The Relationship between Corporate Social and Financial Performance

The Relationship between Corporate Social and Financial Performance
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The Relationship between Corporate Social and Financial Performance
The Relationship between Corporate Social and Financial Performance Introduction Corporate social responsibility (CSR) is one of the key elements that corporate organizations worldwide embrace in developing their business strategies for sustainable growth and development. The relationship between corporate social responsibility and financial performance raises diverse perspectives across both the scholarly and the business management fields on the correlation of the two concepts in corporate or business organizations. Precisely, the influence of corporate social performance on the financial performance of corporate organizations accounts for many studies revealing different perspectives on the existing relationship. The quest for achieving the key objective of sustainable growth and development for business organizations worldwide demands the development and implementation of effective business strategies. Corporate social performance (CSP) refers to the observable outcomes of a business organization’s societal relationships from its configuration of social responsibility principles, social responsiveness processes, policies, and programs (Lahouel, 2020). In essence, corporate social responsibility is characteristic of an organization’s market behavior, societal commitment, respect for the environment, and respect for human rights in the workplace. On the hand, financial performance refers to the observable outcomes of a business organization’s financial aspects, such as return on equity, return on assets, and market-to-book ratio (Hirigoyen, 2015). Engaging in corporate social responsibility endeavors entails the use of resources or investing in diverse processes, programs, and projects across the different principles of social responsibility. Such investments may have different implications on an organization’s financial performance. It is, therefore, important to understand the impact of corporate social performance on the financial performance of business organizations towards fostering an effective integration of the two concepts for sustainability. Existing research on the relationship between corporate social and financial performance reveals divergent views on the correlation between the two concepts. For instance, some studies find a positive correlation between corporate social performance and financial performance, with greater investment in the former being a prerequisite for profit maximization. Other studies find a negative relationship between corporate social performance and the financial performance of business organizations. Hirigoyen (2015) reiterates the lack of consensus across different studies in determining the relationship between the corporate social and financial performance of business organizations. According to Hirigoyen (2015), empirical studies of the relationship between corporate social responsibility and financial performance result in divergent conclusions. Lin (2015) concludes that other factors, such as industry type, determine the influence of corporate social responsibility on the financial performance of organizations. Orlitzky (2003) further holds that the operationalization of corporate social performance (CSP) and corporate financial performance mediates the positive relationship between corporate virtue and financial performance. Most studies fail to address how corporate social performance affects financial performance. This study focuses on the impact of engaging in corporate social responsibility endeavors on the financial performance of organizations. This research study seeks to unveil how corporate social responsibility affects the financial performance of business organizations towards an informed understanding of the relationship between the two concepts. The study builds on the following research questions: RQ1: What is the relationship between corporate social responsibility and the financial performance of business organizations? RQ2: How does corporate social performance (CSP) affect or influence the financial performance of business organizations? Thus, this study will:

• Explore the correlation between corporate social responsibility (CSR) and financial performance
• Establish the impact of corporate social performance (CSP) on financial performance

The research study creates an excellent framework for different stakeholders in the scholarly and business management fields to understand the relationship between corporate social responsibility and financial performance for the effective integration of the two concepts. The study also provides an effective platform for practical application of the diverse aspects of corporate social responsibility for positive financial outcomes. Provided herein is a comprehensive literature review on the relationship between corporate social and financial performance. Literature Review Corporate social responsibility entails the voluntary development of responsible citizenship in both economic and social terms by business organizations through the integration of economic, social, societal, and environmental concerns with their operational activities and relationships with their diverse stakeholders (Hirigoyen, 2015). Corporate social performance (CSP) refers to an organization’s ability to integrate the various aspects of social responsibility, processes of social responsiveness, policies, programs, and observable outcomes concerning its societal relationships (Lahouel, 2020). On the other hand, corporate finance performance (CFP) refers to an organization’s ability to achieve its economic objectives. This literature review explores the relationship between corporate social and financial performance toward establishing the impact of the former on the latter in business organizations based on three pre-existing perspectives on their correlation: positive, neutral, and negative. According to Lin (2015), the impact of corporate social responsibility on the financial performance of an organization determines the extent to which it invests in the principles of socially responsible principles, processes, programs, and activities. Existing studies reveal divergent perspectives on the nature of the relationship between corporate social and financial performance, including positive, neutral, and negative correlations (Hirigoyen, 2015). Gaps exist in literature that make this study important. Saona (2009) demonstrates that multiple studies have been done on the link between corporate social performance and corporate financial performance. However, the author contends that the analysis have led to conflicting results. With such results, it is challenging to have a generalized conclusion on the issue. Similarly, Hirigoyen & Poulain-Rehm (2015) demonstrate that the relationship between an organization’s social responsibility and its financial performance is critical. Managers need to understand if improved performance is an ingredient for the implantation of socially responsible policy. There is a need to consider the practical aspect of the issue since managers want realistic solutions. Positive Correlation between Corporate Social and Financial Performance Proponents of the positive correlation between corporate social and financial performance posit that corporate social responsibility leads to positive financial outcomes. Hirigoyen (2015) highlights the three hypothesizes upon which the positive relationship manifests. Effective application of the social impact, slack resources, and positive synergy theoretical frameworks in developing an organization’s responsible citizenship across the diverse aspects of corporate social responsibility leads to positive implications on its financial performance (Hirigoyen, 2015). For instance, the social impact hypothesis postulates that meeting the corporate social responsibility expectations of the organization’s stakeholders contribute to the firm’s improved financial performance (Perrini, 2011). According to the social impact hypothesis, stakeholders such as the shareholders, customers, suppliers, employees, and the community expect and demand corporate social responsibility to reflect positively on the organization’s financial performance (Hirigoyen, 2015). Conversely, failure to meet such expectations may negatively affect the organization’s financial performance. Meeting the stakeholders’ expectations enhances the organization’s reputation and thus reflects positive financial performance (Hirigoyen, 2015). Maqbool (2021) further reiterates that only the social dimension of an organization’s corporate social responsibility yields positive financial performance. In essence, the effective configuration of the observable outcomes of an organization's different corporate social responsibility endeavors strengthens its relationship with equally diverse stakeholders, leading to improved financial performance. It suffices, therefore, that corporate social performance has a positive implication on the organization’s financial perf...