I had several calls yesterday on Steven Pearlstein's Washington Post piece on social responsibility. I think the article is a solid and accurate one, written by someone who has obviously done some homework. (I should note here that Pearlstein praises Haas professor David Vogel's new book).
That said, I think Pearlstein misses some important aspects of the question. Much of the article frames the question as an ideological one. A picture of Ben Cohen, a mention of Milton Friedman - that's fine, and certainly shows the philosophical side of the debate.
But the question of whether social responsibility has financial impacts is an empirically testable proposition. And it has been tested. The most comprehensive work so far is Marc Orlitzky's meta-analysis (full study is here). Orlitzky finds a statistically significant positive effect, although it is much stronger at the firm level than at the stock market level. His analysis is the largest and most statistically sophisticated attack on the question to date, and one of only a very few directly addressing questions of publication effects and causality (does social responsibility drive business performance, or is it the other way around?) . Other recent studies like Tsoutsoura's find positive associations as well.
There are virtually no studies showing that social responsibility hurts companies financially. Economist Arthur Laffer recently released a study intended to take the other side. Although touted as a refutation, if you read the actual study it finds "there is no correlation between how well a firm performs its traditional business roles and where it is ranked in the Business Ethics survey." That is to say, they couldn't find a cost either.
But Laffer makes one point I strongly agree with. "Future efforts to evaluate the effect of CSR initiatives on profitability," he argues, "should be careful to tease out the specific financial impact of CSR initiatives..." In other word, let's narrow the focus and get specific about issues. Orlitzky argues, and successfully shows, in my opinion, that the concept of social responsibility can be expressed statistically. But it is still a very broad definition. Like Laffer, I would much rather zoom in on specific variables.
Doing so will not bring much comfort to critics of corporate social responsibility, however. Mr Pearlstein, here are some people you should consider calling:
- Nadja Guenster at Erasmus University in the Netherlands finds a positive association between environmental performance and operating performance over a long time period (see post below).
- Marc Orlitzky, who is linked above.
- You could call Charles Lee and David Ng at Cornell University. They find that global securities markets take corruption levels into account when valuing stocks.
- Paul Gompers at the Harvard Business School has shown that good corporate governance was associated with superior investment performance over time.
- Or Stuart Hart, whose work has shown that environmental policies matter for stock market valuations, and whose recent book is a careful and thoughtful analysis of the issue.
I would like to show you counterexamples: carefully-done studies that call these findings into question. But I have looked, and I cannot find them. Corporate social responsibility is not gaining momentum because of some ideological debate. It is gaining momentum because there is considerable empirical evidence that it matters.
I should also note that none of this suggests social investors have a performance advantage over other investors. Social investment studies show competitive performance, not outperformance over time (although the folks at KLD might disagree). If anything, the studies cited above suggest that markets are already aware of at least some of these issues, which would make it tough for a social approach to add performance on its own.