Moskowitz Prize Study Removes Doubt Over Link Between Strong Corporate Social and Financial Performance

Source: Institutionalshareowner.Com, 1 November 2004

The study analyzes over 50 published studies on corporate social performance and corporate financial performance, and finds an unambiguous positive relationship.
"Can business meet new social, environmental, and financial expectations and still win?"

Business Week posed this question in 1999, though scholarly investigations dating back to the early 1970s have been generating and examining empirical evidence on whether corporate social responsibility (CSR) pays or costs. Results of these studies in aggregate have been considered inconclusive, largely because the body of findings had yet to be analyzed in statistically rigorous ways–until now.

This month, the Social Investment Forum (SIF) awarded the 2004 Moskowitz Prize to a paper that performs just such an analysis of all known studies on the relationship between corporate social performance (CSP) and corporate financial performance (CFP). The annual Moskowitz Prize, named after CSR research pioneer Milton Moskowitz, honors outstanding research in the field of socially responsible investing (SRI).

"Based on this meta-analysis integrating 30 years of research, the answer to the introductory question posed by Business Week is affirmative," states the study, entitled Corporate Social and Financial Performance: A Meta-Analysis. "The results of this meta-analysis show that there is a positive association between CSP and CFP across industries and across study contexts."

In other words, corporate social responsibility does not cost, it pays, according to the report

The study, based on lead author Marc Orlitzky’s 1998 doctoral dissertation and co-authored by his University of Iowa professors Frank Schmidt and Sara Rynes, analyzes 52 studies published between 1972 and 1997, containing a total of 33,878 observations. This "study of studies" technique used by Prof. Orlitzky, who now teaches at the Australian Graduate School of Management (AGSM), is commonly employed in drug testing to ascertain the overall findings of all clinical trials.

"This analysis provides strong evidence of what many people have suspected all along–that corporate social responsibility does indeed have a measurable impact on the financial bottom line," said Tim Smith, president of SIF. "That a survey of so many studies by so many respected individuals supports this view is a major finding that validates the core thinking of socially responsible investing."

Previous attempts to analyze aggregate findings relied on simplistic techniques such as narrative reviews and "vote-counting." The latter method, "whose lack of validity has been known for more than 20 years" according to Profs. Orlitzky, Schmidt, and Rynes, codes studies as showing significantly positive, negative, or mixed (and thus statistically non-significant) results. Meta-analysis allows for a much more nuanced and precise examination, as statistical findings that may seem insignificant in isolation become more significant when aggregated over a large body of evidence.

In granting the prize, SIF quotes from the abstract of the study written by Lloyd Kurtz, a portfolio manager at Nelson Capital Management who has overseen the Moskowitz Prize since its inception.

"The study does an unusually thorough job of analyzing possible confounding issues," writes Mr. Kurtz in the abstract posted on, the online annotated bibliography of quantitative studies of SRI that Mr. Kurtz maintains. "For example, some analysts have expressed concern about availability bias–i.e., that studies failing to show a positive relationship between social responsibility and financial performance are unlikely to be published."

"The authors conduct a ‘file drawer’ analysis demonstrating that the number of such studies would have to be very high (as many as 1,000) to change their overall conclusions," states Mr. Kurtz.

The study reports several other important findings.

First, it finds that corporate social performance correlates more strongly with corporate financial performance when using accounting measures for analysis than market-based measures, such as stock price.

Second, it finds that corporate environmental performance affects corporate financial performance to a lesser degree than the various other measures of corporate social performance, such as corporate reputations for minority hiring for example.

Third, it finds a "virtuous cycle" between corporate social and financial performance: not only does strong CSP lead to strong CFP, but also strong CFP allows companies to afford spending on social responsibility measures, which can lead to increasing CSP–and so on.

Finally, the study notes that its findings carry significant implications for corporate managers:

"First and foremost, market forces generally do not penalize companies that are high in corporate social performance; thus managers can afford to be socially responsible," the study states. "As findings about the positive relationships between [corporate social performance and corporate financial performance] become more widely known, managers may be more likely to pursue [corporate social performance] as part of their strategy for attaining high [corporate financial performance]."