Productivity as Mediator of CSR and Performance

Transcription

1 DECISION SCIENCES INSTITUTE Disentangling the Corporate Social Responsibility and Financial Performance Relationship: Examining the Mediating Role of Productivity (Full Paper Submission) Patti Miles University of Maine Grant Miles University of Maine ABSTRACT As research within the Corporate Social Responsibility (CSR) literature more consistently establishes a positive relationship between CSR and financial performance, attention is shifting to the business case for CSR and examining the mechanisms that underlie this relationship. In this vein, the current study examines the role of productivity in this relationship and builds a case that the influence of CSR on financial performance operates through CSR s influence on firm productivity. The hypotheses developed are tested on a sample consisting of Fortune 500 firms and findings reveal that productivity fully mediates the CSR/financial performance relationship. KEYWORDS Social Issues, Productivity, Strategic Management - Operations Interface INTRODUCTION Is there a market for virtue? This is the question that Vogel (2005) used to introduce an exploration of whether companies that engaged in practices directed at the common good would see a positive impact on their financial statement. At the time, the evidence of a positive relationship between companies behaving in what is typically referred to as a socially responsible manner and subsequent financial performance was mixed, with some studies finding a positive relationship, others no relationship, and a few even finding a negative relationship. Subsequent meta-analytic reviews, however, have been consistent in finding that there is indeed a market for virtue, suggesting that in the aggregate the research findings do in fact support a positive link between corporate social responsibility (CSR) and firm performance (see Margolis, Elfenbein & Walsh, 2009). Still at issue, however, is exactly what the mechanisms are that produce this positive relationship. Accordingly, attention within the CSR literature has begun to shift from establishing a relationship between CSR and performance to examinations that seek to decouple CSR and performance. Said differently, attention is now beginning to turn to an examination of the business case for CSR (Vogel, 2005; Kurucz et al, 2008; Carroll & Shabana, 2010). To date, though, most of this work has been conceptual rather than empirical. Underscoring this, Aguinis and Glavas (2012), in a review of more than 550 articles and more than 100 book and book chapters, found that only a handful of articles had empirically examined the mechanisms that might intervene between CSR and firm performance. They suggested that 1

2 there appeared to be a black box regarding the relationship between CSR predictors and outcomes of CSR (Aguinis & Glavas, 2012:940), and that future research should be focused on examining these intervening mechanisms. Heeding this call, the current research looks to disentangle the impact of CSR on profitability by examining its impact on productivity. A number of previous works have suggested that good CSR practices should lead to an ability to attract and retain better employees (Greening & Turban, 2000; Maignan et al, 1999; Maignan & Ferrell, 2001; Jones, 2010; Galbreath, 2010) and suggested that this may in fact result in increased productivity for the firm. Further, there is at least some evidence that more sustainable supply chain practices might lead to reduced waste and thus greater efficiencies (Walker et al, 2014). Since more productive firms tend, on average, to be more profitable (Skinner, 1986), there is reason to believe that at least some of the positive financial benefits of CSR may in fact come from the positive impact of CSR on productivity. In the pages that follow, we develop the case for productivity as a mediator of the relationship between CSR and financial performance. We begin by reviewing the extant work in each of the areas and use these to develop an argument for the relationship between CSR and productivity and how this could lead to financial performance benefits for a firm. We then test our arguments using the 2012 Fortune 500 firms, examining their CSR performance, financial performance, and productivity over an extended time frame. The results support our hypotheses, indicating that while there is a positive relationship between CSR and financial performance in our sample, there is also a positive relationship between CSR and productivity and that this relationship fully mediates the CSR/financial performance relationship. We close with a discussion of the findings and the implications they have for future research. LITERATURE REVIEW AND HYPOTHESES Why do firms that have positive CSR perform better than firms that do not? As noted, research in CSR, having established the positive CSR/financial performance relationship (Orlitzky et al, 2003; Margolis et al, 2009), has begun to shift its emphasis to an exploration of the underlying mechanisms that may intervene between CSR and financial performance. Broadly captured under the business case for CSR label, these studies have begun to try to uncover the impact of CSR on a variety of different organizational outcomes and establish how these might lead to increased financial performance. Carroll and Shabana (2010) build on the work of Kurucz et al (2008) and others in identifying 4 different ways that CSR might lead to increased financial performance for a firm. They suggest that CSR activities may 1) reduce cost and risk, 2) strengthen legitimacy, 3) build competitive advantage, and 4) create win-win synergies with stakeholders. In the main, research on the specifics within any of these categories remains more conceptual than empirical, especially when making a complete link from CSR to a businesses operating or competitive outcomes and then on to financial performance. Still, the empirical work that has been done suggests that CSR activities can influence a range of organizational outcomes. CSR and Organizational Outcomes Regarding perceptions and reputation, for example, research has generally found a positive connection with CSR. Ellen et al (2000) and Sen and Bhattacharya (2001) both found that CSR was positively related to consumer evaluations of a company and/or its products, and several 2

