Two Truths of How Social Performance Pays
Companies that consistently treat customers, employees, and other stakeholder groups well perform better financially than those that play favourites.
Companies that consistently treat customers, employees and other stakeholder groups well perform better financially than those that play favourites.
Research has debated whether corporate social and financial performance is related. Researchers Heli Wang (Hong Kong University of Science and Technology) and Jaepil Choi (Singapore Management University) added another dimension to the social-financial performance relationship: Their study plotted consistency against degree of social performance across multi-stakeholder groups, and observed how the relationship influenced financial returns.
Wang and Choi say firms can exhibit two types of consistency in social performance: temporal (over time) and interdomain (across stakeholder groups). The authors state: “if a firm’s treatment of a stakeholder group varies markedly with time, [their] social performance demonstrates low temporal consistency.” In addition, different domains (i.e. customers, shareholders, investors, and community members) “obtain cues about whether a firm has a genuine interest in their well-being from how the firm treats [others].”
They hypothesized the two consistencies in tandem would interact positively with social performance to boost the bottom line.
Measuring "Social Performance"
Using data from Kinder, Lydenberg, Domini & Co., Inc., the researchers examined 622 firms listed on the S&P 500, the DSI 400, or both – totalling more than 2,000 firm-year observations. They determined companies’ social performance by totalling their KLD scores for product, community, diversity, environment, and employee relations. They measured the same companies’ financial performance using Tobin’s q – a measure of market value. The researchers then compared each company’s social performance with their financial results.
Truth #1: Slow and Steady Wins the Race
The results show even firms with low but consistent levels of social performance have higher market values than firms with occasional spikes of high social performance. But of course, companies with consistently high social performance had the highest payoff of all. This was true both across stakeholder groups and over time.
Truth #2: Customers, Employees, and Shareholders Deserve Equal Treatment
The researchers also found that firms whose social performance was consistent between stakeholder groups – that demonstrated equal commitment to customers, employees, and shareholders alike – also performed higher than firms that targeted individual stakeholder groups more than others.
Think of it like this: Firm A has contributed five per cent of quarterly sales to charities of their customers’ choice for the last 15 years. They actively promote recycling and waste diversion programs throughout their operations, and they grant employees two paid volunteer days every year. The firm demonstrates high consistency and level of social engagement over time and across groups.
Firm B made a high-profile push five years ago to recruit female directors but abandoned the initiative after two years. They've made large but infrequent donations to random charities for the last 10 years. And they’ve built a marketing campaign around the motto “Customers First” – but they struggle with employee morale issues.
Firm A will perform better financially than Firm B because its social performance is consistent over time and across stakeholder groups.
Consistency is Key
It’s worth noting that, while competitors can easily copy one-off social initiatives like philanthropic donations or community events, it’s much more difficult for them to replicate a purposeful and consistent CSR strategy.
This research finding is further evidence that the link between sustainability and financial performance is likely less about cause and effect and more about good management. Work these insights into your strategy and the way your business operates.
Be Consistent Over Time: Treat your employees, customers, and shareholders well – through good times and bad. They will see you are genuine, strengthening their trust in you, improving relationships, and boosting your firm’s value.
Be Consistent Across Domains: Customers and shareholders will notice if you treat some of them well and not others. Don’t play favourites; participate in good social practices across multiple groups.
Consistency Distinguishes Your Firm: It’s not enough to demonstrate high levels of corporate social practices in intermittent or one-off situations. Only consistent involvement, over time and across different stakeholder groups, will give you a competitive edge.
Knowledge Intensity: Being consistent is especially important in knowledge-intensive industries.
Wang, H. and Choi, J. 2013. "A New Look at the Corporate Social-Financial Performance Relationship: The Moderating Roles of Temporal and Interdomain Consistency in Corporate Social Performance." Journal of Management.39-2: 416–41.