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Corporate social (ir)responsibility towards employees and financial performance: using time to solve the chicken-egg problem

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Abstract

In a context where companies are increasingly paying attention to their financial performance, but also to their social responsibility towards employees (e.g. work-family balance, diversity management, employee retention practices), we attempt to answer the following question: is it the financial performance that determines the level of corporate social responsibility towards employees undertaken within a firm or is it the other way around? Analyzing a sample of 28,932 firm-year observations between 1991 and 2015, this paper explores the bidirectional relationship between corporate social responsibility and irresponsibility towards employees (CSRE/CSIRE) and financial performance, and the way this relationship unfolds over time. Stakeholder theory and the resource-based view, as well as the slack-resources hypothesis constitute the theoretical foundation of this relationship. These theories model CSRE as an investment that needs resources but that also has financial benefits. Using a vector autoregressive model for panel data, we show that there is a bidirectional relationship between CSRE/CSIRE and financial performance. However, contrary to what we expected, both CSRE and CSIRE are negatively related to financial performance. Additionally, we find that financial performance increases CSIRE, which means that firms adopting practices harming employees are not necessarily doing so because of financial constraints. Our findings also show that the impact of CSRE/CSIRE on financial performance is more spread over time than the relationship in the reverse direction. In order to see the benefits of CSRE (if any), managers should not only be patient but should also adopt practices that are aligned with the company’s needs.

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Acknowledgements

A special thank you to Professor Patrice Jalette for his helpful comments on this paper.

Funding

The author had a doctoral scholarship provided by Fonds de Recherche du Québec-Société et Culture (Grant No. 2019-B2Z-255910).

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  1. University of Montreal, 3150, Jean-Brillant Street, Montreal, QC, H3T 1N8, Canada

    Raja Abid

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Appendix: Variable stationarity

Appendix: Variable stationarity

See Table 7.

Table 7 Variable stationarity
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Abid, R. Corporate social (ir)responsibility towards employees and financial performance: using time to solve the chicken-egg problem. Rev Manag Sci 17, 635–659 (2023). https://doi.org/10.1007/s11846-022-00541-9

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