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Morals or Economics? Institutional Investor Preferences for Corporate Social Responsibility

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This article presents the results of a study that analysed whether social responsibility had any bearing on the decision making of institutional investors. Being that institutional investors prefer socially aligned organizations, this study explored to what extent the corporate actions and/or social/environmental investments influenced their decisions. Our results suggest that there are specific variables that affect the perceived value of the organization, leading to decisions to not only invest, but whether to hold or sell the shares, and therefore having a consequential impact on the capital market’s valuation.
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Morals or Economics? Institutional Investor
Preferences for Corporate Social
Responsibility
Henry L. Petersen
Harrie Vredenburg
ABSTRACT. This article presents the results of a study
that analysed whether social responsibility had any bearing
on the decision making of institutional investors. Being
that institutional investors prefer socially aligned organi-
zations, this study explored to what extent the corporate
actions and/or social/environmental investments influ-
enced their decisions. Our results suggest that there are
specific variables that affect the perceived value of the
organization, leading to decisions to not only invest, but
whether to hold or sell the shares, and therefore having a
consequential impact on the capital market’s valuation.
KEY WORDS: social responsibility, institutional
investing, social–financial performance
Introduction
Milton Friedman, the late Nobel Laureate in eco-
nomics, famously said that ‘the social responsibility
of business is to increase profits’. For decades his
dictum served as a brake on the idea of corporate
social responsibility (CSR) becoming established in
business. Business leaders often used Milton’s argu-
ment that adopting notions of CSR would lead
society down the slippery slope to socialism. Now, it
seems that social responsibility and corporate citi-
zenship have become mainstream as evidenced by
the number of companies appearing to adopt the
idea in corporate practice. The reasons for this
trend of CSR going mainstream are varied but an
increasing number of investors being interested in
so-called socially responsible funds provide one
compelling incentive. According to Fortune Maga-
zine, socially responsible investments (SRI) account
for approximately $2.3 trillion of capital funds in US
markets (Demos, 2006). This provides a compelling
argument for why managers of these companies are
choosing to adopt CSR – corporate executives
generally respond to shareholders’ expectations
because failing to do so will hurt the company’s
market performance and by extension will hurt
executives’ remuneration (Mitchell et al., 1997;
Wood, 1991). However, there have been sugges-
tions that these shareholders may not be making such
investments based primarily on a moral or ethical
choice (Weigand et al., 1996) but may be making
choices based on self-interested economic reasoning.
This article presents the results of a research project
that builds on the work of Graves and Waddock
(1994) and of Cox et al. (2004) in identifying pref-
erences or moderators of decision making of insti-
tutional investors for CSR. The outcomes of this
analysis suggest that these investors are making
decisions based not so much on morals but more so
on how CSR adds economic value to the firm.
Following is a brief review of the literature, meth-
odology, results and summary.
Historically, shareholder inquiries and investor
demands on corporations were the stimuli that led to
the development of investor relations offices in For-
tune 500 companies (Rao and Sivakumar, 1999). The
development of this office created a common avenue
to facilitate communication between corporate
management and investors and increased the likeli-
hood that not only would shareholder interests and
inquiries be heard but that the messages from investors
were consolidated, integrated and acted on appro-
priately. Likewise, the investor relations office also
integrated and coordinated outgoing communication
which legitimated corporate actions (Wilmshurst and
Frost, 2001). Much of investor relations offices’
efforts are taken up with communicating how
Journal of Business Ethics (2009) 90:1–14 Springer 2009
DOI 10.1007/s10551-009-0030-3
corporate actions align with the interests of
shareholders and shareholder wealth (Preston and
O’Bannon, 1997).
Fifteen years ago Graves and Waddock (1994)
identified a positive link between institutional
investors’ stock preferences and socially responsible
organizations and suggested that this preference
was due in part to the long-term performance of
the investment. CSR, they argued, adds value to
the organization over the long term, attracting, in
turn, leading institutional investors. Graves and
Waddock’s finding was supported by Cox et al.’s
(2004) study of UK fund managers and funds the
management industry. The intriguing aspect of these
studies was the positive association uncovered
between investors seeking financial performance and
CSR. This positive association between financial
performance and CSR begs the question of what in
particular are these investors looking for? What did
they perceive or perhaps measure that was of eco-
nomic value in the companies that practiced CSR?
Economists have long argued that efficient capital
markets assess and reflect the true value of corpora-
tions via their stock prices over the long run (Fama,
1991). Of course in the short run, capital market
inefficiencies such as information asymmetries pro-
vide the basis for investment gurus’ claims of being
able to identify attractive investment opportunities.
