Journal of Cleaner Production 162 (2017) 1607e1616

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Journal of Cleaner Production

journal homepage: www.elsevier.com/locate/jclepro

Corporate social responsibility governance, outcomes, and financial

performance
Zhihong Wang a, *, Joseph Sarkis b
a
Graduate School of Management, Clark University, 950 Main Street, Worcester, MA, 01610, USA
b
School of Business, Worcester Polytechnic Institute, 100 Institute Road, Worcester, MA, 01609-2280, USA

a r t i c l e i n f o a b s t r a c t

Article history: Prior research has shown mixed results for the relationship between corporate social responsibility (CSR)
Received 5 April 2016 and corporate financial performance. Call for investigations on mediators and moderators have been put
Received in revised form on notice to provide further explanations of previous mixed findings. This study responds to the calls for
16 March 2017
research by investigating the mediation effect of CSR outcomes, on the relationship between CSR
Accepted 15 June 2017
Available online 20 June 2017
governance and financial performance. We extract CSR governance and outcomes data from the
Bloomberg environmental, social and governance (ESG) database and financial performance data from
^ as de
Handling Editor: Cecilia Maria Villas Bo the COMPUSTAT database. Using a sample of 1980 firm-year observations from the top 500 Green
Almeida companies in the United States for the years 2009 through 2013, we find that CSR outcomes mediate the
relationships between CSR governance and financial performance. The results suggest that whether
Keywords: companies implement CSR governance successfully to generate good CSR outcomes plays an important
Corporate social responsibility role influencing companies’ financial performance. The results of our study contribute to the CSR liter-
Environmental ature by providing an explanation of the mediation effects of actual CSR outcomes to the previous
Social
heterogeneous findings on CSR-financial return relationships.
Performance
© 2017 Elsevier Ltd. All rights reserved.
Mediation
Greenwashing

1. Introduction insight in explaining the relationship between CSR and corporate

Whether and how corporate social responsibility (CSR) relates
to corporate financial performance is still a point of contention and
debate amongst organizational researchers (Lu et al., 2014). Some
CSR related studies have shown evidence that CSR is positively
associated with companies’ financial performance (e.g., Reverte
et al., 2016; Wang and Sarkis, 2013); however, other studies show
mixed or insignificant relationships (e.g., Barnett and Salomon,
2012). Lack of consideration for moderating or mediating in-
fluences has been posited as a reason for these studies’ mixed re-
sults (Endrikat et al., 2014; Javed et al., 2016; Reverte et al., 2016).
Varying data sources on CSR governance and CSR outcomes1 may
also contribute to these mixed study results. With these concerns in
mind, investigating the effects of additional factors and relation-
ships more comprehensively may provide additional nuanced
* Corresponding author.
E-mail addresses: Zhihwang@clarku.edu (Z. Wang), Jsarkis@wpi.edu (J. Sarkis).
1
CSR governance represent control mechanisms in which companies engage.
CSR outcomes represent achievements that companies generate by engaging in
governance.
financial performance. The purpose of this study is to investigate
whether actual CSR outcomes mediate the relationship between
CSR governance and financial performance, providing additional
explanations on previous mixed findings of the relationship be-
tween CSR governance and financial performance.
Companies may engage in two types of CSR strategies (Kim et al.,
2012). One strategy is to take serious and rigorous action to
implement CSR governance. Organizations may consume signifi-
cant resources to implement CSR governance with a greater pro-
pensity to “walk the talk” and generate significant CSR outcomes
(Clarkson et al., 2011). The other CSR strategy involves engagement
in symbolic and opportunistic CSR governance to improve corpo-
rate image or address emergent issues but does not include allo-
cation of the resources needed to implement CSR activities deeply
or strategically. In the latter case, CSR governance may be imple-
mented from the perspective of improving the organizational im-
age and is symbolic, or ‘greenwashing’ (Christmann and Taylor,
2006). Therefore, there may be lessened potential for significant
CSR and financial payoffs for this latter group because of a larger
legitimacy gap (Sethi, 1975; Seele and Gatti, 2015). According to
Sethi (1975), a legitimacy gap occurs when there is a discrepancy

