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On the Measurement of Corporate Social Responsibility: Self-Reported Disclosures as a Methodof Measuring Corporate Social Involvement

Author(s): Walter F. Abbott and R. Joseph MonsenSource: The Academy of Management Journal, Vol. 22, No. 3 (Sep., 1979), pp. 501-515Published by: Academy of ManagementStable URL: http://www.jstor.org/stable/255740

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?Academy of Management Journal1979,Vol. 22, No. 3, 501-515.

O n t h e Measurement o fCorporate S o c i a l Responsibility:Self-ReportedDisclosures a s a

Method o f Measuring C o r p o r a t eS o c i a l Involvement1

WALTERF. ABBOTTUniversityof KentuckyR. JOSEPH MONSENUniversityof WashingtonThis articledevelopsa corporatesocial involvementdisclosurescale based on a content analysis of the an-nual reports of the Fortune500 companies. Three re-

sultsareshown: (1) thechangeovertimeof thesecorpo-rations' social involvement, 2) the directionand scopeof this involvement,and (3) the effect that corporatesocial involvementappearsto have on corporatepro-fitability.A peculiarparadoxof Americaneconomichistory s that the largecor-poration has been, at one and the same time, the symbol of economicprogressand yet a consistent object of criticism or institutingproblemsfor which t hastraditionallydivested tselfof responsibility.Growingcor-porateinterest n socialaccounting,whichis intendedto providethe firmwith usable measures of social involvement,indicates recent corporateawarenessof its linkage o society.Theempirical tudyof corporate ocialinvolvement,however,is in an undevelopedstate.In Europe, state owned firms in both Franceand Englandhave at-tempted"social contracts"that would recordandpaythe firmsfor socialactivities-apart from theirprofit makingfunctions.In the United Statestherehas beena frequentcall overthe past few years, recently n 1978by'The authors acknowledge the advice and assistance of Kenneth D. Walters, Kavasseri V.Ramanathan, Gary Sundem, Marna Tallman, Paul Davis, James Houghland, and Ronald Rauch inthe preparation of this paper.

501


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502 Academy of Management Journal SeptemberSecretaryof CommerceKreps,thata social activitiesreportbe developedby corporations.As yet, of course, neitherthe U.S. governmentnor theaccountingprofessionhas required uchan annualreport.However,thetimemaynot be faroff whenfirmsdealingwiththe U.S. governmentmayhave to do even morein socialaccounting hanreport heiraffirmativeac-tion activities.Although the literature on corporate social responsibilities s nowsubstantial,measurement n this branch of organizationalresearchisundeveloped n comparisonwith measurementn other areas. Therearetwo basic difficulties n measuringcorporatesocial involvement or pur-posesof research.The firstis the unavailability f detailed nformation nquantitative monetaryand otherforms)termsof the social activities hathave relevancefor the generalrubricof social responsibilities.For pur-poses of research, furthermore,the activities must be measured andreportedconsistentlyacross a large number of firms in order to enablestatisticalanalyses.The seconddifficultyis that a methodologymust bedevisedby researchers o measure he full impactof knowncorporateac-tivities on society. Whereas the first problem is one of enlisting fullcooperationfrom the firms themselvesto obtain such information,thelatter s one of scientificknowledge hatis theresponsibility f researchersof the businesssystem,not the corporations.As a result of the combinedeffects of these two factors, the prospectsare not promising n the nearfuturefor developingmeasuresof social activities hatareconvincinganduseful for policy purposes n registeringhe linkagebetweenthe corpora-tion and society.An adequatemeasureof corporatesocial activitiesmust be based on amethod of datacollection n which the investigator researcher,publicin-terest group, governmental agency, corporate researcher, etc.) hasunrestricted ccess to dataon the full range of activitiesof the firm. Thecontents of this scale must be independentlydefined and must measureanyform of behavior hatis of policyinterest.This is theequivalentof thesocial survey typically used in social researchexcept that the unit ofanalysis s the organizationand not the individual.Although there are nosuchsourcesat present, herearethreetypesof publishedresearch hat at-temptto deriveusablemeasuresof corporate ocial activities: 1) social ac-counting, (2) reputationalscales, and (3) content analysis of corporatepublications.Whereasaccountingtraditionally s consideredto be a body of tech-niquesfor recording he financial ransactions f a firm,thegoal of socialaccounting s to add categoriespertaining o the socialimpactof the firminto the firm's formalizedaccountingsystem.But, as Ramanathannotes,"A comprehensiveanalysis of the social impact of private enterprisesuffersat the presenttime from a generalabsenceof reliabledata on ag-gregatesocial costs and benefits of business... " (1976, p. 516). It thusmust be acknowledged hat social accounting is not now at a stage atwhichthe resultscan be used for decisionmakingpurposes.Indeed,in the


