Evaluation of the Relationship Between Social Involvement and Economic Performance

Businesses engaged in social involvement incur costs as a result of their activities, so it is only natural to determine if there is a financial justification for the investment, beyond the moral and ethical. Though many studies have been conducted, the only conclusion defined as “meaningful” by our textbook is that there is little evidence that a business’s social involvement is detrimental to its long term economic performance. Some businesses do engage in socially responsible activities based on the reasoning that acting in a socially irresponsible manner can create significant business risks, such a liability and the potential for legislative intervention.

The majority of studies conducted about the relationship between social involvement and economic performance did show a positive relationship between the two, meaning that social involvement had a positive effect on a company’s economic performance. However our textbook also indicates that no general conclusion can be reached, due to flaws in the methodology of the studies. Many studies used short-term economic metrics such as net income, return on equity or per-share stock prices, but the economic impact of social involvement may take longer than the period those indicators measure. Additionally, many of the analyses were done on the basis of news articles, “reputation” indexes or annual reports which are questionable in terms of their reliability as measures of a company’s social responsibility.

Causation is another problem with the studies conducted. If a study showed a positive correlation between social involvement and economic performance, it does not necessarily mean that the better economic performance was caused by the social involvement of the company. The opposite may in fact be true – better economic performance gave the company the opportunity to be more socially involved.

The methodological flaws in the studies are quite serious.