Takeaway: A firm’s intangibles include innovation, human resources, reputation and company culture. Sound corporate citizenship practices tend to have a positive impact on an organization’s intangibles, which in turn improves the organization’s financial performance. A firm with good financial performance will have slack resources available to put toward the improvement of intangibles, creating a virtuous cycle of value creation.
Suggested Audience: Corporate citizenship managers building a business case, chief financial officers.
This research examined the mediating role of intangibles in the relationship between corporate financial performance and corporate citizenship performance. The study looked at 599 industrial firms that were included in the Sustainalytics database at least once between the years of 2002-2004. Researchers measured corporate citizenship performance based on the weighed sum of scores in the Sustainalytics Platform for five stakeholder groups: employees, customers, suppliers, community, and environment. Measures of corporate financial performance were based on dividing the sum of firm equity value, book value of long-term debt, and net current liabilities by the book value of inventories and property, plant, and equipment. The intangible assets were then examined:
- Innovation -- Ratio of R&D expenses to a firm’s total number of employees
- Human capital -- Seven items provided by Sustainalytics, including the measurement of job satisfaction, training programs, profit-sharing programs and employee participation, and the introduction of indicators to seek information about employees
- Reputation – Based on Fortune magazine’s “World Most Admired Companies’” survey, which determines a reputation score from eight attributes ranked on 11-point scales from poor to excellent
- Company culture – Based on four dimensions of the company: Involvement, consistency, adaptability, and company mission, which were ranked individually on an 11-point scale from poor to excellent
Among the findings:
- Profitable and socially responsible firms are capable, more so than irresponsible firms, of generating intangibles such as innovation, human capital, reputation, and culture
- Mediation of intangibles is stronger in growth industries than non-growth industries
If citing please refer to the original article: “Corporate Responsibility and Financial Performance: The Role of Intangible Resources”, Strategic Management Journal J 31: 463-490. 2010, Jordi Surroca, Josep A. Tribo, and Sandra Waddock