Pinpointing the Value in CSR [Archive.org URL]

Proponents of corporate social responsibility (CSR) initiatives tend to justify their position by arguing that these expenditures improve a company’s economic performance―allowing it to earn higher profits through enhanced brand reputation, more-productive employees, and insulation from regulatory penalties. In other words, executives promote the company’s own interests by pursuing a strategy of “doing well by doing good.”

In contrast, economist Milton Friedman proclaimed in 1970 (the relative infancy of the modern CSR movement) that in a free society, “there is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game.”

Our research on the impact of CSR expenditures on financial performance suggests that the views of both CSR proponents and Friedman are incomplete. We find that CSR expenditures generate insufficient returns and hence reduce shareholder value, consistent with the Friedman view. However, we also find that companies whose CSR spending exceeds investor expectations experience positive stock returns, consistent with evidence promoted by CSR proponents.

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