However, over time, the true valuation of their
investments is eventually realized. In the case of
CSR, and its relationship to long-term financial
performance, many studies have been conducted
over the last decade. Since Griffin and Mahon’s
(1997) review of all the studies in the previous
25 years that discussed the social responsibility and
shareholder value link (Belkaoui, 1976; Clarkson,
1995; Knight and Pretty, 1996; Walley and
Whitehead, 1994), which found the specific impact
on the bottom line vague, several studies have sug-
gested a positive correlation between CSR and
corporate financial performance (Frooman, 1997;
Gilley, et al., 2000; Hamilton et al., 1993; Hillman
and Keim, 2001; Jones and Rubin, 2001; Knight and
Pretty, 1998; Kroll, 2001; Schaltegger and Figge,
1998; Turner, 1999; Waddock and Graves, 1997;
Westphal and Zajac, 1998). The meta-analysis
published in 2003 and conducted on all the pub-
lished studies in this area appears to provide the
statistical evidence for the positive correlation
between CSR performance and financial perfor-
mance (Orlitzky et al., 2003).
Porter and Kramer in their 2006 Harvard Business
Review article suggest that corporate senior managers
are strategically responsible to create value for both
shareholders and society. They argue that how one
measures societal contributions and whether added
societal value occurs may be hotly debated but
whether shareholder wealth is created can be ascer-
tained through one simple proxy, through the capital
markets. Jones and Murrel (2001) propose, however,
that this is only if the markets recognize or perceive
the CSR variable and identify the positive or neg-
ative linkage that occurs between social and eco-
nomic performance.
Despite the increasing evidence that a link appears
to exist between CSR and corporate financial per-
formance, little appears to be known about the
behavioural–economic mechanism at work ‘inside
the black box’ of this relationship. In other words,
we really do not know why CSR and corporate
financial performance appear to be correlated. In
the study reported in this article, we wanted to
probe ‘inside the black box’ of the CSR–corporate
financial correlational relationship and identify the
variables that were instrumental in institutional
investment decision making. In other words, we
wanted to explore why CSR and corporate financial
performance appear to be correlated. By analysing
perceptions of institutional investors of socially
responsible firms, we sought to explore not only
whether social responsibility had any bearing on
investment decisions but exactly what was behind
this relationship. Since that Graves and Waddock
(1994) had identified institutional investors as pre-
ferring such ‘socially aligned’ organizations, we
attempted to probe into institutional investors’
cognitions to identify why this might be so. We also
tried to understand to what extent the corporation’s
actions and/or social/environmental investments
influenced the institutional investors’ decisions and
by extension affected the capital market’s valuation
of the firm.
Methods
We explored the ‘black box’ between social per-
formance and financial performance and investor
2Henry L. Petersen and Harrie Vredenburg
decision making at the firm level. These types of
linkages are challenging to measure because of the
difficulty associated with separating out the phe-
nomena from its organizational context. For events
such as these, the case study method is suggested to
be an appropriate empirical research method (Yin,
1998). It enables the researchers to explore a phe-
nomenon under study in its organizational context
and answer the ‘what’ and the ‘how’ and ‘why’
associated with it. Hence in this study, we analysed
the perceived impact social responsibility strategies
had on financial performance from an institutional
investor’s perspective. From this qualitative data, we
generated a survey instrument which was adminis-
tered to institutional investment firms in Canada.
The following describes the methodology of the
research with phase 1 providing the details of the
exploratory study using the case study method and
phase 2 describing the testing of the conceptual
model with a survey.
Phase 1
This initial phase of the research was conducted
with institutional investors and their target firms
within a single industry, the oil and gas industry of
Canada. To investigate the perceptions of social
responsibility and firm value, we invited three firms
from the industry to participate in the study.
Taking the grounded theory (Glaser and Strauss,
1967; Stake, 2000) approach to studying the phe-
nomenon of CSR–corporate financial performance,
we were purposeful in our selection process. We
wanted to have target corporations that declared
themselves to be socially responsible. In today’s
markets, these characteristics were not difficult to
find. Organizations with such characteristics com-
municate their activities through both investor
relations and public relations offices. A recent
supplement in the New York Times (Tuesday, 1
November 2005) serves as an example. In this
supplement, Dow, Pfizer, Starbucks and other
organizations championed their activities associated
with CSR in an apparent effort to be recognized as
differentiating themselves from the rest of the
competitors in their respective industries. The three
major independent oil and gas corporations selected
for this study could also be considered exceptions
in their industry in their differentiation on the basis
of CSR performance.