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1979 Abbottand Monsen 5031975 report by the American AccountingAssociation's CommitteeonSocialCosts the committeewasable onlyto indicateexploratory ctivitiesby such individuals,organizations,and journalsas DennisBeresfordofErnst and Ernst,George Steinerof U.C.L.A., Businessand Society, andseveral consultingfirms. However, the reportclearlyindicates that theprimarydifficulty in developinga social audit on a professional.evel isformulatingmethodsof obtainingquantitativemeasurements f socialac-tivitiesand impacts.The state of the art at present s to have developedcategoriesof activities hat need measurement nd to have becomeawareof some of the problems n obtainingquantifieddata.The reputationalmethod, commonlyused in social research o obtainthe responseof a public to a social phenomenon,is a second source ofdataon corporatesocialresponsibilities.Limitedscaleshave beenderivedfromresponses romtwo groups:business tudentsand corporate taffers.Heinze (1976) reportshow the student surveywas made. The NationalAssociationof ConcernedBusinessStudentspolled 150graduate tudentsregarding he social involvementof a sampleof largecorporations.Theresultswerepublishedoriginally n 1972. Theresponseswereregistered na Likert-type calerangingfrom 1 (very poor) to 5 (outstanding).A "noopinion" was assigneda zero. The mean score was the reputedcorporateinvolvementscore. Of the 28 corporations hat Heinze reported,Xeroxwas highestwith a score of 4.12. StandardOil of California 1.97), U.S.Steel(2.00), andBethlehemSteel(2.25), wereat the lower end. There huswas substantialvariation n the scores.Vance(1975)reported he applica-tion of the same methodologybut using 86 corporatestaffersto obtainratingsof 45 majorcorporations.The studywasconducted n 1972.IBM(4.0)was at theupperend;StandardOilof California 2.3)andBethlehemSteel(2.4) againwereat the lower end.A basicdifficulty n the use of the reputationalmethodin studyingcor-porate social involvementis that the respondentsprovidingthe ratingsmustbe in a positionto havedetailed nformationabout the corporationsin the sample.What is beingstudied s actually heimageof a corporation,which is highly nfluencedby the corporation's ize, age, and accessto themass media,as well as by the experienceof the respondent n the businessworld. Changes n corporatenames becauseof mergersand otherreasonsalso are a complicating actor. How much confidencethus can be put onknowledgeaboutthe innerworkingsof a large corporationby an outsidepublic?A second basic difficulty s that thereputationalmethod imitsthenumberof corporations o be rated.It is easily possible, for example,toaskrespondents o assess10to 20 objects.Thismaybe accomplishedn afew minutesof timeandmaybe achievedwitha one or twopage question-naire.The respondentsmay even be asked to rank 30 or 40 objects. (Oc-cupationalprestige studies even ask respondents or responseson up to110occupations.)However,there s a need,at the veryminimum, o assessthe corporatebehaviorof the entireFortune500 industrials.


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504 Academyof Management ournal SeptemberThe third sourceof information s the content analysisof documentsand reportsof corporations ntendedfor communicationpurposes.Suchsourcesof information ncludeannualreports,personnelhandbooks,and

employee newspapers. Media sources include advertising and newsreleasesin papers, journals, radio, and television. Speechesof top ex-ecutivesare another source (Hull, 1971; Bunting, 1971). Bowman andHaire (1975), for example, have reported he resultsof a contentanalysisof the annual reports of 82 food-processingfirms listed in the 1973Moody's IndustrialManual.Their measureof social involvementwasthepercentageof the spacein annualreportspertaining o corporaterespon-sibilitiesand activities.They found, forexample, hattheaveragewas 3.63percent, although six firms devoted 20 to 23 percent of their annualreportsto corporate responsibilities.Their scale is limited, however. Itdoes not indicate the breakdownby issue area. It also is restricted o thefood-processing ndustry. However, the scale used has the value of in-dicatingan aggregatemeasureof concernwithcorporateresponsibilities.The purpose of this paper is to pursue the use of self-reporteddisclosuresas a meansof constructinga quantitativescale, identified asthe Social InvolvementDisclosure(SID) scale, obtained from a contentanalysisof the annualreportsof the Fortune500. Therearetwo tasks. Thefirst is to discuss the methodologicalproblemsof content analysis n con-structing he SID scale. The secondis to report hreeusesof the SID scalein analyzing the Fortune 500: (a) to show their responses to corporatecriticism and governmental pressureand regulation, (b) to show thedimensionsof such corporateresponsesto currentsocial pressures,and(c) to indicate the implicationsof social involvementfor corporatepro-fitability.

