You are on page 1of 39
Misery Loves Companies: Rethinking Social Initiatives by Business Author(s): Joshua D. Margolis and James P. Walshy : Johnson Graduate School of Management, Cornell University Stable URL: http://www.jstor.org/stable/3556659 Accessed: 13/08/2009 10:45 Your use of the JSTOR archive indicates y our acce p tance of JSTOR's Terms and Conditions of Use, available at http://www.jstor.org/page/info/about/policies/terms.jsp . JSTOR's Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the p ublisher re g ardin g an y further use of this work. Publisher contact information may be obtained at http://www.jstor.org/action/showPublisher?publisherCode=cjohn . Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission. JSTOR is a not-for-profit organization founded in 1995 to build trusted digital archives for scholarship. We work with the scholarly community to preserve their work and the materials they rely upon, and to build a common research platform that promotes the discovery and use of these resources. For more information about JSTOR, please contact support@jstor.org. Johnson Graduate School of Management, Cornell University is collaborating with JSTOR to digitize, preserve and extend access to Administrative Science Quarterly. http://www.jstor.org " id="pdf-obj-0-2" src="pdf-obj-0-2.jpg">

Misery Loves Companies: Rethinking Social Initiatives by Business Author(s): Joshua D. Margolis and James P. Walsh Source: Administrative Science Quarterly, Vol. 48, No. 2 (Jun., 2003), pp. 268-305 Published by: Johnson Graduate School of Management, Cornell University Stable URL: http://www.jstor.org/stable/3556659

Accessed: 13/08/2009 10:45

Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at http://www.jstor.org/page/info/about/policies/terms.jsp. JSTOR's Terms and Conditions of Use provides, in part, that unless

you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use.

Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at http://www.jstor.org/action/showPublisher?publisherCode=cjohn.

Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission.

JSTOR is a not-for-profit organization founded in 1995 to build trusted digital archives for scholarship. We work with the scholarly community to preserve their work and the materials they rely upon, and to build a common research platform that promotes the discovery and use of these resources. For more information about JSTOR, please contact support@jstor.org.

Misery Loves Companies: Rethinking Social Initiatives by Business Author(s): Joshua D. Margolis and James P. Walshy : Johnson Graduate School of Management, Cornell University Stable URL: http://www.jstor.org/stable/3556659 Accessed: 13/08/2009 10:45 Your use of the JSTOR archive indicates y our acce p tance of JSTOR's Terms and Conditions of Use, available at http://www.jstor.org/page/info/about/policies/terms.jsp . JSTOR's Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the p ublisher re g ardin g an y further use of this work. Publisher contact information may be obtained at http://www.jstor.org/action/showPublisher?publisherCode=cjohn . Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission. JSTOR is a not-for-profit organization founded in 1995 to build trusted digital archives for scholarship. We work with the scholarly community to preserve their work and the materials they rely upon, and to build a common research platform that promotes the discovery and use of these resources. For more information about JSTOR, please contact support@jstor.org. Johnson Graduate School of Management, Cornell University is collaborating with JSTOR to digitize, preserve and extend access to Administrative Science Quarterly. http://www.jstor.org " id="pdf-obj-0-44" src="pdf-obj-0-44.jpg">

Johnson Graduate School of Management, Cornell University is collaborating with JSTOR to digitize, preserve and extend access to Administrative Science Quarterly.

http://www.jstor.org

Misery Loves

 

are

increasingly

asked to provide innovative

Companies:Rethinking Social Initiatives by

Business

Companies

solutions to

deep-seated problems of

theory

instructs

human

misery, to focus on

we

even as economic

managers

In

maximizing their shareholders' wealth.

assess

how

organization theory

and

this paper,

empirical

research

Joshua D.

Margolis

Harvard University

James P Walsh

 

have thus far

responded

to this tension

over corporate

scholar-

involvement in wider social life.

ship

has

tiatives with

Depicting

Organizational

typically sought to reconcile corporate social ini-

seemingly inhospitable

economic

logic.

the hold that economics has had on how the

University of Michigan

relationship between the firm and

we examine

the

consequences

for

society is conceived, organizational

research and theory by appraising both the

for an

social initiatives and its financial

the

development of stakeholder theory.

approach, embracing

alternative

the tension

as

economic and broader social

objectives

30-year quest

as well as an

propose

between

a starting

empirical relationship between a corporation's

performance,

We

 

point for systematic organizational inquiry. Adopting a

pragmatic stance,

we

introduce a series of research

tions whose

answers will reveal the

descriptive

mative dimensions of organizational responses misery.?

ques-

and nor-

to

The world cries out for repair. While some

world are well

magnitude

people

in the

off, many more live in misery.

problem

defies

Ironically, the

of the

easy recognition. With the

it is difficultto

of social life. In the

global populationexceeding six billion people,

paint

a vivid and

compelling picture

extreme, Bales (1999)

27

conservatively estimated that there are

today,

while Attaranand Sachs

millionslaves in the world

(2001) reported

that 35 million people are now infected with

living in sub-SaharanAfrica.

the HIV virus, 95 percent of them

Even more

broadly,aggregate

numb. Compiled from

(2002), table

1

tistics

statistics both informand

by

the WorldBank

data released

the kindof

represents

snapshot that such sta-

many peo-

provide.

