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The economics of corporate social responsibility: an overview of the special issue
Structural Change and Economic Dynamics 16 (2005) 309–312
Editorial
The economics of corporate social responsibility: an overview of the special issue
There is growing interest among scholars in the economics of corporate social responsibility (CSR), especially environmental responsibility. Following McWilliams and Siegel (2001), we define CSR as “actions that appear to further some social good, beyond the interests of the firm and that which is required by law.” Firms continually encounter demands from consumers, employees, suppliers, community groups, government, and shareholders to engage in CSR. The end result is that there has been a substantial increase in investment in these activities in all OECD nations. The purpose of this special issue is to explore the economic and managerial implications of this trend. Some key policy issues relate to the optimal level of regulation in this arena and the relationship between investment in CSR and economic performance. Managers also seek guidance on how to allocate resources to CSR and how to incorporate CSR in strategic decision-making. The recent accounting scandals in the US have also focused attention on ethical decision-making in the private sector and the importance of monitoring the business practices of firms. Unfortunately, the analysis of CSR is still in a somewhat embryonic stage and critical issues regarding frameworks, measurement, and empirical methods have not been resolved. Furthermore, this topic, like the study of innovation, cannot be analyzed from the lens of a single disciplinary perspective. Thus, it appears that CSR is fertile ground for interdisciplinary theory development and empirical analysis, which makes it an appropriate topic for a special issue of Structural Change and Economic Dynamics. Our objective in this special issue is to begin to fill this gap. After identifying some of the leading contributors to this burgeoning literature, we solicited manuscripts, had them reviewed, and then held a Special Issue Workshop at Rensselaer Polytechnic Institute in Troy, NY, where the revised papers were presented. The event was jointly sponsored by the School of Humanities and Social Sciences at Rensselaer Polytechnic Institute and the International Centre for Corporate Social Responsibility (ICCSR) at the University of Nottingham in the UK. Among the authors and discussants at the workshop were
0954-349X/$ – see front matter © 2004 Elsevier B.V. All rights reserved. doi:10.1016/j.strueco.2004.04.007
310
Editorial / Structural Change and Economic Dynamics 16 (2005) 309–312
scholars from several academic disciplines (economics, political science, accounting, finance, and management), many international contributors, and a high proportion of junior scholars. The best papers from this workshop are contained in this special issue. These studies address four themes: analysis of the determinants of the propensity to engage in CSR, the antecedents and consequences of socially responsible investment, the link between environmental/social performance and firm performance, and methodological issues in productivity measurement related to CSR. In the remainder of this introductory essay, we provide a brief summary of each study. John T. Scott examines the determinants of firm-level investment in environmental R&D, i.e., product or process R&D undertaken to reduce emissions or to develop a new technology that allows users to improve their environmental performance. His theoretical model assumes that firms choose the level of investment in environmental R&D that maximizes the expected value of profits. It predicts that the extent to which a firm engages in this activity is related to various firm and industry characteristics. Using a novel econometric procedure, a Tobit model with sample selection correction, he finds that investment in environmental R&D is strongly influenced by greater corporate self-interest in reducing emissions. The author concludes that two types of public policies can also affect the propensity of firms to engage in environmental R&D: a pre-innovation periodic tax and stricter regulations. The paper by Amir Barnea, Robert Heinkel, and Alan Kraus is a theoretical analysis of socially responsible investing (SRI), a growing trend in mutual fund investment. The authors focus on the role of “green investors,” who screen their investment portfolios based on social or environmental criteria. They find that the actions of green investors can encourage companies to change their environmentally-unfriendly practices. More importantly, the authors have