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Corporate Social Financial Performance

The relationship between corporate social performance and corporate financial performance is a topic that “business and society” scholars have been debating for several decades. This entry will focus on the empirical evidence that point to complementarities and, thus, a positive correlation between corporate social and financial performance. However, different scholars have also portrayed social and financial performance as two contradictory or independent concepts. Before the arguments for each position are summarized, the definition and consequences of “social responsibility” and “social performance” must be specified a bit more clearly.

Corporate social performance can be defined as an organization's configuration of principles of social responsibility, processes of social responsiveness, and observable outcomes as they relate to the organization's societal relationships. In other words, a socially responsible organization evaluates its impact on society comprehensively and acts on certain principles to protect and improve its social and natural environments. Consequently, such a responsible firm will develop internal structures and processes to respond constructively to concerns ranging from product safety to pollution prevention to employee work-life balance. As such, high corporate social performance is the outcome of a relationship-building process between the organization and all its internal and external stakeholders. Organizational stakeholders include, among others, employees, customers, suppliers, partners, social and environmental activists, governments, local communities, and other groups. It is important to keep these specific, technical definitions of “social responsibility” and “social performance” in mind throughout this entry. (Contrary to this usage of the term in this entry, some economists redefine “business social responsibility” as “profit maximization.”)

A Complementary Relationship?

According to instrumental stakeholder theory, an organization will be more likely to achieve its economic goals if it tries to satisfy its various stakeholders' needs in a balanced way. Through social performance, an organization may enhance its economic effectiveness because it may have developed a favorable reputation for fair business dealings, which may attract more customers (increase sales revenues) or better and more committed employees (increase labor productivity). Simultaneously, balanced stakeholder management can either reflect organizational learning or build up managerial skills, which can translate into higher financial performance. In turn, higher financial performance may allow organizations to spend more money on social or environmental causes. Such complementarities may result in self-reinforcing cycles of social and financial performance in which both variables are positively correlated.

A Contradictory Relationship?

Some economists and ethicists regard the complementary vision of social and financial performance as utopian and idealistic. For example, economists such as Nobel Prize winner Milton Friedman argue that, by definition, corporate social performance is an altruistic, sacrificial strategy that expends financial and other organizational resources at the expense of the organization's owners. A social responsibility strategy, according to this view, is particularly harmful to a firm's market performance because stakeholder management is performed by executives that have not been elected by the public and generally do not possess the skills (especially compared with the government) to make informed decisions about stakeholders in social and environmental arenas. Overall, advocates of this perspective argue that social performance is a waste of shareholder funds and, thus, hinders rather than enhances an organization's economic performance, which explains and predicts a negative relationship between the two variables.

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