The Corporate Social Responsibility (CSR) Trend

Corporate Social Responsibility, or “CSR,” has recently become a subject of study by financial economists. While there is no shortage of anecdotal evidence to support all variety of positions, broad‐based statistical evidence about the CSR movement is in short supply. This article presents some new empirical evidence that aims to answer three related questions about CSR: First, are corporations increasing their “investment” in what is considered socially responsible behavior? Second, does corporate investment in social responsibility affect a company's financial performance and shareholder value? Third, why do companies invest in CSR: to increase shareholder value, or to uphold a “moral” commitment to non‐investor stakeholders and “society”? Using a social responsibility metric that measures the net CSR strengths (i.e., strengths less concerns) of each S&P 500 and Domini 400 company, the authors report that the average net CSR for both indexes decreased during the 15‐year period (1991‐2005) of the study—though the Domini 400, as might be expected, experienced a smaller decline. The authors also report that corporate strengths have increased, on average, but at a slower rate than the “concerns,” which suggests that corporate CSR efforts may be aimed at a moving target with steadily rising expectations and requirements. Second, the authors report that companies with more CSR strengths or fewer CSR weaknesses produced higher ROA over the same 15‐year period. The authors' findings here suggest a “circular” causality in which profitable companies are more likely to invest in CSR initiatives to begin with, but then find their performance further improved by such investment. Third, the authors' findings suggest that most companies devote resources to CSR initiatives as a means of maximizing long‐run value rather than out of a prior commitment to stakeholders. More specifically, the study shows that companies appear to invest more heavily to build CSR strengths than to eliminate CSR concerns. And as the authors conclude, this behavior is consistent with a strategy of using CSR as a form of “risk management” that promotes corporate strengths in order to limit the potential negative effects of—perhaps by diverting attention from—their weaknesses.