METHODContentanalysis s a technique or gatheringdata that consists of codi-fying qualitative information in anecdotal and literary form into

categories n orderto derivequantitative cales of varying evels of com-plexity.Thesimplestof contentanalysesconsists of nothingmore than theattributionof the incidenceof an eventas indicatedby the mention of theevent under question in the literarydocumentthat constitutes the rawdata. In this simple analysis, therefore,the dichotomy s the only level ofmeasure hat may be achieved for each category. However,if more thanone categoryis subjectedto a content analysis, a more complex level ofmeasurementmay be achievedthrough the summing of the results foreachcategory.Thus, if eachcategory s assigneda score of zero or one, in-dicating the absence or presence of the attribute under analysis, theresultingscalevariesbetweenzero and the numberof attributesbeing in-vestigated.The codificationof the data from the Fortune500 was performedby the"Big-8" accounting irm of ErnstandErnstunder he directionof partner


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1979 Abbott and Monsen 505Dennis R. Beresford(1974a, 1974b, 1975, 1976;Beresford& Feldman,1976). Beginning n 1971, Ernst and Ernst has developed an annualun-publishedsummaryreportingwhetherthe annual reportsof the Fortune500 indicatedactivities or specific socialinvolvementcategories.The SIDscale is the sum of the items mentionedfor each firm. The numberofcategoriesused for codingvaries slightlyby year. For the 1973 index, thescore ranged from zero to a high value of 23. For 1974, the score had ahigh value of 24. Table1indicates hespecific ndicatorsof each issueareathat were used in the Ernst and Ernst content analysis of the annual

TABLE 1Detailed Breakdown of Content Areas and Location of SocialResponsibility Disclosures in Ernst and Ernst Analysis ofAnnual Reports of Fortune 500: 1973 and 1974

Ernst & Ernst DisclosureCode (percent)aIssue Areas and Indicators 1973 1974 1973 1974 Change

Environment1. Pollution control 01 01 32.5 35.8 3.32. Product improvement 02 02 3.8 4.0 0.23. Repair of environment 04 03 4.0 3.6 -0.44. Recycling of waste materials 03 04 7.3 15.9 8.65. Other environmental disclosures 05 05 8.3 30.6 22.3Equal Opportunity6. Minority employment 10 06 17.7 15.9 -1.87. Advancement of minorities - 07 - 12.3 -8. Employment of women 09 08 14.3 14.1 -0.29. Advancement of women - 09 - 12.9 -10. Minority business 08 10 4.6. 5.8 1.211. Other disadvantaged groups - 11 - 2.6 -12. Other statements on equal opportunity 11 12 14.5 21.1 6.613. Advancement of racial minorities or women 07 - 10.9 - -14. Hard core racial minority employment 06 - 0.8 -Personnel15. Employee health and safety - 13 - 13.3 -16. Training 14 14 13.3 16.1 2.817. Other disclosures 15 15 10.5 12.1 1.618. Personnel counseling 12 - 0.4 - -19. Assist displaced employees locate new work 13 - 1.0 - -Community Involvement20. Community activities 16 16 14.3 18.3 4.021. Public health 17 17 4.2 5.8 1.622. Education or the arts 18 18 12.9 15.9 3.023. Other community activity disclosures 19 19 8.1 10.5 2.4Products24. Safety 20 20 1.8 3.6 1.825. Quality 21 21 1.2 4.4 3.226. Other product-related disclosures 22 22 2.6 6.0 3.4Other27. Other disclosures 23 23 9.7 5.6 -4.128. Additional information - 24 - 3.6 -

Location of Disclosures1. Letter to stockholders - - 21.0 22.5 1.52. Separate section of annual report - - 24.6 29.2 4.63. Other section of annual report - - 30.6 52.1 21.54. Separate booklet with annual report - - 1.2 1.2 0.0alndicator percentages are based on 496 firms in 1973 and 497 firms in 1974.


