Corporate Social Responsibility: A Theory of the Firm Perspective

Author(s): Abagail McWilliams and Donald Siegel

Source: The Academy of Management Review, Vol. 26, No. 1 (Jan., 2001), pp. 117-127
Published by: Academy of Management
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at Academy of Management Review

2001, Vol. 26, No. 1, 117-127.

NOTE

CORPORATE SOCIAL RESPONSIBILITY:

A THEORY OF THE FIRM PERSPECTIVE
ABAGAIL MCWILLIAMS

University of Illinois at Chicago

DONALD SIEGEL
University of Nottingham
We outline a supply and demand model of corporate social responsibility (CSR). Based on
this framework, we hypothesize that a firm's level of CSR will depend on its size, level of
diversification, research and development, advertising, government sales, consumer in-

come, labor market conditions, and stage in the industry life cycle. From these hypotheses, we conclude that there is an "ideal" level of CSR, which managers can determine via
cost-benefit analysis, and that there is a neutral relationship between CSR and financial
performance.

Managers continually encounter demands

Many managers have responded to height-

from multiple stakeholder groups to devote

ened stakeholder interest in CSR in a very pos-

resources to corporate social responsibility

itive way, by devoting additional resources to

(CSR). These pressures emerge from custom-

promote CSR. A primary reason for positive re-

ers, employees, suppliers, community groups,

sponses is the recognition of the relevance of

governments, and some stockholders, espe-

multiple stakeholders (Donaldson & Preston,

cially institutional shareholders. With so

1995; Mitchell, Agle, & Wood, 1997). Other man-

many conflicting goals and objectives, the def-

agers have a less progressive view of stake-

inition of CSR is not always clear. Here we

holder relevance. They eschew attempts to sat-

define CSR as actions that appear to further

isfy demand for CSR, because they believe that

some social good, beyond the interests of the

such efforts are inconsistent with profit maximi-

firm and that which is required by law. This

zation and the interests of shareholders, whom

definition underscores that, to us, CSR means

they perceive to be the most important stake-

going beyond obeying the law. Thus, a com-

holder.

pany that avoids discriminating against

This divergence in response has stimulated

women and minorities is not engaging in a

an important debate regarding the relationship

socially responsible act; it is merely abiding

between CSR and financial performance. It has

also raised two related questions regarding the

by the law.

provision of CSR:

Some examples of CSR actions include going

beyond legal requirements in adopting progres-

1. Do socially responsible firms outperform or

underperform other companies that do not
meet the same social criteria?
2. Precisely how much should a firm spend
on CSR?

sive human resource management programs,

developing non-animal testing procedures, recycling, abating pollution, supporting local

businesses, and embodying products with social attributes or characteristics. We limit the

In existing studies of the relationship between

scope of our analysis to satisfying the burgeon-

CSR and financial performance, researchers

ing demand for CSR through the creation of

have primarily addressed the first question, and

product attributes that directly support social

the results have been very mixed. Recent stud-

responsibility (e.g., pesticide-free produce) or

ies indicate no relationship (McWilliams & Sie-

that signal the firm's commitment to CSR (e.g.,

dolphin-free-tuna labels).

gel, 2000), a positive relationship (Waddock &

Graves, 1997), and a negative relationship

117

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(Wright & Ferris, 1997).1 This leaves managers

Review

January

(1978) and Carroll (1979), who outline a corporate

without a clear direction regarding the desir-

social performance (CSP) framework. As expos-

ability of investment in CSR. More important,

ited by Carroll (1979), this model includes the

the second question, which is of greater impor-

philosophy of social responsiveness, the social

tance to managers, has not been directly exam-

issues involved, and the social responsibility

ined in the academic literature.

categories (one of which is economic responsi-

The purpose of our study is to fill this void. We

bility). An empirical test of the CSP framework is

propose a methodology that enables managers

presented in the work of Waddock and Graves

to determine the appropriate level of CSR in-

(1997), who report a positive association be-

vestment, based on a theory of the firm perspec-

tween CSP and financial performance. The CSP

tive. This perspective is based on the presump-

model has much in common with the stake-

tion that managers of publicly held firms

holder perspective, which is the most widely

usually attempt to maximize shareholder

used theoretical framework.

