The Elusive Connection Between Social and Financial Performance

Can corporate social performance actually help a company’s bottom line? According to a new model focused on consumer behavior, the secret could lie in the ways companies disseminate information about social programs and how they segment markets based on customers’ values.

As the concept of corporate social performance (CSP) gains credence throughout the business world—with firms spending millions on social programs such as better labor practices and environmental stewardship—the obvious and inevitable question is whether such programs help the bottom line. Up until now, both academic and internal corporate studies have produced only equivocal results. Instead of trying to find some direct correlation between social and financial measures, as previous studies attempted, a new research model by Jesse H. Jones Graduate School of Management professors Douglas Schuler and Margaret Cording views consumer behavior as the key ingredient to understanding the potential relationship. “What we found that could be powerful for some companies,” says Schuler, “is that there’s potentially money to be made from these social activities.”

The research, published in the Academy of Management Review, first considers how firms convey information to the public about their social programs. It then looks at how consumers use or don’t use that information in their purchasing decisions. One of the keys to the purchase is the consumer’s moral orientation. The researchers argue that a company’s social activities can lead to financial gains by impacting consumers’ decisions only when there is ample information about a company’s social performance and the consumers are more focused on others as opposed to themselves.

Schuler and Cording plan to test their model soon with a consumer survey, but in the meantime, the research offers some immediate real-world implications for managers, particularly regarding the ways firms segment their markets. The authors argue that some consumers give more weight than others to information about companies’ social performance and that understanding who those consumers are would allow companies to target their CSP messages accordingly.

“A bunch of men watching a football game together probably don’t care as much as a woman watching Lifetime whether Budweiser has a program to support needy children,” Schuler notes. “If you can segment your customers on certain ethical characteristics, you’ll have a better idea of what you have to gain from these social activities.”

In addition, the authors argue that the message about a company’s social performance programs is more powerful if it comes from a third party not connected to the company, such as a media outlet or a social watchdog organization—trusting Nike less, say, than the San Francisco Chronicle or Human Rights Watch. This suggests that managing relationships with appropriate third-party groups is critical.

Companies with a positive CSP image also need to be vigilant to maintain that image, because they have the most to lose in the face of unfavorable news. “It’s almost a tabloid-type proposition,” Schuler says. “We live to find dirt about movie stars, so companies that have very strong reputations really need to be careful to not have some internal scandal or something else of the sort come to light.”

The authors limited their study to consumers—as opposed to other corporate stakeholders such as investors and employees—and looked exclusively at buying behavior connected with “high-involvement” goods like cars and home electronics, since consumers are more likely to research these purchases—and thus evaluate CSP information—than daily household goods they routinely buy. Ultimately, once information about a company’s CSP reputation reaches consumers, the buyer’s own moral compass plays a key role in the final buying decision.