It can be shocking to learnthat so

 

live on less than $2.00

Bangladesh

per day,

that a

quarter of

the chil-

and Nigeria are at work in their nations'

labor force, or that some

childrenunder age

countries have

mortality rates for

five more than ten times that of the Unit-

to sanitation,let alone access to a tele-

?2003

by

Johnson GraduateSchool,

 

ed States. Access

Cornell University.

0001-8392/03/4802-0268/$3.00.

phone or computer, can be very limitedaround the world.

  • 0 The picture in the United States alone is as vividand com-

We thankChristine Oliver, Linda Johan-

son, our three

anonymousreviewers,

PaulAdler, Howard Aldrich,Alan

Andreasen,Jim Austin,Charles Behling, MichaelCohen, Bob Dolan,Mary Gentile,

TomGladwin, Morten Hansen,

Stu Hart,

Nien-he Hsieh, Linda Lim, Nitin Nohria,

LynnPaine, Gail Pesyna, Robert Phillips, LanceSandelands, Debora Spar, Joe

White, RichardWolfe, and the students in

Jim Walsh's

"The Corporation in Society"

Ph.D. seminarfor theirconstructive com-

pelling.

period

of

For

twenty years,

Americans have lived

through a

unparalleledprosperity. IbbotsonAssociates (2000)

terms, a dollarinvested

in large compa-

by year-end

worth

calculatedthat in real

ny

1979.

$303.09.

stocks in December 1925 was worth $24.79

Exactlytwenty years later,that dollarwas

Nevertheless, the fact that the upper echelon of

these

gains

is no

longer

intercountry income

Mishel,

society disproportionatelyreaped

news. Even as debate

persists

inequality(Firebaugh, 1999),

about

Galbraith(1998), and

ments on earlierversions of this

 

We also thank

   

Bernstein,

and Schmitt (1999)

provided a comprehensive pic-

United States, while

many

Conley

black Americanshave

provides a com-

ture of wealth inequality in the

(1999) clearlypointed

out that

been left out of this economic boom. Table 1

Galvin,and NicholePelak for their

helpful

researchassistance. The HarvardBusi- ness School, the Michigan Business

School, and the Aspen Institute'sBusi- ness and Society Programprovided

invaluable support for this

project.

 

parativeportrait of how the top 10 percent of the people in

each of the world's thirteen

largest countries controlso much

 

268/Administrative

Science

Quarterly, 48 (2003): 268-305

Table1

Social Initiatives by Business

A Snapshot of Social Life in the World's Most Populous Nations, 2000

Popula-

% Pop.

tion in

living on

Nation

millions < $2/day

China

1,262.5

52.6

India

1,015.9

86.2

U.S.A.

281.6

*

Indonesia

210.4

55.3

Brazil

170.4

26.5

Russia

145.6

25.1

Pakistan

138.1

84.7

Bangladesh

131.1

77.8

Japan

Nigeria

Mexico

126.9

126.9

98.0

*

90.8

37.7

Germany

Vietnam

82.2

78.5

*

*

* Data not available.

% Share

 
 

of

income

 

or con-

% Chil-

Under-

sump-

dren

five

tion:

aged

mortali-

bottom

10-14 in

ty per

10%/

labor

1000 live

top 10%

force

birth

2.4/30.4

8

39

3.5 /33.5

12

88

1.8 /

30.5

0

9

4.0 /

26.7

8

51

.7/48.0

14

39

1.7 / 38.7

0

19

4.1 /27.6

15

110

3.9/28.6

28

83

4.8 / 21.7

0

5

1.6/40.8

24

153

1.3/41.7

5

36

3.3 / 23.7

0

6

3.6 /29.9

5

34

% Rural

pop.

% Pop.

with

with

access

access

to

to

improvedimproved

water

sanita-

source

tion

66

38

86

31

100

100

65

66

54

77

96

*

84

61

97

53

*

*

39

63

63

73

*

*

50

73

Illiteracy

rate

among

Main-

15-24

line/

year

mobile

olds:

phones

% male/ per 1000

% female

people

1/4

112 /66

20/35

32 /4

*

700/398

2/3

31/

17

9/6

82/136

<.5/<.5

218/22

29 / 58

22 / 2

39/60

4/1

*

586/

526

10/16

4/0

3/3

125/142

*

611 / 586

3/3

32 /

10

Personal

comput-

ers per

1000

people

15.9

4.5

585.2

9.9

44.1

42.9

4.2

1.5

315.2

6.6

50.6

336.0

8.8

more of each nation'swealth than those in the bottom 10

percent. Miringoff and

same kinds of

Miringoff (1999) chronicledthese

inequality data but also provided evidence that

suicide, and violent crime,

child abuse, child poverty,teenage

as well as the number of

people

living without health insur-

ance, These kinds of data serve as a stimulus for outrage and

reform (Korten,1995; Greider,1997; Wolman osca, 1997; Kapstein,1999; Madeley, 1999).

and Colam-

have all increased in the United States since the 1970s.

