David Baron

David Baron

Investment Advisor magazine features an interesting interview with David Baron, professor of political economy and strategy at Stanford University’s Graduate School of Business, on his research about corporate citizenship and its impact on companies’ financial and stock performance.

The research has implications for financial advisors and their clients interested in socially responsible investment portfolios.

Baron was recently awarded the prestigious Moscowitz prize for his paper, The Economics and Politics of Corporate Social Performance, which presented what the awards committee called a “nuanced view” of the relationship between a company and its interactions with society.

In the interview, Baron provides a demonstrably balanced view of corporate social responsibility.   For example:

It could be that a company does all these things right and is rewarded by consumers, but it could be that there’s enough competition in that industry that it drives prices way down. If prices get driven way down, the company may not perform well, even though it may have these beneficial social dimensions. It depends on the competitiveness of the industry. It could be that there are these effects, but they just get competed away in the marketplace.

We can’t determine if there’s a causal effect of corporate social responsibility on corporate financial performance.


Now let’s take the 2,000 firms in the study and divide them up into two categories. One category would be firms that face the consumer, what we would generally refer to as consumer products companies. Let’s call the other firms, those that generally sell to other businesses, industrial products companies.

When we do our regression analysis on those two groups separately we find quite a difference in the relation between corporate financial performance and corporate social performance. For the consumer goods companies, the relation between corporate financial performance and corporate social performance is an increasing function. If you looked across all those consumer products firms, the ones that had the highest corporate social performance tend to have the highest corporate financial performance as well, and vice versa. If you looked at industrial products companies, that line goes down. Firms that have the highest social performance tend to have the worst corporate financial performance. Again we can’t really say if that’s causal or not, but it is a striking difference. This is consistent with the story that consumer goods companies are able to advertise their good deeds and be rewarded by employees, or consumers, or investors, and industrial products companies that try to do the same things don’t find rewards.

It’s an interesting interview, available on the Investment Advisor web site.