http://dx.doi.org/10.1016/j.jclepro.2017.06.142
0959-6526/© 2017 Elsevier Ltd. All rights reserved.
1608 Z. Wang, J. Sarkis / Journal of Cleaner Production 162 (2017) 1607e1616
between an organization’s actions and society’s expectations of this
organization. Thus, a legitimacy gap will exist if companies do not
generate the promised outcomes. A long-term legitimacy gap may
result in long term inferior financial performance outcomes and
potentially lead to the operational demise of an organization (Leng
Chu et al., 2012; Deegan et al., 2002; Deegan, 2009). Unsuccessful
implementation of CSR governance or a misfit of designed CSR
activities may also be contributing factors to the lack of positive
relationships between CSR and financial outcomes. Thus, we hy-
pothesize that CSR governance may contribute to superior financial
performance only when companies “walk the talk” to seriously
implement CSR governance and achieve good CSR outcomes.
We adopt a relatively large sample from a growing environ-
mental, social and governance (ESG) database, the Bloomberg ESG
database,2 for our investigation. Using the Baron and Kenny (1986)
approach to examine the mediation effects, we find that CSR out-
comes fully mediate the relationships between CSR governance and
corporate financial performance. The results indicate that CSR
governance that leads to achieving good CSR outcomes will
contribute to good financial performance. Practically these results
imply that companies’ decisions on how to implement CSR gover-
nance, superficially versus substantially, influences financial re-
sults. Thus, for organizations to take full economic advantage of CSR
initiatives, actual improved CSR outcomes should be a goal.
This study contributes to the CSR literature in the following
ways. First, we adopt legitimacy theory and a legitimacy gap lens
(Deegan et al., 2002; Leng Chu et al., 2012; Seele and Gatti, 2015) to
identify the research gaps in the literature on CSR and financial
outcomes relationship. We then investigate the effects of both CSR
governance and CSR outcomes on corporate financial performance
to fill the research gaps. Our results suggest that superficial CSR
governance implementation may generate a greater legitimacy gap
which may harm the business environment such as losing investor
and consumer trust. This greater legitimacy gap may result in
inferior financial outcomes. The results can encourage companies
to take serious action for CSR governance implementation and
pursue superior CSR outcomes in order to realize financial returns.
Second, the current study introduces a new, but becoming more
established industry database e the Bloomberg ESG database e to
measure CSR governance and outcomes separately. Prior studies
that examine corporate CSR performance tend to use data such as
the KLD social rating that only provides information on the
numbers of initiatives and weaknesses for various CSR dimensions
(Chatterji et al., 2007). These studies tend to focus on the gover-
nance mechanisms that companies have implemented, rather than
actual CSR outcomes. The Bloomberg ESG database utilizes corpo-
rate environmental and social achievements, as well as CSR
governance to mitigate the data limitations of other data sources.
Thus, we provide additional empirical evidence using this new
database to help shed light on the CSR and financial performance
relationship.
Lastly, this study emphasizes the importance of CSR governance
implementation strategies on generating positive outcomes envi-
ronmentally, socially and financially, thus distinguishing the effects
of CSR on financial performance between true ‘doing-good’ com-
panies and ‘greenwashing’ companies. True good CSR outcomes can
be viewed as a consistent legitimacy message and with outcomes
matching messaging, creating a lower discrepancy between com-
panies’ CSR governance and CSR outcomes, indicating a low
2
The ESG database has been argued to be the most comprehensive database that
evaluates companies’ environmental, social and governance activities and out-
comes (Marquis et al., 2011). A detailed explanation of this database is provided in
the methodology section of this paper.
legitimacy gap. Organizations that focus on symbolic CSR gover-
nance or greenwashing arguably have a larger legitimacy gap. Our
results suggest that CSR governance will be positively associated
with economic outcomes if companies can generate good CSR
outcomes, or a lowered legitimacy gap. The results provide an
explanation for the inconsistent findings with regard to the CSR and
financial outcomes relationships from previous research studies.
The remainder of this paper is organized as follows. The next
section introduces related theories and develops the theoretical
framework and hypotheses. This section is followed by sections on
research methods and results. This paper concludes with a dis-
cussion of the implications of the results and directions for future
research.
2. Theories and hypotheses
2.1. CSR governance and CSR outcomes
Legitimacy theory stipulates that CSR governance can be viewed
as an organization’s intention to pursue moral legitimacy given by
external, and sometimes internal, agents for socially beneficial as-
pects of business strategy and operations (Scherer and Palazzo,
2007, 2011; Windolph et al., 2014). Following previous studies
and the Bloomberg ESG database description (Marquis et al., 2011),
we define CSR governance as control mechanisms that companies
voluntarily adopt to integrate social and environmental concerns in
their business operations. It also includes core strategies adopted
by companies to interact with their stakeholders (Dahlsrud, 2008).
Implementation of CSR governance is not a homogeneous ac-
tivity that has similar motivation and strategies. Companies might
engage in two types of CSR strategies to build legitimacy (Kim et al.,
2012). One strategy is to take serious actions and be committed to
environmentally and socially responsible behavior, which is likely
to result in a lower legitimacy gap (Seele and Gatti, 2015). Orga-
nizations that adopt this CSR strategy may incur significant upfront
costs and consume continuous resources to implement CSR
governance, but have a higher potential to generate significant CSR
outcomes (Clarkson et al., 2011). Companies that implement CSR
governance rigorously may enhance their organizational structure
and achieve good CSR performance to fulfill their corporate social
responsibility goals and achieve sustainable business development.
Externally, they provide legitimacy for their operations and meet
their social contract obligations by having actual CSR outcomes.
Another CSR strategy involves engagement in symbolic CSR
governance to improve corporate image or address emergent is-
sues, but they may not allocate necessary resources to implement
CSR governance rigorously or strategically. This strategy may be
termed as “greenwashing” or “window-dressing” and is likely to
result in a higher legitimacy gap (Seele and Gatti, 2015). These
greenwashing organizations may seek to gain advantages from
disclosing their CSR governance while putting in minimal efforts to
address CSR issues, which may result in inferior CSR performance.
Thus, companies that strive to meet CSR goals and pursue moral
or social legitimacy to be a good citizen should put effort into
responsible CSR governance mechanisms and achieve actual
beneficial outcomes socially and environmentally. According to
Marquis et al. (2011), beneficial social outcomes may include pro-
moting and maintaining effective equal employment opportunity
and acquiring human rights awards and recognition. Beneficial
environmental outcomes may include fewer greenhouse emissions
and environmental fines. We evaluate the effects of CSR governance
from both environmental and social perspectives.
2.1.1. Environmental related CSR governance
Environmental behavior is typically separated from social
 Z. Wang, J. Sarkis / Journal of Cleaner Production 162 (2017) 1607e1616
behavior because of its unique non-anthropocentric and eco-
centric perspectives (Shrivastava, 1995). Organizations can
develop competitive advantages by engaging in a number of envi-
ronmental related CSR governance mechanisms (Porter and Van
der Linde, 1995; Reinhardt, 1999; Sarkis, 2009).
Environmental related CSR governance may include governance
policies and regulations that range from strategic practices such as
including environmental experts on boards and top executives
(Cordeiro and Sarkis, 2008; Lewis et al., 2014; Walls and Hoffman,
2013), to operational issues such as integrating environmental ac-
counting and management systems and green supply chain activ-
ities (Darnall et al., 2009; Henri and Journeault, 2010; Wolf, 2014).
Organizations may implement these governance mechanisms for a
number of reasons including meeting environmental regulatory
requirements, beating competitive benchmarks, and enhancing
corporate reputation (Archel et al., 2011; Contrafatto, 2014). How-
ever, these mandated allocations of resources may not provide
guarantees for improved environmental outcomes (e.g. Boiral and
Henri, 2012; Christmann and Taylor, 2006; Clarkson et al., 2011).
Whether the original goals are met may be dependent on various
motivations and capabilities that are internally developed by or-
ganizations. When the CSR governance implementations are illu-
sory or propagandized, they are completed from the perspectives of
improving the environmental image and symbolism, and are never
truly meant to ensure improved environmental performance
(Christmann and Taylor, 2006; de Vries et al., 2015). Following Dahl
(2010), we posit that organizations that are introducing a number
of environmental governance initiatives and signaling or informing
the market about these initiatives but not performing to an
acceptable level are completing greenwashing activities.
2.1.2. Social related CSR governance
Socially responsible behavior focuses more on anthropocentric
social issues that range from poor working conditions (Alamgir
et al., 2013), employee rights and fair labor practices (Zhu and
Zhang, 2015), to inequities (Huffman, 2013). More traditional in-
ternal social outcome measures may include health and safety
initiatives, diversity of workforce and employee turnover percent-
ages. External social measures have also been viewed as important
social corporate initiatives and may include philanthropic activities
and community support activities (Labuschagne and Brent, 2008).
Similar to organizational greenwashing, some organizations
have utilized their social activities as “spin” and “window-dressing”
(Matten and Moon, 2008) to enhance corporate public image. For
example, Matten and Moon (2008) develop an implicit-explicit
framework of CSR. Implicit CSR suggests that companies integrate
corporate norms and values into CSR, thus, “walk the talk” to pur-
sue greater good for the broader society. Alternatively, explicit CSR
refers to corporate symbolic CSR governance policies and regula-
tions that spread a signal that companies are doing CSR activities.