In the face of these broadand

for companies to help.

fight

such

problems.

dedicated to

Some

deep problems,

calls go out

to

organizations exist solely

There are

waste

publicly traded companies

(e.g.,

Waste

Management,

treating

M6decins Sans

cleaning up

Inc.), privatenot-for-profit organizations dedicated

the sick in

very

difficultcircumstances

(e.g.,

to

Frontibres),and consortia of development organizations dedi-

cated to

fighting poverty,hunger,

and social

injustice(e.g.,

Oxfam International).The calls for help,

it-making firms that produce goods

services that

may

and

have littleto do with

however, target prof-

services-goods

and

ameliorating human

misery. For example, all three branches of the United States

government

in

have

recognized

the role

corporations could play

Secretary

of

to contributeto a

global

promoting social

welfare. President Bush and

companies

State Powell have asked

AIDSfund (New YorkTimes, 2001), while FormerPresident

Clintonused his "bullypulpit" to urge corporations to attend

to social

problems

(New YorkTimes, 1996) and later advocat-

(New YorkTimes, 1999). With the Econom-

increased (from 5

percent

tax deduction for chari-

ed that minimumlabor standards be a part of international

trade

agreements

ic Recovery

to 10

Act of 1981, Congress

the allowable

percent)

corporate

table contributions(Mills and Gardner,1984). Even as a

majority of states were adopting "other constituency

269/ASQ, June 2003

statutes," statutes that allow directorsto attend to factors other than shareholderwealth maximizationwhen fulfilling

their

fiduciaryduty

(Orts, 1992), the Delaware

Supreme

Court

endorsed this same idea in 1989 when it allowed Time Inc.'s

management

to

reject

a lucrativetender offer from Para-

mount Communicationsto pursue other non-shareholder- related interests (Johnson and Millon,1990).

Activitybeyond

the halls of government that focuses on the

is

equally intriguing.Non-govern-

in recent

social

such initia-

firms to be more

corporation's role in society

mental

years

organizations(NGOs) have worked tirelessly to establish worldwide standardsfor

corporate

accountability-Ranganathan(1998) listed 47

tives-and

investors have

pressured

responsive to social problems (e.g., Carleton,Nelson, and

Weisbach, 1998). Major charitablefoundations and

interest groups-the

and the

public

Ford Foundation, the Sloan Foundation,

business school acade-

corporate

the call to

on a larger role in soci-

of

competitive advantage

Kanter(1999) identified ways

inno-

Aspen Institute, to name three of the most promi-

launched

major

initiativesto

investigate

and even

societal ills.

nent-have

encourage business investment in redressing

Publicintellectuals,

including leading

mics whose prior contributions shaped the fields of

strategy and organizationalbehavior, have joined

encourage

ety.

doing

in which

and

guide

firms in

taking

Porter(1995) celebrated the

business in the inner

city,

public-privatepartnerships advance corporate

vation, and Prahalad(Prahalad and Hammond,2002;

Prahalad

and Hart,2002) mapped the untapped

economic

opportuni-

ties that reside in what he called the bottom of the world's

wealth pyramid.

Business leaders and firms themselves are even

to calls for enhanced corporate social

mavens, such as the Body Shop's

responding

responsibility. From

Anita

Roddick,to converts,

such as BritishPetroleum's John Browne, some business

leaders are

preaching-and

at least

trying

to

practice-an

approach to business that affirmsthe broadcontribution that

companies

can make to

human welfare, beyond maximizing

a largerscale,

representing

the United

tens of thou-

recently founded the is to

purpose

pro-

the wealth of shareholders.On

States Chamberof Commerce,

sands of business interests worldwide,

Center for

CorporateCitizenship, whose

vide an institutionalmechanism to assist humanitarianand

philanthropic business initiativesaround the world.

The

repeated

calls for corporate action to amelioratesocial

underlying tension.

The sheer

On the one hand,

misery

from

magnitude of problems,

illiteracy and homelessness,

inspires

ills reflect an

loves

companies.

malnutritionand HIVto

a turntoward all availablesources of aid, most notablycorpo-

rations.

Especially when those problems

are

juxtaposed

to

the wealth-creation capabilities of firms-or to the ills that

firms

may have helped to

target

of

create-firms become an under-

On the other

hand, a sturdy

suggests

and

that

misguided. It may

be neither

corporate

resources to

Easterbrookand Fis-

standable

persistent

such

appeals.

theoretical argument in economics

involvement is

corporate

permissible

redress social

nor prudent to devote

misery (Friedman,1970;

chel, 1991; Sternberg, 1997). Callsfor broader corporate

270/ASQ, June 2003

Social Initiatives by Business

responsibility,therefore,

constitute an effort to surmountthe corporate action is illicit.With social

on the

presupposition that such

misery

and the

imperative of corporateinvolvement,

one hand, and the

attempts

intense

skeptical economic rationale,on the other,

corporate

social initiativesreach an

to mobilize

pitch. Organizationalscholarship has confrontedthe

argument

head-on.

economic

THE POINTOF TENSION

Appeals

for

corporate

involvement in

ameliorating malnutri-

tion, infant mortality,illiteracy, pollution, pernicious wealth

inequality, and other social ills quickly call to mind a

contentious debate about the

firm. Despite a long history

sey,

1989), Bradley et

long and

theory and purposes of the

of communitarian protest (Morris-

al.'s (1999) review of these efforts

found that the neoclassical construalof the

firm as a nexus

of contracts has

prevailed.Although organizational and legal

scholars (Bratton,1989a, 1989b;

