Laffer, Arthur B., Andrew Coors, and Wayne Winegarden. "Does Corporate Social Responsibility Enhance Business Profitability?" Laffer Associates, 2004.

This study of corporate social responsibility and financial performance examines the 28 companies appearing on all five Business Ethics "100 Best Corporate Citizens" lists from 2000-2004 time period. It includes three separate exercises:

First, these 28 companies are compared with their "top competitors" as identified by Hoover's on three financial metrics: annual net income growth, average net income margin, and stock price appreciation. The authors comment that "on a visual basis there does not appear to be any special 'profitability' earned by those firms anointed with the CSR designation." (The actual charts used are not included in the electronic version of the study provided at CSRWatch.com, however.)

Second, the authors conduct a cross-sectional regression analysis of social and financial factors for the years 2003 and 2004 (unclear why the prior three years were not studied), and conclude that "there is no correlation between how well a firm performs its traditional business roles and where it is ranked in the Business Ethics survey."

Finally, the authors conduct a dummy variable analysis in which they evaluate the impact of being one of the 28 companies on the three financial performance variables. They find a statistically significant negative relationship (p=0.043) with compound net income growth for the period. This finding is somewhat limited by the fact that some sample companies had negative net income and were therefore excluded from the dataset. The other comparisons were statistically insignificant.

In addition to their data analysis, the authors also argue, with some merit, that two biases have distorted past studies of CSR:

First, the concept of "the triple bottom line" includes financial profitability, so it should not be surprising that it correlates with financial profitability. This may seem like an obvious pitfall, but it is a fair criticism - some studies, such as Pfau (2001) use past stock returns as a guide to which independent variables to use.

Second, "to a certain extent, only profitable companies can engage in CSR. For instance, Southwest Airlines has consistently scored as one of the top 100 socially responsible companies in the Business Ethics survey over the past 5 years. It is hard to imagine USAir or United Airlines earning the same distinction if only because they do not have the resources (human or financial) to engage in any CSR programs. Orlitzky (2003) offers data supporting this point, finding that companies engaging in CSR tend to be better off financially to start with.

This study, widely cited by critics of CSR and socially responsible investing, is essentially a null finding with a small data set. The authors' conceptual arguments are well-taken, however, and both proponents and critics of CSR could benefit from reading them.

A copy of this study is online at: http://www.csrwatch.com/CSRProfitabilityStudy.pdf</span>