Valuing Financial Impact is part three of a four part series on optimizing corporate philanthropy. 

Recap

In part one, we talked a little bit about the difficulty encountered when optimizing corporate philanthropy (which is just a single tactic in the overall CSR/ESG strategy.) In part two, we dug into how to value the social impact of corporate philanthropy from a corporate standpoint. But what about valuing financial impact: does corporate social performance result in positive corporate financial performance?

The long shadow of a magazine article

If you read a bunch of journal articles on CSR, you’ll notice that much of the argument against it comes from a single citation:

Friedman, M. 1970.

That’s Milton Friedman. Nobel Prize-winning economist and Chicago-school anti-Keynesian. Overall, a pretty smart dude. But digging into the full citation, we get:

Friedman, M. (1970, September 13). The social responsibility of business is to increase its profits. The New York Times Magazine.

Hang on. Is The New York Times Magazine a peer-reviewed journal, now? Yet, Google Scholar shows that this article has been cited 6,491 times

In the article, Milton Friedman argues quite hyperbolically that managers of businesses should only engage in activities that benefit shareholders, and that social responsibility is a dangerous distraction.² He refers to CSR as “pure and unadulterated socialism” and its proponents as  “unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades.” I’m guessing peer review might have blunted some of his rhetoric, and that this may have been the 1970’s version of clickbait.

Later in the article he makes the exact distinction between strategic and non-strategic corporate philanthropy that Michael E. Porter and Mark R. Kramer would articulate in 2002.³ But it’s written as such a tirade that most of those 6000+ citations miss the point and only parrot the headline.

As a result, there is a widespread belief that CSR does not benefit the bottom line.

Enter the academics

Many of those 6,491 citing articles are searching for the causal link between corporate social performance (CSP) and corporate financial performance (CFP). The results vary.

In the book People and Profits? by Margolis & Walsh, the authors review 80 studies in which CSP is seen as modifying CFP, and find 53% show a positive relationship, 24% show no relationship, 5% show a negative relationship, and 19% show a mixed relationship.

But, of course, there are complicating factors:

Nearly all of the studies used different measures for CSP, and many used different measures for CFP, so we could be comparing apples, oranges and bananas.

The studies themselves all focused on large companies, so it is possible that the causation arrow points the wrong way. In other words, perhaps good financial performance allows a company to engage in good social performance.

The original studies themselves were taken over a long period of time – from 1972 to 2002. Perhaps something has changed over those 30 years.

Enter the Internet

Eight years after People and Profits? came out, Pieter van Beurden and Tobias Gössling revisited the question in the Journal of Business Ethics. What they found is that regardless of the measures used for social performance, there was a positive correlation with financial performance if you use only studies completed after 1990.

Many things were changing around 1990, but one that makes intuitive sense is the rapid adoption of browser access to the internet (1994) and its astonishing effect on transparency. The concept of transparency comprises accountability, ethical action and trust, which are all things that sound a lot like corporate social practices.

In other words, we can close the debate on whether CSP affects CFP. Unless you literally live in the past.4

Valuing Financial Impact

Finally, the payoff. It’s reasonably clear that if done right, CSP can positively affect CFP, but to what extent? If the significant social performance inputs are unknown, is it possible to optimize your financial impact?

Yep. I gave away the secret in part two, but since you’ve read this far, I’ll give it to you again.

Valuing Social Impact - Valuing Financial Impact

It’s the x-axis on this graph: stakeholder interest. The more interested your stakeholders are in a particular topic, the better financial performance you’re going to see. Too simplistic? How about an analogy:

Standard practice for increasing firm value is to innovate, generally via R&D. And popular thinking on innovation connects it directly to customer needs.  The most promising innovations come from creating value for customers and then capturing some of that value.

CSR can be thought of simply as innovation derived from stakeholder needs. So the analogy would be, “The most promising CSR comes from creating value for stakeholders and then capturing some of that value.”

The more important the stakeholder to the firm, the better. And the more stakeholder interest in the social topic, the better. Which gives us our formula for valuing the financial impact of corporate philanthropy.

Next up: Part 4 – Optimizing Corporate Philanthropy

¹ The most cited economics article published in 1970 has been cited 24,153 times.

² If you’re one of my students, and you’ve discovered this post while researching for a project I’ve assigned, congratulations. Please include the word “ultraviolet” in your paper somewhere for a bonus point. Plagiarizing any portion of this article, however, isn’t a good idea.

³ Porter and Kramer cite Friedman’s article, too.

4 There’s a huge caveat here, one that Porter and Kramer pointed out, too. Sloppy, nonstrategic CSP will not result in positive CFP.