In 1970, the Nobel Laureate Milton Friedman published a now famous paper arguing that the role and responsibility of business is to maximise profits within the basic rule of law. Any activity that detracted from this responsibility for profit maximisation was in the eyes of Friedman, inefficient and bad for business. For Friedman, the idea of a social responsibility over and above that of profit maximisation was not only counter-intuitive but wrong.
Friedman’s article fuelled much debate amongst the academic community which continues to flourish today. Back in the 70’s Corporate Social Responsibility (CSR) had not been formally defined and was certainly not a function of any prominence in the firm. Early arguments were founded largely on theoretical and ethical terms as there was limited empirical data to base propositions on.
Rolling forward four decades and it is evident that the relatively nascent field of CSR has grown in prominence in practice as well as theory. A multitude of case studies and data now exists which researchers can draw on to test theories.
One of the key questions that dominates the literature is the link between CSR and profitability – often phrased as the relationship between corporate social performance (CSP) and corporate financial performance (CFP). To date the results have been mixed with some researchers finding a strong positive correlation (see: Orlitzky, Schmidt and Rynes, 2004), whilst others suggesting no discernible correlation (see: Bauer, Koedijk and Otten, 2005) and in some instances a negative relationship (see: Brammer, Brooks and Pavelin, 2006).
Of course, the challenge with looking at CSR from a profitability perspective is that it is very difficult to establish causation between CSR activities and financial performance – the former is often very abstract and intangible.
Intuitively it makes sense that investment in CSR could lead to improvements in brand reputation which could translate into higher sales, premium prices and better attraction / retention of staff, amongst other things. But showing causation is very difficult.
This is partly why most executives believe that there is a clear economic rationale to incorporate CSR activities into their business, but usually not clear enough to make decisions that require significant investment. Hence, it is unusual to find a Fortune 500 company that doesn’t have some form of CSR programme, but equally unusual to find a large company which has a CSR budget that isn’t a fraction of the size of other more central budgets like finance, HR, audit and operations.
That being said, a number of high profile companies have proved the exception to the rule. Unilever’s Simple Living Plan, GE’s Ecomagination programme and Nestle’s Creating Shared Value are excellent examples; each company having invested heavily in CSR programmes that are central to their business strategy and market positioning. However, the jury is still out on the impact of these initiatives on each company’s financial performance.
Despite the abstract nature of CSR as it relates to profitability, there are cases where a direct relationship between an investment in CSR and financial benefit can be established. In particular, investments in resource efficiencies such as energy or water conservation often results in cost savings. Return on investment is easy to calculate and the financial benefit of efficiency initiatives easy to establish.
A good example that illustrates this relationship comes from Wal-Mart who was able to reduce their environmental impact and save significant costs by tackling inefficiencies in their value chain. In a direct CSR effort, the company reduced packaging saving millions in lower disposal costs, and invested in better route planning for its huge fleet of trucks which cut out 100 million miles from their 2009 delivery routes, saving $200 million in costs and reducing their carbon footprint by a similar quantum.
Beyond looking at the relationship between CSP and CFP, some researchers have suggested that CSR has wealth-protective instead of wealth-enhancing effects (Oikonomou, Brooks and Paevlin, 2012). The suggestion here is that good CSR practices mitigate financial risk and therefore protect the balance sheet from adverse shocks. These wealth-protective effects are essentially captured in a corporations’ stock market valuation and are usually signalled to the market through listings on sustainability indices like the FTSE4Good or Dow Jones Sustainability Index. In theory investors are willing to pay a market premium for stocks that have a lower financial risk, thus making executive and shareholder stock more profitable.
Other commentators have proposed that CSR adds most value when environmental and social objectives are aligned with business objectives. In this way CSR activities become central to an organisations strategy benefiting both the financial performance of the firm as well as generating a societal benefit. The idea was succinctly proposed by Michael Porter and Mark Kramer using yet another term, Creating Shared Value (CSV).
Nonetheless, the debate still continues on the role that CSR plays in terms enhancing financial performance. What is clear though, is that major companies continue to invest in CSR initiatives. Assuming Friedman was right, it follows that companies must be receiving some form of benefit, either in a wealth enhancing or wealth protective way, that explains the continued interest and investment in CSR.
Have your say – what are your thoughts?