3 researchers have found a positive impact of CSR activities on firm reputation (e.g., Brammer & Pavelin, 2006; Turban & Greening, 1997). Given this, it is not surprising that CSR has also been found to be positively related to consumer choice of a product/company (Arora & Henderson, 2007; Sen and Bhattacharya, 2001) and customer loyalty (Maignam, Ferrell & Hult, 1999). Findings along similar lines are also seen when looking at the relationship between CSR and outcomes more directly related to firm operations. Agle, Mitchell and Sonnefield (1999) and Johnson and Greening (1999) for example, examined the connection between CSR and product quality and found a positive relationship. Others have found that firms rated highly on CSR are likely to have a greater R&D intensity than those who are lower rated on CSR (McWilliams and Siegel, 2000; Hull & Rothenberg, 2008; Padgett & Galan, 2010), to have lower levels of risk (Bansal & Clelland, 2004), and have good management practices (Graves & Waddock, 1994). Taking these ideas together, it is not surprising that CSR has also been found to be related in a positive manner with competitive advantage (Greening & Turban, 2000). While certainly positive outcomes that are likely to bolster the business case for CSR, the various outcomes just identified still don t really address how these outcomes are achieved. Taking a resource-based view (Barney, 1991), a case can be made that achievement of all of the outcomes rests on the development and maintenance of a committed, productive workforce. Such is the contention of a variety of researchers (c.f., Porter and Kramer, 2006, 2011; Schreck, 2011; McWilliams & Siegel, 2011; Edmans, 2012) and empirical results, while most often focused on the attraction, attitudes, and retention of workers rather than on the work performed, appear to support this view. CSR has been found to positively relate to the attractiveness of the firm to prospective employees (Greening & Turban, 2000) as well as lead to greater identification with the organization (Carmeli et al, 2007), commitment (Maignan et al, 1999; Maignan & Ferrell, 2001), and retention (Jones, 2010; Galbreath, 2010). In addition, firms with higher levels of CSR are found to have higher levels of employee engagement (Jones, 2010) and to see greater demonstration of organizational citizenship behaviors from their employees (Lin et al, 2010; Sully de Luque et al, 2008). In the main, the extension of these positive employee outcomes from CSR to organizational productivity has been implied rather than directly tested. That is, it has relied on other work that relates the employee outcome to productivity rather than testing the link directly. To cite just one example, employee retention has been found to relate positively to productivity (Huselid,1995; Guthrie, 2001), so any positive effects of CSR on employee retention would, in theory, help increase productivity. The few studies that have directly examined the CSR/productivity relationship in relation to employees support this extension. Stuebs and Sun (2010), for example, examined the most admired companies in America and found them to have greater labor efficiency and productivity rates than did a matched sample of firms, and Willard (2002) also found a positive relationship between CSR and productivity as a result of human resource practices. These findings also dovetail with recent work in operations management that examines the relationship between CSR practices and productivity. Productivity has long been a primary focus in the operations management literature (Sprague, 2007) and its connection to financial performance is generally accepted as a given. While the work in this area has been primarily focused on environmental sustainability and how it can improve resource usage productivity (Weizsacker, Lovins & Lovins, 1997; Wilkinson, Hill & Gollan, 2001), recent years have seen a broadening of focus to include other CSR practices and their impact on behavioral aspects of 3