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506 Academy of Management Journal Septemberreports for 1973 and 1974. The issues (environment,equal opportunity,productquality, etc.) reflect the criticismsthat are currentlybeing en-counteredby the moderncorporationand also are the targetsof govern-mental regulation. Environmentand the specific problem of pollutioncontrol have received substantialattentionin the annual reportsof theFortune500. However, activitiesof the corporationalso have relevance osuch other currentlycriticalissues as equal opportunitites or minoritiesand females, general personnelpolicies, and involvementwith the com-munityand the quality and safety of its products. The location of thesocial involvementdisclosures n the annual reportsalso is indicatedinTable1. Whereas he disclosuresn 1973tended to be distributedmore orless equally amongthe president's etter,a specialsection, or the generalbody of the report, about one-half of the disclosuresare in the generalbody of the 1974reports.Reportingsocial involvementactivitiesof thefirmthus has become institutionalizednto the standardreporting ystemof the large corporation o its shareholders.Themost basic issue regardinghe annualreportas a sourceof socialin-volvementdata is whether hereportedvariation n social activitiesamongfirms is a reflection of real activities or is only an index of companypolicieson communicating ctivities o shareholders.Therearetheoreticalreasons o expectthecorporation o underreportts social involvementac-tivities. Sincesocial involvementactivitiesarealso costs, readingof suchsocialactivitiesby shareholders anbe takento meanthatthe firm's man-agementis failing to put highest priorityon the interestsof the share-holdersby not maximizing ncome available o be distributed s dividends(Friedman, 1970). Why should management hus be anxious to informstockholders of such expenditures?On the other hand, the alternativeview is that stockholdershave a vested interest n the stabilityand legiti-macyof the entrepreneurialnstitutionand the autonomyof that institu-tion from state control. Aware, then, of the criticismsthat have beenmade of the corporation,readingof itsprogressive iewson social respon-sibilitiesin the annual report can enhance confidenceof the politicallysavvy shareholder n management'spolicies. In addition to managerialconcernwith stockholderresponse,staff effectivenessand sensitivitytoissuesalso area determinant f reportingactivities.Theoreticalargumentsthusmaybe presented hattheannualreportsboth overreportandunder-reportthe social involvementactivitiesof the firm.Evenif it is assumed hat theannualreportsaccurately eflectthe socialactivitiesof the firm, otherproblemsof a methodologicalnatureareap-propriately aised.The rawdatain the annualreportarenot in a state thatis immediatelyusablefor researchpurposes.In order to use the data it isnecessary o formulatea set of categoriesand code the rawdata in termsof the categories.Errorsof two typesthus are possible:(1) the formula-tion of categories hat do not reflectall the issuesactuallycontained n thereport hat are of policy interestand(2) inaccuracyn coding the raw datain termsof the selectedcategories.Theseerrors husaffect the validityand


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1979 Abbott and Monsen 507reliabilityof theresulting cale. A thirdquestionmightbe raisedregardingthe meaningof the variationobtained n the scale.The only meaning hatmay be attributed o the scale is that it reflects hevarietyof social involve-ment activities.It does not measure he intensityof each activity. In orderto do this, monetaryor impact data would be needed.Three argumentssupport the use of the SID scale in organizationalresearch.First, because of the ready availabilityof annual reports, it ispossibleto derivesocial involvementscores for large quantitiesof firms.The researchcosts are reasonably ow in comparisonto other forms ofdatacollection. The annualreportsarealso publicdata, thus not requiringcooperation romthe firms. (Responserates n voluntarybusinesssurveysoften areextremelyow.) Reputational cales do not allowsuchquantitiesof firmsto be rated. Basedon availableErnst and Ernstdata, the scaleisnow availablefor almost 500 firms.Nor is therea theoreticalreason forlimitingthe scaleto theFortune 500. Indeed,it would be most useful forresearchpurposesto extend the scale to other universesof corporations(such as smallcorporations)becausethey are likelyto be far less sensitiveto social involvement matters than are large corporations. Second, thedata are public, and it is possibleto replicate heresultsandthus provideareliabilitycheck on the scale. Reputational cales, on the other hand, aredifficult to replicate.

Third, limitedvaliditymay be demonstrated or the SID scale. Validitypertainsto the extent to which a measuringprocedureactuallymeasuresthe theoreticalconcept for which the measurementprocedurewas in-tended.Is thereconsistency, hen, between he concept (a theoreticalcon-struct)and the empiricaloperationsusedto studythe theoreticalconcept?Validation s the empiricalprocedureused to test the consistencybetweenthe theoreticalconcept and the operationalizationprocedures."Face"validity,althoughfrequentlyused, is in fact not an empirical estat all: theoperationalmeasuresare simplyassessedon the basis of their logic andmeaning.A moredefendablemethod of validation s to testa given opera-tional procedure for its association with other measures intended tomeasure he samething. A high correlation hus givesgreaterconfidencein all the measuresunder consideration.Table 2 attemptsto assess thevalidity of the SID index throughits correlationswith the reputationalscales based on businessmenand businessstudentsreportedby VanceandHeinze. (The overlappingof firmsunfortunately s quite low becauseofthesmall numberof firms nthereputational tudies.)Of the two scales,itis reasonable to assume that the businessmen's index is based onrespondentswith greaterknowledgeof corporateactivities.The correla-tion between he SID scale andthebusinessman'sndexis reasonablyhigh(.58), whereas he correlation s lower(.33) with the studentindex. Bothindexes, however,correlatereasonablywellwith specificissues measuredby the SID scale:equal opportunitiesand community nvolvement.


