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Introduction

An area that has received an increased focus of attention is the corporate social performance (CSP) of organizations (i.e. Carroll 1979; Wartick and Cochran 1985; Wood 1991a, b). Previous work has focused primarily on the relationship between CSP and financial performance (i.e. Anderson and Frankle 1980; Ingram and Frazier 1980; McGuire et al. 1988). This study builds on this existing research base by examining the relationship between corporate social performance and three organizational variables: organizational size, financial performance and environmental performance.

Theoretical Background

Corporate Social Performance

Wood (1991a) describes Corporate Social Performance (CSP) as being comprised of three major components. The first component is the level of corporate social responsibility which is based on legitimacy within society, public responsibility within the organization, and managerial discretion by each individual within the organization. The second component is the processes of corporate social responsiveness which includes environmental assessment, stakeholder management and issues management. The third component refers to the outcomes of corporate behavior and includes social impacts, social programs, and social policies. As a result, CSP is a critical factor to consider for all organizations since CSP components such as: “(s)ocial issues, environmental pressures, stakeholder concerns are sure to affect corporate decision making and behavior far into the future” (Wood 1991b, p. 400).

Corporate Social Performance and Financial Performance

Previous research on the relationship between CSP and financial performance has provided conflicting results. A positive relationship has been identified in a number of studies (i.e. Bowman 1978; Fry and Hock 1976; Preston 1978; Anderson and Frankle 1980; Belkaoui 1976). This research supports the view that the cost of having a high level of corporate social responsibility is more than offset by the increased benefits in employee morale and productivity (Soloman and Hansen 1985). However, additional studies have found a negative relationship (i.e. Ingram and Frazier 1980; Freedman and Jaggi 1982). This research supports the view that the costs of being socially responsible forces the firm into an unfavorable financial position versus firms that are not socially responsive (Aupperle et al. 1985).

One explanation why these studies may have yielded inconsistent results could be the method in which the social performance variable has been measured (Ullmann 1985). However, a number of recent studies (i.e. McGuire et al. 1988; Fombrun and Shanley 1990; Thomas and Simerly 1994) have been consistent in the use of the same variable to measure corporate social performance. This measurement variable is the Fortune Corporate Reputation Index.

The Use of the Corporate Reputation Index as a Measurement of CSP

In a number of recent studies, the firm’s corporate reputation has been used as a measurement of CSP (i.e. McGuire et al. 1988; Fombrun and Shanley 1990; Thomas and Simerly 1994). The firms corporate reputation is based on Fortune’s Corporate Reputation Index. Using the Corporate Reputation Index, both McGuire et al. (1988) and Fombrun and Shanley (1990) found a positive relationship between CSP and financial performance.

However, Fryxell and Wang (1994) warn that there will be a strong relationship between the Corporate Reputation Index and the firm’s financial performance since, they argue, the Corporate Reputation Index is heavily weighted based on the financial position of the firm. Therefore, a fundamental question that needs to be addressed is whether the Corporate Reputation Index is a valid measurement of a firm’s corporate social performance. By examining the relationship between CSP and three organizational variables, including the firm’s environmental performance, the results of this study will provide empirical support as to whether the Corporate Reputation Index does indeed represent the firm’s environmental commitment.

Corporate Size and Corporate Social Performance

Based on past research, it is expected that the size of the firm will play a role in the firm’s CSP (i.e. Dierkes and Coppock 1978; Trotman and Bradley 1981). Larger firms receive a high level of attention from the general public, which may, in turn, “encourage” the firms to have a higher level of CSP. In their study, Fombrun and Shanley (1990) found that larger firms had a higher value of their Corporate Reputation Index. As a result, it is expected that larger firms would have a higher level of CSP.

Corporate Social Performance and Environmental Performance

Based on the principles of corporate social responsibility (Wood 1991a), it is expected that one of the critical components in the measurement of CSP will be based on the environmental performance of the organization. This is supported by research conducted by Poduska et al. (1992) and Reilly (1992). In examining the social responsibility at Eastman Kodak, Poduska et al. (1992) found that Kodak made a conscious effort to reduce the level of pollution emissions through technological innovations. Reilly (1992) also supports this relationship by examining the pollution reduction activities at Minnesota Mining and Manufacturing.

