The Impact of CSR on Corporate Reputation and Financial Performance

A great deal of research has been carried out on corporate reputation as measured by members on Fortune’s list. Our paper looks at how CSR performance contributes to a firm’s reputation, although other research has focused on the behavior of those on the list. For example, Haleblian et al. (2017) found that high reputation firms (i.e. those on the Fortune Most Admired list) engage in more acquisitions. These authors also found that investors in these firms hold higher expectations. Therefore, when investors were unhappy with these acquisitions, their stock was more negatively affected.
Turning to our measure of reputation, significant research has shown that corporate financial performance (CFP) is the largest contributing factor to membership on Fortune’s Most Admired Companies list even though it is not directly used as a criterion formembership. In fact, early research showed that CFP was able to explain 84 per cent of the variance in membership (Fombrun and Shanley, 1990). Their study showed that the nine criteria that survey participants use to determine industry ranking load primarily on a single factor, with all questions somehow related to CFP.

To resolve this unidimensionality problem, Fryxell and Wing (1994) performed confirmatory factor analyses on three models – the single factor model implied by Fombrun and Shanley (i.e. CFP), a two-factor model, and a “dominant factor” model. The single factor solution allowed all eight items to load on a single factor as found in the original work (Fombrun and Shanley, 1990). These authors also performed a confirmatory factor analysis on a twofactor model. They began by loading three financial measures (long-term investment value, financial soundness and use of corporate assets) on a financial ends factor, while the other five factors (innovation, people management, social responsibility, quality of management and quality of products/services) were forced to load on a factor they called “capabilities and strategic means.” Although the elements of capabilities and strategic means had better factor loadings on this different factor, this two-factor model was rejected on the grounds of poor discriminant validity due the correlation between the two factors (0.971).
These authors then created a hybrid model (i.e. a dominant factor model) that forced four of the capability elements to load on a dominant financial factor, believing that these capabilities led to increased profitability and thereby membership on the Most Admired list. These four capability elements (quality of management, quality of product/service, innovativeness and talent management) were also combined into a subordinated “means” factor. The element “community and environmental responsibility” was added only to the subordinated means factor. It was this third model that produced the best validity. Ultimately, however, the authors still believed that financial performance was the key driver of membership on the Fortune Most Admired list. In other words, using only financial measures would be sufficient to predict membership on the list. Even though it confirmed the impact of financial performance on reputation, this research does show that reputation can also be impacted by factors outside of CFP.

Corporate Financial Performance as a Driver of Membership on Fortune's Most Admired Companies List

While our research focuses on CSR behavior, the public’s perception of a CEO will also influence a company’s membership on the Most Admired list. In fact, CEO behavior is critical to engagement in CSR activities. Researchers have found that higher CEO prominence in the media leads to a higher reputation (Love et al., 2017). This effect is magnified depending on whether the media tenor is negative or positive. This research also found that CEO awards make it more likely that a firm will become one of Fortune’s Most Admired Companies. We believe that our research fits nicely with these findings since CSR behavior is likely to drive CEO awards and the tenor and amount of coverage in the press.
Scholars have examined how CSR behavior affects a firm’s financial performance. Peiris and Evans (2010) observed a positive relationship between CSR and CFP, particularly community relations, employment conditions, and environmental standards. Peiro-Signes et al. (2013) observed that CSR behaviors measured by ESG factors significantly contribute to financial performance, although the effects were moderated by market-to-book ratio, return on assets and company size.
Companies that engage in more CSR behaviors have been found to have higher revenue per employee and cash flow per share when compared to companies near the industry median (Flanagan et al., 2011). Other research has shown that when a company’s CSR is proactively monitored and managed, a company is more successful financially (Baumgartner, 2014). In addition, an analysis of over 2,500 international firms listed on both the Dow Jones Sustainability Index and the Global Vantage database found that companies that are deemed sustainable (high levels of CSR) reap higher valuation within the marketplace (Yu and Zhao, 2015). Other research has modeled CSR as an insurance policy against negative publicity or bad acts (Brammer and Pavelin, 2005). Lankoski (2008) claimed that CSR outcomes lead directly to reputation because reputation is the only way for many stakeholders to learn about CSR behavior. This reputational improvement then leads to increases in financial performance. there is considerable research that makes the connection between financial performance and Most Admired status. The positive correlation between CSR behavior and a firm’s value demonstrates that leaders in performance and execution of these efforts outperform others and receive a premium in their stock price. In this paper, however, we want to determine whether CSR behavior can affect changes in corporate reputation beyond their contribution to financial performance. Because of the increases in SRI and the focus by companies on the release of sustainability reports, we offer the following propositions:
P1. Positive CSR behavior will increase the likelihood of a firm becoming a Most Admired Company.
P2. Negative CSR behavior will decrease the likelihood of a firm becoming a Most Admired Company.