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The Relationship between CSR and Financial Corporate Performance

CSR is an organization’s commitment to a behavior that leads to economic development and contributes to the welfare of its employees, the local community, and society at large. Similarly, CSR is an organization’s commitment to the enhancement of the community’s well-being through ethical business practices and contributions of corporate resources. Corporate social responsibility (CSR) can be defined as “the voluntary integration of social and environmental concerns into business operations and into their interaction with stakeholders”. Thus, CSR can be treated as a voluntary organizational commitment to further the well-being of its employees and society at large and to practice discretion in doing business.

 

However, in this context, the issue of the corporate benefits of CSR arises. Does CSR have an impact on organizational performance? Do CSR investments really lead to an improved corporate reputation, and hence to better economic performance? Does it pay to be morally good? This latter issue is probably one of the oldest philosophical dilemmas.

 

Although many researchers have examined the effect of CSR on corporate financial and economic performance, the findings remain mixed and indicate the possible bi-directional relationship between CSR and economic performance. Numerous studies have viewed the practice of CSR as an interaction between an organization and its physical and social environment, including disclosures relating to human resources, community involvement, the natural environment, product/customer safety, and corporate finances. Previous studies regarding the relationship between corporate social responsibility (CSR) and financial performance have been based mainly on theoretical arguments. Those that have suggested a negative relationship between social responsibility and financial performance have argued that high responsibility results in additional costs, which put the firm at an economic disadvantage compared to other, less socially responsible, firms.

 

However, other studies have concluded that the additional costs are potentially compensated for by a range of direct and indirect benefits which show a positive correlation between social responsibility and financial performance. Firms having a public image of high CSR engagement may also achieve higher financial performance. Waddock and Graves reported that CSR programs that were aimed at the employees, community, environment, and diversity produced a positive effect on the firm’s financial performance. Inoue and Lee also reported that the CSR programs that were oriented toward the employees, community, and environment increased the firms’ financial performance. Russo and Fouts found a positive relationship between stock returns and environmental performance, and concluded that “it pays to be green”. Aragon-Correa confirmed those findings on a unique sample of small and medium-sized enterprises. Bauer demonstrated that the benefits of corporate governance – one of the CSR’s components – generate higher prices, and hence corporate values. Higher CSR levels result in an increase in corporate value, by increasing a firm’s reputation. He posits that CSR programs have a positive effect on the firms’ performance because they encompass the mechanisms intended to improve a firm’s competitiveness.

CSR programs that were aimed at the employees, community, environment, and diversity produced a positive effect on the firm’s financial performance.

 

According to Crisóstomo, there are three-dimensional (positive, negative, and neutral) arguments concerning the relationship between CSR and corporate financial performance. Griffin’s and Mahon’s analysis, based on 62 samples, found that nine of them revealed no definitive results between CRS and corporate financial performance, twenty were in favor of a negative relationship, and 33 of them supported a positive correlation. Orlitzky’s findings suggest that the commitment to social and environmental responsibility is likely to improv corporate performance.

 

Most studies confirmed that incorporating sustainability in business can yield economic benefits. However, some authors advocate an inversely U-shaped curve, especially when discussing the link between environmental performance and economic performance, suggesting that there is an optimal level of environmental.

 

Source:

Mikolajek MG. 2016. The Relationship Between Corporate Social Responsibility And Corporate Financial Performance – Evidence From Empirical Studies. Comparative Economic Research: 19 (4).

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