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508 Academy of Management Journal SeptemberTABLE 2Pearsonian Correlations Between Social Involvement Disclosures,Businessmen's and Business Students' Social Responsibility Indexes

SID Correlations withFortune 500 Social Involvement Businessmen's BusinessDisclosures: Index Students' Index1973-1974 (N= 23) (N= 22)Total index .58 .33Environment .22 -.34Equal opportunity .66 .50Personnel .11 .01Community involvement .41 .53Products .49 .08Other disclosures .62 .26

RESULTSResponse to External Pressure

The modern, especially large corporation is subject to pressure fromboth the public in general and government regulatory agencies in par-ticular. (Indeed, the two sources of pressure undoubtedly are correlated.)Table 3 consolidates two sources of data to determine trends in confidencein American institutional leadership from 1966 to 1975. Louis Harris

TABLE 3Trends in Percentage Indicating a "Great Deal of Confidence"in American Institutional Leadership in National Samples from 1966 to 1975:Harris and General Social Survey DataaHarris Data General Social Survey Percent Changeb(percent) (percent) Harris GSS1966 1971 1973 1973 1974 197S (1966-73) (1973-75)Institution (1) (2) (3) (4) (5) (6) (7) (8)

Business:Major companies 55 27 27 31 33 20 -51 -35Congress 42 19 21 24 18 14 -50 -42Education 61 37 33 38 50 32 -46 -16United StatesSupreme Court 51 23 28 33 35 32 -45 -3Military 62 27 35 32 41 37 -44 16Press 29 18 18 23 26 25 -38 9Science 58 32 37 41 50 42 -36 2Executive Branch-Federal Government 41 23 27 30 14 14 -34 -53Doctors 72 61 48 55 61 51 -33 -7Labor leaders 22 14 15 16 19 11 -32 -31TV 25 22 17 19 24 18 -32 -5Clergy (organizedreligion) 41 27 30 36 45 26 -27 -28

aDavis (1977) and Subcommittee on Intergovernmental Relations (1973).bPercentages use initial year as the base and are rounded.


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1979 Abbott andMonsen 509asked respondentsn national polls in 1966, 1971, and 1973 whether heyhad a greatdeal of confidence,only some confidence,or hardlyany con-fidence in the leadershipof the main institutions of the United States.Identicalquestionson confidence n institutional eadershipwere ncludedin the GeneralSocial Surveysof 1973-1975 Davis, 1977).The Harrisdata(1966-1973) ndicatethat a generaldeclineof confidence n American n-stitutionshad occurredat least by 1971.The GSS data (1973-1975) evealthat this confidencehad not been regainedby 1975. Confidencein bigbusiness leadershipdeclinedfrom 55 percentto 27 percent n the Harrispolls. The GSS data for 1973-1975 ndicateadditionaldecline.The 1975report ndicated hat only20 percentof Americanshad greatconfidence nbig business eadership.Although it is essential o considerthe declineofconfidence n businessas part of a syndrome, t is striking hat the declineof confidencein big business s on the sameorderas the declinein con-fidence in the executive and legislativebranches of the federalgovern-ment.Fundamentalo anyinterpretation f the declineof confidence n an in-stitutionis the basicquestionof how an institutioncan ever achievecon-fidence n the first place.Functionalsocialtheory providesat leastone in-terpretation. nthisview,a society s comprisedof a set of specialpurposeinstitutions that operate to achieve specializedtasks through legitimatemeans.Any perceiveddisjuncturebetween egitimateends and legitimatemeans will result in a state of anomieof the system(Merton, 1968).It issuggested,therefore,that the most general explanationof the declineinconfidencein leadership s the pervasivebelief that U.S. institutionsarefailingto fulfill their functionslegitimately.The activitiesthat comprisethe social involvement ndex(equal opportunities,environment, tc.) maybe regardedas attemptsby the largecorporation o regain egitimacywiththe public.Table4 reports he incidenceof one or more itemsin the socialinvolve-mentindex among the Fortune500overthe years1971-1975. n 1971,51.4percentreportedone or moreactivities.By 1975,thishad increased o 85.7percent.As thecorporationncreasingly as come underpressure rom thepublicas well as the state, areas of criticismhave receivedeven greater

TABLE 4Trends in Reporting Social Responsibility

Disclosures AmongFortune 00: 1971-1975aPercent

Categories 1971 1972 1973 1974 1975Firms reporting social responsibility disclosures 51.4 58.1 60.1 69.6 85.7Firms with no social responsibility disclosures 48.6 41.9 39.9 30.4 14.3100.0 100.0 100.0 100.0 100.0Nb= (465) (492) (496) (497) (496)

aBeresford (1974a, 1975, 1976).bReports were not readily available for the remaining Fortune 500 firms for each year.


