“There is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the games, which is to say, engages in open and free competition without deception or fraud” Milton Friedman.
According to Friedman, every corporate social responsibility is an investment into the firm. There is no doubt that CSR is becoming an increasingly integral part of corporatons. For example, in 2011 European companies had three times more CSR activities than its US counterparts. However, fast forward two years and the US firms were number one when it came to CSR (Moravcikova, Stefanikova and Rypakova, 2015).
Despite this development, CSR still has substantial lesser budget than those of core business functions. These functions include finance, HR, and of course, its operations. But why is this? CSR can be classified as an investment that can result in profit, rather than a necessary operating expense to generate revenue. Therefore, CSR is an operating choice.
This begs the question, is corporate social responsibility purely a profit maximisation tool? And why do firms partake in CSR? Especially, when there is evidence to support that companies that act with moderate to high levels of irresponsibility can lead to a higher stock value, as they are “unconstrained by restrictive CSR policies or not precluded from the advantages some irresponsible activities present”. (Ding, Ferreira and Wongchoti, 2016, pg 97).
The Media & Consumer
The media is key when it comes to depicting the CSR activity, and the message it sends to the public (Shim, Chung and Kim, 2017), and in turn, how they perceive the company in lieu of its actions and therefore increases profits as “Customers are interested in a company’s responsible activities and… influences buying decisions” (Moravcikova, Stefanikova and Rypakova, 2015 pg 338) Additionally, the media coverage may result in a cost efficient way to achieve potential advertising. For example, if a firms CSR activities was given full page spread in the global addition of the WSJ, it would result in a saving of $221,353 (Wsjmediakit.com, 2017).
According to Ding, Ferreira and Wongchoti (2016) investors that are not interested In proactive CSR, often indicates their chase for short term goals. An objective that is not beneficial to the long term health of any organisation. However, long term orientated shareholders pursuit CSR as they believe “that CSR may have a financial pay-off” (Cullinan, Mahoney and Roush, 2017, pg 239). Additionally, an investor may also be drawn to a firm if “they perceive the company’s values… are congruent to their own” (Cullinan, Mahoney and Roush, 2017 pg 239). The aforementioned could be imperatively important to a CEO or MD, as companies that follow socially driven ethical and CSR practices, often receive greater support from their shareholders (Cullinan, Mahoney and Roush, 2017), which is the cornerstone of any stable business.
We already know that good CSR doesn’t automatically mean more profit (Ding, Ferreira and Wongchoti, 2016). However, companies that have an eye on their future stability and long term goals through their CSR activities have a 5% higher stock evaluation than their counterparts acting in irresponsible behaviours (Kecskés, Mansi and Nguyen, 2017). Additionally, these responsible firms will also have less volatile profits by roughly 5% (Kecskés, Mansi and Nguyen, 2017).
Corporate social responsibility may just be one of the most overlooked and mutually beneficial activity for both firms and society. By carefully constructing media messaging, shareholder objectives, and the monitoring of mangers by long term investors, CSR can result in significantly higher stock evaluations, shareholder value, and an increase sales to ensure profit maximisation. Which in turn, leads to the suggestion of CSR being an extra source of revenue and profit maximisation through socially responsible means.
Cullinan, C., Mahoney, L. and Roush, P. (2017). Are CSR activities associated with shareholder voting in director elections and say-on-pay votes?. Journal of Contemporary Accounting & Economics, 13(3), pp.225-243.
Ding, D., Ferreira, C. and Wongchoti, U. (2016). Does it pay to be different? Relative CSR and its impact on firm value. International Review of Financial Analysis, 47, pp.86-98.
Kecskés, A., Mansi, S. and Nguyen, P. (2017). Does Corporate Social Responsibility Create Shareholder Value? The Importance of Long-Term Investors. Journal of Banking & Finance.
Moravcikova, K., Stefanikova, Ľ. and Rypakova, M. (2015). CSR Reporting as an Important Tool of CSR Communication. Procedia Economics and Finance, 26, pp.332-338.
Shim, K., Chung, M. and Kim, Y. (2017). Does ethical orientation matter? Determinants of public reaction to CSR communication. Public Relations Review, 43(4), pp.817-828.
Wsjmediakit.com. (2017).] Available at: http://www.wsjmediakit.com/files/uploads/201410/WSJ%20Mag%20Mediakit_FALL%202017_Rates_SpecsOnly.pdf [Accessed 30 Oct. 2017].