Does Corporate Social Responsibility Increase Profits?

By Ron Robins, Founder & Analyst, Investing for the Soul

Blog Enlightened Economics; twitter

First published May 12, 2011, in his weekly economics and finance column at
alrroya.com

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.

Most 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.

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