Corporate social responsibility is playing an increasingly important role in company evaluation.
Milton Friedman uttered his now famous line, "The business of business is business," a few decades before irresponsible business practices ruined the economy and blackened the Gulf of Mexico. With people paying closer attention to how companies do business, corporations are wise to include corporate social responsibility (CSR) in their operations. On a purely altruistic level, there's no doubt that Corporate Social Responsibility pays social and ecological dividends. How CSR affects companies' stock and financial performance is another matter.
The Argument
One side believes that a company's dedication to CSR takes its focus off of the company's primary goal, making money. The other side thinks that the integration of socially responsible policies not only create opportunities for improved public relations, but also attract better employees and reduce waste, which naturally improves a corporation's bottom line. According to Ashish K. Bhattacharyya of the Indian business publication, "Business Today," there is no clear evidence that investors buy stocks based solely on a company's CSR policies, but it is not unreasonable to believe that companies with public support and a top flight workforce enjoy a considerable business advantage.
The Link
Research by Margarita Tsoutsoura of the Haas Business School at the University of California at Berkley explains the inherent difficulty in measuring CSR levels and stock valuation, and instead attempts to demonstrate a relationship between CSR and corporate financial performance, one of the foremost influences on stock price. The study compared the stock prices of companies actively adhering to CSR principles against those who remained CSR-neutral. Using metrics such as return on equity (ROE) and return on assets (ROA), the study found significantly positive financial performance for the CSR-positive companies compared to the others.
Corruption and Scandal
According to the study, an important consideration in evaluating a corporation is its risk of "negative rare events." Using the clothing industry's sweatshops and child-labor scandals as examples, the study points to the decreased likelihood of corruption and scandal occurring in CSR-positive companies. Since these firms are less likely to damage their reputations, reasons Tsoutsoura, their bottom lines are less likely to suffer the significant expense of controlling damage through massive information and advertising campaigns.
Sustainability and Profits
Tsoutsoura also points to CSR initiatives that reduce company's operating costs. When a company discovers a more efficient way to transport its products or supplies, says Tsoutsoura, it not only benefits the planet in reducing carbon emissions, but also costs the company less to transport its materials. Similarly, adopting CSR principles often compels managers to develop more efficient ways of operating the business in general, which can produce enormous savings.
