An Institutional Theory Approach to the Evolution of the Corporate Social Performance – Corporate Financial Performance Relationship

• Published date: 01 June 2020
• DOI: http://doi.org/10.1111/joms.12550
• Author: Peter A. Dacin,Jacob Brower
• Date: 01 June 2020

© 2020 Society for the Advancement of Management Studies and John Wiley & Sons, Ltd.

An Institutional Theory Approach to the Evolution

of the Corporate Social Performance – Corporate

Financial Performance Relationship

Jacob Brower and Peter A. Dacin

Queen’s University

ABSTRACT In the present study, we integrate research from the dynamic institutional theory

literature to develop a set of theory-driven hypotheses regarding how the institutionalization of

corporate social performance (CSP) in the organizational field over the period 1991–2008 im-

pacts the CSP- corporate financial performance (CFP) relationship for firms in the marketplace.

The results of our panel time series and dynamic linear estimation models suggest that early

CSP adopters are more likely to experience both greater firm profitability and increased stock

market valuation as a result of their higher CSP levels. However, they also tend to incur more

firm-idiosyncratic risk for being ahead of the market’s CSP expectations. We also demonstrate

that the significant rise in CSP adoption and activities over time, as CSP has become institution-

alized, has resulted in CSP becoming a weaker driver of both fir m profitability and stock market

valuation.

Keywords: corporate social performance, corporate financial performance, dynamic linear

modelling, institutional theory, KLD database

INTRODUCTION

The relationship between a firm’s corporate social performance (CSP) – its ‘configura-

tion of principles of social responsibility, processes of social responsiveness, and policies,

programs, and observable outcomes as they relate to the firm’s societal relationships’

(Wood, 1991, p. 693) – and its corporate financial performance (CFP) has been of in-

terest to researchers for decades. Margolis et al. (2009) find that, through the year 2007,

214 academic works on the CSP-CFP relationship appeared in books, dissertations, and

working papers. Our own review of the literature published in the ensuing decade sug-

gests that this number now exceeds 300 academic works, a continued level of growth

Journal of Man agement Studi es 57:4 June 2020

doi:10. 1111/jo ms.1 255 0

Address for reprints: Jacob Brower, Marketing, Smith School of Business, Queen’s University, 143 Union St.,

Kingston, Ontario K7L3N6, Canada (jbrower@queensu.ca).

806 J. Brower and P. A. Dacin

© 2020 Society for the Advancement of Management Studies and John Wiley & Sons, Ltd.

clearly reflecting ‘the enduring quest to find a persuasive business case for social initia-

tives’ (Margolis and Walsh, 2003, p. 273).

Despite this volume of research, consensus for a strong business case remains elusive

(Lee, 2008; Mellahi et al., 2016; Schneitz and Epstein, 2005) and the ‘jury is still out’

on whether CSP strategies can provide a source of sustainable competitive advantage

(Waldman and Siegel, 2008). Still, the lack of strong evidence in support of the CSP-

CFP relationship does not seem to have hampered the widespread adoption of CSP

practices over the past few decades. Since the mid-1990’s, there has been a surge of in-

terest in CSP or the ways in which a company’s business model, strategies, and practices

affect stakeholders and the natural environment (Waddock, 2008). This observation is

corroborated by findings from a 2008 study by The Economist (contemporaneous with the

end of our study period), reporting that 87 per cent of firms at that time had some form

of CSP program in place. In addition, more recent studies report that 93 per cent of

CEOs see sustainability and CSP as factors that can materially affect their firm’s future

success (Oikonomou et al., 2014a), and that CSP reporting by Fortune 250 firms grew

from a mere 2 per cent in 1992 to 95 per cent in 2011 (Shabana et al., 2017).

While some argue that we should stop asking questions about the CSP-CFP relationship

(Margolis and Walsh, 2003), the continued growth of the CSP-CFP literature suggests

that such an outcome is unlikely. Indeed, an emerging literature has diverged from the

decades long struggle to ‘demonstrate a universal rate of return’ (Barnett, 2007, p. 813),

focusing instead on explaining the underlying mechanisms through which non-market

strategies – such as CSP – impact firm outcomes (Mellahi et al., 2016) and understanding

‘when’ CSP is most likely to pay off by exploring potential moderators of the CSP-CFP

relationship (see Wang et al. (2016) for a review of this literature). While experienc-

ing great recent growth, a review of this literature suggests that one potentially import-

ant, though relatively unexplored, moderator is the evolving nature of the institutional

context in which CSP decisions are made over time. Flammer (2013), examining the

changing impact of environmental initiatives on CFP over three decades, reports that, as

such initiatives became more widely accepted and adopted, the negative impact of eco-

harmful behaviours became progressively stronger over each decade studied. Furthermore,

she observes, the reward for eco-friendly behaviours decreased over time, to the point of

being only ‘marginally’ significant in the most recent decade studied.

