Corporate Social Performance

Corporate social performance and corporate reputation have been linked in numerous theoretical and methodological configurations. Corporate social performance is typically defined as a commercial organization’s arrangement of principles of social responsibility, its processes of social responsiveness, and its policies, programs, and observable outcomes as they apply to society. Research on the relationship between corporate social performance and corporate reputation tends to use a more restrictive view of corporate social performance as observable outcomes to society. And within this limited scope researchers have tended to find a positive relationship between corporate social performance and reputation in the United States.

Both corporate reputation and social performance are socially constructed, intangible constructs that vary over time and across institutional environments. Yet they share characteristics that link them theoretically as well as practically. Corporate social performance has been linked to corporate reputation as an antecedent and as a way to measure corporate reputation. In addition, corporate reputation may prime how the public perceives or evaluates corporate social performance. Often, corporate reputation is an important step in the process by which corporate social performance influences corporate financial performance. This entry briefly discusses the construct’s domain, including its nomological network and measurement, key theories, and findings.

What Is Corporate Social Performance?

A source of confusion is the term corporate social performance itself. Although corporate generally refers to the actions of for-profit firms, corporate social performance certainly can be expanded to include the actions of nonprofit organizations as well. Social refers to the effects on society. Yet there has been some inconsistency in who is included in society. For example, are shareholders and, thus, corporate financial performance included in society? A stakeholder approach provides a framework and structure for examining actions and impact. Thus, shareholders and corporate financial performance are elements of corporate social performance, not its consequences.

In addition, the word performance causes some confusion in the literature. Performance can be the corporate actions and process as well as the outcomes of those actions, such as financial performance. Herein lies a critical concern in the epistemology and broader (managerial) understanding of corporate social performance. Yet few articles clearly address this potential tautology. In addition, both types of performance require attention to understand the implications of corporate policies and activities for society, or for the corporation’s bottom line. Recent research on the environmental components of some environmental, social, and governance (ESG) measures has found that both processes and outcomes are measured and contained in the scores. However, only processes affect financial performance.

An interesting idea is that society benefits not only when companies amplify or increase their corporate social performance strengths but also when companies decrease their corporate social performance weaknesses. However, decreases in corporate social performance weaknesses are not considered to offset or compensate for a lack of improvement in corporate social performance strengths.

Nomological Network

Corporate social performance is related to numerous constructs including, but not limited to, corporate social responsibility, corporate citizenship, corporate social activities, and corporate social responsiveness. These constructs share a recognition that corporate actions influence those beyond the company’s proscribed boundaries. Corporate social responsibility refers to the obligations that companies have to those within and beyond their boundaries. It is often defined as voluntary firm actions to enhance a social situation. Corporate citizenship refers to the obligations incurred by companies as members of society. Thus, citizenship positions companies as part of society, as opposed to outsiders affecting society. In addition, corporate citizenship connotes companies replacing government spending to solve social ills. Corporate social activities refer to specific corporate actions and their audience, such as philanthropy, pollution abatement, and political activity. Corporate social responsiveness refers to the quality of a company’s answer to society’s demands.

Measurement

Many ways exist to measure corporate social performance. Some of these include customer and consumer outcomes, employee outcomes, changes in stock price and other investor outcomes, disclosure, environmental outcomes, supplier outcomes, criminal conduct, and reputation outcomes. In addition, several organizations have developed overall corporate social performance measures and ratings, such as the Corporate Responsibility Association’s “Best Corporate Citizen” ratings and the CSRHub. Measures include company self-reports, stakeholder self-reports, objective data, and third-party assessments. Both measurement and analysis can be at the individual or firm level. In addition to self-reports and surveys, online assessments have created new opportunities for measuring outcomes. Primary stakeholders include customers, employees, and investors.

Customer and Consumer Outcomes

Customer and consumer outcomes refer to corporate performance implications such as product and/or service quality, reliability, and safety. Organizations such as Consumer Reports and J. D. Power provide independent ratings that consumers and customers can use to evaluate the degree to which companies are responsive. In addition, companies and their market research or marketing agencies survey customer attitudes, satisfaction, and values.

Employee Outcomes

Employee outcomes refers to corporate performance implications for both employees directly on the company payroll and the employees of subcontractors and vendors. Employee outcomes, such as wages, benefits, and safety, affect employee experiences and the organization’s attractiveness. Companies may seek to be an “employer of choice” to attract valuable human capital or with the expectation that satisfied employees will provide better customer experiences. Consumers, researchers, and social monitors are increasingly interested in the use of child labor and slave labor as well as institution of worker safety measures by vendors and contractors. Numerous media ratings, such as Fortune’s “100 Best Companies to Work for” and Working Woman’s “Best Places for Working Mothers,” and social monitor ratings, such as the Human Rights Campaign’s “Corporate Equality Index,” provide archival, longitudinal data sets. In addition, researchers have surveyed current and past employees.

