Abstract
Research focusing on the relationship between measures of Corporate Social Responsibility (CSR) and company financial performance has led to mixed results in the North American context. In addition, the ethical attitudes and approaches toward CSR investments of both companies and rating agencies are not necessarily the same in Europe and the United States. In this study, we use CSR ratings issued by a major European CSR ratings agency (Vigeo) to examine in a bi-directional manner the relationships between CSR ratings and financial performance in the European context. By bi-directional, we mean an examination of the relationship between prior CSR ratings and subsequent accounting and financial performance and reciprocally, the impact of accounting and financial performance of year N − 1 on CSR ratings of year N. Our principal findings are: (1) the greater the market capitalization of a company, the higher the Vigeo rating, (2) the higher the risk of the company, the lower the Vigeo rating, and (3) the greater the stock market return of a company, the lower the Vigeo rating. Based on these findings, we propose (1) a concept of “political visibility” pursuant to which enterprises of a greater size are exposed to greater pressure to conform to norms of socially acceptable behavior, (2) a concept of “priorities” in which enterprises that have resolved their most urgent financial needs have a greater ability to invest in CSR, (3) a concept of “rating downgrading” which reveals the sanctioning role of the rating agency from an ethical standpoint.
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28 August 2017
An erratum to this article has been published.
Notes
This lack of consensus is demonstrated by the disparity of results reported in prior studies. For example, in the banking sector, Soana (2011), indicate that: "[…] our analyses […] show no evidence of a significant relationship between CSP and CFP." Baird et al. (2012) found that "In conflict with expectations, the unweighted average effect of CSP [Corporate Social Performance] on CFP is negative." These authors find a positive effect of the CSP on CFP for only 17 % of the sectors examined. Finally, Servaes and Tamayo (2013) "[…] show that in certain circumstances CSR enhances the value of the firm, but in others, it could destroy value, suggesting that some firms adhere to the shareholder model, and others may consider broader objectives […]
Unlike financial rating agencies, CSR ratings agencies are paid by investors. Their assessments of the CSR ratings agencies rely primarily on public data about the companies as well as data from NGOs, government agencies, or unions. This type of rating is called a “declarative notation.” The public is not a recipient of this information and can only rely on information about CSR issued by the company itself. (Translated by the authors from Novethic 2013).
Human rights, human resources, environment, behavior in the markets, corporate governance, and societal commitment.
Policies and objectives, deployment and result.
The scale of Vigeo ratings is as follows: "companies below the industry average”, “companies at the average for the sector”, “companies active in the sector,” “companies which are the most committed in the sector.”
This CSR rating will be qualified as: “insignificant engagement,” “started,” “conclusive,” or “advanced” according to its level.
According to the Vigeo methodology 20/03/2008.
Financial P&L is the difference between financial revenues and financial expenses.
Outliers were defined as accounting ratios in relation to turnover greater than 100 %, annual stock returns greater than 200 %, and annual change in turnover greater than 200 %.
The control variables "capitalization" and "risk", are contemporaneous variables. This is the reason why we take into account ln Market capitalization "i, t + k" and Risk "i, t + k" and not ln Market capitalization "i, t" and Risk "i, t." In contrast to the approach that we have adopted for the calculation of the accounting and financial performance variables, we have not taken into account the sectorial average CSR ratings calculated by Vigeo. Our sectorial averages were estimated for 6180 companies while Vigeo takes into account in its calculation only 509 companies on which it issues an average sectorial rating. In fact, the average of the CSR ratings that could be attributed to these 6180 companies is not known.
The control variables "capitalization" and "risk" are contemporaneous with the rating. That is why we take into account lnMarket capitalization "i, t" and Risk "i, t" and not ln Market capitalization "i, t − 1" and Risk "i, t − 1."
Our work suggests that the CSR is a cost. Nevertheless, one can imagine that certain less costly expenditures may be effective from a CSR perspective.
These conclusions support the work of Becchetti et al. (2008) who indicate that their results are: "[…] consistent with the hypothesis that CSR is expected in principle to redirect the focus of corporate activity from the maximization of shareholders to that of the stakeholders interests."
From this point of view, arguably, subject to verification, a time series analysis would not have as much discriminatory power as a cross-sectional analysis in terms of variance. The CSR rating is probably more sensitive to a difference between companies than it is with respect to the evolution of performance within the same firm over a given period due to a certain level of inertia in ratings.
This perception is confirmed by the Prospective approach which explains the future performance of firms based on CSR ratings (see “Model 1” section). The results indicate that companies that invest more in CSR are those that have lower OPERATINGP&L, EBIT, and NETINCOME and logically the worst stock market returns compared to their sector. Implementing CSR policies may therefore be perceived by shareholders as a potential source of performance decline (see Prospective approach). Furthermore this result confirms the conclusions of Mackey et al. (2007) who, in a theoretical article, argued that, under certain conditions, making an investment in CSR can have a negative impact on shareholder wealth.
This intuition is implicitly present in McGuire et al. (1988) since these authors state that "[…] government agencies may find it necessary to pass more stringent regulations, constituting explicit contracts, to force the firm to act in a socially responsible social manner."
This attitude seems logical since stock prices include certain elements which are not reflected in accounting numbers.
A difference in managerial culture might account for the persistence of a size effect in the presence of a business case for CSR. However, if a cultural difference exists between managers of large companies as compared with managers of small and medium sized companies, it is less likely to be present in our sample composed of good quality companies quoted on stock exchanges and therefore headed by managers who would presumably be familiar with "good" management techniques.
Becchetti et al. (2008) speak about a "[…] penalty that social responsibility (SR) imposes on shareholders […]"
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The authors would like to thank Vigeo for providing the data for this study.
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An erratum to this article is available at https://doi.org/10.1007/s10551-017-3628-x.
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Quéré, B.P., Nouyrigat, G. & Baker, C.R. A Bi-Directional Examination of the Relationship Between Corporate Social Responsibility Ratings and Company Financial Performance in the European Context. J Bus Ethics 148, 527–544 (2018). https://doi.org/10.1007/s10551-015-2998-1
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DOI: https://doi.org/10.1007/s10551-015-2998-1