cleverly devised a new SRI strategy: green investors can also induce changes in corporate environmental policies by short-selling polluting companies. Thus, it appears as though the stick, as well as the carrot, can result in changes in corporate policies. Wendy Chapple, Catherine Morrison Paul, and Richard Harris present an empirical analysis of the cost implications of voluntary waste minimization. They analyze countylevel, manufacturing data from the UK and employ a framework that treats waste as a “bad” or “undesirable” output. The authors report that waste reduction is associated with increased costs, which are increasing at the margin. They also find that for most counties, waste reduction is associated with an increase in the use of materials and a decline in the use of labor. V. Eldon Ball, Rolf F¨are, Shawna Grosskopf, and Osman Zaim address an important research question relating to the CSR activities of firms: How should we measure productivity if there are “bad” outputs? They demonstrate that conventional estimates of productivity growth are biased, because such measures ignore external or social output. They construct an alternative measure of productivity growth that takes account of externalities and social dimensions. The authors then apply this method to the US agricultural sector. Khaled Elsayed and David Paton conduct an econometric analysis of the link between the environmental performance and accounting profitability of UK firms, using dynamic panel data techniques. Such methods have not been employed in previous empirical studies (e.g., Russo and Fouts, 1997; McWilliams and Siegel, 2000; Dowell et al., 2000). The authors
Editorial / Structural Change and Economic Dynamics 16 (2005) 309–312
311
report that environmental performance has a neutral effect on corporate profitability, which is measured using three proxies: Tobin’s q, return on assets, and return on sales. Another key result is that controlling for firm heterogeneity has a significant effect on estimates of the impact of environmental performance on firm performance. Thus, studies that do not control for this factor are likely to yield imprecise estimates of the effects of environmental social responsibility on corporate performance. Existing empirical studies of the relationship between corporate environmental performance and firm performance have typically been based on OLS estimation. These papers have yielded inconclusive results (Griffin and Mahon, 1997; Orlitzky et al., 2003). Aly Salama conjectures that this inconsistency could be due the sensitivity of OLS regression results to the presence of outliers. To address this concern, he employs robust regression techniques on a rich, UK firm-level dataset. He also explores industry heterogeneity in the “returns” to better environmental performance. Based on the robust techniques, the author reports that environmental performance has a positive impact on subsequent firm performance, especially in the consumer goods, financial services, and utilities/resource industries. Our special issue concludes with an essay by Matthew Clark on a research program at the US Environmental Protection Agency (EPA) that is focused on understanding the connection between corporate environmental behavior (CEB) and policy interventions. This contribution provides recommendations to stimulate further research on the economics of CSR. Of particular interest to the CEB program are studies that assess the antecedents and consequences of voluntary environmental initiatives, the impact of environmental regulation on innovation, and the private and social returns to environmental research. The author implores researchers to make their results more useful to environmental policymakers.
References Dowell, G., Hart, S., Yeung, B., 2000. Do corporate global environmental standards create or destroy market value? Management Science 46 (8), 1059–1074. Griffin, J.J., Mahon, J.F., 1997. The corporate social performance and corporate financial performance debate: twenty-five years of incomparable research. Business and Society 36 (1), 5–31. McWilliams, A., Siegel, D., 2000. Corporate social responsibility and financial performance: correlation or misspecification? Strategic Management Journal 21 (5), 603–609. McWilliams, A., Siegel, D., 2001. Corporate social responsibility: a theory of the firm perspective. Academy of Management Review 26 (1), 117–127. Orlitzky, M., Schmidt, F.L., Rynes, S.L., 2003. Corporate social and financial performance: a meta-analysis. Organization Studies 24 (3), 403–441. Russo, M.V., Fouts, P.A., 1997. A resource-based perspective on corporate environmental performance and profitability. Academy of Management Journal 40 (3), 534–559.