4 productivity and other operations practices (Walker et al, 2014; Croson, Schultz & Siemsen, 2013; Neumann & Dul, 2010). This is perhaps surprising, since the search for productivity has often been cited in socialist oriented work as having a negative impact on workers (c.f., Broad, 2011). As Sprague (2007) points out, however, some of the earliest proponents of efficiency and productivity such as Taylor and Ford also saw a connection between sharing the wealth with workers (a common CSR practice) and improved productivity. Further, Skinner (1986) addressed the productivity paradox and noted that real productivity was likely to come through people and broader approaches rather than from simple cost cutting or process refinement. As such, the more recent findings of a connection between CSR and productivity may in fact have long standing roots. Hypotheses Given the groundwork and logic laid out above, we can now turn to the specification of hypotheses relating CSR to both financial performance and productivity as well as the role of productivity in mediating the relationship between CSR and financial performance. The arguments begin with the CSR/financial performance relationship. As noted, there are a variety of ways that CSR may have a positive influence on the financial performance of a firm. These may occur through cost savings, competitive advantage and/or reputation (Carroll & Shabana, 2010; Kurucz et al, 2008), but regardless of the mechanism firms that engage in greater CSR practices appear to have greater financial returns. While there are still some questions regarding factors that may moderate this relationship (see Aguinis & Glavas, 2012 for a review), the preponderance of studies do in fact find a positive relationship (Orlitzky et al, 2003; Margolis et al, 2009). As such, it is predicted that: Hypothesis 1. There will be a positive relationship between CSR activities and firm financial performance. As noted, conclusions regarding the relationship between CSR and productivity rest as much on a conceptual as an empirical base. While there is extensive evidence that CSR does lead to the recruitment (Greening & Turban, 2000) and retention (Jones, 2010, Galbreath, 2010) of better employees with greater commitment and organizational citizenship (Jones, 2010; Lin et al, 2010; Sully de Luque et al, 2008), there are fewer studies that make a direct connection between these outcomes and productivity. Still, the logic from operations management (c.f. Sprague, 2007) and the few studies that have directly examined this relationship (c.f., Stuebs and Sun, 2010; Willard, 2002) indicate a positive connection. As such, it is predicted that: Hypothesis 2. There will be a positive relationship between a firm s CSR activities and the firms overall productivity. The final step in the process is establishing the interrelationship between CSR, productivity and financial performance. The recent attention to building the business case for CSR (Carroll & Shabana, 2010; Kurucz et al, 2008) provides the general direction, as does work from the resource-based view of the firm (Barney, 1991). For a firm to gain an advantage and generate profitability at a greater rate than competitors it must in some way have capabilities that others do not have and that others cannot easily copy (Barney, 1991). While this may occur in a variety of ways, an important component in this process are the employees of the organization. If in fact increased CSR practices aid in the attraction and retention of better workers, and if these better workers do in fact produce greater productivity levels for the organization, then the 4

5 impact of CSR on firm financial performance may in fact be generated through the increased levels of productivity. This relationship, shown graphically in Figure 1, can be hypothesized as: Hypothesis 3. Organizational productivity will mediate the relationship between CSR and firm financial performance. Figure 1 Mediated Role of Productivity between CSR Practices and Firm Performance METHODS Sample CSR Practices Productivity Firm Performance a C In order to test our hypotheses, we chose to focus on firms from the Fortune 500. Specifically, the sampling frame is all 2012 Fortune 500 firms that were also publicly traded in The value of this approach is that a sample with such breadth represents a diverse set of companies across many industries, thereby reducing the impact of any one industry. A helpful byproduct of this approach is that the sample represents economically successful firms (Liston-Heyes & Ceton, 2008) which are publically traded, facilitating data collection. Following the practices of other researchers (Makni, Fancoeur, & Bellavance, 2009; Miles & Miles, 2013) we chose data available through COMPUSTAT. Given that there was a desire to both examine a long enough period of time to limit the influence of abnormal years and to control for past firm performance and actions, the COMPUSTAT data was examined for availability over an extensive period. From the initial list of Fortune 500 companies, 416 had sufficient data available on public databases for the period from Further analysis revealed that the years shortly following the 9/11 terrorist attacks and the subsequent economic downturn returned numbers that did not coincide with earlier and later data, so the final sample consisted of 416 firms, each with 12 years of data, partitioned into two time period groups ( and ). Once the firms were identified, attention was turned to the Wharton Research Analytics Data Base (WRDS). As noted, our hypotheses imply a causal time lagged relationship between CSR, productivity and firm performance, so it was necessary to section the data into two time periods: a six-year starting point ( ) and a six year lagged follow-up ( ). Such an approach is necessary to enable the creation of a time lag, as well as to provide sufficient data to create nonvolatile performance indicators. This approach also follows the recommendation of accounting researchers, who note that one year of data is often subject to unexplainable swings in firm performance, and averaging tends to overweight the effect of years with unusually large or small values (Dyreng, Hanlon & Maydew, 2008). All variables of interest are computed by summing components across each time period and then performing the computation, rather than taking an average of yearly computations. This produces a variable that more closely reflects the firm s actual actions over the long-run. b 5