Davis and Useem, 2000;

Paine, 2002) have

questioned the contractarianmodel and

sketched alternativeviews,

purchase

this

they

have also

acknowledged the

corpo-

economic model of the firm has had on

rate conduct, law, and scholarship. The purpose

from a contractarian perspective, is

the landmark1919

Dodge

v. Ford

perhaps

best

of the firm,

capturedby

Michigan State Supreme

Henry Ford

Courtdecision that determined whether or not

could withholddividends from the

Dodge

brothers(and other

shareholders).The court famously argued, "A business orga-

nizationis

organized

and carriedon

primarily for the profit of

Company,

not

primary, if

the stockholders" (Dodge Brothers v. FordMotor

1919: 170 N.W. 668). The

assumption

that the

sole,

purpose

of the firm is to maximizewealth for sharehold-

ers has come to dominate the curriculaof business schools

and the thinking of

recent survey

future managers, as evidence from a

graduates

reveals

of business school

(Aspen

Institute,2002). Investigatingcorporate

sents a rich

scholarlyopportunity in part

nomic account

social initiatives pre- because the eco-

suggests tiatives to investigate in the first place.

that there should be no so such ini-

The contractarianview of the firm or, to be more accurate,

the economic version of contractarianism(cf.

Keeley, 1988;

Donaldsonand Dunfee, 1999), challenges the legitimacy and

value of corporateresponses

challenges

to social

misery.

saying

The

specific

come in three distinct forms:

that firms

possible,

already advance social welfare to the

saying

full extent

that the only legitimate actors to address societal

or

saying

that if

problems are freely elected governments,

firms do

cies so

get involved, managers

they

can

protect

point

must warn their constituen-

misad-

corporate of view defends the economic con-

same aim that stimulates

example,

themselves from

ventures. The first

tractarianmodel by invoking the

efforts to enlist

companies

to cure social ills. For

Jensen (2002: 239) argued, "200 years' worth of work in

economics and finance indicatethat social welfare is maxi- mized when all firms in an economy maximizetotal firm

value." Jensen conceded that

companies

must attend to

multiple constituencies in order to succeed but,

firms must be

guided by

a

single

ultimately,

objective function:wealth

creation. He argued that it is logically incoherentand psycho-

271/ASQ, June 2003

logicallyimpossible to maximize performancealong more

than one dimension-calculating tradeoffs and selecting

courses of action become intractable. Althoughany

objective

could

satisfy

the

single

logical and psychologicalrequire-

ments,

Jensen concluded that

long-term

marketvalue is the

one objective

scribing to

that best advances social welfare. Those sub-

this view believe that if shareholderwealth is

maximized,social

the challenge for

welfare is maximizedas well. In the end,

firms to invest in social initiativesis no chal-

lenge

at all.

Friedman's(1970) well-known criticismof

corporate

social

responsibility embodies the second form of criticism.He con-

strued these

investments as theft and political subversion:in

responding to calls for socially responsible practices, execu-

tives take money and resources that would otherwise go to

owners, employees,

in a manner that is

politicalprocesses.

social

problems;

and customers-thus

objectives

imposing a

tax-

and dedicate those resources to

tives, under the

that the execu-

the existence of

sway of a minority of

beyond

the

voices, have selected

democratic

reach of accepted

deny

Friedmandid not

he simply claimed that it is the state's role

to address them.

The thirdform of the economic

argument against corporate

social initiativesdeems them dubious

disclosed, unobjectionable. As long

but, providedthey are

contractingparties

those intentions

as the

are clear about the firm's intentions, even if

include something

other than wealth creation, Easterbrook

and Fischel

object." They not survive is

(1991: 36) argued,

"no one should be allowed to

thing

that can-

went on to conclude that "one

systematic efforts to fool participants" (Easter-

1991: 37).

They

were

of

corporate

brookand Fischel,

wary

social investments and, like Jensen, trusted

propertyrights

and the invisiblehand of the marketto solve most social

problems.

If all

contractingparties

know that the firm

plans

to make a social investment, no matter how ill conceived,

however, then those parties

can decide if

they want to partic-

ipate

in the venture. The marketwill

ultimately sort out

whether it is the best use of a firm's resources.

The

point

of tension between a nexus of contracts

approach

to the firm and those who

push

for

corporate social

from their

involve-

ment can thus be distilledto two central

priation and misallocation.When

concerns: misappro-

in social

companies engage

will

initiatives,the first concern is that managers

ate corporate claimants, whether these

resources

by diverting them

misappropri-

rightful

be the firm's owners or, some-

times, employees.

diverting those

Managers also misallocate resources by

purpose

to advance

poorly

best used for one

purpos-

es for which those resources are

perspective, managers'

suited. Fromthis

using

a

social initiativesare akinto

dishwasher to wash clothes. While economic contractarians

may be as committed to

one, they

ameliorating human misery as any-

corporation to divert

its

see no reason for a

resources to solve

society's problems directly.Corporations

society

if

they

do what

they

do best:

providegoods

doing,

and services to the

fulfill people's needs and create

can contributebest to

employ

a workforceto

marketplaceand, in so wealth.