Changes in Stock Price and Other Investor Outcomes

The third primary stakeholder is composed of investors who benefit from dividends and share price appreciation. Researchers in accounting, finance, and management have performed event studies to examine stock market reactions to both positive outcomes, such as awards, and negative events, such as investigations for misconduct. Underlying this research is the assumption that share price represents the net present value of future cash flows. Positive or negative events change stakeholders’ relationships with and supportive behavior of firms, altering the net present value of future cash flows and thus the share price. The reputational penalty, or decrease in the value of shares after the direct costs of misconduct are factored out, can be substantial. Other financial and accounting measures include profitability, Tobin’s Q ratio, and sales. Tobin’s Q ratio, developed by economist James Tobin, is calculated as the company’s market value divided by the replacement value of its assets. Thus, it is a measure of the company’s intangible versus tangible assets. In theory, strong corporate social performance should increase the company’s intangible assets, which would be reflected in its Tobin’s Q ratio.

Disclosure

Academics in accounting, communications, and management have measured corporate social performance using corporate disclosure. Disclosure can be a voluntary or a mandatory reporting of corporate behavior such as environmental performance, human rights, and political activity. The U.S. Securities and Exchange Commission has required increased disclosure of environmental risks. Institutional investors and rating agencies are among the audiences requesting greater disclosure to reduce investor risk. Some researchers focus on formal reports, such as annual reports or corporate social performance reports, while others consider websites and social media. In addition to basic word counts are analyses measuring disclosure quality and tone.

Recently, scholars have realized that more disclosure may not equal better social performance. Disclosure may be a way to manage the issue in terms beneficial to the company. High-volume disclosure may be a tactic to confuse or even hide information from stakeholders. A company’s stakeholders may not be able to discern the important information from the superfluous.

Environmental Outcomes

Environmental outcomes are a key element of performance for the communities surrounding corporate facilities and for green consumers, who consider these outcomes in their purchasing decisions. Measures include objective pollution data such as the U.S. Environmental Protection Agency’s Toxics Release Inventory, corporate environmental reports, nongovernmental organization reports, and subcomponents of ESG reports.

Supplier Outcomes

Suppliers also may be affected by corporate social performance via an inability to pay on accounts.

Criminal Conduct

Organizational criminal conduct is not mutually exclusive from other corporate social performance outcomes. Rather, it is a category of social performance that spans outcomes for various stakeholders, such as customers and investors. Criminal activities include fraud, illegal dumping, and bribery. The empirical accounting and management literature has amassed numerous event studies and content analyses.

Reputation Outcomes

Reputation outcomes, of course, are the ones most directly related to this volume. Among the reputation measures are Fortune’s “Most Admired Companies” lists; the Reputation Institute’s RepTrak, RepTrak Pulse, and Reputation Quotient; and Management Today’s “Britain’s Most Admired Companies” survey.

Additional Community Outcomes

Researchers and stakeholders also have measured other community or social outcomes such as taxes paid and corporate giving. The amount of taxes that companies pay is related to their corporate citizenship—that is, being a citizen in society. Taxes are receiving renewed attention due to overt tax reduction strategies such as foreign “shell” subsidiaries and corporate inversion, or shifting a company’s headquarters to a lower-tax-rate country via merger and acquisition. Tax data are reported in annual reports and can be found in databases such as Compustat.

Companies also create corporate foundations and make voluntary charitable contributions to support causes from the arts and education to health care. Details on corporate foundations are available through their tax filings and sources such as the Foundation Center. Details on corporate direct giving can be found in the Chronicle of Philanthropy and reference books.

Omnibus or Multidimensional Outcomes

Recently, researchers have been able to use third-party measures of social performance, most of which were designed to facilitate social investing. Among the third-party outcomes are social monitors and omnibus or multidimensional measures of ESG performance, such as the Kinder, Lydenberg, Domini Social Ratings Database and Thomson Reuters Asset4 ESG Ratings.

In summary, corporate social performance can be measured in numerous ways that should align with the aspect of corporate social performance to be examined. This breadth offers opportunities for triangulation and thus better measurement. As with any research area, scholars and practitioners need to critically assess corporate social performance measures to ensure that they correspond with the theory, level of measurement, and level of analysis. In addition, measures can vary in their “objectivity.” For instance, corporate reports—that is, environmental reports—may be distorted by opportunistic managers attempting to enhance themselves (agency theory). In their meta-analysis, Marc Orlitzky, Frank L. Schmidt, and Sara L. Rynes noted that a mismatch among corporate social performance measures, corporate reputation audience, and financial performance created noise and obscured the relationship.

The Corporate Social Performance/Corporate Reputation Relationship

This section examines the relationship between corporate social performance and corporate reputation. Corporate social performance is a broad concept composed of many types of corporate behavior and can be either positive or negative depending on the specific actions. Thus, the blanket proposition that corporate social performance enhances corporate reputation ignores the seminal work on corporate social performance. This blanket proposition probably derives from the desire in both management and marketing to establish a business case for corporate social performance. So, as we consider the corporate social performance and corporate reputation relationship, we note that until recently corporate reputation tended to be studied as a mediator in the relationship between corporate social performance and corporate financial performance.