6 Measures We used the following measures to operationalize the constructs necessary for hypotheses testing. Corporate Social Responsibility Corporate Social Responsibility (CSR) is an independent variable in this research. As such it was necessary to compute a CSR measure for each firm. Following previous practice (Miles & Miles, 2013; Makni, Fancoeur, & Bellavance, 2009; Waddock & Graves, 1997), we utilized the Kinder, Lyndenberg and Domini (KLD) index, created for professional portfolio managers to gauge a firm s commitment to social factors when determining their investment strategies. The KLD uses a binary, an on or off rating system, to assess the firm s participation on a variety of qualitative CSR practices. Given the general nature of our inquiry, a data base such as the KLD was ideal, as it provides ratings on a variety of positive firm indicators such as: corporate diversity and governance, employee relation indicators such as community involvement and work life balance policies, as well as providing information about product quality, management information systems, supply chain management and environmental considerations. Like many other archival sources, the KLD indicators are firm attributes in an individual year. As such it is necessary to sum these factors over a succession of years in order to create continuous factors and apply normal statistics. Each firm s ratings were summed across the years of each of the time periods. We then used the Fama-French 12 industry classification to place each firm within an industry classification and computed the mean and standard deviation for each industry. This allowed the computation of a set of standardized scores for the firms in each industry (Z-value) on the CSR measure. Done in this manner, it was then possible to treat the CSR variable as a continuous measure for analysis using regressions and also use the Z- scores to create a positive CSR group and a control group for comparison purposes. The CSR group contained firms with positive Z-scores for their industry; and the control group contained firms reflecting negative Z-scores on the KLD values for their industry. Firm Productivity Firm Productivity is a second independent variable in the research. For this, a measure was sought that could be calculated using available archival measures and that would capture a broader sense of productivity than simply labor productivity. Following recent practices in both the finance and management literature, productivity was therefore estimated using the data envelopment analysis (DEA) approach utilized by Bryan, Fernando, and Tripathy (2013) and Balsam, Fernando and Tripathy (2011) that builds on the work of Banker (1984). This measure utilizes several inputs for the estimation that are readily available in publicly available data. The DEA model proposed by Banker (1984) suggests estimating firm productivity through a process that involves summing the cost of goods sold (CoGS), selling and general expenses (XSGA), and capital expenditure (CAPX) and then dividing by output, (operationalized as sales revenue REVT). As with the KLD data, typical productivity values are likely to vary significantly by industry, so it was necessary to compute this value relative to other firms in the industry (Bryan, Fernando, & Tripathy, 2013). Accordingly, data were partitioned using the Fama-French 12 industry classification and then a standardized firm productivity score for each firm in each industry (Z-value) was created. This method enables us to compare productivity relative to others in the industry, as well as between industries 6