wealth, with a vigorous "market for corporate

In a seminal paper on stakeholder theory,

control" as the primary control mechanism

Freeman (1984) asserts that firms have relation-

(Jensen, 1988). Our framework applies generally

ships with many constituent groups and that

to publicly held firms but not necessarily to pri-

these stakeholders both affect and are affected

vately held companies that may have alterna-

by the actions of the firm. Stakeholder theory,

tive objectives and are not subject to the market

which has emerged as the dominant paradigm

for corporate control. Based on this framework,

in CSR, has evolved in several new and inter-

we derive hypotheses regarding the demand

esting ways. According to Donaldson and Pres-

and supply of CSR attributes across industries,

ton (1995), three aspect of this theory-norma-

firms, and products. Because these hypotheses

tive, instrumental, and descriptive-are

and the conclusions we draw from them are

"mutually supportive." Jones and Wicks propose

relevant to the extent that managers wish to

"converging" the social science (instrumental)

enhance shareholder wealth, we are able to in-

and ethics (normative) components of stake-

fer managerial implications.

holder theory to arrive at a normative "theory"

that illustrates "how managers can create morTHEORETICAL PERSPECTIVES ON CSR

ally sound approaches to business and make

them work" (1999: 206).

Several theoretical frameworks have been

The instrumental aspect and its relationship

used to examine CSR. Friedman (1970) asserts

to conventional theories in economics and cor-

that engaging in CSR is symptomatic of an

porate strategy have also received considerable

agency problem or a conflict between the inter-

attention in the literature. For instance, Jones

ests of managers and shareholders. He argues

(1995) developed a model that integrates eco-

that managers use CSR as a means to further

nomic theory and ethics. He concluded that

their own social, political, or career agendas, at

firms conducting business with stakeholders on

the expense of shareholders. According to this

the basis of trust and corporation have an incen-

view, resources devoted to CSR would be more

tive to demonstrate a sincere commitment to

wisely spent, from a social perspective, on in-

ethical behavior. The ethical behavior of firms

creasing firm efficiency. This theory has been

will enable them to achieve a competitive ad-

tested empirically by Wright and Ferris (1997),

vantage, because they will develop lasting, pro-

who found that stock prices reacted negatively

ductive relationships with these stakeholders.

to announcements of divestment of assets in

Russo and Fouts (1997) examined CSR from a

South Africa, which they interpreted as being

resource-based view of the firm perspective.

consistent with agency theory.

Using this framework, they argue that CSP (spe-

The agency theory perspective has been chal-

cifically, environmental performance) can

lenged by other researchers, such as Preston

constitute a source of competitive advantage,

especially in high-growth industries.

Although these frameworks are useful, we

' For a review of theoretical and empirical studies of the

outline an alternative theoretical perspective

relationship between corporate social performance and fi-

that further develops instrumental aspects of

nancial performance, see Griffin and Mahon (1997).

CSR. This framework allows us to develop a set

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of hypotheses regarding the determinants and

capped and supports such organizations as the

consequences of CSR. Additionally, managers

Ronald McDonald House, establishing a reputa-

can use this framework to determine precisely

tion for CSR. The presumption is that firms that

how much they should spend on CSR.

actively support CSR are more reliable and,

therefore, their products are of higher quality.

INVESTMENT IN CSR AT THE FIRM LEVEL
We begin our analysis of CSR by relating it to

There is strong evidence that many (although

certainly not all) consumers value CSR attributes. A growing number of companies have

a theory of the firm, in which it is assumed that

incorporated CSR into their marketing strate-

the management of publicly held firms attempts

gies, because they wish to exploit the appeal of

to maximize profits (Jensen, 1988). Based on this

CSR to key segments of the market, such as

perspective, CSR can be viewed as a form of

baby boomer or "generation X" shoppers. We

investment. One way to assess investment in

need only look at the rapid growth of such so-

CSR is as a mechanism for product differentia-

cially responsible companies as Ben & Jerry's,

tion. In this context there are CSR "resources"

the Body Shop, and Health Valley to confirm the

and "outputs." A firm can create a certain level

importance of CSR in marketing.

