Companies that are good corporate citizens are more likely to be better financial performers, according to a new study by AGSM’s Dr Marc Orlitzky to be published soon.
The wide-ranging study to be published in the international journal Organization Studies is the first rigorous meta-analysis to show a strong positive link between an organisation’s socially responsible behaviour and its financial bottom line.
The quantitative study, which analysed over 30 years’ worth of corporate data of nearly 34,000 observations, confirms a positive link between corporate social responsibility (CSR) and financial performance.
Dr Orlitzky said the accepted wisdom that CSR was at odds with financial performance was a false dichotomy. Instead, the evidence in the study points to a positive correlation between CSR and various rates of return both in terms of accounting return (e.g., ROA, ROE) and market return measures (e.g., share price increases).
"The tide seems to be turning in terms of deeper understanding of the correlation between corporate financial performance and social responsibility," Dr Orlitzky said.
"CSR can help corporations build positive reputations for good management and proactive leadership. CSR can also help a firm accumulate the organisational learning necessary for the maintenance and improvement of relationships with various sectors of society."
The research provides cogent evidence that corporate responsibility improves a firm’s bottom line and drives shareholder value. If corporations are managed responsibly and act as good citizens they enjoy a significant financial return. Furthermore, firms that are high performers can also better afford to engage in CSR activities.
Dr Orlitzky said most companies only paid lip service to social responsibility and thought of it in superficial terms such as sponsorship and philanthropy and, therefore, as a cost to business.
"To reap the full economic rewards of CSR, companies will have to integrate their activities into their strategic decision-making processes and ethical cultures. The data reveals that the highest performers were those corporations that did not think of stakeholders as forces to be ‘managed’ by public relations, but that took their moral obligations to all the communities in which they operate very seriously.
"My research adds to the growing evidence that when corporations are good citizens, business risk decreases for both large and small firms," Dr Orlitzky said.