In this study, environmental performance of the organization is represented by the level of pollution emissions released by the organization. Based on the CSP model and subsequent research, it is expected that organizations will have an obligation to implement actions that will benefit society (Wood 1991a). As a result, it is predicted that there will be an inverse relationship between CSP and the level of pollution emissions.

Therefore, the hypothesis to be empirically tested in this study is:

Hypothesis 1:

Hypothesis 1: Corporate Social Performance of a firm will have a positive relationship with the size of the firm and the profitability of the firm and an inverse relationship with the level of pollution emissions released by the firm.

Methodology

Sample

This study is based on a sample of firms that meet the following criteria for each year from 1987 to 1992:

  1. 1.

    The firm was listed in the Fortune Corporate Reputation Index;

  2. 2.

    The firm was listed in the top 500 companies of pollution emissions in the United States Environmental Protection Agency’s Toxic Release Inventory Report; and

  3. 3.

    Information was available about the firm’s level of profitability and sales from the Fortune 500 listing.

This criteria resulted in the selection of 111 firms in 1987; 102 firms in 1988; 120 firms in 1989; 125 firms in 1990; 118 firms in 1991; and 121 firms in 1992.

Measures

Corporate Social Performance

Corporate Social Performance is based on the Fortune Corporate Reputation Index. Over 8,000 executives and outside industry experts are asked to evaluate organizations within their own industry on eight different variables on a scale from zero (poor) to ten (excellent). The eight attributes are: (1) quality of management, (2) quality of products or services, (3) innovativeness, (4) long-term investment value, (5) financial soundness, (6) ability to attract, develop, and keep talented people, (7) wise use of corporate assets, and (8) responsibility to the community and the environment. Based on the ranking of these eight variables, an overall reputation number is derived.

Since responsibility to the community and the environment is one of the eight attributes of the Corporate Reputation Index, the Corporate Reputation Index is used as a proxy measurement of CSP. The measurement of CSP based on the Corporate Reputation Index which has been used in previous research studies (i.e. McGuire et al. 1988; Fombrun and Shanley 1990; Wokutch and Spencer 1987; Thomas and Simerly 1994) supports the validity of the instrument.

In addition, the benefits of using the Corporate Reputation Index include the high number of respondents and high quality level of respondents to the survey. The respondents are familiar with the performance of the firms and the overall characteristics of the industry and, therefore, can make a well informed evaluation of the organization.

Size

Based on previous work by Fombrun and Shanley (1990) and Cowen et al. (1987), the size of the organization is based on the annual sales of the firm.

Financial Performance

The financial performance of the organization is based on the level of profitability (Cowen et al. 1987). To control for the variation in the size of the organization, the profitability of the firm is based on the yearly profits of the firm divided by the annual sales level of the firm.

Environmental Performance

The environmental performance of the organization is based on the level of pollution emissions released by the firm. The level of pollution emissions is obtained from the EPA’s Toxic Release Inventory Report which generates a listing of the top 500 firms based on pollution emissions. The EPA sent the authors this summary for the years 1987 through 1992. This summary report was unavailable beginning in 1993. This report provides information on air releases, water releases, underground injections, land releases, and transfers from publicly owned treatment works and other transfer facilities. To control for the variation in the size of the organization, the emissions level of the firm is based on the annual pollution emissions of the firm, as reported on the Toxic Release Inventory Report, divided by the annual sales level of the firm.

Results

The yearly descriptive statistics are shown in Table 26.1. As can be seen from the results presented in Table 26.1, there is significant variation of all the variables in the study. In the 6 years examined in this study (1987–1992), the sales of the firms in the sample varied from $123.4 million to $132.7 billion. The Corporate Reputation Index of the companies varied from 3.24 to 9.02. The level of emissions also varied significantly from 5186.3 to 14,396,995. There was also a high level of variation in profitability (−59.49 to 57.96).

