Reputation Institute

RI Insights

Welcome to RI In-Sights, the new monthly publication from the RI that is designed to provide a compass to RI Members seeking to navigate through the jungle of academic theory and best practice about corporate reputations. Different themes will be summarized, reviewed, and assessed regularly in order to bring out succinct insights about cutting-edge developments, research, ideas, and analyses about corporate reputations.

The topic of this introductory RI In-Sights is the relationship between a company's Financial Performance (FP) and its Social Performance (SP) –the building blocks of the so-called Business Case for Social Responsibility.

The Business Case for Social Responsibility

A question of interest to both academics and practitioners is: Does 'doing good' have financial payoffs? In this introductory RI In-Sights, we examine academic research on this question, all of which takes as its point of departure a seminal article written by Milton Friedman written in 1970.

Reference: Milton Friedman, "The Social Responsibility of Business is to Increase its Profits," New York Times Magazine, Sept 13, 1970, pp.122-126.

In1970, the New York Times Magazine published an article by prominent U. of Chicago conservative economist Milton Friedman. In it Friedman argued that if managers focused their energies solely on maximizing shareholder wealth, the rest would take care of itself. The article set the stage for a continuing debate between proponents of so-called "shareholder profit maximization", and those who point to the dysfunctions of focusing solely on the bottom-line. The latter favor a so-called "stakeholder perspective", one that works to balance the financial interests of shareholders against the frequently neglected interests of employees, consumers, communities, and society at large.

RI Highlights

Since Friedman's essay, dozens of academic studies have been conducted to explore the link between a company's Social Performance and its Financial Performance. This issue of In-Sight examines two leading articles that capture the core findings to date. Readers can also access the full text of those articles.

Griffin, J. G., and Mahon, J. F. The Corporate Social Performance and Corporate Financial Performance Debate: Twenty-Five Years of Incomparable Debate, Business and Society, 36 (1): March 1997, pp. 5-31.

Orlitzky, M., and Benjamin, J. D. Corporate Social Performance and Firm Risk: A Meta-Analytic Review, Business and Society, 40 (4): December 2001, pp.369-396.

RI Analysis

Academic evidence argues against the strict shareholder profit maximization view originally advanced by Milton Friedman, and in favor of the more responsive approach advocated by the stakeholder perspective. The business case for social responsibility is rooted in a more complex understanding of the short and long term pressures that stakeholder groups put on companies. Their heightened expectations create real pressures on companies for increased transparency and responsiveness. The research largely confirms what Boston University researchers Sandra Waddock and Samuel Graves describe as a 'virtuous circle': Companies that improve perceptions of their Social Performance at any time during the business cycle through social initiatives will see their Financial Performance improve over time.