David Paton Nottingham University Business School Wollaton Road, Nottingham NG8 1BB, UK Corresponding author. Tel.: +44 115 846 6601; fax: +44 115 846 6667 Email-address: [email protected] (D. Paton)
312
Editorial / Structural Change and Economic Dynamics 16 (2005) 309–312
Donald S. Siegel Department of Economics, Russell Sage Laboratory Rensselaer Polytechnic Institute, Sage Building, Room 3502 110 8th Street, Troy, NY 12180-3590, USA Tel.: +1 518 276 2049; fax: +1 518 276 2035 Email-address: [email protected] (D.S. Siegel) 1 November 2003 Available online 2 July 2004
Editorial
The economics of corporate social responsibility: an overview of the special issue
There is growing interest among scholars in the economics of corporate social responsibility (CSR), especially environmental responsibility. Following McWilliams and Siegel (2001), we define CSR as “actions that appear to further some social good, beyond the interests of the firm and that which is required by law.” Firms continually encounter demands from consumers, employees, suppliers, community groups, government, and shareholders to engage in CSR. The end result is that there has been a substantial increase in investment in these activities in all OECD nations. The purpose of this special issue is to explore the economic and managerial implications of this trend. Some key policy issues relate to the optimal level of regulation in this arena and the relationship between investment in CSR and economic performance. Managers also seek guidance on how to allocate resources to CSR and how to incorporate CSR in strategic decision-making. The recent accounting scandals in the US have also focused attention on ethical decision-making in the private sector and the importance of monitoring the business practices of firms. Unfortunately, the analysis of CSR is still in a somewhat embryonic stage and critical issues regarding frameworks, measurement, and empirical methods have not been resolved. Furthermore, this topic, like the study of innovation, cannot be analyzed from the lens of a single disciplinary perspective. Thus, it appears that CSR is fertile ground for interdisciplinary theory development and empirical analysis, which makes it an appropriate topic for a special issue of Structural Change and Economic Dynamics. Our objective in this special issue is to begin to fill this gap. After identifying some of the leading contributors to this burgeoning literature, we solicited manuscripts, had them reviewed, and then held a Special Issue Workshop at Rensselaer Polytechnic Institute in Troy, NY, where the revised papers were presented. The event was jointly sponsored by the School of Humanities and Social Sciences at Rensselaer Polytechnic Institute and the International Centre for Corporate Social Responsibility (ICCSR) at the University of Nottingham in the UK. Among the authors and discussants at the workshop were
0954-349X/$ – see front matter © 2004 Elsevier B.V. All rights reserved. doi:10.1016/j.strueco.2004.04.007
310
Editorial / Structural Change and Economic Dynamics 16 (2005) 309–312
scholars from several academic disciplines (economics, political science, accounting, finance, and management), many international contributors, and a high proportion of junior scholars. The best papers from this workshop are contained in this special issue. These studies address four themes: analysis of the determinants of the propensity to engage in CSR, the antecedents and consequences of socially responsible investment, the link between environmental/social performance and firm performance, and methodological issues in productivity measurement related to CSR. In the remainder of this introductory essay, we provide a brief summary of each study. John T. Scott examines the determinants of firm-level investment in environmental R&D, i.e., product or process R&D undertaken to reduce emissions or to develop a new technology that allows users to improve their environmental performance. His theoretical model assumes that firms choose the level of investment in environmental R&D that maximizes the expected value of profits. It predicts that the extent to which a firm engages in this activity is related to various firm and industry characteristics. Using a novel econometric procedure, a Tobit model with sample selection correction, he finds that investment in environmental R&D is strongly influenced by greater corporate self-interest in reducing emissions. The author concludes that two types of public policies can also affect the propensity of firms to engage in environmental R&D: a pre-innovation periodic tax and stricter regulations. The paper by Amir Barnea, Robert Heinkel, and Alan Kraus is a theoretical analysis of socially responsible investing (SRI), a growing trend in mutual fund investment. The authors focus on the role of “green investors,” who screen their investment portfolios based on social or environmental criteria. They find that the actions of green investors can encourage companies to change their environmentally-unfriendly practices. More importantly, the authors have cleverly devised a new SRI strategy: green investors can also induce changes in corporate environmental