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By Dorothy Hinchcliff
Do
industries perform better financially when they do things like prevent
pollution or treat their workers equitably? A new, award-winning study
concludes the answer may be "yes" for one group and "no" for another.
Consumer
industries with greater corporate social performance tend to perform better
financially than those that don't, but the opposite is true for industrial
industries, says The Economics and Politics of Corporate Performance.
The
three California university professors who did the study and wrote the paper
are David P. Baron at the Graduate School of Business at Stanford University,
Maretno A. Harjoto at the Graziadio School of Business and Management at
Pepperdine University, and Hojo Jo in the Department of Finance at the Leavey
School of Business at Santa Clara University. The paper received the 2009 Moskowitz Prize for Socially
Responsible Investing, an award that was announced October 26 at the SRI in the
Rockies conference in Tucson, Ariz.
When
they looked across all firms, the authors found corporate financial performance
and social performance to be largely unrelated. But that result doesn't necessarily
apply to individual firms, which might be able to improve the bottom line by
making social improvements, the study says. In fact, the report concludes that
more research on individual firms is needed to determine whether increased
social efforts make firms financially stronger.
Social
pressure, on the other hand, hurt the financial performance of the overall
group and industrial firms, the study found. It was social pressure from
private groups, such as nongovernmental organizations (NGOs) and social
activists, rather than from government, that was responsible for the impact.
"The lower CFP [corporate financial
performance] then makes the firm a weaker target, so social pressure increases.
So why do firms increase their CSP [corporate social performance] in response
to social pressure if doing so is not rewarded and results in greater future
social pressure? On explanation is that firms increase their CSP because it is
morally required and do so despite the cost. In contrast, for firms in consumer
industries an increase in CSP in response to an increase in social pressure
increases CFP, so being responsive could be motivated solely by financial
performance objectives," the report says.
Another
interesting finding was that firms with a high proportion of their shares held
by institutional investors have lower corporate social performance and face
less social pressure. "The causation, however, is likely to be that
institutional investors shun firms with high CSP, possibly because high CSP is
(weakly) associated with worse financial performance, and also shun firms facing
social pressure. ... Social pressure from NGOs and social activists thus appears
to reduce the likelihood that institutional investors will hold shares of that
firm, as does greater CSP," the study says.
The
study looked at data from 1996 through 2004 on 2,010 firms provided by KLD
Research & Analytics, which has the most comprehensive and widely used
database on corporate social performance. Because data wasn't available for all
firms in all years, the study also looked at a subgroup of 486 firms, most of
which were in the S&P 500, for which data was available for all the years.
To read the study, click here.
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Dorothy 