The extraction of oil and gas, a natural resource,
can have a significant impact on local communities
and the surrounding natural environment. In most
cases this impact is negative. As a result and as a
consequence of past industry practices, some of the
firms within the oil and gas industry, such as the
firms in our study, have taken the initiative to offset
these negative outcomes through the advent of CSR
and sustainable development. Some of the organi-
zations in our study also operated in some of the
most politically volatile regions of the world, further
exacerbating the problems of being part of the oil
and gas industry. They operated in emerging market
regions that carry significant political and social risks,
characterized by operating environments within
economically depressed communities, the threat of
terrorism, guerilla activity, political instability, pov-
erty and a multitude of other social or environmental
ills. All in all, these corporations in our study claimed
that social and environmental issues were strategic
imperatives and, if mismanaged, could threaten their
organization’s survival. Hence, they initiated a
multitude of social and environmental activities that
were designed to align with their corporate strategy
of being socially responsible. Corporate investments
in education, health, public infrastructure and other
activities not related to their primary economic
interests were common.
We invited senior officers of the companies under
study and representatives of the majority holding
shareholder groups, institutional investors such as
pension funds, banks and mutual funds, to partici-
pate in in-depth interviews. The officers held senior
corporate positions and had investor relations
responsibility. The institutional investors and invest-
ment analysts associated with them who were
invited to participate were selected based on their
percent holdings of the oil and gas companies
selected for our study. These investment organiza-
tions were from the top 10 shareholding institutions
as a percentage of shares held. The investment ‘team’
responsible for the specific portfolios that held shares
in these respective organizations contributed either
an analyst or an investor for the interview in which
the individual’s participation would be representa-
tive of the team. In total, 18 individuals participated:
9 managers and 9 investors/analysts.
Morals or Economics? 3
Each individual participated in an interview that
lasted approximately 1 h. The discussion began with
the target corporation’s activities, its social respon-
sibility and any association or disassociation that
CSR either added shareholder value, eroded value
or was innocuous. Due care was taken to ensure the
interviewer did not impose definitions or any other
subjective matter that may influence the intervie-
wees and their responses. Participants discussed
activities, outcomes, values and cause and effect
relationships.
Following the interviews, we compiled the
interview data, documentation and other publicly
held information on the firms (Yin, 1993,1998)
for theoretical grounding (Glaser and Strauss, 1967)
including 1 year of discussions held on an Internet
discussion board for investors specifically for the
firms in this study. Using these data and principles of
triangulation, we coded the interviews to develop
categories representative of the linkages found
between CSR and firm financial performance.
These categories were then assembled to character-
ize the conceptual model that captured the percep-
tions these professionals have that of a company’s
social responsibility (Palmer and Pickett, 1999;
Morgan et al., 2002).
Phase 2
The second phase of the study was a test of the
conceptual model developed in phase 1 using a
survey instrument. Two types of questions were
utilized: moderator questions with a simple yes/no
or male/female response to collect demographic
information and scaled questions for the variables to
be tested. The scaled questions used a 7-point Likert
scale to measure respondents’ level of agreement
with the statements (Alreck and Settle, 1985). The
questions in the survey were formulated from the
comments made by the interviewees. These were
pilot-tested with individuals in the investment
industry and with members of a business school
academic finance area. An example question is
shown below.
Corporate social responsibility reduces the volatility of
a firm’s stock.
Feedback from the pilot test of the survey
instrument resulted in adjustments to meet concerns
and clear discrepancies. In total, there were 61
questions in the survey instrument, nine of which
related to demographic information and one col-
lecting self-perceived risk propensity. Seven ques-
tions gathered general information related to the
CSR–financial performance link. These questions
ranged from identifying a cause and effect relation-
ship such as social responsibility leading to superior
financial performance or superior financial perfor-
mance leading to social responsibility, to whether
the respondent would pay a premium for a firm that
declared itself to be socially responsible. We also
asked respondents directly whether they believed
that CSR was measurable on a firm’s valuation or
stock price.
The mode of delivery of the survey instrument
was online on the Internet. This was convenient for
respondents and facilitated a quick turnaround and
had the added benefit of minimizing costs (Bradford,
2001; Ray and Tabor, 2003). All potential partici-
pants were sent emails with formal invitations, a fax
and then followed-up with a telephone phone call.
The sample frame came from Canadian Invest-
ment Magazine which listed 160 potential respon-
dent investment firms. These potential respondent
firms were members of the Canadian Securities
Exchange, which is composed of 206 members. The
160 were considered representative of the group.
Multiple listings for the same organizations were
discovered in the list and the list was culled 156.