272/ASQ, June 2003

Social Initiatives by Business

The

challenge facing

those who advocate

way

to

promote

corporate social ini-

what

they

see as

tiatives then is to find a

social

justice

in a world in which this shareholderwealth

maximization paradigmreigns. Although a dauntingtask, it

has attracted

many management

has

attempted

with

scholars over the

to sort out the

years.

Their scholarship

relationship

and

between shareholders, society, with its interest

development.

The aim has

their economic interests,

in broader well-being

largely been to

misery

is

and human

demonstrate that

consistent

corporate attention to human

with

maximizingwealth,

Secretary

between what

Nations'

vergence

perfectly

that there is, in the words of United

happy

con-

GeneralKofi Annan (2001), "a

your

shareholderswant and what is

best for millionsof people the world over."

ORGANIZATIONALSCHOLARSHIP ON BUSINESS IN SOCIETY

Aware of human

suffering

and alert to the

cal researchers have

sought

to

identify a

focused on

establishing

a

positive

porate

social

offered as

something

challenge

from

economic contractarianism,organization theorists and empiri-

role for the firmthat

both attends to shareholders'interest in wealth creationand

largely

looks beyond it. In this light, empirical research has

connection between cor-

performance(CSP) and corporate financial per-

studies were

formance (CFP).First appearing in 1972, these

of an antidote to a public conversation

that was quite skeptical of corporate social responsibility

(Levitt,1958; Friedman,1970).

The now 30-year search for

enduring

an association between CSP and CFP reflects the

quest to find a persuasive

business case for social initiatives,

to substantiate the kindof claims that KofiAnnan (2001)

recently made to U.S. corporations:"by joining the global

fight against HIV/AIDS,your business

bottom line." A dozen

years

after

will see benefits on its

the publication of the first

began

response to the

legitimate

CSP-CFPstudies, stakeholder theory (Freeman, 1984)

to take shape as the dominanttheoretical

economists'

challenge.

place for parties

concerns can

body

It aims to establish the

other than shareholderswhose interests and

orient

managers'

actions. With a

defensibly

of empirical work and a rivaltheoretical model of the

firm, organization studies has tried to respond to the econo-

mists'

fundamental challenge by establishing

direct corporate

problem

involvement in

is that the

some

grounds

to license

misery.

The

ameliorating social

resultingempirical findings

and theoretical

ability to develop

propositions restrict organizational scholars'

a more

expansive approach to

understand-

We

CSP-CFP empirical research tradi-

theory

and use this sum-

of stakeholder

ing the relationship between organizations and society.

brieflyappraise

tion and the

the

30-year

standing

mary and critique as a springboard to develop an alternative

scholarlyagenda.

The Empirical CSP-CFPLiterature

Between 1972 and 2002, 127

examined the

responsible

published studies empirically

relationship between companies' socially

conduct and their

financial performance.Bragdon

published

the first

and Marlin(1972) and Moskowitz (1972)

studies, with 17 other studies following during the 1970s, 30

273/ASQ, June 2003

in the 1980s, and 68 in the 1990s. In the most recent

period 64 new studies.
period
64 new studies.

interest in this question seems

10-year

from 1993 through 2002, researchers have published

Notwithstanding a long empiricalhistory,

to be gaining momentum.

Corporate social performance

has been treated as an inde-

in 109 of

pendent variable,predicting financial performance,

the 127

studies. In these studies, almost half of the results

(54) pointed

social

to a

positive relationship between corporate

performance and financial performance.Only seven

negative relationship; 28 studies reported

20

studies found a

non-significantrelationships, while

findings.

reported a mixed set of

Corporate social performance has been treated as a

dependent variable,predicted by financial performance, in 22

of the 127 studies. In these

studies, the majority of

results

(16 studies) pointed to a positive relationship between corpo-

rate financial performance and social performance. Fourstud-

ies investigated

explains why

the

relationship in both directions,which

there are more results than studies. Table2

Table 2

Relationship

between

Corporate

Social

Performance

and Corporate

Financial Performance

in 127 Studies*

Measure

Study

Social performance

Financial performance

Corporate social performance as independent variable

Positive

relationship

Anderson& Frankle(1980)

Belkaoui(1976)

Blacconiere& Northcut(1997)

Blacconiere& Patten (1994)

Bowman (1976) Bragdon & Karash(2002)

Bragdon & Marlin(1972)

Brown(1998)

Christmann(2000)

Clarkson(1988)

Conine& Madden(1986)

Disclosureof social

Disclosureof

performance

pollution control

Disclosureof and expenditures on environmental

practices Disclosureof and expenditures on environmental

practices Disclosureof social performance

Stewardship,systems thinking,transparency,

employee growth,

CEPevaluation

financial strength

Fortune reputationrating

Survey

of environmental practices

Ratings of charity,community relations, customer

relations,environmental practices,

practices,

and

org.

humanresource

structuresbased on case studies

Fortune reputationrating

D'Antonio,Johnsen & Hutton

(1997)

Dowell, Hart& Yeung(2000)

Epstein

& Schnietz (2002)

Freedman& Stagliano(1991)

Graves& Waddock(2000)

Griffin& Mahon(1997)

Hart&

Ahuja(1996)

Heinze (1976)

