October 26, 2004
Moskowitz Prize Study Removes Doubt Over Link Between Strong Corporate Social and Financial Performance
by William Baue
The study analyzes over 50 published studies on corporate social performance and corporate
financial performance, and finds an unambiguous positive relationship.
"Can business meet new social, environmental, and financial expectations and still win?"
Business Week posed this question in 1999, though scholarly investigations dating back
to the early 1970s have been generating and examining empirical evidence on whether corporate
social responsibility (CSR) pays or costs. Results of these studies in aggregate have been
considered inconclusive, largely because the body of findings had yet to be analyzed in
statistically rigorous ways--until now.
This month, the Social Investment Forum (SIF) awarded the 2004 Moskowitz Prize to a
paper that performs just such an analysis of all known studies on the relationship between
corporate social performance (CSP) and corporate financial performance (CFP). The annual Moskowitz
Prize, named after CSR research pioneer Milton Moskowitz, honors outstanding research in the
field of socially responsible investing (SRI).
"Based on this meta-analysis integrating
30 years of research, the answer to the introductory question posed by Business Week is
affirmative," states the study, entitled Corporate Social and Financial Performance: A
Meta-Analysis. "The results of this meta-analysis show that there is a positive association
between CSP and CFP across industries and across study contexts."
In other words,
corporate social responsibility does not cost, it pays, according to the report
based on lead author Marc Orlitzky's 1998 doctoral dissertation and co-authored by his University
of Iowa professors Frank Schmidt and Sara Rynes, analyzes 52 studies published between 1972 and
1997, containing a total of 33,878 observations. This "study of studies" technique used by Prof.
Orlitzky, who now teaches at the Australian Graduate School of Management (AGSM), is commonly
employed in drug testing to ascertain the overall findings of all clinical trials.
analysis provides strong evidence of what many people have suspected all along--that corporate
social responsibility does indeed have a measurable impact on the financial bottom line," said Tim
Smith, president of SIF. "That a survey of so many studies by so many respected individuals
supports this view is a major finding that validates the core thinking of socially responsible
Previous attempts to analyze aggregate findings relied on simplistic
techniques such as narrative reviews and "vote-counting." The latter method, "whose lack of
validity has been known for more than 20 years" according to Profs. Orlitzky, Schmidt, and Rynes,
codes studies as showing significantly positive, negative, or mixed (and thus statistically
non-significant) results. Meta-analysis allows for a much more nuanced and precise examination, as
statistical findings that may seem insignificant in isolation become more significant when
aggregated over a large body of evidence.
In granting the prize, SIF quotes from the
abstract of the study written by Lloyd Kurtz, a portfolio manager at Nelson Capital Management who has overseen the Moskowitz
Prize since its inception.
"The study does an unusually thorough job of analyzing possible
confounding issues," writes Mr. Kurtz in the abstract posted on SRIstudies.org, the online annotated bibliography of
quantitative studies of SRI that Mr. Kurtz maintains. "For example, some analysts have expressed
concern about availability bias--i.e., that studies failing to show a positive relationship between
social responsibility and financial performance are unlikely to be published."
authors conduct a 'file drawer' analysis demonstrating that the number of such studies would have
to be very high (as many as 1,000) to change their overall conclusions," states Mr. Kurtz.
The study reports several other important findings.
First, it finds that corporate
social performance correlates more strongly with corporate financial performance when using
accounting measures for analysis than market-based measures, such as stock price.
Second, it finds that corporate environmental performance affects corporate financial
performance to a lesser degree than the various other measures of corporate social performance,
such as corporate reputations for minority hiring for example.
Third, it finds a "virtuous
cycle" between corporate social and financial performance: not only does strong CSP lead to strong
CFP, but also strong CFP allows companies to afford spending on social responsibility measures,
which can lead to increasing CSP--and so on.
Finally, the study notes that its findings
carry significant implications for corporate managers:
"First and foremost, market forces
generally do not penalize companies that are high in corporate social performance; thus managers
can afford to be socially responsible," the study states. "As findings about the positive
relationships between [corporate social performance and corporate financial performance] become
more widely known, managers may be more likely to pursue [corporate social performance] as part of
their strategy for attaining high [corporate financial performance]."