However, these explicit symbolic activities might not eventually
generate beneficial CSR outcomes. Following Matten and Moon
(2008)’s framework, we define corporate explicit CSR governance
that present CSR initiatives to the public but not performing to an
acceptable level, as “window-dressing” social activities, which
contribute to a legitimacy gap.
2.2. CSR and financial performance
As discussed above, companies implement CSR governance for
various purposes. From the resource-based view, implementing
CSR governance mechanisms can help build capabilities and re-
sources to obtain competitive advantage (Torugsa and O’Donohue,
2012). However, CSR governance implementation also requires
firms to consume a generous amount of organizational resources
1609
that some companies may be unable to afford or unwilling to invest
in. Engert and Baumgartner (2015) survey CSR literature and
analyze in-depth a case in the automotive industry and conclude
that in order to successfully implement CSR governance, companies
need to not only maintain effective organizational structure and
management, but also allocate resources to motivate and commu-
nicate with employees effectively on CSR goals. Thus, companies
with limited resources might use CSR as a “greenwashing” tool to
improve corporate environmental and social image without
investing a significant amount of resources to actually seek orga-
nizational CSR related improvements and performance. As such,
Kim et al. (2012) summarize theoretical proposals in the literature
and argue that there are two types of CSR firms. The first type of
CSR firm is committed to environmentally and socially ethical
behavior and consumes significant resources to implement CSR
governance for the broader social good. Therefore, these firms are
likely to generate beneficial and positive outcomes on CSR-related
issues, and thus achieve enhanced business results and greater
social legitimacy. The other CSR firm category, which is defined as
“greenwashing” firms, engage in opportunistic behavior trying to
improve corporate image but does not substantially engage in
environmentally and socially responsible governance mechanisms.
Therefore, these “greenwashing” firms may generate a legitimacy
gap because of their inferior CSR outcomes, and might not result in
significant payoffs in the short- and long-term.
Previous studies have identified mixed relationships between
CSR and accounting-based corporate financial performance, e.g.,
Return on Assets (ROA). Some studies report positive relationships
between CSR and financial performance measures. For example,
using the KLD social rating of CSR activities for large U.S. firms,
Turban and Greening (1996) find that CSR is positively associated
with ROA. Using the Australian Firm Reputation as a measure of CSR
performance, Galbreath (2006) find that CSR is positively associ-
ated with financial performance measured by ROA and Return on
Equity (ROE). More recently, Reverte et al. (2016) revisit the rela-
tionship and document evidence that CSR practices are positively
related to both financial and non-financial organizational out-
comes. However, some other studies report negative and insignif-
icant relationships. For example, Cowen et al. (1987) investigate the
relationship between CSR and ROE and find that the relationship is
negative. Dooley and Lerner (1994) use more objective environ-
mental related CSR measures to examine the same relationship and
find similar results that CSR is negatively related to ROA. Also using
the KLD rating, Turban and Greening (1996) report that CSR is
negatively associated with ROA. In addition, some studies that
investigate the relationships between CSR and measures of ac-
counting performance also report insignificant results (e.g., Seifert
et al., 2003).
Furthermore, the literature also reports mixed relationships
between CSR and market-based financial performance, such as
stock returns, fund returns, and Tobin’s Q (Seifert et al., 2003; Luo
and Bhattacharya, 2006). Some prior studies suggest that CSR is
positively associated with companies’ stock performance, thus,
companies are rewarded for good CSR performance and punished
for violations (Brown, 1998; Jones and Rubin, 2001; Karpoff et al.,
2005; Seifert et al., 2003). However, other studies report negative
association between CSR and companies’ market performance
(Becchetti and Ciciretti, 2009; Brammer et al., 2006). Brammer et al.
(2006) further examine the effect of CSR on stock returns by
adopting disaggregated CSR measures and suggest that the nega-
tive effects are generated by companies’ good environmental
performance.
Many possible reasons might account for the mixed results re-
ported by these previous studies, including the varying data sour-
ces for CSR governance and CSR outcomes, and the consideration of
1610 Z. Wang, J. Sarkis / Journal of Cleaner Production 162 (2017) 1607e1616
CSR Governance CSR Outcomes
Policies,
ESG scores
Fig. 1. Mediation effect of CSR Performance.
moderation and mediation variables (Orlitzky et al., 2003). For
example, using the KLD database to measure CSR performance,
Surroca et al. (2010) identified intangible resources as a mediator
that affects the relationships between CSR and financial perfor-
mance. However, CSR initiatives and concerns as documented by
the KLD database confound the results because it mixes CSR
governance and outcomes in their CSR dimensions. We argue that
the strategies that companies adopt to implement CSR governance
influence corporate economic performance through the actual CSR
outcomes generated by implementing these activities. In other
words, CSR outcomes mediate the relationship between CSR
governance and organizational financial performance. Specifically,
companies that rigorously and seriously implement CSR gover-
nance to generate good CSR outcomes are truly supporting their
legitimacy signals or claims. This activity will tend to enhance their
business environment and leads to greater financial benefits.
Alternatively, organizations that use CSR as a “greenwashing” tool
to improve corporate image may create a legitimacy gap. This
legitimacy gap will result in decreased financial returns from CSR
activities.
In addition, there have been implications made by previous
studies suggest that companies’ environmental outcomes may
serve as a mediator influencing business performance for the
supply chain in the food and other industries (Pullman et al., 2009;
Zhu et al., 2012). More recently, Agan et al. (2016) suggest that one
specific environmental outcome, environmental supplier develop-
ment, plays a mediating role influencing the relationship between
CSR governance and financial performance. Reverte et al. (2016)
also suggest that corporate innovation mediates the relationship
between CSR governance and organizational performance. There-
fore, actual CSR outcomes may effectively serve as a mediator for
the relationships between CSR governance and financial perfor-
mance. This discussion leads to our hypotheses,
H1. Environmentally-oriented CSR performance mediates the rela-
tionship between CSR governance and corporate financial
performance.
H2. Socially-oriented CSR performance mediates the relationship
between CSR governance and corporate financial performance.
The visual presentation of the mediation effects are presented
on Fig. 1.
3. Research methods
3.1. Sample selection and variables
3.1.1. Sample selection
Our sample is selected from the top 500 U.S. green companies
evaluated by Newsweek’s green ranking reports. Newsweek’s green
ranking analyzes data from corporate environmental management,
corporate governance and disclosure for the largest 500 U.S. com-
panies, and ranks these 500 companies based on comprehensive
ranking standards (Yarett and Salo, 2012). This large sample helps us
Financial Performance
ROA and Tobin’s Q
obtain a significant number of companies that have implemented
and disclosed CSR activities. Focusing on a five-year data period
from year 2009e2013, we obtain 423 companies cross-listed in all
four years’ rankings and have both CSR and accounting information
available. Thus, our sample includes 1980 usable firm-year obser-
vations from 423 companies for the years from 2009 to 2013.
3.1.2. Independent variables
The independent variables defined in the research models
include CSR Governance and CSR outcomes including both envi-
ronmental and social outcomes. Corporate environmental and so-
cial outcomes and CSR governance data are obtained from the
Bloomberg Environment, Social and Governance (ESG) database.
We adopt the ESG database because it has several advantages over
other publically available databases. First, according to Marquis
et al. (2011), the ESG database adopts the most comprehensive
methodology to evaluate companies’ environmental, social and
governance activities and outcomes. It clearly distinguishes CSR-
related governance mechanisms and outcomes. The ESG database
was initially developed by Bloomberg’s ESG group in early 2008.
The original ESG scores are calculated using 72 data points based on
the standards set by the Global Reporting Initiative (GRI) for
corporate sustainability reports. These 72 points primarily disclose
corporate social and environmental related CSR performance. By
2010, the ESG team expanded the data points to 101 by adding
additional important “Bloomberg indicators” that disclose corpo-
rate social and environmental related governance about com-
panies’ activities on emphasizing and spreading CSR awareness.
There are 51 data points to examine corporate environmental
performance. The 51 data points detail companies’ performance on
CO2 emissions, GHG emissions, total waste, water waste, etc.
Twenty-two data points are used to detail companies’ social per-
formance, including employee turnover, workforce accidents, fa-
talities, etc. The other 24 data points, categorized as CSR
governance, describe the activities and control mechanisms that
companies engage in to implement CSR. For example, board sup-
port for CSR, the policies adopted by the company to implement
CSR, percentage of sites certified, and CSR training, etc. Table 1
presents a list of the 101 data points summarized by Marquis
et al. (2011). Second, the Bloomberg ESG database provides
detailed scores that range from 0 to 100 on each of the environ-
mental, social and governance categories. For example, for the year
2009, Coca-Cola has an environmental score of 41.33, a social score
of 31.00 and a governance score of 62.50; 3M has an environmental
score of 43.41, a social score of 28.07 and a governance score of
57.14. The Bloomberg Sustainalytics team comments that the ESG
data can “provide investors with a macro level assessment of how
companies are managing their ESG capita” so that investors can
“integrate ESG factors into their fundamental analysis”.3 Thus, the
3
The comments are available at http://www.sustainalytics.com/sustainalytics-
esg-research-now-available-bloomberg.
 Z. Wang, J. Sarkis / Journal of Cleaner Production 162 (2017) 1607e1616 1611