Individual representatives of the organizations were
solicited to participate in the survey. Thirty-one
completed the survey, which was a large enough
number to satisfy the assumptions underlying the
multivariate statistical analyses conducted, providing
a response rate of approximately 20%.
Results
Phase 1
The data collected from senior executives and insti-
tutional investment representatives were extensive
and rich. Discussions surrounded each individual’s
4Henry L. Petersen and Harrie Vredenburg
initial exposure to CSR, their thoughts about it, their
respective organization’s approach to it, and CSR’s
strategic implications with respect to costs/benefits.
For the development of the conceptual model,
interview transcripts were coded based on references
or associations interviewees made to social responsi-
bility. Then, each of the associations was analysed and
categorized based on likeness.
First, social responsibility was expressed as directly
correlated to financial performance. Both institu-
tional investors and managers identified specific
activities that they believed added value to specific
firms. Yet, even as they identified specific linkages or
activities that were construed to add value to the
organization, they did not engage in measuring the
outcome from those activities. Consequently, with
respect to stock valuation, investors did not identify
a multiple or premium that they would allocate or be
willing to pay for a socially responsible firm. Nev-
ertheless, they still believed that social responsibility
was positive and that these firms were positive assets
for their portfolios.
The perceived value of these firms’ stocks was
explored further. This exploration resulted in the
identification of specific functions that were thought
to add value. These were coined ‘social–financial
performance’ linkages. Based on relatedness, we
categorized the linkages into four general areas: risk
mitigation, generating market opportunities, accru-
ing capital market advantages and serving as a proxy
for quality management. In consideration of the
richness of the interview data, we provide a brief
description of these four areas with brief sample
statements from interviewees. Arrows within the
cognitive model do not represent cause and effect
relationships but simply associations.
Risk mitigation
Everything in business is investor perception because
they are putting a value on what they think is a future
value of your company. (Senior Executive)
Under this first subheading of risk mitigation, we
grouped all activities or outcomes that were con-
sidered risk mitigating. Figure 1represents the risk
component of the conceptual model. In this con-
ceptual frame, social responsibility was perceived as a
management strategy that decidedly reduced the
exposure of the respective firms to specific risks. The
mitigation of these risks was considered value adding
and therefore having a positive impact on the firm’s
financial performance. In other words, CSR was
considered a form of insurance.
The risks that were believed to be mitigated by
CSR are listed in Table Iwith example quotes from
our interviewees. Each risk identified had a corre-
sponding activity that was recalled to substantiate the
claim. That recall was correlated amongst both
executives and investor representatives. For instance,
socially responsible activities were believed to miti-
gate terrorism. The company’s work within the local
communities resulted in the local people taking a
greater interest in the firm’s well being. This was
Risk Management
Terrorism
Accessing
Resources
Public perception
and Negative
Media
Community
Problems
Government
Problems
Financial
performance
Figure 1. Cognitive model of managerial and investor perceptions for risks mitigated by social responsibility.
Morals or Economics? 5
especially apparent with respect to other stakeholders
that may seek to harm the organization’s employees.
Whether the potential offenders were rogue indi-
viduals or organized guerrilla groups, the people in
the local communities seemed to protect the orga-
nization and its employees from impending harm. As
a result, these firms realized an effective for insurance
through their local communities as a consequence of
the firm’s social responsibility activities.
CSR was perceived to mitigate risks associated
with negative government and community relations
thereby avoiding fines and/or local social issues.
Since these organizations were reliant upon having
access to the natural resources that they were
developing, CSR was considered enabling and pro-
vided for continued access. Also, public relations and
the organization’s reputation were believed to be
protected by CSR. Being written about in the
newspaper for environmental or social wrongs was
perceived as a potential risk which could result in the
public having a negative view of the organization
and negative consequences. CSR was believed to
hedge this risk.
Quality management
The senior company executives perceived that the
CSR strategies their firms implemented were per-
ceived to be reflective of superior corporate man-
agement. Quality management was not necessarily
seen as an outcome of CSR but executives did
believe that it was seen as a proxy for it. By declaring
themselves to be engaged in CSR and embarking on
social and or environmental activities, it was felt that
they would be perceived as being more transparent
and that stakeholders would believe that they not
only had integrity but that they were also compe-
tent managers. This message was especially targeted
towards shareholders and investors where corporate
governance issues were concerned.
The institutional investors interviewed were not
convinced of this benefit, and this variable of quality
management was not a factor for their decision
making regarding CSR. However, as will be seen in
the next section, the results of the survey would
suggest the opposite. Those institutional investors
who valued firms which had declared themselves to
be engaged in CSR also affirmed the company’s
managerial qualities such as competence and integ-
rity. Figure 2illustrates the conceptual model of how
social responsibility was believed to provide specific
characteristics that illustrated quality management
which results in superior financial performance.
