The Costs and Benefits of CSR

By Augus Harjoto, PhD, Assistant Professor of Finance

Monday, January 11th, 2010

Along with his co-authors, Dr. Harjoto’s research on CSR was awarded the prestigious 2009 Moskowitz Prize for Socially Responsible Investing at SRI in the Rockies, the largest and longest-running sustainable and responsible investing conference in the world. Below is a summary of his paper offering the most salient points for managers. You can read the entire paper here.

Following the unprecedented corporate scandals in the early 21st century, there has been significant interest among corporate managers regarding socially responsible activities in an effort to restore public image and to differentiate themselves.

In simple terms, corporate social responsibility (CSR) is how a firm manages its business processes to produce an overall positive impact on society; it refers to serving people, communities, and the environment (stakeholders) in ways that go above and beyond what is legally required. While CSR tends to be morally motivated, a firm may utilize CSR for its own self interest. We define corporate social actions as corporate social performance (CSP) rather than CSR as not all social actions are morally motivated.

How Does Corporate Social Performance Serve the Bottom Line?

So, why would a firm conduct CSP? Let us examine three separate markets: the capital market, the product market, and the market for social pressure.

In the capital market, our research did not show a relationship between a firm’s social performance and its value.

However, that does not imply that investors do not care about corporate social activities. After all, investors are part of the greater society and approximately $2.7 trillion of the $25 trillion in total U.S. investments are considered socially responsible investing (SRI), according to the Social Investment Forum (SIF). But what we discovered is that investors still prefer personal giving over the “warm glow” from investing in socially responsible firms, so for a company engaging in social activities, do not expect your investors to support your social actions.

In the product market, firms with consumer-oriented products tended to engage in CSP more than firms with industrial goods.

So, if your products are directly consumed by retail customers and you rely on a positive social image to sell products, CSP may be necessary key for your success.

In the market for social pressure, firms that receive social pressure tend to have lower market value.
In other words, once a firm receives pressure from social activists to conduct CSP, shareholders’ wealth is adversely affected. Interestingly, the most effective social pressure comes from the private sector, and once a firm responds to such demands, it tends to receive even more pressure to do even more social activities.

Conclusion

Engaging in CSP is necessary when your firm is facing social pressures. However, be aware that once you give in to demands from social activists, you may be expected to do even more. Always try to integrate CSP as part of your business strategies if you think that your company’s activities will most likely elicit a negative reaction from social activists.

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Obesity, Social Responsibility, and Economic Value by Donald Atwater, PhD and Shizuka Suzuki

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Topic: America's Financial Crisis, csr
Tags: corporate social performance, csp, csr, moskowitz prize, socially responsible investing, sri