Corporate Social Responsibility

Corporate Social Responsibility

Introduction

A number of research studies have focused on the corporate social performance and its relationship with the financial performance of the business. The issue has gained significant importance as the researchers aim to find out if the businesses can create wealth and at the same time do not harm the society.

Relationship of Social and Financial Performance

Many empirical studies have been carried out to measure the impact of CSR activities on the financial performance of the business. This relationship was examined by Margolis and Walsh (2002) who included the data from 1971 to 2001 from 122 studies in order to explore the relationship. The data reveals that there are two types of studies that study the relationship of social and financial performance. One group of studies included the impact of social performance on short term financial performance. Thus the abnormal returns that are possible in short term were assessed. This led to mix results as few researchers concluded the negative relationship while others had the positive results (Bies et.al, 2007). There are other researchers who found no relationship among the two variables (Blackburn, 1994). The second group of study included the long term financial impact of social performance of business. In these studies, financial and accounting measures of profitability were included. Mixed results were also generated in this set of studies as positive correlation was found after controlling for the age of assets (Jensen, 2002). However, the risk adjusted return on assets showed no significant relation with the corporate social responsibility actions carried out by the businesses. Also no significant positive relationship was found when they measured the social performance with the ROA of following year (Arellano, 2003). Another argument in this regard is the type of social performance of the business affecting the financial results and profitability. This can be viewed in terms of negative and positive social performance. However, it is clear that when business meets the expectations of the stakeholders even and the problems are identified before they become an issue, then it shows the proactive attentions of the management (Margolis & Walsh, 2001).

This leads to positive social performance which enhances the brand image of the business. It also builds positive reputation in the minds of consumers. Also, the improved image of business attracts better employees and business partners which add to the productivity of the business. The positive social performance also acts as the safety net for businesses as the socially responsible businesses are able to manage their activities in a better way in case of the negative events (Arellano, 2003). Thus the financial and operational risks are lesser. The processes of such firms are also transparent which indicates lesser activities of corruption and bribery (Jensen, 2002). In addition to this, such businesses have lesser chances of paying heavy fines or claims of products defects as they take necessary actions to abide by the rules and obligations. These firms also save a huge amount of investments on the litigations or any event ...