The Magazine of Corporate Responsibility

Does Corporate Social Responsibility Increase Profits?

by Ron Robins, Investing for the Soul

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.

Sustainability_Palm w Coins_FeatureMost 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.

Ron Robins is Founder and Analyst at the website Investing for the Soul and a financial and economics columnist for alrroya.com, a leading Middle Eastern business portal/publication.

This article is reprinted with permission.  Copyright alrroya.com.

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6 Responses »

  1. Yes of course, it's true that social responsibility and business code of conduct and ethics increase the long term profit of any organization.

  2. I was looking for materials for an ethics course I'm currently teaching and happened upon this article. I thought it ironic (at best) that an 'ethics' site was promoting CSR with a profit motive. First, if the motive for CSR in a firm is based on increasing profitability, then the firm's leadership has missed the point...see Kant. Second, CSR is not a substitute for ethical practices but should rather be a natural outcome of ethical practices in an organization. The fact that many business schools are focusing on CSR programs/curriculum vice ethics programs evidence this approach. Ethical practices need to be taught in the home, reinforced in the education system and demanded in the workplace.

    An example of why this approach does not work: Enron. Enron had a robust and active CSR program with green initiatives and strong human rights advocacy (see brief excerpt here: http://www.masterresource.org/2011/12/remembering-green-enron-part-ii-corporate-social-responsibility/). However, it did not have leaders firmly grounded in objective standards of right and wrong and who were centered on the profit motive, which made their CSR efforts hollow. And all now know what happened to Enron. In the end, companies who are viewed as having 'strong' CSR programs without an objective ethical grounding in the Natural or Moral Law are always at risk. Especially in times of austerity and increased competition.

    What this article implies is that if CSR is not profitable, then there would be no reason to do it. Instead, you should be reinforcing that regardless of its impact on revenue and profitability, CSR is the right and ethical thing for a firm to do. That giving back to your community is a noble act that is not predicated on its value to the firm.

  3. Darren I think that you miss the point. Yes we should all be morally and ethically bound to CSR but the fundemental existence of business in the corporate world is to make a profit for the stakeholders.

  4. Forcing altruism is not the way to get into the boardroom of any for-profit business. The reality is that they operate to make a profit and if they can be guided to see the benefits of CSR as part of a way of business on a regular basis and not just a 'day of giving' then they will incorporate it into their practices. I've spent my life in Corporate America working working on leadership initiatives and they are not naturally altruistic but give them a blueprint that will aid in the bottom line and they're all over it. Don't get stuck on principle....because you may be pleasantly surprised that through corporate objectives comes a changed perspective altogether!

  5. You are absolutely right "Darren. W". CSR should be motivated by that human side of the company itself. It is managed by humans anyway. If we introduce Kant in this debate, we would understand that the company should conduct those social programs to bring some help to its environment and give back to the community, without expecting anything in return (ethics). That is an absolute, clean, perfect and human intention that tend to only bring some relief, help, or even to make things better in the environment that the company is part of. I would compare that to a human enough person who walk outside and notices a hungry human and gives him some food without even expecting a thank you from him/her and keeps walking. Even according to the saying " the company cannot do well in an environment that does not do well" make us think of something that is not clean and clear enough. I would look at it in the angle that the company would not do anything for the betterment of that environment unless it has some goal of ensuring its own well being. Anyway, if a company develops good CSR programs and work hard to emplement them, that would sooner or later gain it a great reputation and even profits at the long run. We humans like to thank anybody or organization that takes care of us and our environment. The company wouldtherefore gain only good things from its environment that it takes care of. Even though, some people/Stakeholders would oppose that and say not to CSR.

  6. It is a mistake to focus on the instrumental value of 'ethics' in generating profit; but equally it is a mistake to think that the alternative is altruistic or 'ethical' activity that ignores the profit motive altogether. After all, one of the firm's most significant ethical obligations is to pursue the interests of shareholders. The requirements of ethics are more nuanced than this. For example, there is a distinction to be made between what ethics says about the goals that a firm may or must pursue, and what it says about *how* those goals should be pursued.

    Even if we accept a firm should only pursue profit, this does not mean that the only point of thinking about ethics is to help maximise profit. It is more likely to be to help us think through constraints that should be placed on the ways in which profit should be pursued. There may well, in addition, be an argument to be made for firms pursuing ethical aims besides profit; this possibility is captured, in business language, by the idea that some businesses have fiduciary duties to parties beyond shareholders. These might, for example, be the duties that professional firms have to their clients.

    There is, of course, an awful lot more to be said about what ethical business might look like. But reducing it to either the pursuit of profit or altruism at the beginning is deeply misguided.

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