policies by short-selling polluting companies. Thus, it appears as though the stick, as well as the carrot, can result in changes in corporate policies. Wendy Chapple, Catherine Morrison Paul, and Richard Harris present an empirical analysis of the cost implications of voluntary waste minimization. They analyze countylevel, manufacturing data from the UK and employ a framework that treats waste as a “bad” or “undesirable” output. The authors report that waste reduction is associated with increased costs, which are increasing at the margin. They also find that for most counties, waste reduction is associated with an increase in the use of materials and a decline in the use of labor. V. Eldon Ball, Rolf F¨are, Shawna Grosskopf, and Osman Zaim address an important research question relating to the CSR activities of firms: How should we measure productivity if there are “bad” outputs? They demonstrate that conventional estimates of productivity growth are biased, because such measures ignore external or social output. They construct an alternative measure of productivity growth that takes account of externalities and social dimensions. The authors then apply this method to the US agricultural sector. Khaled Elsayed and David Paton conduct an econometric analysis of the link between the environmental performance and accounting profitability of UK firms, using dynamic panel data techniques. Such methods have not been employed in previous empirical studies (e.g., Russo and Fouts, 1997; McWilliams and Siegel, 2000; Dowell et al., 2000). The authors
Editorial / Structural Change and Economic Dynamics 16 (2005) 309–312
311
report that environmental performance has a neutral effect on corporate profitability, which is measured using three proxies: Tobin’s q, return on assets, and return on sales. Another key result is that controlling for firm heterogeneity has a significant effect on estimates of the impact of environmental performance on firm performance. Thus, studies that do not control for this factor are likely to yield imprecise estimates of the effects of environmental social responsibility on corporate performance. Existing empirical studies of the relationship between corporate environmental performance and firm performance have typically been based on OLS estimation. These papers have yielded inconclusive results (Griffin and Mahon, 1997; Orlitzky et al., 2003). Aly Salama conjectures that this inconsistency could be due the sensitivity of OLS regression results to the presence of outliers. To address this concern, he employs robust regression techniques on a rich, UK firm-level dataset. He also explores industry heterogeneity in the “returns” to better environmental performance. Based on the robust techniques, the author reports that environmental performance has a positive impact on subsequent firm performance, especially in the consumer goods, financial services, and utilities/resource industries. Our special issue concludes with an essay by Matthew Clark on a research program at the US Environmental Protection Agency (EPA) that is focused on understanding the connection between corporate environmental behavior (CEB) and policy interventions. This contribution provides recommendations to stimulate further research on the economics of CSR. Of particular interest to the CEB program are studies that assess the antecedents and consequences of voluntary environmental initiatives, the impact of environmental regulation on innovation, and the private and social returns to environmental research. The author implores researchers to make their results more useful to environmental policymakers.
References Dowell, G., Hart, S., Yeung, B., 2000. Do corporate global environmental standards create or destroy market value? Management Science 46 (8), 1059–1074. Griffin, J.J., Mahon, J.F., 1997. The corporate social performance and corporate financial performance debate: twenty-five years of incomparable research. Business and Society 36 (1), 5–31. McWilliams, A., Siegel, D., 2000. Corporate social responsibility and financial performance: correlation or misspecification? Strategic Management Journal 21 (5), 603–609. McWilliams, A., Siegel, D., 2001. Corporate social responsibility: a theory of the firm perspective. Academy of Management Review 26 (1), 117–127. Orlitzky, M., Schmidt, F.L., Rynes, S.L., 2003. Corporate social and financial performance: a meta-analysis. Organization Studies 24 (3), 403–441. Russo, M.V., Fouts, P.A., 1997. A resource-based perspective on corporate environmental performance and profitability. Academy of Management Journal 40 (3), 534–559.
David Paton Nottingham University Business School Wollaton Road, Nottingham NG8 1BB, UK Corresponding author. Tel.: +44 115 846 6601; fax: +44 115 846 6667 Email-address: [email protected] (D. Paton)
312
Editorial / Structural Change and Economic Dynamics 16 (2005) 309–312
Donald S. Siegel Department of Economics, Russell Sage Laboratory Rensselaer Polytechnic Institute, Sage Building, Room 3502 110 8th Street, Troy, NY 12180-3590, USA Tel.: +1 518 276 2049; fax: +1 518 276 2035 Email-address: [email protected] (D.S. Siegel) 1 November 2003 Available online 2 July 2004