Corporate Social Responsibility and Firm Performance

8/3/2019 Corporate Social Responsibility and Firm Performance

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Corporate Social Responsibil ity andFirm Performance

Abagail McWill iamsProfessor of Management

University of I l l inois at Chicago


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Presentation Outl ine1) Crit ique of existing empir ical studies of theeffect ofCSR on firm performance2) CSR - Supply and Demand Framework3) Hypotheses pertaining to the provis ion of

CSR attributes across firms/industries4) Strategic Impl icat ions of CSR Usingpreemptive strategies that rely on CSR


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Corporate Social Responsibil ity (CSR)1) Do socially responsible firms outperformor under-perform other firms that dontmeet the same social criteria?2) Precisely how should firms allocateresources to CSR?Most management researchers addressQuestion #1, not Question #2


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Methods Used to Assess the Impact ofCSR on Firm PerformanceEvent Studies:

As shown by McWilliams & Siegel (1996, 1997a,1997b, 1998, 1999), these studies are typicallypoorly designed and executed spurious results

Regression Analysis:As demonstrated by McWilliams & Siegel (2000)these studies may suffer from specification errorbiased results (see Appendix I)


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Empirical Evidence: CSR has a NeutralImpact on Performance

Firm Profitability: Neutral relationship betweeninvestment in CSR and firm profitabilityCapital Market Evidence: Returns on sociallyscreened portfolios are roughly the same asthe returns on (actively managed) unscreenedportfoliosCSR has a neutral effect on firm performance (onaverage) for a broad cross section of firmsThe need for a new theoretical perspective


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Theoretical Perspectives on CSR in theManagement Literature1) Agency Theory (Fr iedman, 1970)

2) Stakeholder Theory (Freeman, 1984)3) Resource-Based Theory (Russo and Fouts,1997)4) Theory of the Firm/Supply and DemandFramework (McWill iams and Siegel, 2001)


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CSR: Definit ion

Corporate Social Responsibil ity - Actions takenby a firm that appear to further some socialcause, beyond the interests of the firm and thatwhich is required by law and ethics.Examples: goods and services with socialcharacteristics (e.g., organic produce) ormanagerial practices that promote a socialobjective, such as progressive HRM practices


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CSR: Supply and Demand/MarketFramework (see Appendix I)Consumer Demand

Creation of new product categories:Organic produceMade in America apparel

Dolphin-Free tunaMix of Product and Process InnovationsEach CSR characteristic is valued by some consumers(and possibly by other stakeholders as well), that is,some consumers are will ing to pay extra for theseattributes


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Supply and Demand/Market Framework(cont.) Investor Demand for CSR

Socially Responsible Investing: Mutual funds thatemploy various social screens

Additional Stakeholder Demand for CSRWorkers, suppliers, government, and thecommunity


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Supply and Demand Framework (cont.) Search, Experience, and Credence Goods:(Nelson, 1970, 1974; Darby and Karni, 1973)

Search goods: Products whose attributes and quality canbe determined before purchase - clothing, tomatoesExperience goods: Products whose quality can only bedetermined after purchase - processed foods, softwareprograms, new models of carsCredence goods: Products whose quality cannot bedetermined even after purchase - education, consulting,financial planningKey point: Reputation is more important for experiencethan search goods and most important for credencegoods


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Hypotheses Based on Supply andDemand FrameworkDemand-related Hypotheses:

H1: Given that consumers rely more on firm reputationwhen purchasing experience and credence goods, theseare more likely to have CSR attributes than searchgoods.H2: Because consumers must be made aware of theexistence of CSR attributes, there will be a positivecorrelation between the intensity of advertising and theprovision of CSR.H3: There will be a positive correlation between a firmslevel of product differentiation and its provision of CSRattributes.


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Supply of CSR

The provision of CSR characteristics entailshigher costs because firms must devoteadditional resources to generate thesecharacteristics

(see Appendix II)


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Hypotheses Based on Supply & DemandFramework (cont.)

Supply-related Hypotheses:H4: Firms that provide CSR attributes will have higher

costs than firms that do not provide CSR attributes,all else being equal.H5: The presence of scale economies in the provision ofCSR attributes results in a positive correlation betweenthe size of a firm and the provision of CSR attributes.


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Hypotheses Based on Supply &Demand Framework(cont.)

Profitability Hypothesis:H6: In general, firms whose products have CSRcharacteristics earn the same rate of returnas firms whose products do not have CSRcharacteristics (unless firms can use CSR toraise entry barriers or rivals costs).


