Corporate Social Responsibility Not a Profitable Investment
CSR is defined as strategies that appear to foster some social good, including programs that benefit community engagement, diversity, the environment, human rights and employee relations. The study, published in the Journal of Corporate Finance, found that focusing on CSR strategies imposes costs on firms in the form of foregone investment opportunities that in the long run leads to losses for their shareholders.
Companies that try to 鈥渄o good鈥 are likely to find that Corporate Social Responsibility (CSR) is bad for their bottom lines, according to a new study from .
鈥淲e found that emphasizing Corporate Social Responsibility is not good for shareholders,鈥 said , Ph.D., assistant professor of finance, who investigated the relationship between CSR and efficiency with which firms allocate their capital resources. 鈥淚f you鈥檙e an investor you should think twice before you invest in those firms that emphasize CSR.鈥
For the purpose of the study, CSR is defined as strategies that appear to foster some social good, including programs that benefit community engagement, diversity, the environment, human rights and employee relations. The study, published in the , found that focusing on CSR strategies imposes costs on firms in the form of foregone investment opportunities that in the long run leads to losses for their shareholders.
In his empirical analyses using a large sample of firms for the period 1992 to 2014, Javakhadze found that CSR reduces a firm鈥檚 overall performance and investment efficiency. Investment should follow growth opportunities, he explained, and CSR distorts this relationship because it diverts a firm鈥檚 resources from its core practices. That distortion is lower in firms where the CEO鈥檚 compensation is tied to the stock price or in firms that are rich in resources.聽
鈥淚t鈥檚 not only about money; it鈥檚 about time,鈥 said Javakhadze, who co-authored the paper with doctoral student Avishek Bhandari. 鈥淚f I鈥檓 a CEO I should be focusing on finding growth opportunities. If instead I spend my time and my energy to find CSR initiatives it diverts my time and my energy to something else, not focusing on building shareholder wealth.鈥澛
While companies around the world have adopted CSR strategies, a trend that has gained traction in recent years, it hasn鈥檛 always been popular. As the economist Milton Friedman said of CSR back in 1970, 鈥渁 corporation鈥檚 responsibility is to make as much money for the stockholders as possible.鈥澛犅犅犅犅犅犅犅犅犅犅
鈥淢ost firms don鈥檛 have unlimited resources,鈥 Javakhadze said. 鈥淚f you invest in socially responsible activities then you won鈥檛 have enough resources to invest in more profitable projects, which is not good. It might be good for society. It might be good for managers. But it is not good for shareholders.鈥澛
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