Herremans,Akathaporn & Mclnnes (1993)

Ingram(1978)

Jones & Murrell(2001)

Judge & Douglas (1998)

Mutualfund screens

IRRCevaluation of environmental performance

Industryreputation for environmentand Disclosureof EPAand OSHAcosts

laborabuses

KLDevaluation

Fortune reputationrating, KLDevaluation, charitable contributions,pollution control IRRCevaluation of environmental performance

NACBS ratings Fortune reputationrating

Disclosureof social performance

Working Motherlist of "Most

FamilyFriendly"

companies

Survey of environmental practices

Market

Market

Market

Market

Accounting

Market

Accounting

Market

Cost advantage

Accounting

Perception of value as long-term investment and of soundness of financial position Market

Accounting & market Market

Market

Accounting & market Accounting

Accounting Accounting Accounting & market

Market

Market

Accounting & market share

274/ASQ, June 2003

Table2 (Continued)

Study

Social Initiatives by Business

Social performance

Measure

Financial performance

Corporate social performance as independent variable

Klassen&

McLaughlin(1996)

Klassen& Whybark(1999)

Konar& Cohen (2001) Luck& Pilotte (1993)

McGuire, Sundgren & Schneeweis (1988)

Moskowitz(1972)

Nehrt (1996)

Newgren et al. (1985) Parket& Eilbirt(1975)

Porter& van der Linde(1995)

Posnikoff(1997)

Preston (1978) Preston & O'Bannon(1997)

Preston &

Sapienza(1990)

Reimann(1975)

Russo & Fouts (1997)

Shane &

Sharma&

Spicer (1983)

Vredenburg(1998)

Simerly(1994)

Simerly(1995)

Spencer & Taylor(1987) Spicer (1978) Stevens (1984) Sturdivant& Ginter(1977) Tichy, McGill& St. Clair(1997)

Travers(1997)

Verschoor(1998)

Verschoor(1999)

Waddock& Graves(1997) Wokutch& Spencer (1987)

Wright et al. (1995)

Environmentalawards and crises Survey of environmental practices and TRI

TRIand environmentallawsuits KLDevaluation

Fortune reputationrating

Market

Manufacturingcost,

quality,speed,

and

flexibility Accounting & market Market Accounting & market

Observationsof charitablecontributions, consumer protection,disclosure, equal employment

opportunity, humanresource

operations, and urbanrenewal

practices,

South Africa

Timing and intensity of pollution-reducingtechnologies

Survey

Survey

of environmental practices

on

minorityhiring and training,ecology,

contributionsto educationand art

Waste

preventionpractices

South Africa:divestment

Disclosureof social

performance

Fortune reputationrating

Fortune reputationrating

Survey of

attitudestoward national government,

suppliers,consumers, community,stockholders, creditors,and employees

FRDC ratings of CEPevaluation

environmental practices

Survey

of environmental strategy

Fortune reputationrating Fortune reputationrating

Fortune reputationrating CEPevaluation

CEPevaluation

Moskowitz

ratings of social responsiveness

Fortune reputationrating Mutualfund screens

Espoused

commitmentto ethics in

annual report

Explicit statement of an ethics code in annual

report

KLDevaluation Fortune reputationrating, charitable contributions,

corporate crime Awardsfrom U.S. Dept. of Laborfor exemplaryequal

employmentopportunity

Personalassessment

Accounting

Market

Accounting

Accounting

Market

Accounting

Accounting

Market

Organizational

competence

Accounting

Market

Operationalimprovement

Accounting &

market

Accounting

Accounting

Accounting & market Market

Accounting

Accounting

Market

Accounting & market Accounting & market Accounting Accounting

Market

Non-significantrelationship Abbott& Monsen (1979)

Alexander& Buchholz(1978)

Aupperle, Carroll& Hatfield

(1985)

Bowman (1978) Chen & Metcalf(1980)

Fogler & Nutt (1975)

Fombrun&

Shanley (1990)

Freedman& Jaggi (1982)

Freedman& Jaggi Fry & Hock (1976)

(1986)

Greening(1995)

Guerard(1997a)

Hamilton,Jo & Statman(1993) Hickman, Teets & Kohls(1999)

Hylton(1992)

Ingram & Frazier(1983)

Disclosureof social

Moskowitz

ratings of

performance

social

responsiveness

and

Survey of social responsibilitypractices organizational structures

Disclosureof

CEPevaluation

social performance

CEPevaluation

Fortune reputationrating CEPevaluation

Disclosureof

pollution

Disclosureof social

EIA reports

performance

on conservation practices

KLDevaluation Mutualfund screens Mutualfund screens Mutualfund screens Disclosureof environmental quality control

Accounting

Market

Accounting

Accounting

Accounting & market Market

Accounting & market Accounting Market

Accounting

Accounting & market Market

Market

Market

Market

Accounting

275/ASQ, June 2003

Table2 (Continued)

 

Measure

Study

Social performance

Financial performance

Corporate social performance as independent variable

Kurtz& DiBartolomeo(1996)

Lashgari & Gant (1989) Luther& Matatko(1994)

Mahapatra(1984)

McWilliams&

Siegel (1997)

McWilliams& Siegel (2000)

O'Neill,Saunders & McCarthy

(1989)

