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The relationship between corporate social performance and corporate financial performance and the role of innovation: evidence from German listed firms

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Abstract

Corporate social performance (CSP) has become increasingly important in recent years, primarily because of growing stakeholder requirements regarding a firm’s environmental and social concerns. Satisfying stakeholder expectations and needs through transparent corporate activities may actually improve a firm’s reputation and financial results. With an empirical study of the CSP disclosures of large German listed firms, we tested the hypothesized causal relationship between CSP and corporate financial performance (CFP). We measure CSP as an equal weighted CSP-Index based on Global Reporting Initiative’s social and environmental core key performance indicators. CFP is measured by return on assets. Based on correlation and regression analyses, we find support for a positive and significant interaction between CSP and CFP for large German listed firms. Our findings indicate that the CSP–CFP relationship is affected by the degree of innovation. Furthermore, there is evidence for a unidirectional Granger causal relationship running from CFPt-1 to CSPt. Thus, firms with superior CFP may use their surplus of monetary or non-monetary resources for further improvements of their CSP.

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Notes

  1. According to Thomson Financial Datastream (2007) the ROA is defined as: \(\text{ ROA }=\frac{\text{ Net } \text{ income } \text{ before } \text{ preferred } \text{ dividends } + ((\text{ interest } \text{ expense } \text{ on } \text{ debt } - \text{ interest } \text{ capitalized })\times (1-{\text{ tax } \text{ rate }}))}{\text{ average } \text{ of } \text{ last } \text{ year's } \text{ and } \text{ current } \text{ year's } \text{ total } \text{ assets }} \times 100\).

  2. The use of the number of patents as proxy measure for the innovation variable is another option, but that proxy measure for innovation is less often used (Donnelly 2000). Additionally, for our study, the complete dataset regarding the number of patents was not available for large German listed firms.

  3. Regarding the main models 1–4, we differentiate between social and environmental indicators for a deeper analysis. There is evidence of a positive relationship between social indicators and CFP as well as environmental indicators and CFP, but the results are not significant.

  4. We suggest that the time-lag of one year is too short to show the (positive) financial long-term effects of an innovation. For this reason we did not test the relationship between CFP and innovation. This analysis would require a time-lag at minimum of 3 years Scholtens 2008).

  5. This result differs from studies of firms in the United States and United Kingdom, e.g., Scholtens (2008), Callan and Thomas (2009), and Nelling and Webb (2009).

  6. Exceptions due to qualitative and quantitative disclosure requirements: EN26, EC2, HR4, HR6, HR7, SO\(_2\)–SO\(_4\) and PR1. For indicators with qualitative and quantitative disclosure requirements individual scoring scales are applied.

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Author information

Authors and Affiliations

  1. Chair of Business Administration, Accounting and Management Control, Friedrich-Alexander-University Erlangen-Nuremberg, Erlangen, Germany

    Thomas M. Fischer

  2. PricewaterhouseCoopers WPG AG Berlin/Munich, Sustainability Services, Berlin, Germany

    Angelika A. Sawczyn

Authors
  1. Thomas M. Fischer
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Correspondence to Angelika A. Sawczyn.

Appendix: Composition of corporate social performance

Appendix: Composition of corporate social performance

1.1 Scoring scale

Scoring scale of quantitative environmental and social performance indicators is from 0 to 6.

Performance indicators

Map to GRI

Scoring scale

Environmental GRI core performance indicators (max. score 54)

   Percentage of materials used that are recycled input materials

EN2

0–6

   Direct and indirect energy consumption by primary energy source

EN3/EN4

0–6

   Total water withdrawal (water discharge) by source

EN8 (EN 21)

0–6

   Description of significant impacts of activities, products, and services on biodiversity in protected areas and areas of high biodiversity value outside protected areas

EN11/EN12

0–6

   Total direct and indirect greenhouse gas emissions (emissions of ozone-depleting substances and, NO\(_\mathrm{x}\), SO\(_\mathrm{x}\), and other significant air emissions) by weight

EN16/EN17 (EN19/ EN20)

0–6

   Total weight of waste by type and disposal method

EN22

0–6

   Initiatives to mitigate environmental impacts of products and services, and extent of impact mitigation

EN26

0–6

   Percentage of products sold and their packaging materials that are reclaimed by category

EN27

0–6

   Financial implications and other risks and opportunities for the organization’s activities due to climate change

EC2

0–6

Social GRI core performance indicators (max. score 84)

   Total workforce by employment type, contract, and region, and total number and rate of employee turnover by age group, gender, and region

LA1/LA2

0–6

   Rates of injury, occupational diseases, lost days and absenteeism, and number of work-related fatalities by region

LA7

0–6

   Average hours of training per year per employee by employee category

LA10

0–6

   Composition of governance bodies and breakdown of employees per category according to gender, age group, minority group membership, and other indicators of diversity

LA13

0–6

   Ratio of basic salary of men to women by employee category

LA14

0–6

   Coverage of the organization’s defined benefit plan obligations

EC3

0–6

   Total number of incidents of discrimination and actions taken

HR4

0–6

   Operations identified as having significant risk for incidents of child labour, and measures taken to contribute to the elimination of child labour

HR6

0–6

   Operations identified as having significant risk for incidents of forced or compulsory labour, and measures to contribute to the elimination of forced or compulsory labour

HR7

0–6

   Percentage and total number of business units analysed for risks related to corruption, and actions taken in response to incidents of corruption

SO\(_2\)–SO\(_4\)

0–6

   Policy, practices, and proportion of spending on locally based suppliers at significant locations of operation

EC6

0–6

   Development and impact of infrastructure investments and services provided primarily for public benefit through commercial or pro bono engagement

EC8

0–6

   Life cycle stages in which health and safety impacts of products and services are assessed for improvement, and percentage of significant products and services categories subject to such procedures

PR1

0–6

   Type of product and service information required by procedures, and percentage of significant products and services subject to such information requirements

PR3

0–6

Corporate social performance (max. score 138)

A point is awarded for each of the following itemsFootnote 6:

  • absolute or relative performance information is presented

  • absolute or relative performance information is presented relative to peers/rivals or industry

  • absolute or relative performance information is presented relative to previous periods (trend analysis)

  • absolute or relative performance information is presented relative to targets

  • performance information is presented in both absolute and normalized form

  • absolute or relative performance information is presented at disaggregate level.

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Fischer, T.M., Sawczyn, A.A. The relationship between corporate social performance and corporate financial performance and the role of innovation: evidence from German listed firms. J Manag Control 24, 27–52 (2013). https://doi.org/10.1007/s00187-013-0171-5

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