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Does Corporate Responsibility Pay Off? There is Still a Long Way to Go

Companies of today need to be successful on several fronts.
Companies of today need to be successful on several fronts. Together with their main purpose of profitability, they are expected to be sustainable and have a positive effect on the world. That is why companies turn to corporate social responsibility (CSR) which refers to actions and policies that are intended to help with pro-social objectives, in addition to maximizing profits. Although CSR is complex and has its costs, numerous top managers believe that these actions can improve a firm’s competitiveness and is critical to its future success (see, e.g., Lacy et al. 2010, Haanaes et al. 2012).
A research paper by Caroline Flammer (Flammer, 2015) focuses on the effects of CSR that are accepted or rejected by a small margin of votes by the shareholders. The common CSR proposals concern the environment, health, labor, political issues, sustainability, animal and human rights, and others. Findings show that authorizing these activities has a positive impact on sales and company performance in general over the following years. These proposals also help improve workforce satisfaction, increase their productivity and help companies be viewed positively by customers that appreciate sustainability. Data shows that it takes 1 to 2 years for the CSR program to increase company profitability and shareholder value by around 1.77% and this effect appears to be long-lasting. The author notes that even though results imply that close call CSR proposals are beneficial to companies, they do not necessarily mean that CSR proposals are beneficial in general. There are three possible reasons why CSR is beneficial for companies:
  • Implementing CSR programs may be a way to improve relationships with customers that appreciate sustainable practices (e.g., Baron 2008, McWilliams and Siegel 2001, Reinhardt 1998).

  • It could be that CSR programs attract, motivate, and retain talented employees in the industry. Employee satisfaction may correlate with unobservable firm characteristics that investors have not fully incorporated into stock prices.

  • CSR initiatives may encourage the use of more efficient technologies or production processes such as environment-friendly technologies. In particular, Porter (1991) argues that efforts to reduce pollution might not only reduce a company’s environmental footprint but also strengthen its competitiveness.
Unfortunately, CSR proposals receive little support at shareholder meetings (the average vote outcome is merely 13.5%), suggesting that shareholders may not find them desirable. Data shows that CSR proposals typically do not fare well at annual meetings and most proposals receive very little support: about 75% of the proposals received less than 20% of favorable votes. This pattern suggests that most CSR proposals may be “symbolic” in nature. Generally, CSR proposals are likely to address employee satisfaction and the mitigation of environmental hazards. They are frequently found among companies that are greatly dependent on the relationship between employees and customers. Proposals that are most likely to be approved are those referring to labor issues (5.27% are approved).
A positive finding is that both the number of proposals and the proportion of their acceptance has increased over time. Although the average percentage of votes in favor was merely 9% in the first half of the sample (1997–2004), it increased to 17% in the second half (2005–2012). This evolution is consistent with previous evidence which showed that there is increased awareness for CSR issues over the past several years (e.g., Flammer 2013).
A positive finding is that both the number of proposals and the proportion of their acceptance has increased over time. Although the average percentage of votes in favor was merely 9% in the first half of the sample (1997–2004), it increased to 17% in the second half (2005–2012). This evolution is consistent with previous evidence which showed that there is increased awareness for CSR issues over the past several years (e.g., Flammer 2013).

References

  • Caroline Flammer (2015) Does Corporate Social Responsibility Lead to Superior Financial Performance? A Regression
    Discontinuity Approach. Management Science
  • Lacy P, Cooper T, Hayward R, Neuberger L (2010) A new era of sustainability: UN Global Compact-Accenture CEO Study 2010. Report, Accenture, New York. http://www.accenture.com/sitecollectiondocuments/pdf/accenture_a_new_era_of _sustainability_ceo_study.pdf
  • Flammer C (2013) Corporate social responsibility and shareholder reaction: The environmental awareness of investors. Acad. Management J. 56(3):758–781.
  • Porter ME (1991) America’s green strategy. Scientific Amer. 264(4): 96–103.
  • Baron DP (2008) Managerial contracting and corporate social responsibility. J. Public Econom. 92(1–2):268–288.
  • McWilliams A, Siegel D (2001) Corporate social responsibility: A theory of the firm perspective. Acad. Management Rev. 26(1):117–127
  • Reinhardt FL (1998) Environmental product differentiation: Implications for corporate strategy. Calif. Management Rev. 40(4): 43–73
  • Loss L, Seligman J (2004) Fundamentals of Securities Regulation, 5th ed. (Aspen Publishers, New York).

About the author:

Mijat Kustudic is a researcher and scholar with focus on finance and A.I. He is also a seasoned project manager in sustainability and has participated in numerous initiatives across Europe, Africa, and Asia.

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