What is the relationship between social responsibility and financial performance?

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Design/methodology/approach
Practical implications
Originality/value
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Shafat Maqbool (Department of Commerce, Aligarh Muslim University, Aligarh, India)

Shabir Ahmad Hurrah (Department of Commerce, Aligarh Muslim University, Aligarh, India)

Abstract

Purpose

This study aims to investigate the relationship between corporate social responsibility (CSR) and financial performance from the bi-directional perspective.

Design/methodology/approach

The final sample for this study are 79 companies listed in the national stock exchange for a period of eight-years (2008–2015). Random effect panel regression was performed to examine the possible link.

Findings

The result shows that CSR has a positive impact on the contemporaneous and future financial performance of the selected companies. Further, the study shows that only social dimension has a positive and significant impact on concurrent and future financial performance. The results further validate slack resource theory as lagged financial performance has a positive and significant impact on CSR.

Practical implications

The strategic value of CSR indicates that it should be seen as a value-enhancing strategy, and therefore, incorporated with the broader corporate strategy of the company. Companies should not trade-off between CSR and financial performance, rather a strategic synchronization of CSR with corporate functioning is essential. This will pave a way to build a stakeholder-sense in the corporate entities.

Originality/value

The study comprehensively examines the relationship between CSR and financial performance from both “prospective” and “retrospective” framework. This bi-directional approach has received minimal attention in the Indian context.

Keywords

Environment
Social and governance
Corporate social responsibility
Indian companies
Prior and subsequent financial performance

Citation

Maqbool, S. and Hurrah, S.A. (2021), "Exploring the Bi-directional relationship between corporate social responsibility and financial performance in Indian context", Social Responsibility Journal, Vol. 17 No. 8, pp. 1062-1078. https://doi.org/10.1108/SRJ-05-2019-0177

Publisher

Emerald Publishing Limited

Abstract

Consumers are demanding that corporations become more socially responsible. Executives are challenged to maximize shareholders' returns with achieving a favorable corporate citizen status. The research problem was a gap in knowledge and understanding of the impact of corporate social responsibility on financial performance. This study used multiple linear regression to assess the relationship between key indicators of corporate social responsibility and financial performance from 372 corporations in the S&P500 in 2014. The theoretical foundation was Freeman's stakeholder theory. Environment, community, human rights, diversity, employee relations, product quality, and corporate governance were measures of social performance. Return on assets was used to measure financial performance. When corporate social responsibility was evaluated as an aggregate variable, a significant and negative relationship was found in the financial and material sectors. When corporate social responsibility variables were evaluated independently, employee relations and product quality in the healthcare sector, and community in the financial sector, were found to be positively significant. Environment, product quality, and corporate governance in the financial sector, and employee relations in the consumer and energy sectors, were found to be negatively significant. This study revealed that the relationship between some social variables and financial performance are significant, but not always in a positive direction. Practitioners, executives, and managers can use the findings to evaluate their firm's social position, develop strategies to address gaps, and undertake actions to enhance their firm's social performance, thereby creating positive social change in the community.

Recommended Citation

Lim, Christopher, "Relationship Between Corporate Social Responsibility and Corporate Financial Performance" (2017). Walden Dissertations and Doctoral Studies. 4529.
https://scholarworks.waldenu.edu/dissertations/4529

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COinS

While it is a reality that businesses aim to maximize profits, it is still essential that they maintain a good relationship with the social environment they operate in. Companies that can demonstrate reliance on society and invest in their social responsibilities tend to have a greater chance of success.

Social responsibility programs can boost employee morale in the workplace and lead to greater productivity, which has an impact on how profitable the company can be. Businesses that implement social responsibility initiatives can increase customer retention and loyalty.

What is the impact of CSR on financial performance?

financial disclosures. Corporate social responsibility performance is part of a company's reputation that gives investors an overall impression that managers are competent and trustworthy. Social initiatives also are effective marketing tools.

In addition to this, meeting their expectations and demands contributes to improving the performance of the company (Perrini et al., 2011). Similarly, Jensen (2002) shows a positive relationship between CSR and firm value. Consequently, CSR leads to an improvement in corporate financial performance.