of CSR by embodying its products with CSR

CSR as a differentiation strategy. Product (ser-

attributes (such as pesticide-free fruit) or by

vice) differentiation is used to create new de-

using CSR-related resources in its production

mand or to command a premium price for an

process (such as naturally occurring insect

existing product (service). Firms that adopt a

inhibitors and organic fertilizers). As such, it

differentiation strategy often pursue multiple

seems natural to consider the nature of the mar-

means of differentiation. An example is Ben &

kets for CSR attributes and CSR-related re-

Jerry's, which differentiates its products by cre-

sources. Our analysis of these markets is based

ating unique flavors, using high-quality ingre-

on a simple supply and demand framework,

dients, supporting the local community, and pro-

which we outline below.

moting diversity in the workplace. CSR may be a

popular means of achieving differentiation, be-

cause it allows managers to simultaneously sat-

Demand for CSR

isfy personal interests and to achieve product

We hypothesize that there are two major

differentiation. For example, Ben Cohen of Ben

sources of demand for CSR: (1) consumer de-

& Jerry's may have a personal, as well as a

mand and (2) demand from other stakeholders,

professional, commitment to diversity.

such as investors, employees, and the commu-

Differentiating through the use of CSR re-

nity. We begin by describing the nature of con-

sources, such as recycled products or organic

sumer demand for CSR.

pest control, may also include investment in re-

CSR investment may entail embodying the

search and development (R&D). R&D investment

product with socially responsible attributes,

may result in both CSR-related process and

such as pesticide-free or non-animal-tested in-

product innovations, which are each valued by

gredients. It may also involve the use of signals,

some consumers. For example, the "organic,

such as the union label in clothing, that convey

pesticide-free" label simultaneously indicates

to the consumer that the company is concerned

the use of organic methods, which constitutes a

about certain social issues. This results in the

process innovation by the farmer, and the cre-

belief that, by using these products, consumers

ation of a new product category, which is a prod-

are indirectly supporting a cause and rewarding

uct innovation of the natural foods retailer. If the

firms that devote resources to CSR. Consumer-

natural foods company is vertically integrated,

oriented CSR may also involve intangible at-

it engages in both CSR-related process and

tributes, such as a reputation for quality or reli-

product innovation simultaneously. This exam-

ability. Fombrun and Shanley (1990) and Weigelt

ple underscores the point that some consumers

and Camerer (1988) have described how reputa-

want the goods they purchase to have certain

tion building is an integral component of strat-

socially responsible attributes (product innova-

egy formulation. A reputation for quality and

tion), while some also value knowing that the

reliability may be especially important for food

goods they purchase are produced in a socially

products. Thus, McDonald's employs the handi-

responsible manner (process innovation).

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An additional example is New United Motor

quality. These attributes can be established by

Manufacturing, Inc. (NUMMI), the innovative

examining the product before purchase. Cloth-

joint venture between Toyota and General Mo-

ing is another example of a search good. With

tors, which was established in Fremont, Califor-

accurate labeling as to the textile content, the

nia, in 1984 to build small cars for both compa-

consumer can establish the quality of the good

nies. The NUMMI plant implemented many of

before purchasing it. For search goods, most ad-

the latest Japanese "lean manufacturing" meth-

vertising will be limited to informing the con-

ods (process innovation) and produced the Geo

sumer as to the availability of the product and

Prism, the prototype for GM's new generation of

its price.

small cars (product innovation). These processes

Experience goods are products that must be

and the product innovations were the result of

consumed before their true value can be known.

R&D investment undertaken by General Motors.

For example, food is an experience good. The

Furthermore, through its unique partnership

consumer cannot determine from viewing the

product how it will taste or whether it will be

with the United Auto Workers (UAW), NUMMI

also implemented a number of progressive

workplace practices, such as a strong emphasis

on teamwork and employee empowerment. Consequently, some consumers perceived that

NUMMI cars, such as the Geo Prism, were superior to traditional, American-made cars, in terms

of quality and reliability. More important, many

customers also believed that by purchasing

these cars, they were demonstrating their support of progressive human resource management practices and the UAW.