7 Firm Financial Performance Firm Financial Performance serves as the dependent variable for the study. A variety of measures of firm performance have been used within the literature, including Return on Sales, Return on Investment (ROI), and Return on Assets (ROA). Return on Sales was deemed inappropriate because sales revenue is used in the creation of the productivity measure and multicollinearity issues might arise. Instead, attention was turned to creating ROA and ROI measures for each of the time periods. Consistent with the previous calculations, each measure represents data summed across the time periods before performing any calculations. Thus, the ROI measure for a period was created by summing the net income for each year and then dividing by the sum of the yearly invested capital. Similarly, the ROA measure was created by taking the same sum of yearly net income and dividing by the sum of the total assets for each year. As expected, these measures are highly correlated and return similar results. Given that, only the results using ROI are reported here. ANALYSIS AND RESULTS Before proceeding with analysis, the data were examined for normalcy, unexpected correlations, and the presence of outliers. This examination revealed a handful of values that did not appear to have face validity, and fell outside the normal limits. As such, following the practice of other statisticians (Hoaglin D., 1986) we applied the multiplier of 2.2 times the middle 50% as a conservative estimate for the elimination of outliers. Observations outside these limits were discarded, reducing our sample to approximately 408 firms across two separate six year time periods. Using an approach such as this makes it highly unlikely (p < 0.01) that a case would be excluded that actually reflected accurate data. Results Table 1 presents the means, standard deviations and correlations for the sample in the relevant time periods. As expected, a significant correlation exists between all measures of firm profitability and previous firm performance, making it necessary to control for previous performance in the regression model. Further, the variables of interest were correlated in the expected directions, suggesting that further analysis was warranted. Table 1. Correlation Matrix Z ROI Z ROI Z Productivity Z Productivity Z KLD Mean SD Z ROI Z ROI ** Z Productivity **.03** Z Productivity **.39**.29** Z KLD **.22**.11**.23** ** Correlation is significant to 0.01 level (2-tail); N = 406 7

8 Hypothesis 1 posits that there will be a positive relationship between CSR and a firm s financial performance. This relationship was explored in several ways. First, as can be seen in Table 1, there was a significant positive correlation between the variables for the time period of interest. Second, the mean values for the CSR and control groups (described above) were compared. As can be seen in Table 2, there is a significant difference between the means of each group. Specifically, the control group s average ROI is 6.77%, while the CSR group s average ROI is 10.54%, a statistically significant difference (f = 13.13, p < 0.01). Similarly the computed Z value for the ROI in the for the control group is while the Z value for the CSR group is A difference such as this in standardized values suggests a difference of about 18% on the normal curve, a statistically significant difference (f = 11.29, p < 0.01). Table 2. Control and CSR Group Mean Comparisons for ROI and Productivity ROI ZROI Productivity Z Productivity N Mean Std. Deviation Std. Error F Sig. Control Group CSR Group Total Control Group CSR Group Total Control Group CSR Group Total Control Group CSR Group Total As a more rigorous test of the hypothesis, the continuous version of the CSR variable was used as a predictor in a regression equation where previous performance could be controlled for. As expected, profitability between 1995 and 2000 was a significant predictor of performance for the period from 2006 to 2012 (see Table 3), but the CSR variable was also significant and added additional explained variance even after controlling for past financial performance. With all three analyses returning the same conclusions, it is clear that Hypothesis 1 is supported. This relationship is displayed graphically in Figure 2. As can be seen in this graph (even using standardized values) firms with a commitment to CSR will show higher profitability over time. Hypothesis 2 predicts a positive relationship between CSR and productivity. As with Hypothesis 1, this relationship was examined in three different ways. First, an examination of the correlation matrix revealed a significant positive correlation (see Table 1). Next, the means for the control and CSR groups were compared. As can be seen in Table 2, the control group s average firm productivity is 1.126, while the CSR group s average productivity is 1.19, a statistically significant difference (f = 8.18, p < 0.01). Similarly the computed Z value for productivity for the control group is (-0.16) and for the CSR group it is 0.093, suggesting a 8

9 difference of about 24% on the normal curve, again, a statistically significant difference (f = 9.26, p < 0.01). Table 3. CSR and Firm Financial Performance regression model Unstandardized Standardized Change Statistics Coefficients Coefficients Model B Std. Error Beta t Sig. R-Square Sig. F 1 (Constant) Z ROI (Constant) ZROI Z KLD Dependent Variable Z ROI Figure 2. CSR and Firm Financial Performance Finally, as a more rigorous test of the hypothesis, the continuous version of the CSR variable was used as a predictor of current period productivity in a regression equation where previous productivity could be controlled for. As expected, a firm s productivity between 1995 and

