Does Misery Love Companies? How Social Performance Pays Off

Is there a relationship between a company's social performance and its financial performance? HBS associate professor Joshua D. Margolis and University of Michigan colleague James P. Walsh make the connection in their latest working paper. PLUS: Margolis Q&A.
by Joshua D. Margolis & James P. Walsh

Corporations have responded to society's plea to provide innovative solutions to deep-seated problems of human misery. Organization and management scholarship can play an important role in understanding and guiding this corporate action. To date, this challenge has largely been ignored. Instead, the empirical quest to link a firm's social investments to its financial returns has preoccupied researchers. Our goal in this paper is to reorient debate and research about social initiatives by business. We try to stimulate a fresh research agenda in three ways. First, we document the 30-year history of empirical work on the search for a relationship between corporate social performance (CSP) and corporate financial performance (CFP). Second, we critically appraise the quality of this work. And third, we question the underlying theoretical and practice-based premises of this research and, in so doing, introduce a set of new research questions to examine. We believe that these alternative questions offer great promise for understanding and, ultimately, guiding possible corporate social initiatives. We conclude the discussion by reflecting upon the role that scholars play, and can play, in guiding the conduct of the business enterprise.

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The world cries out for repair. While some people in the world are well off, many more live in misery. Ironically, the magnitude of the problem defies easy recognition. With the global population approaching six billion people, it is difficult to paint a vivid and compelling picture of social life. In the extreme, Bales (1999) conservatively estimates that there are 27 million slaves in the world today, while Attaran and Sachs (2001) report that 35 million people are now infected with the HIV virus, 95 percent of them living in sub-Saharan Africa. Even more broadly, one is left with aggregate statistics that both inform and numb.

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Living in the United States, we may be shocked to learn that so many people in the world live on less than $2.00 per day, or that a quarter of the children in Bangladesh and Nigeria are at work in their nations' labor force, or that some countries have infant mortality rates more than ten times our own. Indeed, access to a computer, well enough access to sanitation or a telephone, can be very limited around the world. The lists go on. People in Delhi and Beijing breathe air that has 415 and 377 micrograms of total suspended particulates per cubic meter, yet the World Health Organization establishes 90 as a maximum safe level (Berlin's level is 50). Over 25,000 square kilometers of land were deforested in Brazil each year from 1990 to 1995 (on average, 5,886 square kilometers of land were reforested each year in the United States during this same time period). Thirty percent of all indigenous mammals in Indonesia are threatened with extinction, while 13% of Japan's birds are threatened and 24% of higher plants in the United States are so threatened.

The challenge facing social advocates is to find a way to enact humanitarian sentiments in a world where shareholder wealth reigns.
—Margolis & Walsh

Closer to home, the picture may be more vivid and compelling. For twenty years, Americans have lived through a period of unparalleled prosperity. Ibbotson Associates (2000) tells us that in real terms, a dollar invested in large company stocks in December 1925 was worth $24.79 by year-end 1979. Exactly twenty years later, that dollar was worth $303.09. Nevertheless, the fact that the upper echelon of society disproportionately reaped these gains is no longer news. Galbraith (1998) and Mishel, Bernstein and Schmitt (1999) provide a comprehensive picture of wealth inequality in America, while Conley (1999) clearly points out that many Black Americans have been left out of this economic boom. In real terms, Americans in the 90th percentile enjoyed a 6.4 percent wage increase from 1979 to 1997, while those in the 10th through 70th percentiles actually lost 14.9, 8.0, 7.8, 8.6, 5.5, 4.4, and 3.9 percent respectively. Those in the 80th percentile saw an increase of only .4% in this same time period (Mishel et al., 1999: 131).

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Miringoff and Miringoff (1999) chronicle these same kinds of inequality data but also provide evidence that child abuse, child poverty, teenage suicide, and violent crime, as well as the number of people living without health insurance, have all increased in the United States since the 1970s. These kinds of data serve as a stimulus for outrage and reform (see Danaher (1996), Kapstein (1999), Sklar (1995) and Wolman & Colamosca (1997) for a domestic consideration of these issues, and then Greider (1997), Henderson (1996), Korten (1995) and Madeley (1999) for discussions from a global point of view).