Theories

A number of theories have been successfully applied to examine the relationship between corporate social performance and corporate reputation. In particular, stakeholder theory has been used to tease out the responsibilities and outcomes for different groups in society. Signaling theory has been applied as the mechanism linking corporate policies and actions to stakeholder perceptions. Corporate social performance serves as signals to stakeholders that reduce information asymmetry. In addition, attribution theory has been applied to explain how stakeholders perceive corporate motivation for corporate policies and activities and predispose their perceptions. Institutional theory has been applied to tease out isomorphism in activities and legitimacy. Isomorphism refers to the tendency of companies to become more similar over time. In contrast, the resource-based view of the firm has been applied to examine how corporate social performance can be a source of sustainable competitive advantage. These theories and perspectives provide researchers rich insight and a sophisticated set of tools for exploring the corporate social performance/corporate reputation relationship. Certainly, additional theories can inform the relationship.

Empirical Results

Much of the value of the relationship between corporate social performance and corporate reputation relies on the value of corporate reputation as a source of sustainable competitive advantage and an antecedent of positive firm outcomes. Thus, the research often positions corporate reputation as a mediator variable in the relationship between corporate social performance and corporate financial performance. In other words, decades of research tended to find a positive relationship between corporate social performance and corporate reputation. Yet empirical results have been inconsistent enough to warrant further research.

Marc Orlitzky and colleagues found a consistently positive relationship between corporate social performance and corporate reputation; however, the relationship was moderated by the operationalization of the variables. Corporate social performance disclosure had a low reputational effect on corporate financial performance. Social performance and environmental performance had the strongest effect on corporate reputation and financial performance. The researchers described corporate reputation as an “important” mediator in the corporate social performance/corporate financial reputation relationship. Notably, most studies sampled in this meta-analysis examined large U.S. and U.K. companies due to data availability.

In that vein, Naomi Gardberg and Charles Fombrun conceived of corporate citizenship as a portfolio of activities that may need to be tailored to the expectations of various stakeholders across different institutional environments. The appropriateness of the activities for the context determined the outcome success in terms of the creation of intangible assets including corporate reputation.

At the same time, Stephen Brammer and Stephen Pavelin observed that the fit between the type of social performance and the stakeholder audience shaped the relationship between the two constructs. They studied both overall corporate social performance and some of its components across industries in the United Kingdom. They found that corporate social performance’s positive effect on reputation was limited to the chemicals, consumer products, finance, resources, and transportation industries. In addition, the community component, employee component, and environmental component differentially influenced reputation across industries. Overall, the employee component had little effect.

Yijing Wang and Guido Berens complemented this work by dividing the Kinder, Lydenberg, Domini social ratings into four dimensions based on Archie Carroll’s framework (economic, legal, ethical, and philanthropic) and examining the effects on two measures of corporate reputation: (1) Fortune’s “Most Admired Companies,” which surveys analysts and industry insiders, and (2) Reputation Institute’s RepTrak Pulse, which surveys the general public. This important research found that corporate economic social performance enhanced public reputation while negative ethical social performance diminished public reputation. In contrast, negative legal social performance and negative ethical primary social performance diminished financial reputation, while positive ethical and negative ethical secondary social performance enhanced financial reputation. Only ethical social performance affected both types of reputation, but sometimes in conflicting ways.

Moderated Relationship

Thus far, this entry has discussed the corporate social performance and corporate reputation relationship with the dominant proposition that the former enhances the latter. In contrast, Jiyang Bae and Glen Cameron proposed that corporate reputation moderated the relationship between corporate social performance and corporate financial performance. They found that prior reputation predisposed arbiters to evaluate corporate social performance as positive or negative such that attributions of corporate motive created a reinforcing effect. Companies with weak reputations could actually hurt their financial performance via corporate social performance, as their motivation was impure. In contrast, companies with strong reputations enhanced their financial performance via corporate social performance. This valuable work reinforces the view that corporate social performance and corporate reputation are distinct but related concepts and underscores the importance of time in understanding causation.

Conclusion

Herein some key considerations in studying, analyzing, and implementing corporate social performance and corporate reputation research are reviewed. Since corporate social performance is a broad, umbrella concept with multiple aspects, researchers and practitioners alike need to specify the aspect of interest and choose appropriate levels of measurement and analysis for both social performance and reputation. Research in this domain must shift to a more nuanced view of the relationship with corporate reputation. This view should consider the complexity of corporate social performance, stakeholder expectations, and the fit among the dimensions.

In conclusion, our knowledge of the relationship between corporate social performance and corporate reputation has grown via more rigorous analysis and measurement. Yet we still know little about the boundary conditions of corporate social performance components across national institutional environments and stakeholders. Opportunities remain for contributions to theory and practice.