10 was a significant predictor of productivity for the period from 2006 to 2012 (see Table 4), but the CSR variable was also significant and added additional explained variance even after controlling for past productivity. As can be seen in this analysis, if two firms are equally as productive in the period the firms who have made a commitment to CSR will be more productive by.20 (using a normal distribution) than those firms without such a commitment. Taken together with the correlation and group comparison results, this indicates that Hypothesis 2 is supported. This relationship is displayed graphically in Figure 3. Table 4. CSR and Productivity Regression Model Unstandardized Coefficients Standardized Coefficients B Std. Error Beta t Sig. Change Statistics R-Square R- Square Change F Sig. F- Change (Constant) Z Productivity (Constant) Z Productivity Z KLD ALL Figure 3: CSR and Productivity Mediation Hypothesis 3 predicts that productivity mediates the relationship between CSR and firm financial performance. Thus, attention was turned to mediation analysis following the procedure outlined by Baron & Kenny (1986). This analysis consists of four steps: step 1 suggests that the researcher shows that the initial variable is correlated with the outcome; step 2 must indicate 10

11 that the initial variable is correlated with the mediator; in step 3 the researcher must regress the independent variable on the outcome and show the effect; step 4 requires the researcher to confirm the mediating influence by showing that the effect (beta value) of the predictor variable on the criterion variable is less (or has become insignificant), when the intervening (mediating) variable is included. Following this procedure we find support for hypothesis 3. Step 1 began with correlation matrix analysis. As seen in Table 1, the correlation matrix shows that the initial variable representing a firms commitment to CSR (Z KLD ) is significantly correlated with the outcome variable, firm financial performance (ROI ). Specifically the correlation is ρ = 0.26, p < Step 2, also examined through both the correlation matrix and the regression testing Hypothesis 2, shows the variable representing a firms commitment to CSR is significantly related with the mediator variable Z Productivity Step 3, was addressed in the regression testing of Hypothesis 1, where CSR was shown to have a significant positive relationship with firm financial performance even after controlling for past firm performance. In that equation, CSR had a standardized beta of and explained an additional 2% of the variance after controlling for past profitability. Step 4 is the final determination of mediation. In this step, mediation is demonstrated if entering the mediating variable (productivity) into the regression equation before the predictor variable (CSR) results in a reduction of the effect of the predictor variable (partial mediation) or it becomes insignificant (full mediation). As can be seen in Table 5, application of this approach revealed that productivity fully mediated the influence of CSR on firm financial performance. Model 1 and 2 of the regression are both significant, and together explain about 42% of the variation in firm performance. While CSR had shown a significant positive relationship with firm financial performance when entered on its own (see Hypothesis 1 above), entering CSR into this equation (in Model 3) did not result in a significant change in the variance explained nor was the beta for CSR significant. According to Barron & Kenny (1986), when the mediating variable is placed in the equation and it absorbs the explained variance of the predictor variable it suggests that the influence of the predictor variable (CSR) on the outcome (firm financial performance) is being enacted through the mediated variable (productivity). Thus, Hypothesis 3 is fully supported. Table 5. Mediation of CSR and Performance Relationship by Productivity Standardized Unstandardized Coefficients Coefficients Model B Std. Error Beta t Sig. 1 (Constant) Z ROI (Constant) Z ROI Z Productivity (Constant) Z ROI Z Productivity Z KLD