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510 Academy of Management Journal Septembertreatmentin the annual reports. The social involvementindex is onemeasureof the corporateresponseof firmsstriving o regain egitimacynAmericansociety.Issues and Priorities

Table 5 aggregates he social involvementmeasuresby content area,with the content areas ranked by the emphasis indicatedby the 1974survey.The firms include those in the Fortune 500 in the years1973and1974.Thepercentages y contentareamaybe takenas an index of relativeemphasis. Environmentalmatters constitute the most frequentlymen-tioned areain the annualreports or both 1973and 1974.In 1974,for ex-ample, 50.4 percent of the annual reportsindicated concernin variousformswith this one issue. (It should be noted that environmentalmatterswere first in importance for both periods even though disclosuresbymanufacturers f equipment,a likely targetof criticismon environmentaleffects, wereexcludedfor this one contentareain 1973.)All otherissueshave distinctly lower emphasis. In 1974, equal opportunities (32.2percent), personnel(29.4 percent),and communityaffairs(25.5 percent)had essentially imilar evelsof emphasis.The ratesof increase n the con-cernwith equalopportunitiesand personnel 7.7 percentand 9.2 percent,respectively)are similar. It thus is unclearwhich of these concernswillreceiveemphasissecond to environmentalmatters n the nearfuture.In-volvement n communityaffairs(25.5 percent)does not appearto be in-creasing n relativeemphasis 4.4 percent ncrease rom 1973 to 1974)andthus shouldmaintain ts presentorder of priority. Safety and qualityofproductsare last(10.5 percent).In sum, environmentalmattersappear obe of greatestconcernto corporate hinkingand should remainso in thenear future, no doubt because of the threat of political repercussion.Nevertheless, he relative nterestputon the various ssueareasmay be ex-pectedto vary, dependingon issuesthat emergeon the national scene.

TABLE5Percentof Fortune 500 with One or MoreSocial ResponseDisclosuresper Content Area: 1973 and 1974a

PercentsContent Area 1973 1974 ChangeEnvironment 37.Ob 50.4 13.4bEqual opportunity 24.5 32.2 7.7Personnel 20.2 29.4 9.2Community involvement 21.1 25.5 4.4Products 4.7 10.5 5.8Other 9.5 8.3 -1.2

aBased on 494 firms included in Fortune 500 for 1973 and 1974.bManufacturers of equipment excluded in 1973.


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1979 Abbott andMonsen 511Social Involvement and Profitability

Instead of basingits theoreticalsystem on the assumption hat the en-trepreneurhas a propensityto be socially responsible, or altruistic,thelaissez-faire chool takes as its premise hat the entrepreneurs by naturegreedy,self-interested,and does not care at all for the welfareof society.Indeed, Adam Smith argued: "People of the same trade seldom meettogether,even for merriment nddiversion,but theconversation ndsin aconspiracy against the public, or in some contrivanceto raise prices"(1937, p. 128). Smith's systemis not based on the motivation of the en-trepreneur o be socially useful, but ratheron the existenceof competitiveforcesin the systemas a form of socialcontrol that directs he self-interestof the entrepreneurnto sociallyusefulchannels.Therefore,becausecom-petition prevents ong run excessprofits throughcontrol of the market,long runprofitsbecomean indexof the extent to which the entrepreneurhas been able to achieveefficiencyand thus minimizecosts. Being sociallyresponsible thus is incompatible with this model of entrepreneurialbehaviorbecauseit may not resultin minimumcosts. The view that thecorporateofficial should be socially responsible, in Friedman'sterms,thus "shows a fundamentalmisconceptionof the characterandnatureofa free economy. In such an economy, there is one and only one socialresponsibilityof business-to use its resourcesand engage in activitiesdesignedto increase ts profits so long as it stays withinthe rulesof thegame" (1962, p. 133). To attemptany other goal "is a fundamentallysubversivedoctrine."If one of contemporary apitalism's eadingtheoreticalspokesmenre-jects social responsibilityas an obligationof the modern executive,whatare the theoreticalargumentsfor corporatesocial involvement?Argu-ments supporting corporatesocial involvement are based on an open-systemsmodel. An open-systemsmodel involvesexplaining he behaviorof organizationsas a responseto an actual or anticipatedexternalin-fluence. The open-systemsmodel is illustratedin political history byBismarck's ociallegislation n late nineteenthcenturyGermany.In orderto stem the rising influence of the socialists, Bismarcksupported pro-gressive social legislation in an attempt to reduce pressurefor moredramatic orms of politicalchange.Theprogressive ociallegislation huswas intended to "take the wind out of the sails" of the socialists.Althoughconservativen purpose,the policy appears o be liberal as thisterm has been morerecentlyused). This politicalmode of thinking s noless applicable o the situationin which the corporationat presentfindsitself. This model is illustratedby the Narver(1971) thesison corporateresponsibilitiesand firm welfare. The Narverthesis is that the rationaldecisionmakerseeking o maximize hewelfareof the firm in the longrunmust adapt to the demandsbeingmade on the corporation o maximizethe presentmarketvalue of the stock of the firm. In order to maximizemarketvalue,it is necessaryhat theinvestorhave confidence hat thefirm


