May 12, 2011
Does Corporate Social Responsibility Increase Profits?
By Ron Robins, Founder & Analyst
It is generally held that corporate
social responsibility (CSR) could increase company
profits and thus most large companies are actively
engaged in it. But few executives and managers are aware
of the research on this important subject. And as I
review here, the research does show that it may improve
profits. However, linking profit growth to abstract
variables that are frequently difficult to define is a
challenging task.
Most executives believe that CSR can improve profits.
They understand that CSR can promote respect for their
company in the marketplace which can result in higher
sales, enhance employee loyalty and attract better
personnel to the firm. Also, CSR activities focusing on
sustainability issues may lower costs and improve
efficiencies as well. An added advantage for public
companies is that aggressive CSR activities may help
them gain a possible listing in the FTSE4Good or Dow
Jones Sustainability Indexes, or other similar indices.
This may enhance the company’s stock price, making
executives’ stock and stock options more profitable and
shareholders happier.
Substantiating some of these beliefs is a study,
Corporate citizenship: Profiting from a sustainable
business, by the Economist Intelligence Unit (EIU)
published in November 2008. Corporate citizenship is
another term roughly equivalent to CSR.
The EIU study said that, “corporate citizenship [CC] is
becoming increasingly important for the long-term health
of companies even though most struggle to show a return
on their investment from socially responsible
activities… 74 per cent of respondents to the survey say
corporate citizenship can help increase profits at their
company… Survey respondents who say effective corporate
citizenship can help to improve the bottom line are also
more likely to say their strategy is ‘very important’ to
their business (33 per cent) compared with other survey
respondents (8 per cent).”
At the heart of the debate as to whether CSR improves
profits is first how you define it. Besides the terms
CSR and CC, another frequently used and related term is
corporate social performance (CSP). In the above quoted
EIU study, it provides the following definition of CC:
“corporate citizenship is defined as transcending
philanthropy and compliance, and is addressing how
companies manage their social and environmental impacts
as well as their economic contribution. Corporate
citizens are accountable not just to shareholders, but
also to stakeholders such as employees, consumers,
suppliers, local communities and society at large.”
The study of CSR and its relation to corporate profits
is growing. The most recent study on this subject is by
Cristiana Manescu. In her thesis, "Economic Implications
of Corporate Social Responsibility and Responsible
Investments,” at the University of Gothenburg's School
of Business, Economics and Law, Sweden, she wrote on
December 6, 2010 that, “the results [of her thesis]
reveal that CSR activities do not generally have a
negative effect on profitability, but that in the few
cases where they have a positive effect, this effect is
rather small.” Other studies add further perspectives.
Defining the experience of CSR in relation to different
industries is this study, The Economics and Politics of
Corporate Social Performance, by David P. Baron, Maretno
A. Harjoto, and Hoje Jo, published on April 21, 2009.
The researchers found that, “For consumer industries,
greater CSP [corporate social performance] is associated
with better CFP [corporate financial performance], and
the opposite is true for industrial industries…
Empirical studies have examined the relation between CSR
and corporate financial performance, and while the
results are mixed, overall the research has found a
positive but weak correlation.”
However, reviewing individual empirical studies can be
confusing. But by using the technique of
‘meta-analysis,’ many studies can be statistically
analysed to determine collective results. A
meta-analysis on CSR and its link to profits won the
famed socially responsible investing, Moskowitz Prize in
2004. The study, Corporate Social and Financial
Performance: A Meta-Analysis, was compiled by
researchers Marc Orlitzky, Frank L. Schmidt and Sara L.
Rynes. It yielded encouraging data suggesting a positive
link between CSR and increased profits.
Summing up their results, the researchers said, “we
conduct[ed] a meta-analysis of 52 studies (which
represent the population of prior quantitative inquiry)
yielding a total sample size of 33,878 observations. The
meta-analytic findings suggest that corporate virtue in
the form of social responsibility and, to a lesser
extent, environmental responsibility, is likely to pay
off… CSP [corporate social performance] appears to be
more highly correlated with accounting-based measures of
CFP [corporate financial performance] than with
market-based indicators, and CSP reputation indices are
more highly correlated with CFP than are other
indicators of CSP. This meta-analysis establishes a
greater degree of certainty with respect to the CSP-CFP
relationship than is currently assumed to exist by many
business scholars.”
So the research generally indicates that CSR/CC/CSP, no
matter how you define it, does offer potential benefit
to corporate profits. But there is another unanswered
problem, and that relates to causation.
Do high profits enable greater spending on CSR, or is it
that CSR itself creates higher profits? Referring again
to the study, The Economics and Politics of Corporate
Social Performance, the researchers write that, “…the
direction of causation remains an open question. That
is, good CSP could cause good CFP, but good CFP could
provide slack resources to spend on CSP. As the
Economist wrote, ‘...whether profitable companies feel
rich enough to splash out on CSR, or CSR [activity
itself] brings profits.’” Hopefully, future research
will be able to answer this question.
On balance, surveys and the research literature suggest
that what most executives believe intuitively, that CSR
can improve profits, is possible. And almost no large
public company today would want to be seen unengaged in
CSR. That is clear admission of how important CSR might
be to their bottom line, no matter how difficult it may
be to define CSR and link it to profits.
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