Redefining Value: Contextualization of Shared Value Creation In Corporate Social and Financial Performance

Abstract

This study aims to address the question of how a corporation’s social performance impacts its financial performance. In contrast with traditional categorization of corporate social responsibility, the present analysis evaluates a firm’s social performance in terms of three channels under Michael Porter and Mark Kramer’s proposed framework of Creating Shared Value (CSV)\(^{1}\): Reconceiving Products and Markets, Redefining Productivity in the Value Chain, and Enabling Local Cluster Development. Using an extended version of the Fama-French three-factor model and controlling for firm-specific characteristics, regressions are conducted on 445 of the S&P500 companies for which complete annual financial metrics and social performance ratings based on the Kinder, Lydenberg, and Domini, Inc. (KLD) index are available for the time period of 2008-2013. In particular, separate scores for each of the three categories of shared value creation as well as a composite social performance score were calculated from the corporate social ratings; regressions are run on both stock returns as well as three accounting-based financial measures – return on assets, return on equity, and return on sales. The regression results reveal two major findings on the strategic linkage between shared value creation and corporate financial performance. First, the composite social performance score is negatively correlated with stock returns but has positive associations with the three accounting-based measures. The opposite signs in correlations with the two types of financial measures may be caused by the possibility that external market participants and internal corporate management perceive and interpret information about a company’s CSV performance very differently in terms of how corporate social performance is indicative of corporate financial capabilities. This in turn suggests that corporate strategy regarding information disclosure may be able to impact the way in which its CSV performance is incorporated by investors. Second, additional Granger causality tests conducted on the statistically significant correlations in all possible pairings of social-financial performance measures reveal that the CSV category score for “Reconceiving Products and Markets” not only has positive and statistically significant correlations with stock returns, return on assets, and return on sales, but also exhibits Granger causality with these financial measures in both directions; in other words, superior performance in this category will both lead to and be continuously reinforced by enhanced financial performance, thereby creating a positive, interactive cycle of value creation. The implication of this finding is that companies can maximize the impact of its social efforts towards creating shared value on its financial performance by focusing on reconceiving products and markets.