Patten (1990)

Reyes

& Grieb(1998)

Sauer (1997) Teoh,Welch & Wazzan(1999)

Waddock& Graves(2000)

KLDevaluation South Africa:adherence to Sullivan principles Mutualfund screens

Disclosureof

capitalexpenditures on pollution control

Dept.

of

Laborfor exemplaryequal

Awardsfrom U.S.

employmentopportunity KLDevaluation Survey of directors'concern for social responsibility

South Africa:announcement of signing of Sullivan principles Mutualfund screens Mutualfund screens South Africa:divestment KLDevaluation

Market

Accounting

Market

Market

Market

Accounting

Accounting

Market

Market Market Market Accounting & market

Negative relationship

Boyle, Higgins & Rhee (1997)

Kahn,Lekander & Leimkuhler

(1997)

Meznar,Nigh & Kwok(1994)

Mueller(1991)

Teper(1992)

Vance (1975) Wright & Ferris(1997)

Compliance with Defense IndustriesInitiative Tobacco-free

South Africa:withdrawal Mutualfund screens No alcohol,tobacco, gambling, defense contracts,or

operations in South Africa;adherence to broad

social

guidelines

Moskowitz ratings of social responsiveness

South Africa:divestment

Market

Market

Market

Market

Market

Market

Market

Mixed

relationship

Belkaoui&

Karpik(1989)

Bermanet al. (1999) Blackburn,Doran & Shrader

(1994)

Bowman & Haire(1975)

Brown(1997)

Cochran& Wood (1984)

Diltz(1995)

Graves& Waddock(1994) Gregory, Matatko& Luther

(1997)

Guerard(1997b)

Hillman& Keim(2001) Holman,New & Singer (1990)

Kedia& Kuntz(1981)

Luther, Matatko& Corner

(1992)

Mallin, Saadouni& Briston

(1995)

Marcus& Goodman(1986)

McGuire,Schneeweis &

Branch(1990)

Ogden Pava& Krausz(1996)
Ogden
Pava& Krausz(1996)

& Watson (1999)

Rockness, Schlachter& Rockness (1986)

Disclosureof social performance and Moskowitz

ratings of social responsiveness KLDevaluation

CEPevaluation

Disclosureof social

performance

Fortune reputationrating

Moskowitz ratings of

CEPevaluation

social responsiveness

KLDevaluation

Mutualfund screens

Accounting & market

Accounting Accounting & market

Accounting

Market

Accounting & market Market

Accounting

Market

KLDevaluation KLDevaluation Disclosureof social performance & capital

expenditures on regulatorycompliance

Interviewand

survey

on charitablecontributions, low-

minorityemployment

income housing loans, minorityenterprise loans,

female

corporateofficers,

Mutualfund screens

and

Market

Market

Market

Accounting & marketshare

Market

Mutualfund screens

Compliance with safety regulations

Fortune reputationrating

Customerservice complaints CEPevaluation EPAand U.S. House of Representatives data on

hazardouswaste disposal

Market

Capabilities & productive efficiency Accounting & market

Accounting & market Accounting & market Accounting & market

276/ASQ, June 2003

Table2 (Continued)

Study

Social Initiatives by Business

Social performance

Measure

Financial performance

Corporate social performance as dependent variable

Positive

Brown&

relationship

Perry(1994)

Cottrill(1990)

Dooley

& Lerner(1994)

Fry, Keim& Meiners (1982)

Galaskiewicz(1997)

Konar& Cohen (1997)

Levy

& Shatto (1980)

Maddox&

Siegfried(1980)

Marcus& Goodman(1986)

McGuire,Sundgren & Schneeweis (1988) Mills& Gardner(1984)

Navarro(1988)

Preston &

O'Bannon(1997)

Riahi-Belkaoui(1991)

Roberts(1992)

Waddock& Graves(1997)

Non-significantrelationship

Buehler& Shetty (1976)

Fortune reputationrating Fortune reputationrating TRI Charitablecontributions Charitablecontributions TRI Charitablecontributions Charitablecontributions Compliance with emissions

Fortune reputationrating

regulations

Disclosureof social

performance

Charitablecontributions Fortune reputationrating

Fortune reputationrating CEPevaluation

KLDevaluation

Accounting & market Marketshare

Accounting

Accounting

Accounting

Market

Accounting Accounting Accounting Accounting & market

Accounting & market Accounting Accounting Accounting & market Accounting & market Accounting

Organizationalprograms in consumer affairs,environ- mental affairs,urban affairs

Accounting

Cowen, Ferreri& Parker(1987)

Disclosureof social

Disclosureof

performance

social performance

Accounting

Accounting

Patten (1991)

Mixed

relationship

Johnson &

Lerner&

Greening(1999)

Fryxell(1988)

McGuire,Schneeweis &

KLDevaluation CEPevaluation Fortune reputationrating

Accounting Accounting & market Accounting & market

Branch(1990)

* CEP = Council on Economic Priorities; EIA =

Energy

InformationAssociation; EPA = EnvironmentalProtection

Agency;

FRDC= FranklinResearch &

DevelopmentCorporation; IRRC=

Investor Responsibility ResearchCenter; KLD

Kinder,Lydenberg, Dominimultidimensional rating; NACBS= NationalAffiliation of ConcernedBusiness Students;

=

OSHA=

OccupationalSafety

and HealthAdministration; and TRI= ToxicsRelease Inventory. Fourstudies

investigate

the

relationship in both

directionsbut are counted as

only

one

study:

McGuire, Schneeweis & Branch(1990);

McGuire,

Sundgren &

Schneeweis (1988); Preston & O'Bannon(1997); Waddock & Graves (1997). Marcus& Goodman(1986)

contains two separate studies and is therefore counted twice.

captures

the basic

approaches for measuring

social and

financial performance and

reports

which authors found which

results, includingpositive, non-significant,negative, and

mixed relationships.

