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Does it pay to be good? A meta-analysis and redirection of research on the relationship between corporate social and financial performance

Does it pay to be good? A meta-analysis and redirection of research on the relationship between corporate social and financial performance
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    DOES IT PAY TO BE GOOD?A META-ANALYSIS AND REDIRECTION OF RESEARCH ON THE RELATIONSHIPBETWEEN CORPORATE SOCIAL AND FINANCIAL PERFORMANCEJoshua D. Margolis Harvard UniversityBoston, MA 02163-7819Tel: (617) 495-6444Fax: (617) 496-6568email: Hillary Anger Elfenbein Haas School of BusinessUniversity of CaliforniaBerkeley, CA 94720-1900Tel: (510) 643-9700Fax: (510) 643-1412email: James P. Walsh Ross School of BusinessUniversity of MichiganAnn Arbor, MI 48109-1234Tel: (734) 936-2768Fax: (734) 936-0282email: jpwalsh@umich.eduJuly 26, 2007  Acknowledgments: We are indebted to Desiree Schaan for her assistance with coding the articles. We also appreciateinsightful comments by Christopher Marquis and Nitin Nohria, research assistance by AlyssaBittner-Gibbs, and the collegiality of Janet Kiholm Smith and Daniel Turban for sharingadditional information about their published studies.    2 DOES IT PAY TO BE GOOD?A META-ANALYSIS AND REDIRECTION OF RESEARCH ON THE RELATIONSHIPBETWEEN CORPORATE SOCIAL AND FINANCIAL PERFORMANCEAbstract The empirical link between corporate social performance (CSP) and corporate financialperformance (CFP) has been steadily investigated for 35 years. We conduct a meta-analysis of 192 effects revealed in 167 studies. The overall effect is positive but small (mean r  =.13, median r  =.08). Looking deeper, we analyze these effects across nine categories of CSP. We find that theassociation is strongest for the analysis of the specific dimensions of charitable contributions,revealed misdeeds, and environmental performance and when CSP is assessed more broadlythrough observer perceptions and self-reported social performance. The association is weakestfor the specific dimensions of corporate policies and transparency and when CSP is assessedmore broadly through third-party audits and mutual fund screens. Although the results suggest nofinancial penalty for CSP, they indicate at least as strong a link from prior CFP to subsequentCSP as the reverse. We conclude that if future research on the link persists, it should meet anumber of minimum standards. Ideally, though, efforts to find a link should be redirected tobetter understand why companies pursue CSP, the mechanisms connecting prior CFP tosubsequent CSP, and how companies manage the process of pursuing both CSP and CFPsimultaneously.Text: 33 pagesFigures and Tables: 25 pagesReferences: 19 pages  3  It’s 8:30am on a Friday in July, and Carol B. Tomé is starting to sweat. The chief financial officer of Home Depot  Inc. isn’t getting ready to face a firing squad of investors or unveil troubled accounting at the home improvement giant. Instead, she and 200 other Home Depot employees are helping to build a playground replete with swings,slides, and a jungle gym at a local girls’ club in hardscrabble Marietta, Ga. … Is this any way to build shareholder value at Home Depot, where the stock has been stuck near $43, down 35% from its all-time high? (  Business Week  ,2005) Can a corporation create wealth and do it in a way that does not harm society, and, in thebest of all worlds, even redress social ills? The question of whether “doing good and doing well”converge has waxed and waned over the past century (Morrissey, 1989; Wells, 2002), and it haspreoccupied thinkers for nearly 2000 years (Avi-Yonah, 2005). Some theories of the firmemphasize reaching beyond a single-minded focus on wealth creation to attend broadly tosociety’s needs, but the theory that now dominates legal and economic scholarship does not(Allen, 1992; 1993). Commonly known as the “nexus of contracts” theory, it sees the firm as “alegal fiction which serves as a focus for a complex process in which the conflicting objectives of individuals (some of whom may ‘represent’ other organizations) are brought into equilibriumwithin a framework of contractual relation” (Jensen and Meckling, 1976: 311). Even ascompeting models of the firm gain influence, they must contend with this prevailing view (Blair& Stout, 2006; Freeman, Wicks, & Parmar 2004), which may well continue to shapeassumptions about the firm for the foreseeable future (Hansmann & Kraakman, 2001).Anyone who argues that the ultimate purpose of a firm involves anything more thanenhancing shareholder value must come to terms with this dominant theory. Attempts to mitigatea firm’s ill effects on society or to fund projects that might directly benefit society are subjectedto a rigorous financial analysis. Indeed, the prevailing theory argues that society is best served if these attempts can clear such a financial hurdle. In his appraisal of the longstanding controversyregarding the purpose of the firm, Jensen (2002: 239) argued that “200 years’ worth of work ineconomics and finance indicate that social welfare is maximized when all firms in an economymaximize total firm value.” It is a tidy logic that puts the onus on corporate critics and socialadvocates alike to show how a corporation’s social investment must benefit its shareholders.  