Table 1
List of ESG 101 data points (updated from Marquis et al., 2011).

Panel A: Environmental Performance

Direct CO2 Emissions Indirect CO2 Emissions Total CO2 Emissions CO2 Intensity Total GHG Emissions
Travel Emissions Nitrogen Oxide Emissions Sulfur Dioxide Emissions VOC Emissions Carbon Monoxide Emissions
Methane Emission Total Energy Consumptions Renewable Energy Use Water Consumption %water Recycled
Discharges to Water Hazardous Waste Total Waste Waste Recycled Paper Consumption
Paper Recycled Fuel Used ODS Eissions Particulate Emissions Raw Materials Used
Number of Spills Nuclear % of Total Energy Solar % of Total Energy Phones Recycled Number of Environmental
Fines
ISO 14001 Certified Sites Energy Efficiency Policy Emissions Reduction Initiatives Environmental Supply Chain Green Building Policy
Management
Waste Reduction Policy Sustainable Packaging Environmental Quality Waste Per unit of Production Amount of Spills
Management
Environmental Awards CO2 Intensity per Sales New Products e Climate Changes Sulphur Oxide Emissions Electricity Used
Received
Waste Water Gas Flaring %recycled Materials GHG Scope 1 GHG Scope 2
GHG Scope 3
Panel B: Social Performance
Number of Employees CSR Employee Turnover % % Employees Unionized % Women in Management % Women in Workforce
% Minorities in Management % Minorities in Workforce Workforce Accidents Lost Time from Accidents Fatalities e Contractors
Fatalities e Employees Fatalities e Total Community Spending Investments in Sustainability Health and Safety Policy
Equal Opportunity Human Rights Policy Number of Awards Received Political Donations Training Policy
Business Ethics Policy Number of Sites
Panel C: CSR governance
Size of Board Number of Independent Board Duration (Years) Number of Board Meetings Board Meeting Attendance %
Directors
Fair Remuneration Policy Climate Change Policy GRI Criteria Compliance Verification Type Percent Disclosure
% Sites Certified Environmental Accounting Cost SRI Assets Under Management Biodiversity Policy UN Global Compact Signatory
Employee Average Age % Disabled in Workforce Lost Time Incident Rate Employee CSR Training Cost Board Average Age
Board Age Limit CEO Duality Assurance Auditor Audit Committee Meetings