A clear

signal emerges from these 127

studies. A simple

positive

compilationof the findings suggests

ciation, and certainlyvery

little

there is a

asso-

associ-

evidence of a negative

ation, between a cial performance. A recent meta-analysis of 52 CSP-CFP

studies reached this same substantive

Schmidt, and Rynes,

company's social performance and its finan-

conclusion (Orlitzky,

misappropria-

2003). Concerns about

tion, and perhaps even misallocation,would seem to be alle-

viated. If corporate social performance contributesto corpo-

rate financial performance, then a firm's resources are being

used to advance the interests of shareholders,the rightful claimants in the economic contractarianmodel. Concerns about misallocationrecede as well. If social performance is

277/ASQ, June 2003

contributing to financial performance, then the firm is being

used to advance the

objective

for which it is consideredto be

Although it can be argued that

best suited, maximizing wealth.

a company's resources

might be used to produce even more

activity other than CSP,

wealth, were they devoted to some

studies

of the linkbetween CSP and CFPreveal littleevidence

that CSP destroys value,

way,

or

damages

the

injures shareholdersin a

significant

wealth-creatingcapacity of firms.The

empiricalrelationship between CSP and CFPwould seem to be established and the underlying economic concerns about

CSP alleviated.Even as research

CSP and CFPaddresses the

into the relationship between

economic

objections posed by

contractarianism,however, a closer look at this research sug-

gests that role of the

it opens as many questions as it answers about the

firm in

society.

What appears

to be a definite linkbetween CSP and

CFP may

turnout to be more

The

steady

illusory than the body of results suggests.

ongoing

efforts

flow of researchstudies reflects

both to resolve the tension between advocates and criticsof

corporate social performance and to shore up

cal and theoreticalweaknesses in

the

methodologi-

past been 13 reviews of this CSP-CFPresearch

1978, nine in the

past

ten

Arlowand Gannon,1982;

years alone

studies. There have

published since

(Aldag and Bartol,1978;

Wood, 1984; Aupperle,

McKinney,1991;

Cochranand

Carroll, and Hatfield,1985; Wokutchand

Wood and Jones, 1995; Pavaand Krausz,1996; Griffinand

Mahon, 1997; Prestonand O'Bannon,1997; Richardson,Welk-

er, and Hutchinson,1999; Roman,Hayibor, and Agle, 1999;

Margolis and Walsh, 2001; Orlitzky,Schmidt,

and

Rynes,

2003). The reviewers see problems of all kinds in this

research.

They identifysampling problems,

the CSP and

reliability and validity of

concerns about the

CFP measures, omission

of controls,opportunities to test mediating mechanisms and

moderatingconditions, and a need for

a causal

theory

to link

CSP and CFP The imperfect natureof these studies makes

researchon the linkbetween CSP and

each successive

also

CFP self-perpetuating:

study promises a definitive conclusion,while

revealing the inevitable inadequacies of empirically tack-

As the accelerationin the numberof studies

investigates the linkbetween CSP and

abating.

ling the question.

reveals,

researchthat

CFPshows no sign of

This continuing

research tradition produces an ironicand, no

consequence.

The

CSP-CFP empirical liter-

doubt, unintended

ature reinforces, ratherthan relieves, the tension surrounding

corporateresponses

cial

impact

of

research

and accept

helps to

its

unexploredquestions

in

response to

actions

social

The

to social

misery. By assaying

the finan-

corporate social performance,organizational

confirmthe economic contractarianmodel

assumptions. Meanwhile, the work leaves

about what it is firms

are actuallydoing

corporate

society.

misery

and what effects

have, not only on the bottom line but also on

parallelconceptual

work in the area of stakeholder theory

arrivesat the same disquieting destination.

The Theoretical Stakeholder Literature

Freeman(1984) brought a formalconsideration of stakeholder relationsto a burgeoning field of management scholarship

278/ASQ, June 2003

Social Initiatives by Business

twenty years ago.

ideas

firm relates to

affected

by

Smith'swork in the

Tracing its indirectroots back to Adam

eighteenth century

and a 1963 internal

memorandumat the StanfordResearch Institute, Freeman's

and frameworkfor

examining how a

provided a language

"anygroup

or individualwho can affect or is

organization'sobjective"

the achievement of the

(Freeman,1984: 46). Looking at the business corporation

throughsomething

has

inspiredgreat

theory.

other than the

eyes of its equity holders

efforts to translatethat intuitive appeal into a

Donaldsonand Preston (1995) counted more than a

dozen books and 100 articlesdevoted to stakeholder theory;

Wolfe and Putler