Relationships between Corporate Social Responsibility and Financial Performance: What is the Causality?

Abstract

This study examines the causal relationships between the various dimensions of corporate social responsibility (human resources, human rights in the workplace, societal commitment, respect for the environment, market behavior and governance) and financial performance (return on equity, return on assets, market to book ratio).Research Findings/Insights: This study is based on a sample of 329 listed companies in three geographical areas (the United States, Europe and the Asia-Pacific region) for the years 2009 and 2010. Linear regression analysis and the Granger causality test were used to examine the causal relationships between social responsibility and financial performance. The results show not only that greater social responsibility does not result in better financial performance, but also that financial performance negatively impacts corporate social responsibility.Theoretical/Academic Implications: This study seems to confirm the Managerial Opportunism Hypothesis which postulates that corporate social responsibility has a negative influence on financial performance. In this sense, it contradicts the hypothesis of a virtuous circle, i.e. there is a positive relationship and mutual reinforcement between financial performance and social responsibility.Practitioner/Policy Implications: This study raises questions about the changes that must be made in corporate social responsibility towards greater “shared value”. This implies taking the needs of stakeholders seriously and forming alliances with the various local actors. The challenge is not to protect the environment in which businesses operate, but that businesses, through gaining the respect and esteem of their partners, should enhance their competitiveness. In doing so, companies create economic value by creating social value.