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Research summary: This article uses item response theory (IRT) to advance strategic management research, focusing on an application to corporate social responsibility (CSR). IRT explicitly models firms' and individuals' observable actions in order to measure unobserved, latent characteristics. IRT models have helped researchers improve measures in numerous disciplines. To demonstrate their potential in strategic management, we show how the method improves on a key measure of corporate social responsibility and corporate social performance (CSP), the KLD Index, by creating what we term D-SOCIAL-KLD scores, and associated estimates of their accuracy, from the underlying data. We show, for instance, that firms such as Apple may not be as “good” as previously thought, while firms such as Walmart may perform better than typically believed. We also show that the D-SOCIAL-KLD measure outperforms the KLD Index and factor analysis in predicting new CSR-related activity.
Managerial summary: Corporate social responsibility (CSR) continues to grow in importance among the press, political activists, managers, analysts, and investors, yet measurement techniques have not kept up. We show that the most common approach for measuring CSR—adding up observable traits—is fundamentally flawed, even if these traits accurately capture CSR-related behavior. We introduce an improved measurement technique that treats these traits as test questions that are differentially weighted, so that “hard” CSR activities affect a company's score more than “easy” CSR activities. This approach produces a measure that offers a more reliable comparison of firms than standard measures. Our approach has a number of additional advantages, including differentiating firms that receive identical scores on an additive scale and accounting for how CSR-related behavior has evolved over time. Anybody who cares about CSR should consider using our measure (available at www.socialscores.org) as the basis for analyzing firms' CSR.
