Doing Well by Doing Good: Corporate Social Responsibility and Profitability

Article excerpt

Does it pay to try to "improve social or environmental conditions" ? This is not a cynical question but one that managements must confront. Dow Jones, creator of the Dow Jones Sustainability Index, believes it does pay, and companies may seek to join the DJSI as independent affirmation of their sustainability efforts. The authors test the Dow Jones assertion by analyzing the financial performance of 120 firms that are members of the index and 120 that are not (all North American firms, matched by industry, year, and size for nine years). The study found a positive, long-term relationship between financial performance and adoption of the DJSI criteria, but also note caveats to this conclusion.


Sustainability is one of the most indistinct (perhaps incoherent) of subject areas because of its varied applications across academic disciplines. While there is substantial disagreement regarding a unified definition for the application of the term, there is relatively stronger agreement regarding the theoretical benefit of sustainability (Margolis and Walsh, 2003; McPeak and Tooley, 2008). Corporate social responsibility is one aspect of sustainability that Mackey et al. (2007) define as "voluntary firm actions designed to improve social or environmental conditions." For some corporations, this voluntary action leads to the publication of separate special purpose "sustainability" reports. Some of these firms also seek independent assurance of their sustainability reports as a way to further enhance the credibility of their sustainability efforts. One such assurance provider is the Dow Jones Sustainability Index (DJSI). To become a member of the DSJI, firms are assessed on the opportunities and the risks related to economic, environmental, and social dimensions. Dow Jones asserts that corporate sustainability "is a business approach to create long-term shareholder value" (2009). The purpose this paper is to test this assertion by examining the association between corporate social responsibility activities, as evidenced by DJSI membership, and various measures of firm financial performance.

This exploratory study analyzes the financial performance of firms adopting the DJSI criteria. The analysis presented is an extension of a recent exploratory study by Lopez et al. (2007) conducted on a sample of 110 European firms over a six-year period (660 firm-years). Methodologically, nine years of financial and DJSI adoption data from 240 firms was analyzed for this study. A matched sample design was used in which 120 North American firms from the DJSI were matched with 120 North American non-DJSI firms based on industry, year, and size for nine years (1999-2007) resulting in 2,160 firm-year observations. Net sales, total assets, longterm debt, and conformance to the DJSI are regressed against the four measures of the firm's financial performance (gross profit margin, net operating profit, profit margin, and return on assets) and one measure of market value (market-to-book value of stock) for the purpose of determining the marginal effect of these operational and social responsibility characteristics.

The results of this study suggest a statistically significant positive relationship between a firm's financial performance and a firm's adoption of the DJSI criteria. An analysis of the model's variance structure indicates that the variables investigated appear to mutually influence profitability. The overarching findings of this study are that DJSI firms have higher gross profit margins and higher return on assets than non-DJSI firms. Hence, both income statement (short-term) and balance sheet (long-term) effect appears to occur. Higher gross profit margins can result from the willingness of customers to pay a higher per-unit price or from lower costs to produce the good or service. Higher return on assets indicates a long-term effect associated with sustainability, possibly the result of customer loyalty, brand name, or trust. …