Market opportunities
With respect to CSR, the attribution of being
socially responsible was believed to provide oppor-
tunities in the market not necessarily available to
those that were not conceived as being socially
responsible. Items such as enhanced community and
government relations were believed to provide
new market opportunities, especially internationally.
There was also a consensus that employees were
happier with firms that were CSR-oriented com-
panies, leading to a decrease in employee turnover.
There was also the belief that because of social
responsibility, their firms were considered a pre-
ferred employer. As a result, they therefore were able
to be more selective in their hiring practices resulting
in superior employees. Figure 3illustrates the con-
ceptual model for market opportunities.
Capital markets
For senior executives in this study, the capital mar-
kets were perceived to provide specific advantages to
TABLE I
Three of the independent variables, ‘market opportunity’, ‘risk management’ and ‘quality management’, were run
with the dependent variable that these firms were considered an asset for a portfolio
Dependent variable: firm
as an asset for portfolio
Mean Pearson Correlation Beta (b)R
2
R
2
-Adjusted F-statistic t-Value pn
Quality management 3.87 0.608 0.446 0.534 0.482 10.319 2.294 0.000 31
Risk management 4.16 0.577 0.354 3.150
Market opportunities 3.42 0.425 0.139 0.927
6Henry L. Petersen and Harrie Vredenburg
the CSR-oriented firm. In particular, they believed
that they attracted a diversity of investors, and
by region, investment horizon, ethical investment
practice and risk preference. This in turn reduced
stock price fluctuations. As a preferred investment
choice and through the attraction of long-term
investors, the volatility of their share prices were
reduced since their stocks were not so readily ‘flip-
ped,’ based on day-to-day earnings, industry events
or crises.
Some of the investors in the study affirmed the
findings that there is the potential for reducing
the volatility of the firm’s stock. Although the
CSR-oriented firm was perceived to attract specific
types of investors, the investors in this study were
hesitant to suggest that investor decision making
could be influenced in this manner. The mental
perspective for how the capital markets and social
responsibility emerge regarding value adding is
illustrated in Figure 4.
Figure 5illustrates the mental map in its entirety.
The one variable we did not discuss but repre-
sented in this model was that CSR could represent a
risk. Both managerial and investor representatives
expressed how being socially responsible could be
risky. The intentions here were to emphasize that if
the firm’s actions did not line up with its declaration
of being socially responsible, there was an expecta-
tion of trouble or punishment. Hence, exposure
carried some risk.
Phase 2
All but five of the survey respondents managed a
portfolio in excess of C$50 million. Twenty-nine of
the respondents were male while two were female.
Multiple regression analyses were conducted on the
survey data to test our models. A Cronbach aof
0.7677 reinforced the reliability of the scales used.
Market
Opportunity
Int’l Market
Government
Relations
Competitiveness
Employees
Community
Relations
Figure 3. Cognitive map of how social responsibility was perceived to create market opportunities.
Quality
Management
Integrity
Competence
Transparency
Financial
performance
Figure 2. Conceptual model of how social responsibility resulted in a perception of transparency, integrity and
competence. These characteristics were believed to illustrate quality management that resulted in positive financial
outcomes.
Morals or Economics? 7
The regression model tested could be expressed as: a
firm as a valuable socially responsible asset in a
portfolio is a function of the firm’s quality man-
agement, its risk management, its market opportu-
nity and its capital market status or opportunity.
Three of the independent variables were found to be
correlated with the dependent variable as indicated
in Table I. Of the variability in the dependent var-
iable, 48.2% was explained by the model with a
significance of p<0.005. Capital market status or
opportunities as an independent variable proved
to be inconclusive in the survey, as its relationship
Capital Market
Opportunity
Type of Investor
(Investment
horizon,
Region, Risk)
Perception
Volatility
Figure 4. Cognitive associations for opportunities gleaned from the capital markets as a result of CSR.
Corporate Social
Responsibility
CSR as a Risk
Exposure
Risk
Perception of Value
Market
Opportunity
Proxy for Quality
Management
Capital Markets
Access to
resources
Headline Risk
Insurance
Terrorism
Comm.
Relations
Gov.
Relations
Public
Perception
Int’l Markets
Employees
Gov. Relations
Comm.
.Relations
Integrity and
ethics
Competence
Transparency
Volatility
Perception
Type of
Investor
Figure 5. Cognitive map generated from senior executives and institutional investors regarding corporate social
responsibility and financial performance. The arrows do not imply cause and effect but rather they only state an
association.