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512 Academyof Management ournal Septemberwill not encounterlong run sanctions, in particular rom governmentalsources, because of violations regardingpollution and other social in-volvementmatters.The firm, in foregoingshort runprofits, thus is con-tributing o its long-runwelfare.Thedifference, herefore,betweenFried-manand such advocatesof enlightened ocialinvolvementas Narvermaybe a matterof shortrun versus ong runtimeperiods.Does social involvement of a firm decrease profits to the investor?Research indings on the relationbetweencorporatesocial involvementand profitabilityare influenced by the universeof corporationsstudied,the measureof social involvement, he measureof profitability,and thetime frame of the study. The research esultsconsequentlyarecontradic-tory. There is not conclusiveevidencethat thereis a clearlinkagein anydirectionbetween corporate social activities and profitability.Vance's(1975) research,for example, appearsconvincingthat corporatesocialresponsibilitys inversely inked withprofitabilityn the shortrun. Vanceanalyzed he relationbetweenreputationalndexesof corporatesocial in-volvementderivedfrom ratingsof 45 corporationsby corporatestaffersand 50 corporationsby concerned business students and the percentchange n the pricepershare n 1974.Presented n scattergramorm,bothmeasures ndicateda negativerelationbetweencorporatesocial involve-ment and change in share prices, althoughthe inverserelationappearsstronger or the corporatestafferindexthan for the student ndex.Thereare several limitations of this design, however, which restrict theusefulnessof the findings.First,Vancereports he regression oefficientsbut does not report the correlationcoefficients. The strength of thenegativeassociation hus is not known.(Inthe caseof the studentscale,itdoes not appearto be strong.)Second, 1974may not be a representativeyear. Because 1974was a disaster n the stockmarket, t is not appropriateto generalize romthatyearalone. A longertimeperiodis needed.Third,the changein priceper share,although a primecomponent of the totalreturn o investors,does not considerdividends.Dividendsshouldbe in-cluded in measuringthe returnto the investor. There are also othermeasuresof profitability,such as net incomeper unit of sales, assets, orstockholder's quity, that shouldbe consideredn analyzing hisproblem.WhereasVancereporteda negativeassociationbetweensocial involve-mentand profltability,studiesby Heinze(1976)and Bowman and Haire(1975)reporta positiveassociation. The Heinzestudy was based on thereputational cale of the concernedbusiness tudents alsousedbyVance),andsoughtto findtheconnectionbetween hisratingfor 28 largecorpora-tionsand severalmeasuresof performanceor 1972. Thedesignconsistedof consideringhemeasureof socialinvolvementas thedependentvariableand sevenvariablesas independent salesgrowth,net incomeperunit ofsales, operatingprofit per unit of sales, the currentratio, capitalization,net income per unit of assets, and net income per unit of net worth).Heinzereported hatthepartialcorrelationbetweennetincomeperunit ofnetworthand thesocialinvolvementmeasure controlling or all theother