Business Week  ’s (2005) skepticism about Home Depot’s community investment practicescertainly reflects this orientation.  4This theory may be so influential now because it allows managers and regulators alike thefreedom to (relatively easily) restructure the firm’s assets to best meet the demands of globalcompetition. The globalization of the firms’ factor and product markets, and its implications formanagement and corporate governance, is by now a very familiar story (Bradley, Schipani,Sundaram, & Walsh, 1999; Jensen, 1993; Parker, 1996). As globalization ushered in a period of hypercompetitive business practices (D’Aveni, 1994), companies have struggled to survive, wellenough thrive. To see the firm as a bundle of contracts facilitates change. After all, contracts canbe renegotiated, even if the social costs are high (Shleifer and Summers, 1988; Uchitelle,Battenberg and Kochan, 2007). And the changes driven by this economic logic have beenenormous. The conglomerate merger wave of the 1960s was unraveled in the 1980s (Shleifer &Vishny, 1991), as firms shed their unrelated business units (Comment & Jarrell, 1995) andlearned to leverage their “core competencies” (Prahalad and Hamel, 1990) to meet their newcompetitive realities. Then in the 1990s and early 2000s companies combined anew, searchingfor the scale economies and competitive advantages considered essential to prosper in a globalmarketplace – even though the economic benefits have sometimes proven elusive (Moeller,Schlingemann & Stulz, 2005).Seen in this context, it is no surprise to discover that performance, and especiallycorporate financial performance, became the dominant dependent variable in organizationalresearch over the past thirty years (Walsh, Weber, & Margolis, 2003). Even if performance wasancillary to the topic at hand, it served to legitimate the work as academically credible andpractically relevant (Staw, 1984). Indeed, the study of organizations is marked by all manner of attempts to link management practices to corporate financial performance. Work on strategy(McGahan & Porter, 1997), research and development (Wieser, 2005) and human resourcemanagement (Delery & Doty, 1996; Huselid, 1995), to name just a few, attempt to establish aconnection between corporate practices and their financial results. The work on corporate socialperformance is no exception.Scholars have been searching for a link between corporate social performance (CSP) andcorporate financial performance (CFP) for thirty-five years. If only doing good could beconnected to doing well, then companies might be persuaded to act more conscientiously,whether in cleaning up their own questionable conduct (Campbell, 2006) or in redressing societalills (Porter & Kramer, 2006). A positive link between social and financial performance would  5legitimize corporate social performance on economic grounds, grounds that matter so much thesedays (Useem, 1996). It would license companies to pursue the good—even incurring additionalcosts—in order to enhance their bottom line and at the same time contribute more broadly to thewell-being of society.The influence of this economic reasoning was apparent in the very first empirical CSP-CFP study. Bragdon and Marlin (1972) motivated their research by examining whether or notvirtue must be its own reward. They looked at this question from both a manager’s and aninvestor’s perspective:Proponents [of what they called the orthodox economic logic] argue that corporatemanagers can either control pollution or maximize profits but that the former can beaccomplished only at the expense of the latter. From the investor’s perspective, this inturn implies that he can either invest in a profitable company or a “good” company(which protects its environment) but that no company is likely to be both. (Bragdon &Marlin, 1972: 9).These words were written on the heels of Friedman’s (1970) well-known criticism of a firm’scorporate social responsibility initiatives. Friedman took direct aim at any firm that contemplatedsuch activity, considering such investments to be theft and political subversion. In his view,executives were taking money that would otherwise go to the firm’s owners in order to pursueobjectives that the executives, under the sway of a minority of voices, selected in a mannerbeyond the reach of accepted democratic political processes. But when Bragdon and Marlin(1972: 17) found a positive CSP-CFP relationship, they could comfortably remove any conflictby concluding, “[W]e hope that we have made a step in the direction of laying to rest theeconomic model that poses the alternative.” If they only knew. Thirty-five years later, Nakao,Amano, Matsumura, Genba, and Nakano (2007:107) were still investigating this very samequestion: “to examine, by multiple linear regression analysis, whether environmentalperformance has a significantly positive effect on financial performance.” One hundred and sixtyseven studies, investigating 192 CSP-CFP effects, have been conducted since 1972. Figure 1profiles this steady research activity. Our goal is to take stock of this research stream and with ameta-analysis, see if we can answer the question of whether it pays to be good.--------------------------------Insert Figure 1 about Here--------------------------------
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