Although R&D may result in both process and

product innovation, the vast majority of R&D is
devoted to product innovation (Link, 1982). The
role of CSR in product differentiation leads to
our first hypothesis.
Hypothesis 1: There is a positive correlation between the level of product

differentiation (a proxy for which is

the ratio of R&D expenditures to sales)
and the provision of CSR attributes.

CSR and advertising. For CSR differentiation

to be successful, potential customers must be
fully aware of CSR characteristics; otherwise,
they will purchase a similar product without
such attributes. Some of these characteristics
might not be evident to the buyer at first glance.
Thus, advertising plays an important role in
raising the awareness of those individuals who
are interested in purchasing products with CSR
attributes.

The literature on advertising distinguishes

between two types of goods: search and experience (Nelson, 1970, 1974). Search goods are products whose attributes and quality can be determined before purchase. For example, furniture
is usually considered to be a search good. Consumers search for the appropriate style and

safe to consume. Advertising for experience

goods, therefore, will provide more information,
usually tying the product to an established
brand name, such as Heinz. The association

with brand name provides the consumer with

information about the product through the reputation of the brand.

As noted above, support of CSR creates a reputation that a firm is reliable and honest. Consumers typically assume that the products of a
reliable and honest firm will be of high quality.
Advertising that provides information about
CSR attributes can be used to build or sustain a
reputation for quality, reliability, or honestyall attributes that are important but difficult to
determine by search alone. For example, Heinz
advertises its Starkist brand tuna as being dolphin free. This provides the consumer with information that the product has CSR attributes
but also that the company is trustworthy. By
implication, the product will be of high quality.
This type of advertising is used to foster product
differentiation, allowing the firm to charge a
premium price.

The link between advertising and CSR leads

to our next two hypotheses.

Hypothesis 2: Because consumers rely

more on firm reputation when pur-

chasing experience goods than when

purchasing search goods, CSR attributes are more likely to be associated with experience than with search
goods.

Hypothesis 3: Because consumers must

be made aware of the existence of

CSR attributes, there will be a positive
correlation between the intensity of

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advertising in an industry (a proxy for

social awareness than previous generations.

which is the ratio of advertising to

Thus, they have the means to purchase products

sales) and the provision of CSR.

with CSR attributes and are increasingly likely

Additional determinants of consumer demand. We hypothesize that income is another

determinant of consumer demand for CSR.

Whereas low-income shoppers generally are

quite price sensitive, affluent consumers can
more easily pay a higher price for additional
CSR attributes. Goods whose demand increases
as income increases are called normal goods.
We conjecture that CSR attributes are normal

goods, which means that greater levels of afflu-

ence, as reflected in higher disposable income,

will result in greater demand for CSR.2
Hypothesis 4: Because CSR attributes

to make consumption choices based on social

grounds. Savvy firms will capitalize on this
trend.

Because not all consumers place a high value

on CSR attributes, the price of competing goods

will still affect the demand for goods and ser-

vices provided by firms that embrace CSR, if

these competing goods are lower-cost alterna-

tives. Although most consumers might choose a

good with CSR attributes if its price were equal

to that of another good and many might choose

a good with CSR attributes if its price were only

a little higher, some consumers will switch
away from the CSR good if there is a substantial

are normal goods, there will be a pos-

price difference. Therefore, there is a positive

itive correlation between consumer

relationship between the demand for goods with

income and the provision of CSR at-

CSR attributes and the price of competing, or

tributes.

substitute, products (the higher the price of com-

Other determinants of demand include tastes

and preferences, demographics, and the price of
substitute products. Consumer taste and prefer-

peting goods, the higher the demand for goods

with CSR attributes). This leads to an additional
hypothesis.

ences may be affected by mass media, and CSR

Hypothesis 5: There is a positive corre-

has become a hot topic in media circles. Jour-

lation between the price of substitute

nalists often provide free publicity of a firm's

goods and the demand for goods with

commitment or lack of commitment to CSR. The

CSR attributes.