12 DISCUSSION In a recent comprehensive review of the CSR literature, Aguinis and Glavas (2012) noted that very few studies had examined potential mediators of the relationship between CSR and financial performance of the firm. Specifically, they noted the need to conduct research that can help us understand the processes and underlying mechanisms through which CSR actions and policies lead to particular outcomes (Aguinis and Glavas, 2012; 953). Heeding this call, the present study examined the interrelationships between CSR, productivity and profit and developed a logic for why the positive relationship between CSR and financial performance would be mediated by productivity. The findings presented are supportive of this logic. While a significant positive relationship was found between CSR and firm financial performance even when past financial performance was controlled for, this relationship was found to be nonsignificant when productivity was entered into the regression before CSR. This suggests that while CSR does influence firm financial performance, it does so primarily through its influence of firm productivity. As noted, the link from CSR to productivity to financial performance does appear to go against the view of productivity gains coming as a result of exploitation of workers (c.f., Broad, 2011). For a number of years now, though, operations researchers have been encouraging a broader view of operations generally, and productivity specifically, suggesting that good operations practices serve strategic needs and get productivity as a byproduct rather than focusing on productivity as a singular goal (Skinner, 1986). In this vein, the productivity measure utilized here is a broader view of productivity of the organization rather than a narrow labor to output measure. Further, previous research has found consistent positive relationships between CSR and the attraction and retention of quality workers. Having a high quality work force is often viewed as a key to the achievement of productivity levels that are superior to competitors and capable of producing superior financial performance. To the degree that CSR practices can improve the workforce, then, the impact of CSR on financial performance may well be through productivity. It was perhaps a bit surprising, however, to find that productivity fully mediated the relationship. CSR has also been found to relate positively to such outcomes as product quality and customer loyalty, outcomes that are often associated with profitability and thus themselves might serve as other potential mediators of the CSR/firm financial performance relationship. Said differently, CSR s influence on profitability may well be felt through other mechanisms in addition to productivity. While the inclusion of these other potential mechanisms was beyond the scope of the current study, future work may want to consider several of these intervening variables at once in relation to CSR in an effort to more fully disentangle the nature of the relationships. Future work should also look at samples beyond the Fortune 500. At one level, these large firms provide a reasonable cross section of the variety of businesses in the market, and as such provide some degree of control for unique industry conditions that might otherwise bias the findings. Further, the fact that all of the firms included have grown to a size that they are included in the Fortune 500 suggests that all have been successful to a significant degree. Given this, it could be argued that they provide a sterner test to uncover the relationships with performance examined here than would a more random sample of firms that might include more firms with weak performance. As well, their size gives them a disproportionate influence on the 12

13 market so finding support for the proposed relationships between CSR, productivity and financial performance provides a significant argument for those trying to build the business case for CSR. That said, additional studies focused on small and medium sized businesses would help to further bolster the case and extend the generalizability of the current findings. Examination of additional and/or more specific measures of CSR should also be a goal of future research. The current study focused on a commonly used CSR measure a composite index based on KLD data but other measures are possible. There are a number of different categories within KLD and it may be that some of these will relate more directly to productivity or other intervening mechanisms (quality, innovation, etc.) that might then influence financial performance. As well, there are other ways besides KLD to judge a firm s CSR practices and examining these would again serve to provide both further support for the current findings and enhance their generalizability. In this vein, however, it is interesting to note that the correlations between CSR and financial performance found here are similar to the average observed correlations found in the meta-analytic studies of CSR and performance (Orlitzky et al, 2003; Margolis et al, 2009). As evidence continues to mount regarding the positive influence of CSR practices on financial performance, the onus is on researchers to build a more complete explanation of just why this relationship occurs. While there are many who accept the relationship at face value and believe that firms should act responsibly even if there were no financial return, there are many others whose beliefs are more firmly rooted in the business of business is to make money view most notably espoused many years ago by Milton Friedman (1970). Further understanding of the mechanisms through which CSR efforts influence profits will provide a better set of both understanding as well as the ability to provide for proscriptions to managers for not only why CSR is important but how to best utilize it. The findings uncovered here provide a modest step in this process. REFERENCES Agle, B. R., Mitchell, R. K., & Sonnenfeld, J. A Who matters to CEOs? An investigation of stakeholder attributes and salience, corporate performance, and CEO values. Academy of Management Journal, 42: Aquinis, H. & Glavas, A Wht we know and don t know about corporate social responsibility: A review and research agenda. Journal of Management. 38: Arora, N., & Henderson, T Embedded premium promotion: Why it works and how to make it more effective. Marketing Science, 26: Balsam, S., Fernando, G., & Tripathy, A. (2011). The impact of firm strategy on performance measures used in computing executive compensation. Journal of Business Research, 64(2), Bansal, P., & Clelland, I Talking trash: Legitimacy, impression management, and unsystematic risk in the context of the natural environment. Academy of Management Journal 47: Barney, J Firm resources and sustained competitive advantage. Journal of Management, 17: Brammer, S. J., & Pavelin, S Corporate reputation and social performance: The importance of fit. Journal of Management Studies, 43:

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