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Are Good Corporate Citizens Rewarded?

Large U.S. firms with a sustainability program see an uptick in financial performance and have a positive impact on the environment around them.

Bottom Line: Large U.S. firms with a sustainability program see an uptick in financial performance and have a positive impact on the environment around them.

In the last several years, few business issues have provoked as much debate and disagreement as the value and sincerity of corporate responsibility activities (CRAs). Some people are willing to give companies the benefit of the doubt and applaud their sustainability campaigns as a step in the right direction. But the many skeptics see it differently. They view CRA initiatives as merely “greenwashing,” no more than a marketing ploy designed to curry favor with environmentally conscious consumers, investors, and employees.

Wherever the truth lies, one thing is certain: More and more firms are making a point of releasing an annual report about their social responsibility practices via their own websites or a third-party assessor. In just one example, the number of companies that documented their sustainability initiatives with the widely respected nonprofit Global Reporting Initiative (GRI) — which provides a publicly accessible and comprehensive framework for evaluating CRAs — surged nearly five-fold between 2012 and 2015, according to GRI’s data.

Yet, despite all the talk and activity surrounding sustainability, a looming dispositive question remains. Do CRAs actually boost a firm’s financial performance and improve the social and environmental landscape? According to a new study, whose authors carefully disentangled the multifaceted effects of corporate responsibility among Fortune 500 firms, the answer is a decided yes.

Does CRA actually boost a firm’s financial performance and improve the social and environmental landscape?

In line with most research, the authors defined corporate responsibility as voluntary corporate activities designed to improve or respond to social, environmental or economic conditions…that are undertaken to build a corporate social performance (CSP) posture. Given this description, the breadth of activities under the corporate responsibility umbrella is massive, encompassing both internal and external initiatives. Developing environmentally friendly products, working with local communities, investing in employee relations, taking a stand on human rights issues, and reducing the carbon footprint of a supply chain are just a few ways that firms try to behave in a socially responsible manner.

Since 2005, Fortune has published a ranking of the top 500 global firms in terms of gross revenue. Limiting their focus to U.S. companies, the authors analyzed 126 firms that made the list in 2007 to determine how many had adopted social responsibility programs. For those that had, the researchers assessed the effectiveness of the programs’ efforts as well as their impact on financial performance a year later.

About 70 percent of the companies in the sample had embraced socially responsible practices in the baseline year, and roughly 40 percent had used the strict GRI platform to report it. To avoid limiting sustainability opportunities to potentially insular internal ideas and in order to get additional opinions about the efficacy of their CRAs, a quarter of the companies in the study had asked a dedicated committee of board members to weigh in on their programs; 10 percent had hired third-party auditors to offer their opinions.

Using an index that evaluates top firms’ commitment to social responsibility on four measures (product development, employee relations, environmental consciousness, and impact on local communities), the researchers found that companies with CRAs improved their rating the following year, showing that an investment in sustainability has tangible aftereffects. The improvement was especially pronounced, the authors found, for so-called secondary stakeholders — the communities, partners, and labor pools affected by the business activities of large firms. This finding clashes with the prevalent view, the authors note; many people suspect that corporate sustainability initiatives do not improve local lifestyle and environmental conditions in areas impacted by big business.

And the positive effects are also felt on the accounting side. Socially responsible firms had a higher Tobin’s Q ratio — a commonly used metric that measures the stock market value of a firm against its overall assets. In addition, firms with CRAs experienced positive revenue flow, had higher asset levels, and saw the ratio of their market value to asset value increase by 0.2 percent over the subsequent year.

Although they clearly found evidence of significant corporate responsibility activity, the authors were not able to determine how extensive these sustainability efforts really are and whether altruism or marketing was motivating corporate activities. However, the researchers posit that firms launch CRA campaigns because they fear the backlash that comes from harming the environment or communities that they operate in. Plus, the authors write, most people still have low expectations of firms’ CRAs, so even a relatively minor investment in doing good is likely to create a favorable opinion.

In an ideal world, as the authors note, managers who oversee their firm’s CRAs would be able to invest in a full range of internal and external sustainability initiatives, including environmental programs, employee training, charitable contributions, and more. But companies in all industries face substantial cost constraints, especially as globalization continues to take hold, and those responsible for sustainability initiatives face increasing scrutiny of their choices. They are expected to opt for projects that dovetail with the firm’s overall strategic outlook.

Then again, difficult business conditions may provide the perfect opportunity for companies to differentiate themselves by pledging their increasingly scarce resources to CRAs in the broadest possible context, the authors suggest, especially as social responsibility becomes an ever more viable and valuable aspect of doing business on a global scale.

Source:Doing Well by Reporting Good: Reporting Corporate Responsibility and Corporate Performance,” by Jegoo Lee (Stonehill College) and Sylvia Maxfield (Providence College), Business and Society Review, Dec. 2015, vol. 120, no. 4

Matt Palmquist

Matt Palmquist is a freelance business journalist based in Oakland, Calif.

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