media closely scrutinize some sectors, such as

the film industry and professional sports. Celebrities and sports figures often use the media to
highlight their commitment to social responsibility. Journalists also closely follow the work of
social activists. Fedderson and Gilligan (1998)
contend that media attention devoted to social
activists provides the public with access to new
information regarding social attributes and
methods of production. This free publicity,
whether positive or negative, helps heighten

To summarize, we conjecture that the key determinants of the demand for a product with

CSR attributes are the product's price, advertising to promote consumer awareness of CSR attributes, the level of consumers' disposable income, consumers' tastes and preferences,

demographics, and the price of substitute products.

Table 1 presents the determinants of demand

and the predicted effect of each determinant on

public awareness of CSR, reduces information

asymmetry, and, thus, influences demand
for CSR.

Demographics can also affect the demand for

CSR. For instance, baby boomers have smaller
families, greater household incomes, and more

TABLE 1

Determinants of Consumer Demand for

CSR Attributes
Hypothesized Effect

Determinant on Demand
Price of good with CSR attributes Negative

2 Some CSR attributes may even have the

properties of aPositive
Advertising

"luxury" good. That is, an increase in income may induce

greater than proportional increases in the demand for CSR
attributes (e.g., if income increases by 10 percent, the demand for CSR attributes will increase by more than 10 percent).

Income

Positive

Tastes Indeterminate
Demographics Indeterminate
Price of substitute goods Positive

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the demand for CSR attributes-that is, whether

unionized, there will be more CSR

demand increases or decreases when the deter-

provided.

minant increases (as designated by a positive or

negative sign). As shown in the table, for some
determinants, such as tastes and demographics,
the effect is not easily predicted.

Other stakeholders' demand. Employees are

another important source of stakeholder de-

mand for CSR. For example, they tend to support

progressive labor relations policies, safety, financial security, and workplace amenities, such
as child care. Workers search for signals that
managers are responding to causes they support. Unions often play an important role in en-

couraging firms to adopt these CSR policies.

Note that unions can also influence CSR policies
at nonunion firms in the same industry. This is
analogous to the well-documented "threat effect" of unions on nonunion wages (Freeman &

Hypothesis 7: There is a positive relationship between the shortage of

skilled workers in an industry and the
provision of CSR; that is, in industries
with shortages of skilled labor, more
CSR will be provided.
Hypothesis 8: There is a positive correlation between government contracts

and the provision of CSR.

The demand from all stakeholders can be

summed to arrive at the overall demand for

products with CSR attributes. Recognizing the

demand for CSR, managers can make decisions

on the number and level of CSR attributes and
how to produce them.

Medoff, 1983; Mills, 1994). For example, nonunion

firms may adopt progressive work practices to

avoid unionism (Foulkes, 1980). Firms that satisfy employee demand for CSR may be rewarded with increased worker loyalty, morale,

and productivity (Moskowitz, 1972; Parket &

Eibert, 1975). There is also some evidence that

firms in industries with skilled labor shortages

have used CSR as a means to recruit and retain
workers (Siegel, 1999).

Other stakeholder groups, including minority

and community groups and local and state governments, can contribute to the demand for

products with CSR attributes as well. For example, governments may encourage proactive environmental practices, and community groups

may desire support for local social services,

such as those provided by United Way. These
groups will then reward the firms by increasing
their consumption of the firms' products. For instance, government contracts might require that

firms undertake a certain level of CSR investment, such as minority set-asides. Ultimately,

these groups affect demand through consumption, either their own or that of the consumers

Supply of CSR
According to the resource-based view of the
firm, resources are "all assets, capabilities, organizational processes, firm attributes, informa-

tion, knowledge, etc. controlled by the firm" (Barney, 1991: 101). The resource-based view leads

us to a supply-side perspective, which begins

with the realization that firms must devote resources to satisfy the demand for CSR. This indicates that we can modify the macroeconomic
concepts of the production and cost functions to

include CSR-related resources and output. Thus,

we assume that firms use CSR-related capital
(land and equipment), labor, materials, and purchased services to generate output.

