Many companies seek to keep (or regain) the public’s good graces by performing acts of corporate social responsibility, or CSR. But how does it affect the bottom line? When companies do good, do they do better? Or is CSR a necessary cost of doing business that takes a nip out of profit?
Professor of Finance Hoje Jo of the Leavey School of Business set out to answer those questions in a paper titled “The Economics and Politics of Corporate Social Performance.” With colleagues at Stanford and Pepperdine, Jo analyzed data from 3,000 companies during an eight-year period, under the Clinton and George W. Bush presidential administrations. The paper was recognized with the prestigious Moskowitz Prize for Socially Responsible Investing from U.C. Berkeley’s Center for Responsible Business. As for findings: Results are mixed.
Jo compared companies’ financial performance with their social performance, and he took into account social pressures on firms from nongovernment organizations and activists. Generally, CSR measures were not shown to either increase or decrease the profitability of the companies in the study. (Though any one company still could see gains after taking CSR measures.) As for social pressure from nongovernment organizations and activists: It was shown to make a difference—though not across the board. And it could negatively affect the bottom line.
“Social pressure could have a direct effect on the financial performance of a firm if it causes consumers, investors, or employees to shun the firm,” Jo says. “Social pressure could also damage the reputation of the firm or a brand, and it could portend future problems arising from private or public politics.”
One interesting finding: Concerted social pressure was more likely to be directed at a company that markets directly to consumers—Starbucks, for example—and is perceived as likely to respond to that pressure. A company like ExxonMobil, on the other hand, might experience less social pressure if consumers expect it to ignore their complaints.
Ultimately, CSR matters most to companies that depend on individual consumers; industries that trade primarily with each other got little or no financial boost from social performance activities. But if a company’s customer is the public, the enterprise had better do something socially valuable: Jo and his colleagues demonstrate that investors expect it—and reward it.