8Henry L. Petersen and Harrie Vredenburg
with the dependent variable was not statistically
significant.
Risk
In the area of risk mitigation, there were several
associations revealed between engaging in CSR and
acquiring specific risk mitigating benefits. For inves-
tors in the survey, risk mitigation was an important
aspect and CSR had insurance-like qualities that our
professional groups attested to, diagrammed in
Figure 6, with corresponding correlations.
The multiple regression results are listed in
Table II for this model. The figure shows the
regression model for CSR and its value as it pertains
to risk and the corresponding correlations with a
statistical significance of p<0.005 and an R
2
(adjusted) of 0.700.
Everything in business is investor perception because
they are putting a value on what they think is a future
value of your company. And that future value is based
on a whole lot of aspects and whatever they perceive
to be important, because every investor will have
something different. For some it’s history and for some
it’s future. But at the end of the day if they can look
you in the eye and they look at your senior manage-
ment and they say, ‘if what you’re telling me is good
and fine and is true, then if there is a problem in [this
country] I am not about to sell your stock because I
think [the company] is at risk. But if you haven’t built
[the CSR] up and then suddenly there is a problem in
[this country] and they hit your stock hard, your
company is at risk and every project you have out
there is at risk’. (Quote from a Senior Executive)
In terms of the CSR reporting and targeting investors,
my view was that was a success. The response from
investors was that they believed the story. They had a
document in front of them; they could read about
what [our company] was doing in [this country] and
Price Waterhouse Coopers were offering an opinion
They are fairly comprehensive. Investors came back
and said, ‘fine in terms of what you are doing on the
Risk Management
p< 0.005
Terrorism
Accessing
Resources
Negative Media
Community
Problems
Insurance
0.363
0.637 0.592
0.592
0.426
Public Perception
Government
Problems
0.471
0.537
Figure 6. Cognitive model of CSR and the risks believed to be mitigated by it, with associations characterized by the
correlations with a significance of p<0.005.
TABLE II
Multiple regression of the independent variables ‘mitigating negative media’, ‘terrorism’, ‘community problems’ and
‘government relations problems’, ‘being denied access to resources’ and of ‘acting as a form of insurance’ against the
dependent variable of CSR taking the form of risk management
Dependent variable:
risk management
Mean Pearson
correlation
Beta (b)R
2
R
2
-adjusted F-statistic t-Value pn
Negmedia 4.97 0.363 0.308 0.772 0.700 10.67 2.160 0.000 31
Terrorism 2.83 0.592 0.503 3.727
Resources 3.47 0.426 0.347 2.599
Community problems 5.00 0.592 0.003 0.020
Government problems 4.33 0.537 0.021 0.130
Public perception 4.17 0.471 0.030 0.210
Insurance 3.63 0.637 0.690 5.082
Morals or Economics? 9
ground and contributing to the lives of the average
person in that part of [the country], you are doing
good things. (Quote from a Senior Executive)
Quality management
As depicted in Figure 2and with correlations shown
in Figure 7, management believed that their
engagement in socially responsible activities exhib-
ited superior management capabilities. This not only
made them trustworthy but also demonstrated
competence and superior performance.
Table III lists the correlations for quality of
management with respect to transparency, integrity,
competence and corporate governance. The model
explains 62.7% of the variability of the dependent
variable and is statistically significant (p<0.005).
Market opportunity
The answer is complicated. I would say in the most
straight forward way [that] it is to their advantage to both
be and be perceived to be socially responsible because if
they are known to be [socially responsible] then it makes
it easier for them to be in [geographic] territories that
they want to be in and find easier access to [resource]
markets. (Quote from an Investor/Analyst)
With respect to competitiveness and opportuni-
ties in the market, CSR strategies were believed to
provide specific advantages in resource markets. The
executives in this study did not believe that what
they were doing was window dressing or was a
public relations exercise. They saw their approach as
strategic and part of the fabric of the organization.
They saw CSR as part of their identity and practices
and that this resulted in specific strategic advantages,
one being access to foreign government access-
restricted resource markets. The companies’ insti-
tutional investors also recognized firm-specific
advantages from the firms in question, citing specific
activities and potential benefits. Improved commu-
nity and government relations in foreign jurisdic-
tions were believed to provide new opportunities,
especially in emerging markets in the economically
developing world. Also, there was a consensus in
that employees were happier with firms that were
CSR-oriented; they had a lower turnover compared
to the industry average; and finally, they believed
that they were competitively superior because of
their people and the opportunities that opened up
Quality
Management
p< 0.005
Integrity
Competence
Transparency
Proxy for good
corp. governance
0.627
0.620
0.772
0.649
Figure 7. Cognitive model of quality of management with associated characteristics and respective correlations.