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1979 Abbott and Monsen 513independentvariables)was .51. This finding thus appearsto support theview that social involvementand profitabilityare positively correlated.There are two problems n Heinze's researchdesign, however.First, thedirectionality f the causalmodelis inverted n termsof the social involve-ment and profitability ssue. The more appropriatedesign is to considerprofitabilityas the dependentvariableand social involvementas the in-dependentvariable.Although the zero-ordercorrelationswould be thesame, problemsof interpretation rise becauseHeinzereportedonly thestatisticallycontrolledcorrelationbetweenthe performancemeasureandsocialinvolvement.It would have been usefulhad the zero-ordercorrela-tion matrixalso been reported. Second, the universeof corporations shighlyrestrictive.A sampleof only29 corporationsdoes not providecon-fidence that the resultshavewideapplicability.Bowman and Haire used the proportion of lines in annual reportsdiscussingsocial involvementmattersas the index of social involvement.They soughtto validate hismeasureby comparing irmswith a reputationfor social involvement and a comparison group selected simply on thebasisof size andindustry.The highor premiergroups scored significantlyhigher on the Bowman-Hairendex than did the comparisongroup, thusprovidingempirical upportfor theuse of theannualreportas an indexofsocial involvement. The Bowman-Hairesample consisted of all theAmericanfood-processing irmsin Moody's IndustrialManual for 1973,which, with deletions, resulted n 82 firms. The measureof profitabilitywasreturnon investment or 1969-1973 eportedby Standardand Poor's.Theirfindings providesupportfor the view that socialresponsibilitydoesnot appear to threaten the profits received by investors. Those firmsreporting ome discussionof corporate nvolvement 31 of 82 firms)had ameanreturnon investmentof 14.3percent,whereas hose withno discus-sion of social involvement had a mean return of 9.1 percent. TheBowman-Haire tudy of social involvementappearsto indicate that it isnot dysfunctional or a firmto be sociallyinvolved.Table6 assemblesavailabledata on 450 corporationsof the 1974For-tune500 to test for the relationbetweenthe SID scaleand the total returnto investorsfor 1964-1974.The lower involvementfirms are those thatreported ess than threesocial involvement temsin their annualreportsof1973and 1974. Theremaining irms,those reporting hree or moreitems,constitute he highinvolvement irms.Thisclassification esults n214and236 firmsfor the two categories,respectively.The low involvement irmsaveraged2.32 percentand the high involvement irmsaveraged2.58 per-cent averagereturn o investorsfor 1964-1974.The differenceof .26 per-cent obviously indicates that there appearsto be no effect of social in-volvement for this populationof corporations.These results are furtherstratified by employmentsize. Those companies with 30,000 or feweremployeesin 1974are consideredto be in the lower categoryand thosewith greater than 30,000 employeesare in the higher. (This is approxi-mately the 70th percentilefor the 1974Fortune 500.) Size makes little


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1979 Abbott andMonsen 515involvement,despite ts own drawbacks,was found to havesignificantad-vantagesas a techniquefor measuring orporatesocial responsibility ndyieldedgenerallymeaningfulresultswhen appliedto the abovequestions.

REFERENCES1. AmericanAccountingAssociation,Committee n SocialCosts. TheAccountingReview,Supple-ment to 1975, 50, 50-89.2. Beresford, D. R. Compilationof social measurementdisclosures n Fortune 500 annualreport-1973. ErnstandErnst, 1973.3. Beresford,D. R. Social responsibility isclosure n 1974 Fortune500 annualreports.ErnstandErnst, 1975.4. Beresford,D. R. Socialresponsibility isclosure-1976 survey of Fortune500 annualreports.Ernstand Ernst, 1976.5. Beresford,D. R. How companiesarereporting ocial performance.ManagementAccounting,1974, 56 (2), 41-44.6. Beresford,D. R., &Feldman,S. A. Companiesncrease ocialresponsibilityisclosure.Manage-mentAccounting, 1976, 59 (9), 51-55.7. Bowman,E. H., &Haire,M. A strategicposture owardcorporateocialresponsibility.Califor-niaManagementReview, 1975,18(2), 49-58.8. Bunting,J. R. Theeconomicrationale or social involvement.VitalSpeechesof theDay, 1971,38 (2), 51-53.9. Davis, J. National data program or the social sciences.Chicago:NationalOpinionResearchCenter, 1977.10. Friedman,M. Capitalismand freedom. Chicago: The Universityof Chicago Press, PhoenixBooks, 1962.11. Friedman,M. The socialresponsibility f business s to increaseprofits. TheNew York TimesMagazine,September13, 1970, 32-33.12. Heinze, D. C. Financialcorrelatesof a social involvement measure. Akron Business andEconomicReview, 1976,7 (1), 48-51.13. Hull, J. W. The publicconcernsof privateenterprise.VitalSpeechesof the Day, 1971, 37 (12),367-370.14. Merton, R. K. Social theoryand social structure.New York: The Free Press, 1968.15. Narver, J. C. Rationalmanagement esponses o externaleffects. Academy of ManagementJournal, 1971, 14, 99-115.16. Ramanathan,K. V. Towarda theory of corporate ocial accounting.TheAccountingReview,1976, 51 (3), 516-518.17. Smith, A. An inquiry nto the natureand causes of the wealthof nations. Introductionby E.Cannan.NewYork:TheModernLibrary,1937.18. Subcommittee n Intergovernmental elationsof the Committeeon GovernmentOperations,

U.S. Senate. Confidenceand Concern:Citizens ViewAmericanGovernment-A Survey ofPublicAttitudes,PartI andPartII. Washington,D.C.: U.S. Government rintingOffice, 1973.19. Vance,S. C. Are sociallyresponsible orporations ood investment isks?ManagementReview,1975,64 (8), 18-24.