Three other studies offer glimpses of support for the importance of temporal consider-

ations in the CSP-CFP relationship and the possibility of an evolving and dynamic rela-

tionship between the two over time. First, Short et al. (2016) find that temporal variation

explains 43 per cent of the variance in observed CSP by firms, explaining nearly as much

observed variance as firm-level factors (45 per cent), and having nearly four times the

explanatory power of industr y-level factors (12 per cent) in predicting firm CSP. Second,

in their review of non-market strategies, Mellahi et al. (2016) find that empirical studies

of the CSP-CFP relationship after 2010 are more equivocal in their support of a positive

relationship between CSP and CFP than those published prior to 2010. Finally, in their

unpublished post-hoc meta-analysis, Margolis et al. (2009) find that the CSP-CFP effects

were smaller in the last ten-year period of their analysis (1997–2007) than in the first

25-year period (1972–1996).

An Institutional Theory Approach to the Evolution of the Corporate Social Performance 807

© 2020 Society for the Advancement of Management Studies and John Wiley & Sons, Ltd.

In sum, the results of these four studies suggest that the CSP-CFP relationship may

indeed be dynamic, and point to the need to develop a better understanding of the

nature of the CSP-CFP relationship over time. However, only one of the four studies –

Flammer’s (2013) institutional theory-based work – proposes a theoretical mechanism by

which this observed effect may be happening. Further review of the institutional theory

literature reveals that the institutionalization of CSP as a business practice is well stud-

ied in the existing institutional theory-based literature on CSP (as we briefly summa-

rize next), though the implications of this process for the CSP-CFP relationship remain

under-explored.

In examining the adoption of CSP practices among firms, many academics and

business journalists recognize the progressive rationalization of CSP (e.g., Bice, 2017;

Bondy et al., 2012) and acknowledge that CSP transitioned ‘from an irrelevant and often

frowned-upon idea to one of the most orthodox and widely accepted concepts in the last

20 years’ (Lee, 2008, p. 53). This rationalization of CSP resulted in the emergence of a

largely voluntary CSP infrastructure, fuelled to some extent by the increasing presence

of CSP ratings agencies (Avetisyan and Ferrary, 2013). This evolution was progressed

by a set of new institutions driving new practices representing fundamental shifts in

the rules of the game regarding what firms must do to sustain their legitimacy – or the

perceived appropriateness of an organization to a social system in terms of rules, values,

norms, and definitions (Deephouse et al., 2017) – among stakeholders (Waddock, 2008).

Further evidence also suggests that institutional factors have a strong influence on the

adoption of CSP practices (Rodrigo et al., 2016), an influence manifested via three types

of isomorphic pressure – coercive, mimetic, and normative (DiMaggio and Powell, 1983;

Mazutis, 2018).

In the context of CSP adoption, coercive pressures include increased monitoring and

scrutiny by customers, employees, individual and institutional investors, financial man-

agers and analysts, non-investor stakeholders (e.g., environmentalists, NGOs, watchdogs,

and other social activists), regulators and policymakers, and the media (including mag-

azine articles, ratings and rankings of companies, and academic jour nals) (Bice, 2017;

Doh et al., 2010; Flammer, 2013; Lacey et al., 2015; Lee, 2008; Luo et al., 2015; Mackey

et al., 2007; Oikonomou et al., 2012, 2014a, 2014b; Schnietz and Epstein, 2005;

Waddock, 2008; Zyglidopoulos et al., 2012).

Mimetic pressures have also mounted since the early 1990s as firms increasingly

benchmark their CSP practices against leading firms, both within their own industry

and across a range of industries within their local geographic context, leading to a ‘slow

ratcheting effect’ on standard industry practices (Bertels and Peloza, 2008; Bondy et al.,

2012). As a result, firms face the dual challenge of being accountable to the CSP expec-

tations of stakeholders as well as to the need to monitor and benchmark competitors

who can raise the institutional stakes at any time (Bansal and Clelland, 2004; Bertels and

Peloza, 2008; Bondy et al., 2012; Handelman and Arnold, 1999; Waddock, 2008). There

is also a burgeoning consulting industry in CSP, a recognized driver of mimetic effects

(Waddock, 2008).

Finally, from a normative pressure perspective, while some evidence suggests a limited

role of industry associations in driving managerial adoption of CSP practices (Bertels

and Peloza, 2008; Bondy et al., 2012), there is growing evidence of a prevalence of