TABLE III
Results of the multiple regression of integrity, transparency, competence and a proxy for good corporate governance
on quality of management
Dependent variable:
quality management
Mean Pearson correlation Beta (b)R
2
R
2
-adjusted F-statistic t-Value pn
Indic integrity 3.87 0.772 0.600 0.677 0.627 10.569 2.922 0.000 31
Transparency 3.87 0.627 0.034 0.202
Competence 3.84 0.649 0.323 2.236
Proxy 3.29 0.620 0.028 0.157
10 Henry L. Petersen and Harrie Vredenburg
due to their CSR alignment. Table IV shows the
multiple regression statistics.
The model depicted here explains 72.1% of the
variability in the dependent variable with all inde-
pendent variables entering the regression with a
significance of p<0.005. The cognitive model,
depicted in Figure 8, contains the correlations from
the multiple regression.
Capital markets
Lastly, for senior target firm executives, the capital
markets were perceived to provide advantages to
the CSR-oriented firm. In particular, the senior
executives believed that by attracting a diversity of
investors, by region, investment horizon, ethical
investment practice and risk preference, they
reduced their company’s stock volatility. They
believed that since they were seen as a preferred
investment choice they would receive a more stable
share price due to the type of investor that invested
in their type of firm and that their stocks were not
so readily ‘flipped’ based on day-to-day earnings,
industry events or crises. Some of the institutional
investors in the study affirmed the corporate exec-
utives’ perceptions that there is the potential for
reducing the volatility of the firm’s stock. Others,
however, suggested that reducing volatility was not
necessarily a good thing. The survey results were not
conclusive on this point. Although the CSR-
oriented firm was perceived to attract specific types
of investors, there was no evidence from the survey
respondents that this was advantageous to the firm.
With respect to paying a premium for shares of a
CSR-oriented firm, the respondent mean of 2.97,
on a 7-point Likert scale, was indicative of respon-
dents not paying a premium. Nine of the 31 indi-
cated they would pay a premium for CSR with one
that strongly agreed. With respect to risk taking, the
group was on average at 3.60 on the Likert scale or
near the mid range between risk taking and risk
averse. With respect to whether investors perceive
that CSR-oriented companies are assets, which they
would include them in their portfolios, the mean
was 3.81 with 13 that disagreed and 17 agreeing and
TABLE IV
Multiple regression statistics for the dependent variable ‘market opportunity’ and the independent variables of ‘being
more competitive’, ‘having greater access to international markets’, ‘superior community relations’, ‘superior govern-
ment relations’ and ‘having happier employees’
Dependent variable:
market opportunity
Mean Pearson
correlation
Beta (b)R
2
R
2
-adjusted F-statistic t-Value pn
Competitiveness 3.23 0.803 0.402 0.768 0.721 16.54 2.235 0.000 31
International markets 3.35 0.661 0.150 1.015
Community relations 5.00 0.504 0.367 1.992
Government relations 4.29 0.741 0.054 0.315
Employees 4.10 0.583 0.173 1.295
Market
Opportunity
p< 0.005
Int’l Market
Government
Relations
Competitiveness
Employees
Community
Relations
0.384
0.547
0.625
0.670
0.756
Figure 8. Cognitive map of the dependent variable, market opportunities, and their corresponding associated variables
and correlations.
Morals or Economics? 11
one missing response. For those that saw CSR as a
risk in and of itself, the mean was 3.65 with 15
disagreeing and 16 agreeing.
With respect to the questions of whether financial
performance leads to socially responsible behaviour
(FP to SP) or socially responsible behaviour leads to
financial performance (SP to FP), more respondents
believed that social performance led to financial
performance than the other way around. Table V
shows the statistical distribution of responses to the
social performance–financial performance questions.
With respect to whether investors perceived that
CSR companies were assets that they would include
in their portfolios, the mean was 3.81 with 13 that
disagree and 17 agreeing and one response missing.
For those questions regarding CSR as a risk in and of
itself, the mean was 3.65 with 15 disagreeing and 16
agreeing.