ESG database provides sufficient information to examine the re- of the deviation of companies with extreme sizes, we follow pre-
lationships among CSR activities, CSR performance, and financial vious studies (e.g., Jo and Harjoto, 2011) to use the natural loga-
performance. rithm of assets to control for firm size. Second, we also control for
firms’ financial risk using the leverage ratio (debt to asset) because
previous studies (e.g., Opler and Titman, 1994) suggest that a higher
3.1.3. Dependent variables
leverage ratio might indicate higher financial risk, and thus, worse
The dependent variables for this study are accounting based and
financial performance. Our third control variable is liquidity
market based measures of organizational financial performance.
because the level of liquidity may influence business risk and the
Specifically, we adopt Return on Assets (ROA) as an accounting
ability of generating earnings raised by companies’ ability of paying
based financial performance. Tobin’s Q is used to account for
off short debt. Liquidity may also influence corporate governance,
companies’ market-based financial performance. ROA and Tobin’s
which in turn affect companies’ profitability and firm value evalu-
Q have been widely used in business research to measure corporate
ation (Li et al., 2012). Our last control variable is revenue growth
financial performance. ROA is calculated by using income before
because companies that experiencing higher growth need to allo-
extraordinary items divided by total assets, representing firms’
cate more working capital to investment (Rangan, 1998), thus may
earnings controlled by total assets. Thus, a higher ROA indicates
affect their short-term profitability and CSR implementation. In
better financial performance and is comparable across companies
addition, we control for years and industries to eliminate the effect
of differing operational size (Kimmel et al., 2013). Following pre-
of general economic environment and the variations across
vious corporate finance studies (e.g., Kaplan and Zingales, 1997;
different industries.
Gompers et al., 2003), we calculate Tobin’s Q using market value
of equity plus total liability and minus deferred tax expense, then
divided by total assets. Tobin’s Q measures how the market values a
3.2. Research model specification
firms’ operating efficiency and the ability of generating good
financial performance (Tobin, 1969). A greater than “one” Tobin’s Q
We adopt the basic four-step Baron and Kenny approach as
value indicates that the capital market identifies unrecorded value
described in Baron and Kenny (1986) and Kenny et al. (1998) to
(e.g., CSR engagement as suggested by Choi et al., 2010; Jo and
examine the mediation effect of CSR performance on the relations
Harjoto, 2011) outside of a company’s accounting books and per-
between CSR governance and organizational financial perfor-
ceives a company has better financial performance than indicated
mance. The first step is to examine whether the causal variable (CSR
in its accounting book. As discussed in the literature review section,
governance) is associated with the outcome (Financial perfor-
previous studies have suggested mixed results between corporate
mance). The second step needs to show a significant relationship
CSR practices and firms’ accounting and market-based financial
between the mediator (CSR outcomes) and the outcome (Financial
performance. We adopt ROA and Tobin’s Q to reexamine the attri-
performance) variable. Step three examines the relationship be-
butes of this mixed relationship. We obtain corporate financial in-
tween the causal variable (CSR governance) and the mediator (CSR
formation from the COMPUSTAT database.
outcomes) variable and also needs to show a significant relation-
ship. The last step examines the effect of the causal variable (CSR
3.1.4. Control variables governance) on the outcome (Financial performance) variable
We also include a series of control variables. First, we control for when controlling for the mediator (CSR outcomes) variable. In this
company size using firms’ total assets. In order to reduce the impact last step, the mediator is considered to fully mediate the
1612 Z. Wang, J. Sarkis / Journal of Cleaner Production 162 (2017) 1607e1616

