Corporate Social Responsibility and Financial Performance in the Australian Context

Corporate social responsibility and financial performance in the Australian context
Matthew Brine, Rebecca Brown and Greg Hackett 1

The concept of social responsibility of corporations has engendered considerable interest in Australia in recent years. While previous research on the relationship between corporate social responsibility and financial performance has largely been based on international data, this paper examines the relationship between the adoption of corporate social responsibility and the financial performance of companies within Australia. A number of economic drivers for corporate social responsibility have been identified that may explain its voluntary adoption by companies. Our preliminary results revealed no statistically significant relationship between corporate social responsibility and financial performance; however, a number of opportunities for refining the research were identified.

1

The authors are from Corporations and Financial Services Division, the Australian Treasury. This article has benefited from comments and suggestions provided by Geoff Miller and Jim Murphy. The views in this article are those of the authors and not necessarily those of the Australian Treasury. 47

Corporate social responsibility and financial performance in the Australian context

Introduction
There is currently a debate on the extent to which company directors and managers should consider social and environmental factors in commercial decision making. An approach to decision making that routinely encompasses these factors may be described as corporate social responsibility. A view is emerging that corporate social responsibility can contribute to the financial performance of a company. This approach, which has been described as the ‘enlightened shareholder approach’, suggests that corporate decision-makers must consider a range of social and environmental matters if they are to maximise long-term financial returns. This paper presents some

References: ADL, Arthur D Little Limited 2003, The Business Case for Corporate Responsibility, December, Cambridge. Aupperle, K, Carroll, A and Hatfield, J 1985, ‘An empirical examination of the relationship between corporate social responsibility and profitability’, The Academy of Management Journal, vol 28, no. 2, June, pp 446-63. Blackburn, V, Doran, M and Shrader, C 1994, ‘Investigating the Dimensions of Social Responsibility and the Consequences for Corporate Financial Performance’, Journal of Managerial Issues, vol 6, no. 2, pp 195-218. Bodie, Z, Kane, A and Marcus, A 2002, Investments, 5th Edition, McGraw-Hill Companies, New York. CAMAC, Corporations and Markets Advisory Committee 2006, The Social Responsibility of Companies, December, Sydney. Crook, C 2005, ‘The union of concerned executives’, The Economist, 20 January, viewed 3 February 2007, http://www.economist.com/surveys/displaystory.cfm?story_id=3555194. EIA, Ethical Investment Association 2006, Sustainable responsible investment in Australia — 2006: A benchmarking survey, September, Sydney. Globescan Inc 2005, Definition of corporate social responsibility survey, viewed 3 February 2007, http://www.globescan.com/rf_csr_first_01.htm. Gujarati, D 1999, Essentials of Econometrics, 2nd Edition, McGraw-Hill Companies, United States of America. Hill and Knowlton 2006, Return on Reputation: Corporate Reputation Watch 2006, March, New York. McGuire, J, Sundgren, A and Schneeweis, T 1988, ‘Corporate social responsibility and firm financial performance’, The Academy of Management Journal, vol 31, no. 4, pp 854-72. McWilliams, A and Siegel, D 2000, ‘Research notes and communications. Corporate social responsibility and financial performance: correlation or misspecification?’, Strategic Management Journal, vol 21, pp 603-9. 57 Corporate social responsibility and financial performance in the Australian context Orlitzky, M, Schmidt, F & Rynes, S 2003, ‘Corporate social and financial performance: A meta analysis’, Organization Studies, vol 24, no. 3, pp 403-11. PJC, Parliamentary Joint Committee on Corporations and Financial Services 2006, Corporate responsibility: Managing risk and creating value, June, Canberra. Rey, M and Nguyen, T 2005, Financial payback from environmental & social factors, AMP Capital Investors, April, Sydney. SAM Indexes GmBH 2003, Results of DJSI Review 2003, Press Release, 4 September, Zurich. Tsoutoura, M 2004, Corporate Social Responsibility and Financial Performance, University of California at Berkeley, March. Waddock, S and Graves, S 1997, ‘The Corporate Social Performance-Financial Performance Link’, Strategic Management Journal, vol 18, no. 4, pp 303-19. 58