In Table 2 we describe the inputs used in

generating CSR attributes and the attendant

costs. As shown in the table, additional capital
might be required to generate CSR characteris-

tics. For example, pollution abatement to

achieve an environmental standard beyond that
required by law will require the purchase of
additional equipment. Similarly, office space,
supplies, computers, telephones, and other com-

they influence. The characteristics of demand

munications equipment may be devoted to CSR.

from stakeholder groups other than consumers

To the extent that additional capital is required,

capital costs will be higher.

lead to the following hypotheses.

Hypothesis 6: There is a positive corre-

lation between unionization of the

workforce and the provision of CSR;
that is, in industries that are highly

Although capital costs will be higher for firms

that provide CSR, the costs will not increase
uniformly across firms. The use of capital in the
provision of CSR attributes may result in scale
economies, because capital investment often

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TABLE 2

Resources or Inputs Used in the Provision of CSR

Resource or Input CSR-Related Resource or Input Additional Resource or Input Costs
Capital Special equipment, machinery, Higher capital expenditures
and real estate devoted to CSR

Materials and services Purchase of inputs from suppliers Higher-cost materials and services
who are socially responsible (intermediate goods)

Labor Progressive human resource Higher wages and benefits and

management practices and additional workers to enhance
staff to implement CSR policies social performance

entails substantial fixed costs. An example is a

smokestack scrubber. The cost of a scrubber is
fixed, once a particular piece of equipment is
installed. The cost of the scrubber will be amortized over the number of units of output the firm
produces. The higher the level of output, the
lower the per unit cost of the scrubber, resulting

to workers increase the overall labor costs of

in an economy of scale.3

over numerous units of output.

Intermediate materials and services may also

be related to the provision of CSR. For example,
the Body Shop purchases special ingredients
and formulas that have not been animal tested,
Ben & Jerry's has a stated policy of purchasing
dairy products from local Vermont farmers, and
Wal-Mart advertises that its products are made
in America. Locally produced goods and services may be more costly than those imported
from other states and countries, resulting in
higher costs for these socially responsible firms.
There might be scale economies related to these
costs, however, because of the ability of large
firms such as Wal-Mart to obtain quantity discounts on CSR-related intermediate goods and
materials.

Firms may hire additional staff to advance

CSR through affirmative action, improved labor relations, and community outreach. Existing employees also may be asked to promote
these efforts. At the 1997 Philadelphia "summit" on voluntarism, sponsored by President

Clinton and Colin Powell, numerous companies pledged to dedicate additional human
resources to CSR activities. Many large firms

have entire departments devoted to CSR con-

cerns. The costs of personnel devoted to CSR

and additional CSR-related benefits provided
firms. However, human resources may also
generate economies of scale, because they
represent a fixed cost that can be amortized

When scale economies exist, large firms will

have lower average costs for providing CSR

attributes than small firms. This implies that
there may be some differences in the return to
firms within industries. Therefore, within in-

dustries in which CSR attributes are provided

(because the product/service can be differentiated), larger firms will provide more CSR
attributes.

We conjecture that there are economies of

scope in the provision of CSR, or cost savings

that arise from the joint production of CSR

characteristics for several related products. A
large, diversified firm can spread the cost of

CSR provision over many different products

and services. For example, the goodwill generated from firm-level CSR-related advertising
can be leveraged across a variety of the firm's
brands. When scope economies exist, more diversified firms will have lower average costs
of providing CSR attributes than firms focusing on one particular industry. Thus, we expect a positive relationship between firm diversification and the provision of CSR
attributes, all else being equal.

Our discussion of the costs of providing CSR

3There are limits to scale economies.
of scale are exhausted, average cost will climb with additional output. This diseconomy of scale is usually associated
with physical capital constraints or with managerial limitations. Managerial limitations might, for example, result in
less flexibility in responding to social issues in very large
firms.

After all
economies
attributes
has
revealed that embodying products with CSR attributes requires the use of additional resources, which results in higher costs.
When considering the appropriate level of CSR
characteristics, managers must make critical
decisions regarding the optimal use of inputs

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that generate these attributes.4 Thus, a firm's

Determining the Appropriate Level of

cost of producing CSR attributes is positively

CSR Investment

related to the number of these characteristics.

