Blog: Why firms should invest in CSR but we investors should be cautious about high-CSR firms?

Vinci-researcher Jordi Surroca

Should corporations pursue social good beyond the interests of its shareholders and that which is required by law? Typically, the response to this question has been based on the results of the study of the economic impact of corporations’ involvement in socially responsible (CSR) activities. Unfortunately, the dispersion in the results has been of little help in resolving the confrontation between opponents and defenders of CSR: After more than three decades of research on the CSR-financial performance linkage the only conclusion that we can extract is that CSR does not destroy corporate value.

Is this all? Of course not! Maybe there is not a direct relationship between CSR and financial performance, but the engagement in prosocial practices may have other organizational consequences that may, ultimately, influence company outcomes. For example, by embracing CSR the firm is able to:

• Create innovative pollution-reducing products and processes to allow you to enter new markets
• Enlarge brand image, build customer loyalty, and improve relations with stakeholders, which for example allow the firm to negotiate better terms with suppliers and financial institutions
• Create a culture that favors risk taking and innovation, and instills pride, cooperation, and loyalty among employees. A good culture also attracts highly qualified employees
• Provide a clean and safe working environment, health and education benefits, and training opportunities. Investing in empowering employees increases motivation and satisfaction and hence worker productivity

CSR stimulates, then, the development of intangibles related to innovation, reputation, culture, and human capital, which may lead in turn to improved financial outcomes. So, the engagement in CSR alone is not a means for achieving financial success: It is the development of intangibles associated to CSR the key factor in improving firm’s financial performance.

So, if CSR increases firm’s value through the development of intangibles, should we as investors channel our money to high-CSR companies? Curiously, the answer is: not always. As investors, we have to carefully scrutinize the true intentions of CSR activities, in order to delineate whether firms’ investment in CSR indeed contributes to the development of valuable intangibles or, alternatively, CSR engagement is motivated by other spurious purposes. For example, motivated by their desire to remain in their position, senior management of companies threated by the risk of a hostile takeover has offered generous concessions to employees and unions (indirectly increasing firm’s CSR) to increase firm’s costs and, then, diminish the attractiveness of the company for the potential rider. Another example relates to the use of CSR as a smokescreen to hide practices that are far from being socially responsible, as the case of accounting manipulation. Companies that have manipulated their statements have a special interest in appearing publicly as socially responsible companies, in order to divert attention or reduce the impact of an eventual accusation of fraud. Another form of smokescreen is to appear as socially responsible in the eyes of the public, while their most pernicious practices are transferred to parts of the organization that escape public control. This is what sometimes happens in well-known multinationals. While their Western headquarters score high in CSR rankings, their socially irresponsible practices (for example, child labor, violations of environmental regulations) are transferred to subsidiaries located in less developed countries, out of any sort of scrutiny. These examples suggest that, although some companies may appear to be socially responsible, in practice they are far from being so, since the actions they have adopted conceal the true interests of the groups that control the organization. And, what is most important, the spurious interests that CSR conceals will likely impose serious long-run losses to these companies.

 Summing up, firms have a lot to gain from CSR, if it is used to develop strategic resources that can sustain competitive advantage. But the problem is that key organizational actors may also have a lot to gain from CSR, sometimes at the cost of the firm’s competitive position. For this reason, investors that base their resource allocation decisions on an indicator such as CSR should be cautious when qualifying a company as socially responsible. It is therefore of primary importance to separate the truly socially responsible companies, in which they should invest, from those that only appear to be so, which are the firms to be avoided.

Want to know more? Don’t hesitate to contact the author of this post: Jordi Surroca, j.surroca rug.nl