relationship between the causal variable and the outcome variable
if the relationship between the causal variable and the outcome
variable is insignificant (Baron and Kenny, 1986). If, in the last step,
there is a significant reduction in significance between the causal
and outcome variables, but some significance remains, there is a
partial mediation (Sobel, 1986).
Following these four steps for mediation evaluation, we specify
the research models as follows, variable definitions are listed on
Table 2.
Step 1: the direct effect of CSR Governance on corporate finan-
cial performance.
Model 1 : Performancei;t
¼ a þ b1 CSRGOVi:t þ b2 LGATi:t þ b3 LEVi:t
þ b4 LIQUIDITYi:t þ b5 GROWTHi:t þ Years
þ Industries þ ε
Step 2: the direct effect of the mediator e CSR outcomes
(including environmental and social outcomes) on corporate
financial performance.
Model 2a:
Performancei;t ¼ a þ b1 CSRENVi:t þ b2 LGATi:t þ b3 LEVi:t
þ b4 LIQUIDITYi:t þ b5 GROWTHi:t þ Years
þ Industries þ ε
Model 2b:
Performancei;t ¼ a þ b1 CSRSOCi:t þ b2 LGATi:t þ b3 LEVi:t
þ b4 LIQUIDITYi:t þ b5 GROWTHi:t þ Years
þ Industries þ ε
Step 3: the direct effect of CSR Governance and the mediator e
CSR performance (including environmental and social outcomes).
Model 3a:
CSRENVi;t ¼ a þ b1 CSRGOVi:t þ b2 LGATi:t þ b3 LEVi:t
þ b4 LIQUIDITYi:t þ b5 GROWTHi:t þ Years
þ Industries þ ε
Model 3b:
CSRSOCi;t ¼ a þ b1 CSRGOVi:t þ b2 LGATi:t þ b3 LEVi:t
þ b4 LIQUIDITYi:t þ b5 GROWTHi:t þ Years
þ Industries þ ε
Step 4: the mediation effect when including corporate financial
performance as dependent variable, and both CSR Governance and
the mediator e CSR outcomes e as the independent variables.
Model 4a:
Performancei;t ¼ a þ b1 CSRGOVi:t þ b2 CSRENVi:t þ b3 LGATi:t
þ b4 LEVi:t þ b4 Liquidityi:t þ b5 Growthi:t
þ Years þ Industries þ ε
Model 4b:
Performancei;t ¼ a þ b1 CSRGOVi:t þ b2 CSRSOCi:t þ b3 LGATi:t
þ b4 LEVi:t þ b4 Liquidityi:t þ b5 Growthi:t
þ Years þ Industries þ ε
To examine the mediation effects using the four-step Baron and
Kenny approach, we first examine the level of significance of the
relationships among corporate financial performance, CSR out-
comes, and CSR governance; then we compare the coefficient of b1
in model 1 and the coefficients of b1 in model 4a and 4b. If the
significance levels of b1 s in model 4a and 4b decrease relative to b1
or disappear in model 1, then we may conclude that CSR outcomes
partially or fully mediate the relationship between CSR Governance
and corporate financial performance.
4. Results
4.1. Descriptive statistics
Out sample includes 1980 firm-year observations for the years
2009 through 2013. Sample firms are from a broad variety of in-
dustries. Using two-digit SIC industry codes, 57 industries are
identified in this study.
Table 3 Panel A presents the descriptive statistics for the key
variables including the minimum value, the maximum value, the
mean value (the average of the data values of each variable) and the
standard deviation (indicate the variation or dispersion of the data
values of each variable) of the testing variables in our model. The
statistics show that the mean ROA is 0.060 with a standard devia-
tion of 0.063. The mean Tobin’s Q is 1.810 with a standard deviation
of 0.900 for all observations. Our sample firms also have a mean
ESG score of 16.861 on environmental issues (CSRENV), a 22.550
mean score on social issues (CSRSOC), and a mean score of 56.010
on governance issues (CSRGOV). The large variations in the mean
scores for the three ESG issues indicate that there are companies
that have high scores on CSR governance, but do not perform well
on environmental and social oriented CSR outcomes. The ESG
scores range from zero to 100 as defined by Bloomberg. The
maximum ESG scores in our sample are 89.923 on CSR environ-
mental dimensions, 83.333 on CSR social dimensions, and 85.714
on CSR governance. The minimum ESG score for each dimension is

Table 2
Variable definitions.

Performance ROA or Tobin’s Q;

ROA Income before extraordinary items scaled by total assets

Tobin’s Q (market value of equity þ total liability e deferred tax expense)/total assets
CSRGOV CSR governance, defined by the ESG governance score
CSRENV CSR environmental performance, defined by the ESG environmental score
CSRSOC CSR social performance, defined by the ESG social score
LGAT Natural logarithm of total assets
LEV Total debt divided by total assets;
LIQUIDITY Total current assets divided by total current liabilities
GROWTH Percentage of change in sales from year t-1 to year t.
Years year dummy variables (2009, 2010, 2011, 2012)
Industries 2-digit SIC code
 Z. Wang, J. Sarkis / Journal of Cleaner Production 162 (2017) 1607e1616 1613

Table 3
Descriptive statistics and correlations.

Panel A: Descriptive statistics of key variables

Variables N Mean Standard Deviation Minimum

ROA 1899 0.060 0.063 0.435

Tobin’s Q 1689 1.810 0.900 0.719
CSRGOV 1971 56.010 6.859 0.000
CSRENV 1971 16.861 18.612 0.000
CSRSOC 1971 22.550 18.241 0.000
LGAT 1899 9.886 1.294 7.191
LEV 1891 0.631 0.208 0.043
LIQUIDITY 1638 1.755 0.975 0.215
GROWTH 1898 0.047 0.303 0.814

Panel B: Pearson correlations

(1) (2) (3) (4) (5) (6) (7) (8) (9)

(1) ROA 1 0.622*** 0.025 0.084*** 0.041 0.263*** 0.381*** 0.271*** 0.080***
(2) Tobin’s Q 1 0.035 0.045 0.034 0.313*** 0.199*** 0.291*** 0.163***
(3) CSRGOV 1 0.604*** 0.643*** 0.294*** 0.018 0.026 0.027
(4) CSRENV 1 0.614*** 0.189*** 0.038 0.009 0.064*
(5) CSRSOC 1 0.170*** 0.000 0.105*** 0.035
(6) LGAT 1 0.321*** 0.250*** 0.063***
(7) LEV 1 0.571*** 0.037
(8) LIQUIDITY 1 0.056**
(9) GROWTH 1

*, **, *** Indicate significance at the 0.10, 0.05, and 0.01 levels, based on two-tailed tests.