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Market OutcomeAs a general matter, CSR neither helps nor hurtsfinancial performanceCSR could be an integral part of a firmsdifferentiation strategy. Thus, it needs to beconsidered as a form of strategic investment Cost/Benefit Analysis is useful


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Research Agenda:Strategic Implications of CSR

Strategic Positioning for Competitive Advantage:Reputation Building/Product Differentiation

Sustaining Competitive Advantage:Isolating MechanismsImpediments to Imitation (e.g., Social Complexity)Early Mover Advantages (e.g., Reputational)Preemptive StrategiesUsing CSR to Raise Rivals Costs/Entry Barriers(McWilliams, Van Fleet and Cory, 2002)


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Preemptive Strategies: Using CSR to BlockAlternative Strategies and Resources1) Firm A has a resource (e.g., a patentedprocess that lowers the cost of production)2) This resource is valuable, rare, and difficultto imitate3) But, competitors may achieve similar costs

by producing in countries with lower laborcostswhich may involve unsafe/unhealthywork conditions and/or child labor


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Preemptive Strategies: Using CSR to BlockAlternative Strategies and Resources (cont.)

Firm A may attempt block the use of the cheaperforeign labor through the use of CSR tactics- by inducing consumers to boycott rivals- by lobbying for trade restrictions or local

content requirements


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Preemptive Strategies: Using CSR to BlockAlternative Strategies and Resources (cont.)If successful, blocking the use of substitutestrategies or resources will allow Firm A tosustain a competitive advantage or to protect

competitive parity (prevent a competitor fromcreating an advantage).(And will also further some social goal)

However, blocking requires resources (e.g.,advertising, lobbying), so this again suggeststhe need for cost/benefit analysis.


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Preemptive Strategies: Using CSR to BlockAlternative Strategies and Resources (cont.)

Success of such blocking strategies depends on theCSR reputation of Firm A (a credible motive). a reputation for CSR is valuable in the market

Caveat: Such reputations are costly to develop andfragile (can be damaged easily).


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Proposals for Future Projects on CSR with Donald Siegel, RPICorporate Social Responsibil ity: A Synthesis of

Managerial and Economic Perspectives,conference/edited volume, undernegotiationwith MIT Press and Oxford UniversityPress

Interdisciplinary Perspectives on CorporateSocial Responsibil ity, proposal for a special


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Appendices


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Appendix I: Methods Used to Assessthe Impact of CSR on Firm PerformanceEconometric Model Used to Assess the Impact ofCSR on Firm Performance:

Incorrect Specification:(1) Performance = f (CSR, IND, SIZE, RISK)Specification Error: Key Omitted Variable AProxy for Investment in R&D

Correct Specification:(2) Performance = f (CSR, IND, SIZE, RISK,R&D)


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Consequences of Specification Error

Not a concern when the omitted variable isuncorrelated with included regressorHowever, dozens of firm and industry-levelstudies report a strong positive correlationbetween R&D and proxies for long-term firmperformance, that is:

corr (R&D, Performance) > 0


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Consequences of Specification Error(continued)CSR as a form of product differentiation

CSR is correlated with R&D and advertisingcorr (R&D, Performance) > 0; corr (R&D, CSR) >0 existing econometric estimates of the impactof CSR on firm performance are upwardly biased

In our sample of 524 firms: corr (R&D, CSR) = .45(see McWilliams & Siegel, 2000, in which we


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Regression Results of Equations (1) and (2)(N = 524 firms, Standard Errors inParentheses)Dependent Variable: Performance Equation Equation(1) (2)Coefficient on CSR .141*** -.062

(.052) (.059)Coefficient on R&D .263***(.050)Adjusted R2 .10 .29***p .01Note: regressions include controls for size, risk, advertising, andindustry effects


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Appendix II - CSR: Analytical ModelFor simplicity, assume there are only two goods

in the market, that is:Qx = quantity of the good without CSRattributeQy = quantity of the good with CSR attribute

Identical goods, except for the CSR characteristic Qy = Qx+QCSR


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Supply and Demand/Market Framework(cont.)Consumer Demand for CSR

Qy = f (Py , Px, A, I, T, D) ; whereQy = quantity of the good with CSR attributePy = the price of the good with CSR attributeQx = quantity of the good without CSR attributePx = the price of the good without CSR attributeA = advertisingI = incomeT = tastes and preferencesD = demographics


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Corporate Social Responsibility and Firm Performance