Common hypotheses and theories in CSR performance/CFP -studies

There are several hypotheses and theories that have been used in studies to explain the relationship between corporate social performance and financial performance. The basic questions to which the hypotheses are based on are the direction and causality of the two (Preston & O'Bannon, 1997, pp. 419-420; Makni, et al., 2009, p. 410). The more commonly discussed hypotheses presented in existing literature are described briefly in the following.

Social impact hypothesis and stakeholder theory

The stakeholder theory has been a dominant theory in CSR performance/CFP -studies (Margolis & Walsh, 2003, p. 273). Introduced by Freeman (1984), the theory states that companies need to take their stakeholders into consideration in their operations. The theory suggests a positive relationship between CSR performance and financial perfor-mance; the satisfaction of different stakeholders is essential for the organization’s finan-cial performance (Orlitzky, et al., 2003, p. 405; Preston & O'Bannon, 1997, pp. 421-422). The social impact hypothesis is based on the stakeholder theory (Makni, et al., 2009, p. 410).

According to the social impact hypothesis, serving the stakeholders’ implicit claims will improve the company’s reputation and finally lead to a positive financial result. Failing to satisfy the stakeholders’ needs may have a negative impact. (Makni, et al., 2009, p.

410)

The company can also increase efficiency of adaptation to external demands by address-ing and balancaddress-ing the needs of different stakeholders (Orlitzky, et al., 2003, p. 405). The stakeholder theory has also been identified as the ‘good management theory’ (Orlitzky, et al., 2003, p. 406; Waddock & Graves, 1997, pp. 306-307). The main argument for the theory has been that a high correlation between CSR performance and financial perfor-mance is simply the outcome of good management practices that result in a better over-all performance both financiover-ally and in CSR (Waddock & Graves, 1997, pp. 306-307).

Resource based view of the firm

Resource based view of the firm, in literature ‘slack resources hypothesis’ and ‘availa-ble funds hypothesis’ suggests that companies with more resources availa‘availa-ble from better financial performance can use more resources for purposes that are not directly required by financial necessity, e.g. in CSR. ‘Slack resources’ stand for accessible resources that can be used by the company for such purposes as CSR. The available funds or slack resources hypothesis suggests that better financial performance may result to better per-formance in CSR (Orlitzky, et al., 2003, p. 406). Firms with more slack resources from high financial performance have better possibilities in investing in CSR practices (Waddock & Graves, 1997, pp. 311-313; Preston & O'Bannon, 1997, p. 423). In gen-eral, companies with better resources have better possibilities to invest to any purpose they see as required or purposeful for their agenda, including CSR.

Companies with a high level of available resources can use CSR for strategic purposes rather than as short term investment into matters that have high priority and thus proba-bly also high and urgent stakeholder need. Companies with better resources can focus their efforts into long term issues and move the focus of CSR from reaction to stake-holder needs into achieving long term goals. The type of CSR investment is relative to financial performance – a company with better resources can direct investments in long-term projects that could be also qualified as strategic activities (Waddock & Graves, 1997, pp. 315-316). It may be difficult to derive the importance of CSR separately from other strategic choices and even more difficult to point out the actual input/output -relationship of such activities as outcomes may not be directly monetarily measurable.

Trade off hypothesis

According to the trade off hypothesis, CSR performance has a negative impact on fi-nancial performance (Preston & O'Bannon, 1997, p. 421). Arguments for negative rela-tionship between CSR performance and financial performance include that there are costs incurring which could otherwise be avoided or be paid for by someone else (e.g.

government) (Waddock & Graves, 1997, p. 305). Activities in CSR may direct capital and other resources out of the company, creating a disadvantage in comparison to

com-panies that do not participate in same activities (Preston & O'Bannon, 1997, p. 421;

Makni, et al., 2009, p. 410).

Managerial opportunism hypothesis

Managers can have altering motives for CSR and other decisions. The managerial op-portunism hypothesis suggests that managers can try to pursue their own short-term private gains, which then can lead to a weaker performance with regards to objectives of shareholders and other stakeholders (Preston & O'Bannon, 1997, p. 423; Allouche &

Laroche, 2005, p. 5; Makni, et al., 2009, p. 410), rather than focusing on fulfilling their needs. This is in direct contradiction with the stakeholder theory. Managers can also try to subsidize failure in other areas with CSR. Weak financial performance may again lead managers to join noticeable social programs in hope of offsetting their disappoint-ing results (Preston & O'Bannon, 1997, pp. 423-424).

Synergetic models

The relationship between CSR performance and CFP can also be described as being synergetic, in both positive and negative; The cycle can be virtuous and bidirectional (Preston & O'Bannon, 1997, p. 424; Waddock & Graves, 1997, pp. 316-317; Allouche

& Laroche, 2005, p. 5; Orlitzky, et al., 2003, p. 417). The positive synergy hypothesis suggests that high social performance can lead to positive financial performance, which then can lead to better social performance (see slack resources hypothesis). However, the same effect can also exist as a negative cycle. (Allouche & Laroche, 2005, p. 5;

Makni, et al., 2009, p. 410; Waddock & Graves, 1997, p. 316; Preston & O'Bannon, 1997, p. 424).

The relationship between CSR performance and CFP may also be affected by other var-iables, such as research and development activities of new technologies (McWilliams

& Siegel, 1997, pp. 102-103). Overall, the relationship can be more complex than pre-sumed and it may be curvilinear rather than a linear one (Barnett & Solomon, 2006, pp.

1113-1115).