Are Socially Responsible Corporations More Profitable?

Essay by statixUniversity, Bachelor'sA, July 2009

download word file, 12 pages 0.0

IntroductionIn the past decade, there has been an explosion in enterprises adopting and implementing "Corporate Social Responsibility" as stakeholders have encouraged firms to undertake more capital expenditures towards socially responsible initiatives and measures. Firms have responded with mixed sentiment. Some firms have elected to adopt more CSR in response to prevailing market demand; others have taken a more conservative approach and argued that further investment into CSR undermines corporation fiduciary responsibility to shareholders: ensuring profit maximization. The question then becomes, do firms that implement CSR into their business model (by foregoing capital) realize incremental value relative to those firms that choose not to expend their profits on CSR initiatives? Further, can this value be translated into tangible financial metrics that measure profitability?Studies have consistently shown that there is no causal relationship between profits and CSR spending. Despite this, many of the leading firms continue to aggressively spend a portion of their operating income into CSR projects.

The paper will start out to clearly define CSR to provide context. In addition, we examine corporate legal and fiduciary responsibilities and whether those provisions allow a firm to participate in social programs. This paper will then attempt to study the implications of CSR and scrutinize the obscure relationship between financial profitability and CSR spending. Further, the paper will distinguish between short-term accounting profit and long-term economic profit to understand any value added by CSR implementation. Finally, an analysis and discussion of the implication of CSR spending will be examined to provide an explanation into why there has been a dramatic rise in corporate social spending.

Corporate Social Responsibility and Corporate Legal PurposeAccording to Siegel and Vitaliano (2007), CSR occurs when firms engage in activity that appears to advance a social agenda beyond that which is required by law. Put another way,