Table 26.1 Descriptive statistics
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The correlation between CSP and the other three variables is shown in Table 26.2. As highlighted in Table 26.2, there is a significant positive correlation between CSP and profitability for all 6 years of the study. In addition, there is a significant inverse relationship between CSP and pollution emissions in 1987 and a significant positive relationship between CSP and sales in 1988, 1989, and 1990. Furthermore, there is a significant positive relationship between level of pollution emissions and profitability from 1987 to 1991. There is also an inverse relationship between sales and profitability and pollution emissions in 1987.

Table 26.2 Correlation analysis results
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The results of the regression analysis are shown in Table 26.3. The data in Table 26.3 support Hypothesis 1. The data in the 1987 and the 1990 sample support the relationship of all the variables presented in the hypothesis. In the years 1988, 1991 and 1992, the regression analysis demonstrated the positive relationship between CSP and sales and profitability, and the 1989 sample highlighted the positive relationship between profitability and CSP.

Table 26.3 Regression analysis results
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Discussion

The results of this study show that for 2 of the 6 years of the study (1987, 1990), a firm’s size, financial performance, and environmental performance do impact the firm’s level of CSP. Firms that are larger in size, have higher levels of profitability and lower levels of pollution emissions have higher levels of CSP. In addition, 3 of the 4 remaining years (1988, 1991, 1992) showed the positive relationship between CSP and sales and profitability. As a result, this study extends previous research on CSP. The results show that CSP is a multi-faceted construct which is impacted by various organizational variables. The results show that corporate social performance is indeed a complex construct. For firms to be acknowledged as leaders in corporate social responsibility, they need to focus not only on their financial performance, but also on their environmental performance. Although a significant relationship was only present in 2 of the 6 years of the study for all three variables examined, it does confirm that pollution emissions are important when considering the relationship between CSP and organizational variables.

The results of the study also support the belief that a strong relationship exists between profitability and corporate social performance. This study supports the view that profitability of the firm allows and/or encourages managers to implement programs that increase the level of corporate social responsibility.

In addition, the results show that larger firms recognize the need to be leaders in their commitment to corporate social performance. The leadership role may be due not only to the firm’s access to additional resources used to implement corporate social performance programs, but also to the increased influence of additional stakeholders (i.e. environmental groups, government regulations) rather than a primary focus on stockholders.

In addition, this study extends the research using Fortune’s Corporate Reputation Index. The results show that the Corporate Reputation Index is a valid indicator of the firm’s overall corporate social performance. The significant relationship between CSP and the three organizational variables, which include pollution emissions, demonstrates that the Corporate Reputation Index does represent the environmental pro-activeness of organizations.

Limitations and Suggestions for Future Research

There are a number of limitations in this study that can be addressed in future research. A primary limitation is the use of pollution emissions to measure environmental performance in all sizes of firms. The use of pollution emissions ignores the measurement of environmental performance of firms in relatively low polluting industries. Therefore, this study is biased toward heavy manufacturing firms and limits the generalizability of the results.

In addition, the use of pollution emissions will not capture extraordinary environmental impacts, such as major oil spills and toxic gas releases. However, the focus of this study is to examine the consistency of the relationship presented over a 6 year time period. The focus of this study was not to examine the short term measurement of this relationship based on one time unique extraordinary circumstances. Despite these limitations, the authors believe that pollution emissions are a valid proxy to measure the level of environmental performance of an organization. However, the authors suggest that future research should examine other variables which could be used as a proxy for environmental performance.

Another limitation of this study is the bias toward large organizations due to the selection criteria of the firms. Future studies could examine the relationship presented in this study to see if it is also applicable to smaller firms which may be included in the Toxic Release Inventory Report, but not included in the Fortune company listing.

Summary

The purpose of this study was to examine the relationship between the corporate social performance (CSP) of an organization and three variables: the size of the organization, the financial performance of the organization, and the environmental performance of the organization. By empirically testing data from 1987 to 1992, the results of the study show that firm size, financial performance and environmental performance do impact the level of corporate social performance.