Discussion
In this study, we wanted to get inside the ‘black box’
of the CSR–corporate financial performance rela-
tionship. Previous studies had provided evidence of a
positive correlation between CSR and a firm’s
economic performance but none had probed into
why there may be such a relationship. We explored
through qualitative interview-based research with
corporate executives and institutional investors as
well as quantitative survey-based research with insti-
tutional investors why companies engage in CSR
and what effect it might have on a firm’s economic
value as measured by share price. There were several
points of interest. With the limited group analysed
here, there is evidence that socially responsible
behaviour on the part of a corporation appears to
add economic value and that these social responsi-
bility efforts are recognized and rewarded by capital
markets. CSR appeared to be valued not in its
own right but rather as a means of achieving risk
mitigation or enhancing the company’s access to
resources. In other words, investing in local com-
munities in education, medical facilities or other
community, socially oriented projects that were
unrelated to the business of the company was an
important activity if this activity was coupled to
an economic outcome such as reducing terrorism,
increasing market opportunities or reducing the risk
of being cut-off from resources. Institutional inves-
tors who found value in the company’s community
or social responsibility activities were able to recount
specific scenarios that they believed to result in
either a financial benefit or to stave off a potential
risk. Management’s efforts to share stories of com-
munity investment and to communicate the details
of these projects to their investors were significant
especially if the activities were seen as of a strategic
nature rather than philanthropic (an activity of
philanthropic nature would be one where no linkage
could be identified back to the business).
The institutional investors in this study were for
the most part unwilling to pay a premium for shares
of companies that engaged in CSR but did favour
holding shares in companies that engaged in CSR.
As we have shown in our analysis, various company
attributes are productively impacted in companies
that engage in CSR to lead to economic value – for
example, employee turnover, stock volatility. Future
studies might try to measure the specific effect of
CSR on these variables directly using capital market
mechanisms. Future studies might also inquire into
the role of individual leaders, especially chief exec-
utive officers, who lead companies engaged in CSR.
What prompts them to get engaged and how do
they create a CSR culture in their organization?
The adoption of and investment in development
of competencies for implementing CSR strategies
add economic value to the firm through enhanced
competitiveness, greater resource market opportu-
nities, better government and community relations
that both mitigate potential risks and create a value
TABLE V
Distribution of responses defining whether social performance led to financial performance or vice versa
nMinimum Maximum Mean SD
Social leads to superior financial performance 31 1 6 3.19 1.579
Financial leads to superior social performance 31 1 6 2.84 1.485
12 Henry L. Petersen and Harrie Vredenburg
laden environment for employees that in turn
remain committed to the firm. CSR also appears to
communicate to capital markets a secure investment
vessel. CSR, as a risk mitigating strategy, signals
competence, ethics and trustworthiness. It commu-
nicates protected earnings and growth and seeks a
diversity of investors that reduces share price vola-
tility. CSR is also believed to be a proxy for
ethical, trustworthy corporate governance. The days
of Enron and WorldCom are still fresh and it appears
that this trend in CSR communicates trust, com-
petence and honesty that may instil confidence
within the markets.
By way of qualitative and quantitative studies of
corporate executives and institutional investors, this
article has attempted to inquire into why there
appears to be a link between CSR and corporate
financial performance. What we found was that
corporate executives believed that their CSR actions
led to economic value for their firm. The institu-
tional investors in this study largely confirmed this
perspective. Economic value appears to be derived
for the company through corporate risk reduction
from negative social and environmental events,
enhanced access to resource markets and enhanced
access to employees.
Do our findings mean that corporate executives
engaging in CSR lack morals or are amoral? Does it
mean they are engaging in CSR ‘for the wrong
reason’? We do not think so. In our interviews we
encountered executives who passionately believed in
the CSR activities their companies were engaged in.
We encountered executives who worked assidu-
ously to establish and maintain an organizational
culture of CSR. But they also acknowledged that if
capital markets did not recognize their CSR efforts
as impacting corporate economic performance they
would not be able to engage in the CSR activities.
Their organizations, they recognized, were bound
by the discipline and logic of the market. But the
market, fortunately, allowed them to exercise their
personal, moral and ethical beliefs.
Would Milton Friedman be saddened by the
increase in CSR practices in industry today? Would
he think that we are heading down the slippery slope
to socialism? We do not think so. We think Fried-
man, were he alive today, would recognize that
societal standards for business practice have changed
since the 1960s when he made his famous statement
and that in today’s business environment, especially
for firms operating in the resource sector or oper-
ating in emerging markets, companies must engage
in focused CSR in order to make profits and succeed
in the capital marketplace.
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Henry L. Petersen
School of Business and Economics,
Seattle Pacific University,
Seattle, U.S.A.
E-mail: hlp@spu.edu
Harrie Vredenburg
Haskayne School of Business,
University of Calgary,
Calgary, Canada
E-mail: harrie.vredenburg@haskayne.ucalgary.ca
14 Henry L. Petersen and Harrie Vredenburg
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