Jorma Turunen: Exploring the Corporate Financial and Social Performance Relationship with Net Impact Method
Traditionally, corporate social responsibility is divided into economical, social and environmental responsibilities. Financial measurements of company impacts are straightforward and comparable, but the methods for measuring social and environmental impacts are partly based on companies’ own reports on their activities. Additionally, the methods measuring social and environmental impacts are scarce, and they seem not applicable for the impact development.
In the discussion on the company responsibility, growth is regarded as a negative phenomenon, because it seen to result in a larger consumption of the Earth’s resources than zero growth. However, economical growth of companies is the fuel of modern society. Hence, according to the general opinion, growth and company responsibility contradict each other, even though growth is important from many perspectives of the development of society. The objective of this research study has been to explore the relationship between corporate financial performance and corporate social performance in the light of a new method to measure corporate social performance (CSP).
The research stance is hypothetico-deductive and, due to the selected CSP measurement method, explorative. First, the history and the present status of corporate social responsibility as well as the factors and measurement methods of CSP were researched. Also, company growth was studied with a specific focus on company high growth and growth barriers. In the empirical part, the dataset consisted of the 2014-2018 financial information of Finnish small and medium-sized technology companies as well as their corporate social performance that was measured in 2018 using the net impact method. With the net impact method, corporate social performance was studied from four different dimensions: environment, health, society and knowledge.
Through multiple regression, the net impact and its four dimensions are explained by the financial indicators of the companies as well as whether the company is a product or service company. The regression models of net impact and its four dimensions in different years were compared. Additionally, the impacts of company high growth and servitisation were investigated by comparing the means of net impact and its four dimensions in different company groups.
It was discovered that the different dimensions of CSP (environment, health, society and knowledge) are associated with financial indicators which are not necessarily the same for all dimensions. Therefore, the different dimensions of corporate social responsibility should be considered individually to be able to build a holistic picture of CSP and its further development.
It was furthermore discovered that the dimensional temporal lags seem to vary in length depending on the dimension. The temporal lag is considered as the time lag between a CSP improvement and the registered change in the impact dimension. Previous research, in contrast, mainly considers the aggregate measures, and the most commonly found temporal lag is one year. The longest temporal lags seem to appear in health and knowledge dimensions, and the shortest ones in environmental and societal dimensions. Consequently, when optimizing CSP improvement, the dimensions to be improved must be chosen based on measurements of the performance in different dimensions and their net impact.
When designing the sustainability strategy, one also has to take into consideration the cross impacts of the different dimensions. For example, reducing the environmental burden may improve health and improve societal impacts with a time lag. The slack resources theory states that companies need to make investments in order to improve the responsibility performance, which requires earlier financial success. This requires, on the other hand, growth at some time period in the life cycle of the company, even if this research study does not provide evidence on the direct effect of growth on CSP.
Hence, the results indicate that aggregate measures are not suitable for designing the company sustainability strategy. This study, however, supports previous research with the discoveries that the CSP of service companies seems higher than that of product companies and that the most common financial indicator in CFP-CSP research, return on assets (ROA), has a positive effect on CSP. This supports the conclusion that the net impact method seems suitable for measuring CSP and developing the CSP strategy of a company.
The doctoral dissertation of Master of Science (Technology) Jorma Turunen in the field of industrial engineering titled Exploring the Corporate Financial and Social Performance Relationship with Net Impact Method will be publicly examined at the Faculty of Management and Business of Tampere University on Friday 12 November, 2021. The venue is Festia building Pieni Sali 1, address: Korkeakoulunkatu 8. Professor Lassi Linnanen from LUT University will be the opponent while Professor Saku J. Mäkinen will act as the custos.