed to exist by many business scholars.
So the research generally indicates that CSR/CC/CSP, no matter how you define it, does
offer potential benefit to corporate profits. But there is another unanswered problem, and
that relates to causation.
Do high profits enable greater spending on CSR, or is it that CSR itself creates higher
profits? Referring again to the study, "The Economics and Politics of Corporate Social
Performance," the researchers write that, the direction of causation remains an open
question. That is, good CSP could cause good CFP, but good CFP could provide slack
resources to spend on CSP. As the Economist wrote, ...whether profitable companies
feel rich enough to splash out on CSR, or CSR [activity itself] brings profits. Hopefully,
future research will be able to answer this question.
On balance, surveys and the research literature suggest that what most executives
believe intuitively, that CSR can improve profits, is possible. And almost no large public
company today would want to be seen unengaged in CSR. That is clear admission of
how important CSR might be to their bottom line, no matter how difficult it may be to
define CSR and link it to profits.
Ron Robins is Founder and Analyst at the website Investing for the Soul and a
financial and economics columnist for alrroya.com, a leading Middle Eastern business
portal/publication.
This article is reprinted with permission. Copyright alrroya.com.