Differential Impact of Philanthropic Versus Dual-Purpose Corporate Social Responsibility Initiatives

Synopsis The research problem This study examines whether varying levels of socially responsible activities also deliver predictably (and inversely) varying levels of contribution to the firm performance. I propose that it is necessary to distinguish philanthropic corporate social responsibility (CSR) efforts designed to benefit society from those that benefit shareholders while also serving society. The former efforts primarily benefit the larger society external to the firm, while the latter programs generally advance the welfare and the quality of the firm’s human capital. Motivation Despite the popularity of CSR initiatives, the link between corporate social performance (CSP) and corporate financial performance (CFP) is still debatable and remains elusive. Perhaps this is due to the lack of understanding about the path through which CSR affects the firm value or little knowledge about the costs and benefits. Rising corporate failures and hypocrisy also have led to public skepticism that CSR initiatives serve public relations purposes with little substance. This study attempts to narrow the gap by documenting the costs and benefits of engaging in CSR programs. The test hypotheses I test whether there is a link between CFP and CSP, and if so, whether the CSP–CFP link is more robust for dual-purpose CSR efforts than philanthropic CSR efforts. Furthermore, I also test whether labor costs differ across different CSR initiatives and whether the extra cost of caring employees merely reduces the firm’s overall profitability or if it brings net positive benefits to the shareholders. Target population Various stakeholders, including corporate managers, investors and standard setters, and researchers. Adopted methodology and analyses Multivariate regressions are used to test the hypotheses. Heckman’s two-stage estimation approach is adopted. To mitigate endogeneity and ascertain the robustness of findings, I also apply the Generalized Method of Moments (GMM)-based instrumental variable (IV) estimation method. Findings I find that there is little consistent evidence that primarily philanthropic CSR engagements benefit the firm’s financial position. However, there is robust evidence that CSR initiatives that advance employee welfare or develop human capital do enhance short-term and long-term financial performance. Employees are considered the most valuable assets of a company. Because human capital development constitutes a core strategic initiative of the firm, I propose removing the metric associated with human capital development when examining the relationship between CSR and performance.