Rethinking the Corporate Financial–Social Performance Relationship: Examining the Complex, Multistakeholder Notion of Corporate Social Performance

• Published date: 01 September 2014
• Date: 01 September 2014
• DOI: http://doi.org/10.1111/basr.12035

Rethinking the Corporate

Financial–Social Performance

Relationship: Examining the

Complex, Multistakeholder

Notion of Corporate

Social Performance

JAMES WEBER AND JEFFREY GLADSTONE

ABSTRACT

The corporate financial performance (CFP)–corporate

social performance (CSP) relationship has been investi-

gated many times over the past few decades, yet the

notion of CSP has generally been understood to be a

single, monolithic aspect of corporate strategy. This

article examines the common CFP–CSP understanding in

three distinct ways: (1) by extending the evaluation of

CSP as a complex, multistakeholder notion; (2) by ana-

lyzing CSP’s relationship with the firm’s financial perfor -

mance at a given point in time as a lead (independent)

variable in the relationship and as a lag (dependent)

variable in the relationship; and (3) for both positive and

negative stakeholder relationships. The results indicate

that the employee emerges as the stakeholder group

James Weber is a Professor of Business Ethics and Management at Duquesne University,

Pittsburgh, PA. E-mail: weberj@duq.edu. Jeffrey Gladstone is a Sustainable MBA Graduate

Student at Duquesne University, Pittsburgh, PA. E-mail: jeffreygladstone@comcast.net.

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Business and Society Review 119:3 297–336

© 2014 Center for Business Ethics at Bentley University. Published by Wiley Periodicals, Inc.,

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most strongly linked to CFP, followed by the consumer

stakeholder. The natural environment and the commu-

nity stakeholder group are minimally associated with

CFP. General support is found for a CFP–CSP relation-

ship at a given point in time, with some support found

for CSP as a lead (independent) variable. When used as

a measure of financial performance, return on assets is

more often correlated with CSP than is return on equity.

These results and their implications are discussed.

INTRODUCTION

As early as the 1930s, the moral obligations of managers as

trustees for their business organization were questioned

by corporate critics, discussed by business executives and

debated by scholars (Dodd 1932). The discussion escalated in the

1950s and 1960s, with Milton Friedman’s view often representing

one side of the debate—that the only responsibility of business is

to maximize the wealth of its stockholders (Friedman 1970)—and

Frank Abrams’ view representing the other—that managers must

act as professionals and balance the multiple stakeholder claims

made by stockholders, employees, customers, and the public

(Abrams 1951).

The notion of corporate social performance (CSP) has once

again risen to prominence amid multiple financial, environmental,

and ethical corporate disasters and questionable performance.

The explosion of BP’s deepwater drilling well in the Gulf of Mexico,

which resulted in loss of life and billions of dollars of economic

and environmental damage along the Gulf Coast and serial

product recalls (a total of two dozen from 2009 through 2011) by

traditionally reliable corporate social citizen Johnson & Johnson,

among others, has all created a high level of uncertainty regarding

the social performance of many business organizations.

Scholars have explored one dimension of this hotly debated

moral question by examining, assessing, and measuring corporate

financial performance (CFP) in relation to CSP (see reviews by

Frooman 1997; Griffin and Mahon 1997; Orlitzky and Benjamin

2001; Roman et al. 1999; van Beurden and Gossling 2008; Wu

2006). While meta-analyses and summary reviews have thus far

298 BUSINESS AND SOCIETY REVIEW

reported mixed results, overall, there does seem to be a link

between CFP and CSP (Margolis and Walsh 2003; Orlitzky et al.

2003), though exactly what that link is, the casual direction of

this relationship, and how it functions remain difficult to pin

down and evaluate.

What does seem evident from our review of previous investiga-

tions of the CFP–CSP relationship is the overly simplistic under-

standing and treatment of the notion of CSP. Past research, often

plagued by limitations imposed by a clumsy measure of CSP (as

identified by Brammer and Millington 2008) and criticized as

variant, complex, and uncertain (Fu and Jia 2012), prompted

critics to call for greater specificity in the assessment of CSP within

the CFP–CSP framework (Margolis and Walsh 2003; Rowley and

Berman 2000) and to recommend avoiding the lack of conceptual

clarity and measurement difficulty associated with composite mea-

sures of CSP (Margolis and Walsh 2003; Orlitzky et al. 2003).

CSP is a complex, multidimensional artifact that presents chal-

lenges to measuring such a nebulous variable, particularly in

conjunction with other variables (including CFP). Rowley and

Berman (2000) criticize single-dimensional operationalizations of

CSP, citing the limitations of exploring the impact of single pro-

grams or actions, such as air pollution, illegal activities, or product

recalls. A robust, yet clearly distinguishing, construct must be

used, such as individual stakeholders and their relationship with

the firm as it affects both social and financial performance.

This article is therefore intended to extend our current under-

standing of the relationship between CFP and CSP in three sepa-

rate but potentially important ways: (1) by extending the

evaluation of CSP as a complex, multistakeholder notion; (2) by

analyzing CSP’s relationship with the firm’s financial performance

at a given point in time as a lead (independent) variable in the

relationship and as a lag (dependent) variable in the relationship;

and (3) for both positive and negative stakeholder relationships.

This investigation uses the KLD Research & Analytics, Inc. data-

base to measure the correlation between CFP and CSP by isolat-

ing the effects of individual organizational stakeholders, including

the natural environment, employees, consumers, and the commu-

nity. This investigation further examines how management of

these stakeholder relationships can affect the firm’s financial and

social performance relationship.

299WEBER AND GLADSTONE