The cost function has the usual properties. First,

it is monotonically increasing in CSR attributes;
that is, it costs more to generate additional characteristics. Second, at some point there are in-

The supply and demand framework implies

that there is some optimal level of CSR attributes for firms to provide, depending on the
demand for these characteristics and the costs

ing hypotheses regarding the provision of CSR

of generating them. Companies that do not supply CSR attributes have lower costs, but they
face a different (lower at every price) demand
curve than firms that do provide them. Firms
that supply CSR will have higher costs for every
level of output than firms that do not supply CSR

across industries and firms.

and produce similar goods.

creasing incremental costs of providing CSR,

which results in a standard upward-sloping

supply curve for CSR attributes. The nature of

the supply of CSR attributes leads to the follow-

Hypothesis 9: Firms that provide CSR

attributes will have higher costs than
firms in the same industry that do not
provide CSR attributes.

Hypothesis 10: The presence of scale

economies in the provision of CSR attributes results in a positive correlation between firm size and the provision of CSR attributes.

Hypothesis 11: The presence of scope

economies in the provision of CSR at-

Those consumers who value CSR are willing to

pay a higher price for a product with an additional

social characteristic than for an identical product

without this characteristic. This result is contingent on consumers being aware of the existence of
the CSR attribute. If consumers are not aware of
this additional social feature, they will choose the
lower-priced product. Thus, advertising plays an
important role in determining the optimal level of

CSR attributes or outputs provided. Advertising

also helps raise awareness regarding firms' use of
CSR inputs, which may be of interest to several
stakeholder groups.

The provision of CSR attributes will depend as

well on certain characteristics of the market, such
tion between the level of diversificaas the degree to which firms can differentiate their
tion of a firm and the provision of CSR
products and the industry life cycle. Thus, one is
attributes.
likely to find CSR attributes in industries with
highly differentiated products, such as food, cosA caveat to Hypothesis 9 must be mentioned.
metics, pharmaceuticals, financial services, and
As noted earlier, a firm may fundamentally
automobiles. In the embryonic and growth stages
change its production process in response to a
of the industry life cycle, we expect that there is
little product differentiation, as firms focus on perCSR concern, such as conservation. Thus, it is
fecting the production process and satisfying rapconceivable that a CSR-oriented process innovaidly growing demand. As growth slows, and espetion could result in the creation of a CSR charcially
as the industry matures, there is likely to be
acteristic at the same or even a lower level of
a
great
deal of differentiation. For example, in the
cost. Examples of this, however, are difficult to
ice
cream
industry, simple flavors, such as vafind, whereas examples of higher costs for CSR
nilla,
dominated
in the embryonic and growth
products abound. For instance, a trip to the sustages.
As
tastes
and markets became more sopermarket reveals that goods with social charphisticated, more flavors were introduced. In the
acteristics (e.g., organic produce) typically cost
current maturity phase there is substantial prodmore than similar goods without social characuct differentiation (flavors, fat content, modes of
teristics (e.g., nonorganic produce).
delivery, and so forth). Ben & Jerry's has capitalized on the possibility of differentiation through
flavors and CSR attributes.
Demographic and technological changes also
4 In our model we assume that the two firms use the same
can stimulate demand for CSR attributes. The
production technology. This does not apply to a situation in
rapid rise in the number of working women has
which firms adjust their production processes to reflect CSR
concerns.
resulted in an increase in the demand for corpotributes results in a positive correla-

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2001

McWilliams

rate-supplied day care, flexible work schedules,

and

Siegel

125

level of investment can be determined through

and telecommuting. On the supply side, the rise of

cost-benefit analysis. Managers can use our

the internet has made it much easier for firms to

target consumers who have social goals. This is
evident in the substantial growth in the number of
web sites devoted to CSR activity. These have
dramatically reduced the cost of transmitting CSR

framework to make decisions regarding CSR investment by employing the same analytical
tools used to make other investment decisions.
We have also developed several hypotheses re-

garding CSR activity-for example, the provision

information to consumers and other interested

of CSR will depend on R&D spending, advertising

stakeholders. Examples include the Toyota and

Honda web sites, which are devoted to informa-

intensity, the extent of product differentiation, the

tion about their electric cars. On the demand side,

the internet makes it easier for groups who share
common social goals to exchange information. For
example, there are virtual communities (geocities)
for those outside the mainstream of society.

