Corporate Social Responsibility
The Financial Value of Social Responsibility
CSR provides a financial return in the form of lower costs, higher revenue, and returns to investors.
LEARNING OBJECTIVES
Discuss the argument that the short-term costs of social responsibility generate long-term revenues exceeding those costs
KEY TAKEAWAYS
Key Points
- Evidence links socially responsible business practices to improved financial performance.
- Socially focused investors also see a financial return in socially responsible business practices, pointing to competitive returns for socially responsible indices and to the belief in returns from investing in a company’s long-term potential to compete and succeed.
- The shared value model takes a long-term view on financial return of corporate social responsibility (CSR), maintaining that the competitiveness of a company and the health of the communities around it are mutually dependent.
Key Terms
- shared value model: Idea that corporate success and social welfare relate; that a company succeeds and competes in a better society because it needs a healthy, educated workforce and sustainable resources.
- triple bottom line: A means of measuring a company’s success based on its economic returns, its effect on its environment, and its impact on the community.
- externalities: Something that indirectly affects something else. In economics, a cost or benefit that is not captured in the price mechanism.
Evidence links socially responsible business practices to improved financial performance. This is attributable to lower costs or increased revenue from customers who want to support business that reflects their personal values. An organization ‘s CSR practices might also increase employee loyalty, which lowers the cost of turnover; it also helps attract potential employees willing to work for less for a company whose values they share. Some CSR actions, such as investing in renewable energy, can provide tax benefits or lead to technology innovations that create competitive advantage.
Corporate social responsibility: The benefits a company obtains from having a strong community and healthy environment may not generally be expressed in dollars, but these elements do have a financial impact on a business.
Harvard professors Michael Porter and Mark Kramer introduced the notion of “creating shared value” (CSV) as a way of thinking about the benefits of corporate social responsibility. CSV is based on an idea that the competitiveness of a company and the health of the communities around it are mutually dependent. By focusing on creating shared value, an organization helps to shape the context in which it competes to its advantage. In this way, the shared value model takes a long-term perspective on the financial benefits of corporate social responsibility.
Other financial benefits from CSR accrue directly to shareholders. Socially conscious investors may prefer to own shares of a company that demonstrates good CSR, which can lead to higher share prices. Some mutual funds have portfolios exclusively made up of companies that rate highly on independent CSR measures. Proponents of these funds point to competitive returns for socially responsible indices, such as the Domini 400 (now the MSCI KLD 400). Similarly, academic studies have shown that excluding stocks from companies with poor CSR records does not adversely effect financial returns of a fund.