zero. The mean value of log assets is 9.886 with a standard devia-
tion of 1.294, and the mean leverage ratio (debt to assets ratio) is
0.631 with a standard deviation of 0.208. Our sample also presents
a mean liquidity ratio of 1.755 with a standard deviation of 0.975,
and a mean growth rate of 0.047 with a standard deviation of 0.303.
Panel B of Table 3 presents the Pearson correlation matrix. This
table shows that CSR governance is significantly correlated with
both of the environmental and social CSR outcomes. The correlation
results indicate that most companies in our sample that have
higher scores on CSR outcomes also have higher scores on CSR
governance. CSR outcomes are also positively and significantly
correlated with ROA. Other correlations indicate that large com-
panies and companies with high leverage tend to have lower ROA.
Liquidity and growth are positively associated with ROA.
4.2. The mediation effects
Each of the four regression models is now introduced to test for
the mediation effects of the environmental and social CSR out-
comes, respectively, on the relationships between CSR Governance
and firms’ financial performance.
First, Panel A Table 4 shows the results of the mediation effect on
firms’ accounting-based financial performance as measured by
Return on Assets (ROA). As presented in the table, the first model
tests the direct effect of CSR governance activities on ROA and the
results indicate that CSR governance is marginally associated with
firm’s accounting performance (p ¼ 0.064). Results of the second
model suggest a significant direct relationship between environ-
mental outcomes and ROA (p < 0.001). Thus, the results of models 1
and 2 provide the foundation for the mediation effect by showing
that both CSR governance and environmental outcomes are
significantly associated with ROA. When we proceed to model 3, we
find that CSR governance is significantly associated with environ-
mental outcomes (p < 0.001). Then we include both environmental
outcomes and CSR governance as the independent variable, ROA as
the dependent variable in the regression model 4. The results
indicate that environmental performance is still positively related
to ROA (p ¼ 0.001). However, the coefficient of CSR governance is
not significant (p ¼ 0.296).
The results suggest that environmental related CSR outcomes
fully mediates the relationship between CSR governance and ROA,
further suggesting that CSR governance is associated with
increased accounting based financial performance when com-
panies take serious actions to implement CSR activities to achieve
good environmental related CSR performance. Consistent with our
argument, “doing good things” might not be enough for companies
to improve financial performance. Organizations need to actually
“doing well on good things” in order to enhance organizational
legitimacy and generate financially benefit from “doing good
things.”
Among the control variables, companies size (LGAT) is positively
associated with environmental outcomes suggesting that larger
firms tend to achieve greater outcomes on environmental issues,
which is consistent with previous studies. Liquidity ratio and rev-
enue growth are positively associated with both financial perfor-
mance measures suggesting that companies that are more liquid,
and generate higher revenue growth tend to have superior financial
performance. Lastly, leverage ratio is negatively associated with
ROA but positively associated with Tobin’s Q.
Next, we adopt the market based financial performance, Tobin’s
Q, to evaluate how environmental outcomes mediate their rela-
tionship with financial performance. Panel B Table 4 shows the
step-by-step test results. A significant direct relationship between
CSR governance and Tobin’s Q (p ¼ 0.002) is initially found as
shown in Model 1. Results, shown in Model 2, suggests that CSR
environmental outcomes are also significantly associated with
Tobin’s Q (p < 0.001). The third model confirms that CSR gover-
nance is significantly related to CSR environmental outcomes
(p < 0.001). When both CSR governance and CSR environmental
outcomes are included in model 4, CSR environmental outcomes
still correlates with Tobin’s Q (P ¼ 0.001), but CSR governance does
not (P ¼ 0.322). Again, these results show that actual environ-
mental outcomes fully mediate the relationship between environ-
mental activities and corporate market-based financial
performance measured by Tobin’s Q.
Following the same Baron and Kenny approach, we run the four
regression models to test the mediation effect of social outcomes on
the relationship between CSR governance and corporate
1614 Z. Wang, J. Sarkis / Journal of Cleaner Production 162 (2017) 1607e1616

Table 4
Mediation effect of CSR Environmental performance on the relationship between CSR Governance Activities and Financial Performance.

Variables** Predicted Sign (1) ROA* (2) ROA* (3) CSRENV* (4) ROA*

Estimate p-value* Estimate p-value* Estimate p-value* Estimate p-value*

Panel A: Financial performance measured by ROA

(Constant) 0.065 0.006 0.089 <0.001 94.403 <0.001 0.095 0.000
CSRGOV þ 0.000 0.064 1.607 <0.001 0.000 0.296
CSRENV þ 0.000 0.000 0.000 0.001
LGAT 0.001 0.509 0.002 0.215 2.767 <0.001 0.002 0.250
LEV 0.036 0.000 0.036 0.000 2.128 0.371 0.036 0.000
LIQUIDITY 0.010 <0.001 0.010 <0.001 0.724 0.135 0.010 <0.001
GROWTH 0.062 <0.001 0.062 <0.001 0.929 0.683 0.061 <0.001
Observations 1628 1628 1628 1628
R2 0.308 0.313 0.527 0.313

Panel B: Financial performance measured by Tobin’s Q

Variables** Predicted Sign (1) Tobin’s Q* (2) Tobin’s Q* (3) CSRENV* (4) Tobin’s Q*

Estimate p-value* Estimate p-value* Estimate p-value* Estimate p-value*

(Constant) 2.729 <0.001 3.218 <0.001 94.403 <0.001 3.144 <0.001

CSRGOV þ 0.009 0.002 1.607 <0.001 0.002 0.322
CSRENV þ 0.005 <0.001 0.004 0.001
LGAT 0.185 <0.001 0.196 <0.001 2.767 <0.001 0.198 <0.001
LEV 0.302 0.017 0.309 0.014 2.128 0.371 0.311 0.014
LIQUIDITY 0.171 <0.001 0.174 <0.001 0.724 0.135 0.174 <0.001
GROWTH 0.880 <0.001 0.871 <0.001 0.929 0.683 0.875 <0.001
Observations 1588 1588 1628 1588
R2 0.425 0.429 0.527 0.429

*P-values are adjusted to one-tail based on predicted sign. Years and Industries have been controlled for using years and industries fixed effects.
** See variable definitions on Table 2.

Table 5
Mediation effect of CSR Social performance on the relationship between CSR Governance Activities and Financial Performance.

Panel A: Financial performance measured by ROA

Parameter** Predicted Sign (1) ROA (2) ROA (3) CSRSOC (4) ROA

Estimate p-value Estimate p-value Estimate p-value Estimate p-value

(Constant) 0.065 0.006 0.085 0.000 80.743 <0.001 0.093 0.000

CSRGOV þ 0.000 0.064 1.620 <0.001 0.000 0.246
CSRSOC þ 0.000 0.000 0.000 0.001
LGAT 0.001 0.509 0.002 0.249 1.888 <0.001 0.002 0.305
LEV 0.036 0.000 0.036 0.000 0.676 0.768 0.037 0.000
LIQUIDITY 0.010 <0.001 0.010 <0.001 1.343 0.004 0.010 <0.001
GROWTH 0.062 <0.001 0.062 <0.001 1.329 0.544 0.061 <0.001
Observations 1628 1628 1628 1628
R2 0.308 0.313 0.538 0.313