The calls for corporate involvement in redressing broader problems of society come from many quarters. All three branches of the United States government have addressed the role of the corporation in promoting social welfare. President Bush and Secretary of State Powell have asked companies to contribute to a global AIDS fund (New York Times, 2001), while Former President Clinton used his "bully pulpit" to urge corporations to attend to social problems (New York Times, 1996) and later advocated that minimum labor standards be a part of international trade agreements (New York Times, 1999). With the Economic Recovery Act of 1981, Congress increased (from 5% to 10%) the allowable corporate tax deduction for charitable contributions (Mills & Gardner, 1984). And even as a majority of states were adopting "other constituency statutes," statutes that allow directors to attend to factors besides shareholder wealth maximization when fulfilling their fiduciary duty (Orts, 1992), the Delaware Court endorsed this same idea in 1989 when it allowed Time's management to reject a lucrative tender offer from Paramount Communications to pursue other non-shareholder interests (Johnson & Millon, 1990).

What might be most intriguing, however, is the activity beyond the halls of government that has focused on the corporation's role in society.

Non-governmental organizations (NGOs) have worked tirelessly in recent years to establish worldwide standards for corporate social accountability. Ranganathan (1998) compiled a list of forty-seven such initiatives; more recently, Business for Social Responsibility, a national business association, prepared a document in 2000 that compares and contrasts eight of these standards ( Lacking enforcement capability, NGOs nonetheless offer a host of principles (the Reverend Louis Sullivan's Global Sullivan Principles), management standards (the Institute of Social and Ethical Accountability's AccountAbility 1000), best practice guidelines (the OECD Principles of Corporate Governance) and reporting initiatives (the CERES' Global Reporting Initiative), all designed to foster exemplary social and environmental performance. Alongside NGOs, foundations are using their money to advance a business-led social change agenda (see, for example, the Aspen Institute's Initiative for Social Innovation through Business). Other groups, such as the Prince of Wales Business Leaders Forum, work in partnership with business, government, and community leaders to promote business models that emphasize the public good.

Beyond government and NGOs, other parties put their money where their values lie as well. Activist investors try to pressure firms to be more responsive to social problems. Examples range from TIAA-CREF's board diversity initiatives (Carleton, Nelson & Weisbach, 1998), to the Interfaith Center on Corporate Responsibility's (ICCR) tactic of taking an equity position in a company to advance their social change agenda (see, to the wide variety of socially screened mutual funds that offer individuals and institutions an opportunity to invest in firms that meet their social performance objectives (see

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The challenge facing advocates of corporate social initiatives is to find a way to promote social justice in a world where the shareholder wealth maximization paradigm reigns supreme. Advocates for corporate social initiatives must be prepared to argue with a Nobel laureate in economics that such social initiatives do indeed benefit shareholders. This daunting task has attracted a large number of business researchers over the years. Their hope is that business scholarship will play a central role in sorting out the relationship between shareholders, with their economic interests, and society, with its interest in broader well being and human development. The reformers' challenge has been to demonstrate that corporate attention to human misery is perfectly consistent with maximizing wealth: that there is, in the words of United Nations' Secretary General Kofi Annan, "a happy convergence between what your shareholders want and what is best for millions of people the world over" (Annan, 2001). Annan is responding to the often-heard (and often skeptical) refrain from business leaders to "Show me the business case for this kind of social investment activity." The now 30-year search for a correlation between corporate social performance (CSP) and corporate financial performance (CFP) reflects the enduring quest to find this persuasive "business case"—to substantiate claims, such as the one made in Annan's recent appeal to U.S. corporations, that "by joining the global fight against HIV/AIDS, your business will see benefits on its bottom line" (Annan, 2001).

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Research to date has been motivated, at least in part, by the belief that a manifest relationship between CSP and CFP will persuade firms to invest in social initiatives if the relationship is positive, or dissuade firms from doing so if the relationship is negative. While the existing body of research can be used to justify or invalidate corporations' social investments in financial terms—and thus can be mustered in debates over the appropriate role of the firm—a fundamental fact is often missed: firms already engage in social initiatives. We propose a research agenda that takes these initiatives, these investments, as a starting point, and not as an ultimate policy objective. We suggest a set of questions that focus on how companies make their social investments and execute their initiatives, examining the effectiveness of corporate social initiatives—even as debates continue about whether or not a firm should invest in these initiatives at all.