Corporate Social Responsibility Improves Financial Performance – Study

    corporate social responsibility
    Source: Sapho

    Evidence suggests that there is a strong correlation between a company’s social responsibility, specifically the treatment of its employees, and the company’s financial performance. 

    A study examining stock market performance was examined against companies that were ranked in Fortune magazine’s list of “The 100 Best Companies to Work For.” The study hypothesis stated that companies with a positive reputation of social responsibility towards its employees yielded greater stockholder wealth than other companies.

    Variables such as corporate size and employee turnover were also examined, to determine if factors such as a large employee base reflected firm quality. In addition, financial performance of companies was measured via an event-study methodology to investigate performance before, and subsequent years after, the Fortune publication. Since the Fortune ranking is based on employee surveys, this study widely tests the mantra, “Employees are a company’s greatest asset.”      

    Responsibility brings rewards

    Firms that exhibited a high degree of social responsibility towards their employees were rewarded by stock market participants. Examining a total usable sample of 238 publicly traded companies in Fortune’s top 100 list for a six year period, the nonparametric sign test confirmed the hypothesis.  Other findings included that high growth firms are more attractive and lower turnover equated to better financials. 

    It was concluded that firms with their first appearance in Fortune magazine did see strong positive valuation effects.  Cross-correlations of the selected variables were tested to verify their significance. Firms with a favorable ranking that performed well in the subsequent year suggests that happy employees are productive employees; however, a company’s stock return in the two year period after the ranking does not have a significant relationship with firm’s rank.  

    The importance of employee retention

    Largely due to studies like these, employee recruitment and retention has become a hotbed topic in the last decade.

    Backhaus, in 2002, found that job seekers sought out companies who were involved in their local communities, put emphasis on employee relations, and were concerned about diversity.  

    With a shortage of world-class talent, technology companies have become renowned for exorbitant salaries and innovative perks to attract and preserve talent. Besides enormous salaries, companies such as Apple, Google, and Netflix have come up with new novel ways to attract and keep their talent. Unique employee perks include free food, nap pods, on-site child care assistance, oil changes, athletic facilities, flexible work hours, generous vacation time, and much more. Although these benefits come at a financial cost to these firms, the net benefit of these socially responsible actions outweigh the costs and ultimately reward external stakeholders.

    These three companies have consistently been listed as top companies to work for in numerous articles, and all three stocks have widely outperformed the market in the last five years.  

    Improved reputation

    The results of the study substantiate the hypothesis that participating in Corporate Social Responsibility as an employer adds quantifiable value to a firm and increases its reputation amongst its stakeholders.  This strong reputation allows firms to attract qualified employees and reduce turnover. In turn, job growth increases the bottom-line.

    Additionally, financial markets react to these surveys by vesting in the competence of the organization’s management. The study concludes that the financial results of these companies for the data between 1998 to 2003 is correlated to a financial growth rate. Thus, the evidence is that Corporate Social Responsibility towards employees results in better financial performance. 

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