Panel B: Financial performance measured by Tobin’s Q

Parameter** Predicted Sign (1) Tobin’s Q (2) Tobin’s Q (3) CSRSOC (4) Tobin’s Q

Estimate p-value Estimate p-value Estimate p-value Estimate p-value

(Constant) 2.729 <0.001 3.163 <0.001 80.743 <0.001 3.114 <0.001

CSRGOV þ 0.009 0.002 1.620 <0.001 0.001 0.374
CSRSOC þ 0.005 <0.001 0.005 0.000
LGAT 0.185 <0.001 0.194 <0.001 1.888 <0.001 0.195 <0.001
LEV 0.302 0.017 0.298 0.018 0.676 0.768 0.299 0.018
LIQUIDITY 0.171 <0.001 0.177 <0.001 1.343 0.004 0.177 <0.001
GROWTH 0.880 <0.001 0.871 <0.001 1.329 0.544 0.874 <0.001
Observations 1588 1588 1628 1588
R2 0.425 0.429 0.538 0.429

*P-values are adjusted to one-tail based on predicted sign. Years and Industries have been controlled for using years and industries fixed effects.
**See variable definitions on Table 2.

accounting based (ROA) and market-based (Tobin’s Q) financial
performance. As presented in Panels A and B on Table 5, CSR
governance is marginally related to both ROA (p ¼ 0.064) and
Tobin’s Q (p ¼ 0.002). Social outcomes are also significantly asso-
ciated with both ROA (P < 0.001) and Tobin’s Q (p < 0.001). In
addition, CSR governance is significantly correlated with social
outcomes (p < 0.001). When we include both CSR governance and
social outcomes as presented in Model 4, social outcomes are still
significantly related to both ROA (p < 0.001) and Tobin’s Q
(p < 0.001), but the coefficients of CSR governance in both models
are not significant anymore. Thus, the results suggest that social
outcomes fully mediate the relationships between CSR governance
and financial performance represented by ROA and Tobin’s Q. In
addition, the control variables in all models generate the same
 Z. Wang, J. Sarkis / Journal of Cleaner Production 162 (2017) 1607e1616
effects as in the models for testing environmental outcomes.
Overall, empirical analyses on the mediation effects of corporate
CSR outcomes overwhelmingly indicate that CSR governance does
not directly contribute financial performance. CSR governance that
is taken seriously to promote good outcomes on CSR environmental
and social issues tend to generate superior financial performance in
corporate accounting book and the capital markets. However, if CSR
governance is implemented superficially and does not result in
good CSR performance, financial payoffs might not be achieved.
4.3. Additional analysis
The Bloomberg ESG database also provides an overall ESG score
that indicates companies overall CSR outcomes including envi-
ronmental, social and governance. To avoid confounding the mea-
sures of environmental and social outcomes, we adopt separate
measures for our main analysis. We also adopt the overall ESG score
to perform an additional mediation analysis. The results (untabu-
lated) revealed the same mediation effects of the overall CSR out-
comes on the relationship between CSR governance and financial
performance, thus confirm the robustness of our main results.
We also perform an additional analysis to examine whether the
mediation effects still hold for future financial outcomes. We adopt
the same Baron and Kenny four-step models to examine whether
CSR outcomes mediate the relationship between CSR governance
and financial performance (ROA and Tobin’s Q) in the next year.
Results (untabulated) suggest that the mediation effects only hold
for the market-based performance measure Tobin’s Q, but not for
the accounting based performance measure ROA. This result in-
dicates that the capital market might have a more persistent
response to organizational CSR outcomes.
5. Summary and conclusion
This research represents one of the first empirical studies uti-
lizing a comprehensive database to investigate the effects of CSR
outcomes and CSR governance on financial performance. Organi-
zations seek to adopt CSR governance mechanisms to achieve social
and environmental outcomes and build their legitimacy in their
business society. But, building legitimacy can include symbolic or
rigorous approaches. Rigorous CSR governance implementation
may generate superior CSR outcomes through sufficient resource
allocation and business structure changes. Superior CSR outcomes
assist companies achieve and maintain social legitimacy, and thus
contribute to enhanced business environment and greater financial
returns. However, symbolic CSR governance implementation may
create a legitimacy gap, resulting in inferior financial returns.
Therefore, we hypothesize that corporate CSR governance does not
directly contribute to corporate superior financial consequences.
Instead, good financial outcomes relate to good CSR outcomes.
Companies will benefit from implementing CSR governance only
when they can “walk the talk” by seriously implementing CSR
governance to achieve superior CSR outcomes.
To evaluate the hypotheses, we adopt the four-stage Baron and
Kenny mediation evaluation approach to determine mediation ef-
fects of environmental and social CSR outcomes on the relation-
ships between CSR governance and corporate financial
performance. The results suggest that CSR outcomes fully mediate
the relationship between CSR governance and financial conse-
quences, suggesting that corporate decisions on how to implement
CSR governance (symbolically or rigorously) will eventually be re-
flected in corporate financial performance. Window-dressing CSR
governance, that were not fully and successfully implemented to
achieve positive CSR outcomes, do not generate superior financial
performance. Only by “walking the talk” on CSR related issues can
1615
companies benefit from the efforts of engaging in CSR activities.
That is, true legitimacy goals with actual outcomes will be more
rewarding than symbolic legitimacy efforts.
Although the current study adopts rigorous methods and a large
publicly available database to test the mediation effects, it also faces
several limitations. First, due to the data constraints, this study
focuses on the top 500 U.S. companies over a five-year period. Thus,
the results might not be applicable to smaller institutions. Future
studies should try to use a larger dataset to test the effect over
longer periods of time as some activities may take years to imple-
ment and returns may not be immediate. In addition, the current
study does not distinguish “greenwashing” firms from firms that do
not successfully implement CSR Governance because of resource
constraints and/or strategies misfit. Future studies should address
this issue using rigorous methodologies to examine whether
different attributes of the discrepancies between CSR Governance
Activities and CSR performance generate different economic
outcomes.
Limitations aside, this study contributes to the CSR literature by
helping to tease out some of the nuances to explain the mixed
findings of the relationships between CSR Governance Activities
and financial performance in the literature. Practically, the results
of this study imply that CSR governance might not always generate
good financial results if companies cannot seriously implement and
achieve good performance on CSR issues. Companies should seek to
more effectively and fully implement CSR governance mechanisms
in order to benefit economically. Yet, organizations whose goals are
to achieve “win-win” outcomes by improving their financial per-
formance from CSR governance need to make sure programs that
are implemented achieve the CSR performance results. Effective
management systems to communicate CSR governance issues and
monitor CSR outcomes will need to be adopted and implemented.
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