come, the tightness of the labor market, and the

percentage of government sales, consumer in-

stage of the industry life cycle. Additionally,

the likelihood of economies of scale and scope in

the provision of CSR implies that large, diversified
companies will be more active in this arena. Most
important, our model indicates that although

MANAGERIAL IMPLICATIONS

Our analysis reveals that there is some level of

firms providing CSR will have higher costs than

firms not providing CSR, they will each have the
same rate of profit.

CSR that will maximize profits while satisfying

the demand for CSR from multiple stakeholders.
The ideal level of CSR can be determined by cost-

sume there are two firms that produce identical

benefit analysis. To maximize profit, the firm

should offer precisely that level of CSR for which

acteristic to its product. Invoking the theory of

the increased revenue (from increased demand)

equals the higher cost (of using resources to provide CSR). By doing so, the firm meets the demands of relevant stakeholders-both those that
demand CSR (consumers, employees, community)
and those that "own" the firm (shareholders).
On the demand side, managers will have to
evaluate the possibility of product/service differentiation. Where there is little ability to differentiate the product or service, demand may
not increase with the provision of CSR. On the
supply side, managers will have to evaluate the
resource costs of promoting CSR while being
cognizant of the possibility that there may be
scale and/or scope economies associated with
the provision of CSR. In sum, managers should
treat decisions regarding CSR precisely as they
treat all investment decisions.

DISCUSSION

In this study we attempt to answer a question

that has received inadequate attention in the
CSR literature: Precisely how much should a
firm spend on CSR? We addressed this issue
using a supply and demand theory of the firm

framework and found that there is a level of CSR

investment that maximizes profit, while also

satisfying stakeholder demand for CSR. This

To assess the impact of CSR on profitability,

we present the following simple example. As-

goods, except one company adds a social char-

the firm, we assume that each firm makes optimal choices, which means that each produces at
a profit-maximizing level of output. It can be
shown that, in equilibrium, both will be equally
profitable. The firm that produces a CSR attribute will have higher costs but also higher
revenues, whereas the firm that produces no

CSR attributes will have lower costs but also

lower revenues. Any other result-for instance,
one firm earning a higher rate of return-would
cause the other firm to switch product strategies.
Note that our conclusion is based on the assumption that there are no entry barriers associated with providing the social characteristic.
Our conclusion that profits will be equal may
explain why there is inconsistent evidence regarding the relationship between CSR provision
and firm performance. According to our argument, in equilibrium there should be no relationship. CSR attributes are like any other attributes
a firm offers. The firm chooses the level of the
attribute that maximizes firm performance,
given the demand for the attribute and the cost
of providing the attribute, subject to the caveat
that this holds true to the extent that managers
are attempting to maximize shareholder wealth.
From this we predict that there will generally be
a neutral relationship between CSR activity and
firm financial performance.

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126

Academy

of

Management

It appears that the lack of consistency in em-

pirical studies of CSR is due to a lack of theory

linking CSR to market forces. Our supply and

demand framework fills this void, allowing us to

predict that the provision of CSR will vary
across industries, products, and firms. There-

fore, those empirical studies in which research-

Review

January

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searchers working with government support

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2001

McWilliams

and

Siegel

Abagail McWilliams is professor and head of the Managerial Studies Department,

University of Illinois at Chicago. She received her Ph.D. in economics from The Ohio

State University. Her research interests include market structure and firm performance, strategic human resource management, gender issues in worker mobility, and
corporate social responsibility.

Donald Siegel is professor of industrial economics at the Nottingham University

Business School in the United Kingdom. He received his Ph.D. in business economics

from Columbia University. His research interests include productivity analysis, the
economic and managerial implications of technological change, university technology transfer, science parks, and corporate social responsibility.

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127